Congratulations to all the college bound high school seniors! Many of you have started to receive your college acceptance letters which will also include the financial aid award letter. For many students, this year has felt like a marathon with laps that included standardized testing, college applications, college visits and maintaining a good GPA. Although the admission victory into your dream college is now here the race is not over yet. Now is the time to start the final lap by reviewing your award letters. This task is not an easy one, since this decision will affect your career path and your financial future. Here is a set of items to consider as you analyze each of the college’s financial award letters.
Financial Aid Award Letter
Besides the student’s acceptance to the school, the award letter outlines the financial aid offered by the college to the student. The award letter can contain various forms of grants, loans, scholarships and work-study opportunities. Each of these award letter formats could be different. The Department of Education has been trying to get the colleges to agree to a standard format but they have been unsuccessful.
To find the best college value, the first step is for families to compare each award letter side by side. The lack of a consistent format and terminology can make this task difficult. It is important that parents separate the award into the merit awards and the need-based awards. This is critical step since merit aid will normally be available for all 4 years while the need based aid can change each year based on your financial aid position.
An important note, if a Parent Plus loan is listed as an award option, this amount should be removed from your comparison at this time. Many colleges add this into their award letters. This is a type of loan used to fund a family’s funding shortfall. It can be misleading when trying to calculate the college’s net cost.
A four-year analysis is a specific area that is overlooked when comparing the award letter and I think it is the most valuable. The college financial aid award letter only provides one year of financial information. Reviewing the award letters on a four year basis enables the family to focus on the outcome of the college decision and not just the admissions. Picking the right college is even more important today with the college transfer rate approximately at 35% and the national graduation rate after four years under 40%.
A four-year analysis will help families understand how their financial award may change if they have multiple children in college at the same time. It will also better project the undergraduate debt before entering graduate school. Parents can see how these financial decisions will impact their child’s financial future.
Here is an example of understanding the awards letter details and a family’s timeline. Let us say the oldest child’s original financial award is unattractive after the initial review for their top choice. This student has twin siblings who will be attending college the following year. If you factor in the number of siblings entering in the follow year, their financial aid position will change significantly. With this information, the oldest child may be able to attend their dream school since in three of the four years he or she may qualify for more financial aid. This is especially true if the college has a historically generous gifting policy. You will need to contact the college and ask them if this is possible. There are no guarantees but the college will be able to provide some estimate of the four year expected cost.
This works both ways. I had mentioned earlier how important it is to understand the need based financial aid details. Let us say this award letter was for a younger child with older siblings in college. Their initial financial award may look very attractive but if it is filled with need-based dollars the net cost in the outer years could be very expensive. This is why understanding the details are so important.
As you can see a simple multiplication of the initial award letter by four is not a good projection either. It is also important to discuss the merit scholarship with the student. Most of them require the student to maintain a certain GPA to receive future years of the award. The failure to achieve that requirement could be expensive also.
This is where proper planning is required and reviewing the one-year approach may not provide you with a complete value picture. The timeline is also important for parents so that they can see how paying for college falls into their retirement planning. For parents who have had children later in life, understanding this financial commitment and how it impacts retirement planning is essential because they may not have many years to recoup from paying for this big expense.
Developing “Your HOW”
Another advantage of the four-year analysis is that once a family understands “WHAT” you will be paying for college, the “HOW” becomes more important. We just saw the impact of other siblings on the family’s EFC position and the net cost a student will need to pay for college. The missing piece that college financial aid offices don’t provide is the “HOW” the family will pay the bill. Each family has a different financial position and how the bill will get paid will vary student by student. Students and parents need to calculate their “HOW” since it will dictate their student debt. By developing a budget and understanding their cash flow, the accumulation of excessive student debt can be avoided.
There are two problems with current process. The college financial aid offices are limited on the advice that they can provide to families. The more complex funding strategies cross over to personal financial advice, which they legally cannot provide. The second is the easy access and lack of transparency to student loans. Under current law, families are able to borrow the full amount of the college cost less the financial aid received. Due to the easy access and not knowing the total monthly payment, many students are burdened with a life of student debt. This is why the How you will pay is becoming as important as your net cost of college.
By developing a four net cost and then reviewing cash, flow families can help to identify the funding shortfalls. The amount of the funding shortfall will help in identifying best use of your resources and borrowing options.
Importance of Debt structure
Understanding the college student loan options and the repayment methods is now a critical part of the college affordability decision. As college gets more expensive, more families need to take on debt to provide a college education. There are annual and lifetime limits based on the student loan type. The student debt structure will dictate the financial future for both the student and parents.
The important parts of the student loan decision need to include when the loan needs to be paid back, repayment options, interest rates, and legal responsibility of the loan. Families should also be aware that federal student loans have annual loan limits based on their child’s academic progress.
Creating a four-year cash flow analysis with a family time line allows the family to better identify college-funding shortfalls. Understanding when the shortfall will occur will help with the proper debt structure for your family. The correlation of the type of debt drives the loan repayment options. This is rarely reviewed during the decisions process.
EFC PLUS Senior Tool Software
We understand the difficulty of this decision and how the ability to compare the value of each college has becomes harder. It is a very emotional, expensive and important family decision. This commitment involves both factual and subjective inputs. The goal of the EFC PLUS Award Analysis is to provide customized calculations for families so that the four year cost of college will become clearer. The senior tool projects the future student loan debt at the beginning of the process so that this decision does not become a lifetime burden. The senior tool is part of our College Cost Analyzer software. This senior tool answers the questions and organizes the college comparison that we described. It provides the side by side comparison and consistent format so families can make better financial decisions.
Financial Aid Award Letter Summary
As the parent of three daughters, I understand the stress and emotion that both the students and parents are going through at this time. Taking a step back to minimize the emotional side of the college decision is highly recommended.
I have created a three-minute video that will give you a visual approach to my approach. It is called the Financial Award Letter.
Over the next three months, we will be writing different articles to help you make better college financial decisions. This will include writing the appeal letter and the best ways to use your resources to pay for college.
A few years ago, I wrote an article called the Financial Aid Award Letters Lighter Side. It is a video clip from the show “The Middle”. If you need a good laugh or a way to minimize the stress, it is worth a quick look.