College commitment time is here! It is also time for the Financial Aid Award letter analysis. Families need to understand the award letter before making the college decision. As the cost of a college education continues to increase, the financial aid award letter is becoming a very important piece of the process. Student and parents are seeing an increase in college debt and are looking to find the best value.
A few things make this decision more difficult. Many families have attended the admission presentations with the hope of receiving the financial aid needed to attend a specific college. This hope is often not met to the level of expectation or financial need. It can make the decision more difficult, especially when an emotional connection to the school has occurred. Both the student and parent need to minimize the emotions and become more practical. College debt can cripple the financial future of both students and parents.
Another shortcoming of the financial aid award process is the information is only available for one year. Converting your focus to the financial outcome is critical in my opinion. Many parents are concerned about their financial aid position when applying to college but overlook the impact of multiple children entering or leaving the process. These changes can cause significant differences in your net cost each year, which is not shown in the award letter. To make a better value decision, you need to plan for these changes.
Here is a link to a short financial aid award letter video that describes the financial aid award letter. Listed below are descriptions of items to evaluate and consider before making the college decision.
Cost of Attendance or COA
The College’s COA is the sticker price that is on the award letter. In most cases, it is the colleges average cost. Due to the different tuition programs, various house options, meal plans and travel, the typical amount on the award letter needs to be customized. This amount may not be identified until the college issues the final bill, during the summer.
As a best practice, we recommend you build your own Cost of Attendance now. Your specific decisions will allow you to better estimate your true net cost. The cost of attendance will include both direct and indirect cost from the college. Direct costs include tuition, fees, room and board. Indirect costs include books, travel expenses and personal living expenses. These cost are only that of the student and do not include other parent cost such as travel, hotel and other visit expenses that may occur during the year.
The COA is the starting point of the financial aid process. This number can be appealed for students who have special circumstances such as a learning difference or medical needs. If a student can show there will be additional expenses for these circumstances, some institutions will adjust their cost to accommodate those situations.
Award Letter Sections
The college financial aid award letter has various sections and terms that you need to understand before you make your decision. Listed below are the most common. An important part of the analysis requires a family to separate the gift aid and the self-help money by type. This will allow you to better identify the net cost over multiple years.
This is what every family is looking for and is the most coveted item of the financial award. Scholarships are the free money and are a direct reduction of the cost billed by the college. You need to take a scholarship one-step further since the type will dictate if it will change year to year.
A merit scholarship is an award that is given to a student for a specific academic achievement or talent. The college wants this type of student on their campus. The merit scholarships are the best type of financial aid to receive. It is the free money that is recurring over the student’s academic career for a specific length of time. Typically, there is a separate letter describing the award and requirements. In most cases, a required academic level or activity is required to maintain the award.
A need-based scholarship is a little different since this amount may change each year based on a family’s financial strength. These scholarships are determined by the student’s expected family contribution or EFC. If the COA of the college is higher that student’s EFC that student may qualify for some need-based scholarship. Most colleges do not meet 100 percent of need.
It is very important that you understand the difference especially if it is not identified on the award letter. Some colleges do not separate the two different types in their award letter. If the type of scholarship is not identified, I would recommend you call the college and get clarity. The difference between a merit and need based scholarship is important since the need-based scholarship may change in future years. Understanding the type will allow you to compare the net cost of the colleges better. This is especially true if you have multiple children in college at the same time.
Grants are another term that is found in this area of the award letter. This is normally free money but there are a few exceptions, such as the Teachers Grant. Grant money is need-based aid and will change each year depending on the student’s academic progress and financial position.
By separating this information, it allows a student and family to better project the net cost and make a better value decision.
Self Help Aid Section
The self-help section has two major components. They are loans and work-study. This part of the financial award letter is highly dependent on the school’s COA and the student’s Expected Family Contribution. It will determine the amount of some loans and the type. This area can get very confusing since a student could easily have three or four different types of loans on their financial award letter.
Each year the financial aid forms or FAFSA needs to be submitted to qualify for federal loans. By completing the FAFSA, the student’s EFC is created and financial need can be determined. A student could easily have 10 to 20 different loans at graduation. This often results in more confusion around the loan repayment and forgiveness process since debt structure drives that process.
The type of loans will dictate if interest will be charged on the borrowed amount while the student is in school. Both parents and students often misunderstand the different types of loans. Many parents and students have the impression that all student loans are interest free while the student is in college. This is not true. Only the loan payments are deferred. The most common interest free federal student loans are the subsidized direct loans and the Perkin loans. Some states and colleges offer some interest free loans. The Perkins loan has been eliminated and only certain students currently in college now will qualify for this loan in the future.
The other part of the self-help section is the federal work-study program. This program offers a job to the student each semester while in college. Unlike the scholarships and loans, this money will not offset the direct college expenses. These are offered to need-based students to help with the indirect costs mentioned above.
Importance of Cash Flow
As mentioned above the award letters are only a one-year view of the student’s financial picture. There are reasons why colleges do not offer a four-year estimate. Family’s financial position changes, student need to show academic progress, and students housing options change each year to name a few.
An important part of the process is to complete the FAFSA each year no matter what the financial position of the family. More families are financing a portion of their child’s education. To qualify for the federal loans, a family must complete the FAFSA. The federal loans offer additional benefits that many private loans do not offer such as better repayment option and loan forgiveness.
I believe a four-year cash flow needs to be done. It helps students and parents identify the best financial value. This is especially true for families with multiple children in college at the same time. By have the cash flow analysis, you are able to:
- Identify funding shortfalls
- Structure the debt more efficiently
- See possible changes in financial aid positioning
- Compare value of the financial outcome by college
This lack of planning and financial literacy has contributed to the increase of student debt. Many students focus only on getting the college degree and do not plan for the financial consequence of the overall cost. It is the reason why we developed the EFC PLUS College Cost Analyzer software and process.
Due to the lack of college financial planning, more colleges are adding financial literacy to their student services. According to 2014 National Student Wellness Study more than 72.1% of the students are stressed about their personal finances. If proper planning is not done, this problem will continue to grow.
Student Debt Structure
The college financing process is very different from any other personal loan. In most other major purchases, a third party needs to approve the loan. Most student loans do not require this step and if they do, the approval process is minimal.
The biggest difference in most major purchases is that a physical asset is available to reclaim, such as a home or a car. The asset resulting from a college education is an intellectual property that cannot be physically reclaimed. Because of this financial risk, the ability to default for lack of payment is much harder and is the reason why most student loans are not forgiven under the bankruptcy rules.
The college finance process minimizes how the debt needs to be structured. Debt structure is a very important part of the college funding decision. By not structuring the debt correctly, students may forfeit various loan repayment and forgiveness programs. Parents also increase the risk of being legally tied to student loans for a longer period of time.
Since more careers are requiring post-graduate studies, debt structuring and resource utilization can have an impact on your loan interest rate and repayment amount especially when post-grad programs are required. This area is often overlooked. The interest rate and fee difference between the undergraduate and graduate loans are 4 to 6 percent points. By having the cash flow analysis and reviewing the debt structure, a student’s loan interest could be significantly different with proper planning.
As I stated at the beginning of this article, this is an emotional decision. Many families overlook the practicality of college and the financial outcome. I always recommend that you have a discussion with the student and use the Accenture Annual College Graduate Survey. Each March, they survey over 2,000 student and compare the expectations of the upcoming graduates to the two prior years of college graduates. It helps put the expectations into perspective.
As a parent, who just put three daughters through college, I always asked them to envision their life at 25 during their college experience. Parents ask questions like future job prospects in their career, job salary and graduation debt. Tough questions asked now can be eye opening to your child. Remember, keep your focus on what life is going to be like after college is all over.
Listed below are other resources that may help you in your college decision process: