During the college admission process, most teenagers and their parents devote the vast majority of their psychic energy to getting into schools.
It’s understandably a relief when teenagers finally receive their college acceptance letters. This, however, is no time to relax. Families need to focus on deciphering financial aid letters or they could end up spending tens of thousands of dollars too much for a bachelor’s degree.
Unfortunately, financial aid awards are often confusing. As strange as this will sound, when you look at a typical award letter, you may not know if a university is offering a great package or serving up a turkey.
Here is my cynical explanation for why financial aid letters are often so unhelpful: If parents understood what was in a school’s award, they might conclude that the college is too expensive and cross it off their list.
Financial Aid Award Examples
I'm going to share with you some examples of award letters that crossed my desk recently that can help your clients learn how to evaluate them. First, however, I want to pass along the basic figures that should be included, and often aren't, in any award.
Here are the five pieces of information that any financial aid letter should contain:
1. Full cost of attendance. This should be broken down into such expenses as tuition and fees, room and board, textbooks and travel.
2. Grants and scholarships. This is free money and obviously what everybody wants to see in an aid package.
3. Net price. This is the dollar amount that you’ll be obligated to pay after grants and scholarships are deducted.
4. Loans. The award should contain the types of loans and their interest rates.
5. Parents' and student’s expected family contribution. An expected family contribution or EFC is what a family is supposed to be able to afford to pay for one year of college. That figure is automatically generated when a family completes a financial aid application. The student will have an EFC and so will the parents.
Parents should compare the family's combined EFC with the college's proposed price. Unless parents go through this exercise they won’t be able to determine if an award is generous. Let's assume, for instance, that a $50,000 school provides a student with a $22,000 grant. If the family’s EFC was $28,000, this would be a generous award. Based on the family’s EFC, the school would be meeting the full financial aid need of a student:
$22,000 (grant) + $28,000 (EFC) = $50,000.
The $22,000 grant would not be adequate if the student came from a family with a lower EFC. Let's assume the family's EFC is $10,000. In that scenario there would be a financial aid gap between what a school is offering in aid and what the parents can afford. Here is how it breaks down:
$22,000 (grant) + $10,000 (EFC) = $32,000. In this case, the family's unmet need would be $18,000.
Misleading award letters
I'm using an award letter from George Washington University to illustrate some of the hazards that families can encounter when evaluating offers.
The GWU aid letter that I saw appeared, at first glance, like a large award. The aid amount was $46,100, but the letter was lacking enough information to know if this offer was worth celebrating. For starters, the letter didn’t include the school's cost of attendance. That’s a huge omission. The school currently costs $58,690.
The award also didn’t include what the family's EFC was. In this case, I happened to know that the family’s EFC was quite modest: $4,100. With that low of an EFC, this family probably made around $50,000 a year. Ideally, the family would have only had to pay $4,100, but their cost would have far exceeded that.
The family actually received $34,000 in grants. So the family would have had to borrow close to $25,000 a year, which in my opinion would have been financial suicide. The family probably would not have realized how poor the aid package was because the school did not identify the federal Stafford Loan in the package as a loan.
There are other ways to mask an award’s real bottom line. For example, I recently saw an award letter that Fordham University sent to a transfer student that didn’t include the room and board costs. Obviously, the costs of living in Manhattan would be tremendous.
Another trick is to stuff aid packages with loans that make it appear to reduce the cost of the school. I've seen plenty of packages that include the federal Parent PLUS Loan to reduce the family's cost even though parents can routinely qualify for the federal PLUS loan regardless of whether it's in a financial aid letter or not. And the loan, with a 7.9% interest rate and a 4% fee based on the loan amount, is hardly going to cut the cost of colleges.
There is some good news for families getting bamboozled by misleading award letters. The new federal Consumer Financial Protection Bureau (admittedly not a favorite of the financial industry ) has been developing a model financial aid disclosure form that clearly states what the college expenses would be for a family, as well as what the costs of borrowing would be. The bureau has released a draft of what it is calling a financial aid shopping sheet and intends to publish a final version, which I hope will be this year.