Deciphering Financial Aid Letters: What You Need to Know.
This is the time of year when students begin receiving scholarships and financial aid awards from schools. Financial aid letters are confusing. There is no standard format for financial aid award letters, making them difficult to interpret and to compare and contrast. The reasons are not clear as to why they are so confusing. The cynical answer is that many schools do not want you to know their offer is not good and it makes their school look more affordable than it really is. Keeping parents puzzled is an effective way to keep them off balance.
What should be (but necessarily isn’t) on every award letter:
The full cost of attendance. Colleges may use different definitions of the cost of attendance. Some don’t include it at all. There are directs costs like tuition, room and board, and textbooks, but don’t forget about the indirect costs like transportation, personal expenses, laptops, health insurance and travel. Many colleges will not include the indirect costs to make their college seem less expensive than it really is.
- What money is a loan, what does not have to be repaid? Financial aid award letters often use cryptic language for awards or fail to identify the type of an award, making it difficult to distinguish loans (which have to be repaid) and student employment from gift aid such as grants and scholarships (which do not have to be repaid). Typical loans include both unsubsidized and subsidized loans. Unsubsidized Stafford and PLUS loans are often included on the award letter to make it seem like they are awarding you enough aid to pay for the school. These loans are NOT interest free and you will have to pay about $2 for every $1 you borrow by the time you repay the debt. Perkins and Stafford Subsidized Loans are federally guaranteed low interest loans based on financial need. Interest does not accrue on the loan while you are in school at least half time, or during any future deferment periods. The federal government “subsidizes” (or pays) the interest during these times.
Most financial aid letters do not include interest rates or monthly payments. It is hard to make a loan decision with out all the factors in place. Loans without interest rates are difficult to determine which are less expensive and which are more expensive in the long term.
- Disclaimer about student employment. Federal work study funding is paid as it’s earned. If a student works fewer hours, they will not earn the full amount of the award. It may also be difficult to find a desirable work study job, and students may not be able to work as many hours as are awarded.
- Families expected family contribution (EFC). The EFC is a measure of the family’s financial strength. For dependant students it is based on income of the student’s parents, the age of the older parent, family size and number of children in college. Realistically, most can assume they will be expected to pay more than their projected EFC, but the closer to the figure the better.
- Net amount you will have to pay after all financial aid is deducted. They should tell you on the letter what is the bottom line.
- Front loading of grants. Some colleges will award more grants during the freshman year and fewer grants during subsequent years. The intention is partly to ensure that students who drop out have fewer loans to repay, since students who drop out as three times as likely to default as students who graduate. But it also makes the college seem more generous than it really is.
- Financial aid award letters provide information for just one year. The cost will likely increase every year, and may be 20-25% higher by the senior year.
- It is important to understand what a school is offering you for financial aid. If you are unsure you should call the school and stay on the line until you fully understand. With thousands of dollars at stake you can not afford not to.
Help is on the way. For families and counselors who are tired of deciphering financial-aid-offers change is coming. At Congress’ direction, the Department of Education plans to publish a model format that schools can use to communicate financial aid offers. The link below is an example of how schools could present information to prospective students and their families. The CFPB sketched this out, with input from the Department of Education as a “thought starter,” not as a proposal. This type of award letter would be a welcome change. Check it out: