By April 1st, most students will have received their acceptance letters and financial aid awards. Comparing the financial aid award letters can be overwhelming and confusing since there is not a standard format. The award letter tells the family how much financial support the school is willing to give a student for the upcoming year. Comparing the value of each college becomes even harder since there are other non- financial factors that need to be considered in this decision.
The review of the award letter should begin by separating the aid into three types merit-based, need-based and self-help. This will provide the family with the net cost of each college and an insight on which items may change in future years. Merit-based financial aid is free money. Many of these scholarships have requirements such as a certain GPA or participation in a certain activity. These typically do not change year to year.
Need based aid and self-help financial aid are primarily dependent on your financial need and will typically change year to year. As part of the financial award letter review, it important to confirm each type of aid by line items if you are unsure.
The biggest disadvantage of the financial award letter process is the financial award is only for one year. To properly compare each school, you need to estimate your net cost over a four-year period at minimum. Factors like the school’s gifting policy, retention and graduation rates need to be considered to make the best college financial decision.
Listed below are a few other value comparison ideas that should be considered:
Look Beyond the Sticker Price
Before the award letters are issued, some parents may have the perception that a lower cost college is a better value. This can be the furthest from the truth. You need to evaluate your child and understand how they will make the transition to the next learning environment.
The opportunity cost needs to be considered which includes graduation rate as a primary factor. As parents and students make this decision, most families have the expectation that the student will graduate within the four-years. In many cases, the intention and reality are very different for a variety of reasons. Looking at both the total cost and graduation rate can be very helpful. If a college has a low graduation rate, you may need to consider an extra year of cost plus a year of lost earnings to determine your real cost.
As a point of reference, the national average for graduating college in four years is under 40%.
Another great data point is a college’s retention rate. This reference point is often overlooked. Approximately 25% of students will transfer and most students will lose credits with this transition. Reviewing the retention numbers could help minimize this risk. If a student transfers to another college, most students will lose college credits, which will normally result in a later graduation and added cost.
One major reason a student may need to transfer is financial. This refers back to my previous point where understanding the four-year commitment of the college is important. A closer analysis of the total cost of each college will allow families to truly compare the various award letters and see if their budget matches this four-year cost.
Loan Approval and Structure
Currently, the student debt is over 1.3 trillion dollars. Knowing the financial outcome by college should be part of the college value decision. Taking the four-year approach to the total cost of the tuition will allow the student to understand the debt they will be accumulating while in college. Student loans can accumulate quickly and often the career choice may make repaying the loans difficult. We see this indirectly through the student debt issue that continues to grow.
Most students entering college are not thinking about how they will repay their student loans. The financial aid process does not do a good job in planning for the student’s financial outcome. The risk is on the student since loan pre-approval is not required like most other personal loans.
Another important issue is how the debt is structured. Many parents do not realize that the student has limited borrowing power. The student is limited to a certain yearly amount and lifetime limits that are their full legal responsibility. If additional resources are needed, a family may need to obtain a Parent PLUS loan or co-sign for a private student loan, both of these loans are directly or indirectly the legal responsibility of the parents.
As a side note when comparing award letters you need to eliminate the Parent PLUS Loans as part of your award letters. Some schools will include it as part of the financial award.
Family Time Line Impact
Having multiple children can have a significant impact on the amount you will pay and your financial aid package. A four-year plan can show how your financial position can change and help families analyze the true net cost of each college.
As an example, the oldest child’s financial award could be unattractive at an initial review. If you factor in the number of siblings entering in the next year, their financial aid position may improve and if the college is a generous school, the total four-year cost could be overstated significantly. The inverse can also happen with younger siblings in a family. The initial award may take into account an older child in college making their package very attractive in the early years and may become an unaffordable cost when the older sibling graduates. This is where proper planning is required and reviewing the one year approach may not provide you with a complete value picture.
For parents who have had children later in life, understanding this financial commitment and how it impacts retirement planning is important. It should also be considered before you make this college decision.
As more careers require post-graduate degrees, the academic career requirement needs to be part of the evaluation. Many young adults cripple their future by not understanding the financial consequence to their college decision.
Part of the overall plan for a student should be reviewing the academic requirements for the desired career. Delaying the career decision can increase the risk of added college time and cost. If a student knows that the career selected will need a post graduate degree then this should also go into the planning aspect of the college selection. Picking this school should include both one that will enable the student to get into that graduate school but more importantly give them the ability to pay for this further education.
Award Letter Appeals
The media and parent rumor mill have great stories of how you can negotiate with the college financial aid offices. I would agree that it never hurts to ask but the system is restrictive. Most schools have sophisticated financial modeling tools. These models determine what the college can afford to give each child based on the admitted class. You need to realize that college education is a business. The award process is very different from the marketing of the application process.
The people who should appeal are those who have had a significant change in their financial position from their prior year taxes or FAFSA submission. The FAFSA and IRS system are now linked. It has been my experience for successful appeals to be brief with actual number explaining the change or issue.
For many families taking a second look at this decision from a different prospective can be beneficial. It is a very emotional time for both parents and students. Having a practical approach and a goal will normally result in a better outcome. The least expensive solution may not be the best value. The goal is to focus on the outcome of the education. When making this very important decision, the student and parents need to envision the student’s life at 25 and being a productive adult.
EFC PLUS will be hosting a series of financial aid award letter webinars in April. These are designed to help students and parents understand their numbers and make a better college decision. Come join us and learn more about the financial aid award letter. The EFC PLUS college software tool also has an award letter comparison section. Please click see the the advantages of EFC PLUS.