Now is the time of year when families are eagerly watching their mailboxes for their student's financial aid award letters. They have acceptance letters from several colleges, but they might not know a very important piece of the puzzle – how much it will cost! Colleges send out financial aid award letters that provide all the details, but those letters don’t usually go out at the same time as the acceptance letters, can be very confusing, and are not consistent from school to school. Let’s take a closer look at how to read these letters.
The main expense categories a financial aid letter should cover are:
First year’s tuition
Room & Board
Gift money (think: scholarships or grants)
Possible student loans or work-study programs available
What’s the bottom line?
Before you can determine if a school is a good financial fit, you have to compare each school's letter to try and come up with an apples to apples comparison; however, this task can be much more complicated than students and parents realize. Here are some fine print details that families need to be aware of:
#1: Look out for “front-loaded” award letters.
One of the things to look for when awarded a scholarship or a grant is whether it is renewable or not. Front-loading occurs when the college in question gives you a scholarship, but only for the freshman year. When looking at the cost, it may seem lower than other schools your student has applied to, but in reality, that may be only for the first year. Frontloading is a tactic used by colleges and universities to make it appear that every year is going to have this discount applied. Always make sure to evaluate costs over 4 years.
#2: If the scholarship is renewable, what are the criteria to keep it?
A renewable scholarship usually requires students to meet certain criteria based on their GPA. If they meet the GPA requirement, they keep the scholarship from year to year. However, with more and more students not graduating in four years, families may also need to consider whether an award is renewable after those four years are up. If you think your student will attend for 5 years, make sure the aid award renews in the fifth year.
#3: Determine what is self-help vs. gift aid
When reading financial aid award letters, be careful to distinguish between self-help and gift aid. Gift aid is money a student doesn’t have to pay back, and it lowers the bottom line. whereas self-help aid includes both loans and work-study programs. Parents can get confused because the financial aid award letter says the total amount due is $20,000, when in reality that figure includes $5,500 in loans. The student will eventually have to pay that $5,500 back. Self-help aid doesn’t really lower the bottom line!
#4: Watch out for Parent PLUS loans
Sometimes colleges will show a Parent Plus loan on the financial aid letter as a means to fill any gap between the cost and available aid. Be careful!! Most parents of college-bound students are in their 40s to early 50s, and they would like to retire someday, so signing up for what is essentially a new mortgage, is not ideal. When you are looking at an aid package, identify whether parent loans are part of the offer, realizing that it is something you would be paying back.
#5: What is the total loan amount and monthly payment?
While we’re on the topic of loans, be sure to know down to the penny how much your student will need in loans to fund all four (or five) years. To ensure a student loan payment is not too burdensome, don’t take out more in student loans than a graduate anticipates making in the first year of their career.
From there, try to discern what the monthly loan repayment will be after your student graduates. Use a 10-year standard repayment schedule to calculate the monthly cost. Loan providers are more than happy to spread these payments out over 20+ years, which makes the monthly payment more friendly, but remember, you end up paying twice as much interest. Knowing the monthly payment makes the cost of college real for your student!
#6: What is the net cost, and how will you strategically fund all 4 years of college down to the penny?
When you compare eight award letters side by side, the key is mapping out the full cost of all four years. Don’t forget to anticipate tuition increases which can be anywhere from 3-5% per year. Lay out the tuition for each year, and deduct any gift aid from each year. Write out how much in loans or work-study are factored in, and develop a whole picture of the actual costs. Once you've determined that net cost for each school, you can determine whether it is a good fit for your family.
Think about whether the extra cost or premium is worth going to a certain institution. Is it worth $50,000 more for a degree in a specific field of study to potentially get XYZ job? Sometimes the answer is yes, but many times, the premium price tag is not providing comparable added value. For example, teaching elementary education will pay you the same salary regardless of where the degree is from.
Be careful with Private Scholarships!
Private scholarships received from sources outside of the college itself will not be reflected on the financial aid award letter. If your student is a need-based financial aid candidate, and is awarded private scholarships, many colleges and universities will reduce the amount of need-based financial aid that they award. This practice is called “scholarship displacement.” If a student is a need-based candidate and is earning private scholarships, be proactive in your planning to make sure the school doesn't take away your gift aid instead of their need based loans.
Overall, comparing your financial aid award letters side by side is about getting down to an apples-to-apples comparison.
How much money do scholarships or gift aid amount to?
How much self-help (work-study or loans) is offered?
How much will need to be paid back (loans)?
What is the net cost for all four years down to the penny?
How much can a family afford to pay from their monthly cash flow?
How much can a family afford to pay from their assets?
As your student's letters roll in, be sure to compare them apples to apples and so you can determine which are the best fit. The college years are one of the most expensive periods in a family’s life. Paying for college is probably the largest purchase a family will ever have to make after buying a home. Families need to do their homework and know exactly what they are buying to ensure they don’t have buyer’s remorse on a $100,000+ purchase. If you have questions about your award letters or want help developing a strategy to pay for college, we are here to help! Schedule a call with us today to speak with our team!
Mike Bink, AAMS®, CCFS®
Mike works with families to simplify the college funding process and is widely recognized as an expert in college planning. He is passionate about empowering families to become informed consumers of higher education so that they don't pay a penny more for college than they absolutely have to.