PayForED believes understanding the financial outcome of the college decision should be a key decision point when comparing award letters. We have compiled six items to consider when comparing award letter. Our goal is to help families review and clarify the “bottom line”or “net cost” of each college listed on their award letter.
Today, student debt is over 1.5 trillion dollars and is affecting over 44 million people. The lack of financial awareness and additional analysis of the award letter is a shortfall of the college process. Currently, college award letters only provide a snapshot of one year of the college expenses and there is not a standardized format. One of the biggest reasons for transfer is due to financial reasons.
The projection of total net cost and how each family will pay for it is not addressed. The proper college financial award comparison needs to include a four year “WHAT” you will pay and the “HOW” a family will pay for this education. By using this approach, the transparency of the financial outcome will reduce excessive student debt.
Here is our approach and the list of items to consider when comparing the award letter. It will simplify a very confusing and complex problem by standardizing the information.
1.Customize Your Cost of Attendance
Every college bound student should customize their cost of attendance or COA. The COA includes tuition, room, board fees, books, transportation and personal expenses. We recommend that families build their own cost of attendance now while they are in this analysis stage.
Families will need to develop both the direct and indirect costs of a college. Direct costs will include tuition, fees, room and board. The indirect costs include books, travel expenses and personal living expenses. When creating the direct cost families should review academic major, fees, room type and meal plan for each school on their list. Prices can vary greatly depending on the program, room type and meal plan selected. A family may find that some colleges mandate that freshman take the maximum meal plan the first year but this can be reduced as the student progresses through school.
2.Understand Each Scholarship List
An important part of the analysis requires the family to separate the merit scholarships from the need-based scholarships. This will better enable the family to identify the net cost over multiple years and help them project future net cost. The merit scholarships are the free money given to the student and are a direct reduction of the cost billed by the college.
A merit scholarship is a financial award given to a student based on their specific academic achievement or talent. Most merit scholarships have additional requirements that need to be maintained to receive it in future years. This could include a certain GPA or activity, such a community service. Discussing the scholarship with your child can help reinforce the importance of maintaining the merit scholarship requirements.
A need-based scholarship or grant is an amount that is determined by the student’s Expected Family Contribution (EFC) calculation and financial need. If the COA is higher than the student’s EFC then the student may qualify for a need-based scholarship or grant. Most colleges do not meet 100 percent of need.
It is also very important for the family to review their own family timeline and see how this impacts your EFC calculations over the next four years. The EFC calculation may change when a family has more or less children in college at the same time. These changes can have a dramatic impact on your financial award due to the changes in your financial need.
We recommend that if you are unsure of the type of scholarship on the award letter you need to contact the college for clarity.
3. Self Help Money: Loans and Work Study
Loans and work study are considered self-help money on the award letter and is dependent on a student’s financial need each year. The self-help details are directly related to a student’s EFC. Each year, a FAFSA needs to be completed. This will allow the student to qualify for federal loans. The type of federal loans will again depend on the student’s financial need that year.
- Subsidized vs Unsubsidized Student Loans
Identifying the type of student loan you have been awarded can be confusing. When looking at your award letters, you may see only an unsubsidized loan for one school while another school lists both subsidized and unsubsidized loans. The student’s financial need will vary between schools. Due to the variance in cost, a family may see significant differences in the amount and types of loans awarded.
- Warning on Parent PLUS loans
Some college will list a Parent PLUS loan in the financial award. This loan is legally the parent responsibility. It can often distort the true net cost of a college. When comparing colleges, this amount should never be part of the analysis.
Work- study programs offer the undergraduate a part time job each semester while they are in college. Unlike the scholarships and loans, this money will not offset the direct college expense. The award is dependent on the student filing the FAFSA form and is awarded based on need. It is used to offset other costs such as living expenses and books.
4. Projection of the Four-Year Net Cost of College – “Your WHAT”
The award letter provides only a one year look at the cost of college. This is a shortfall in the process. It does not provide a projection of the four-year cost. To make the best college financial decision, a family will need to understand and project the four-year net cost of each college. Creating this analysis can be overwhelming and difficult for families. Taking the initial award letter and multiplying it by four is not a good approach.
The PayForED software can provide a detailed comparison of award letters to help you make the best decision. Families need to know how their financial position can change depending on the family timeline of other siblings in college. These changes will have a direct impact on future financial aid depending on the current award structure. By creating a four-year analysis, a family can better identify the true value of a college and make a more informed decision on what the family will pay.
5. Projecting Student Debt – “Your Customized HOW”
After developing a four-year net cost of college, families need to determine how they will pay for these expenses. It leads us to the next important step which is the “HOW.” A family’s “HOW” may include college savings plan (i.e. 529), monthly cash flow, tax strategies and student loans. After understanding these numbers, students will have a general idea of how much debt they will acquire during their education. It is important to understand the loan structure because it will drive the student’s repayment options in the future. By better understanding how to use your financial resources and structure the student loans, families will plan better for the future and have an easier repayment process after graduation.
Colleges promote how much financial aid they provide, creating a level of hope and an emotional tie for students. Cost and debt are rarely discussed during the application process. If you have a better estimation of “WHAT” you will pay, then you can make informed decisions on “HOW” you can pay this expense.
Most parents do not understand the legal consequences of the federal student loan options. Each student is limited to a certain yearly amount as well as a lifetime limit. These federal student loans are the student’s 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. In both cases, these loans are directly the legal responsibility of the parent. These loan decisions could impact the parent’s credit score and possibly their financial future.
6. Other Factors
Other items that students may fail to consider during the process are the retention and graduation rates for the college. Reviewing the retention gives insights into the transfer rate for the college. If a student transfers to another college, most students will lose credits hence more student debt or tuition at the very least. Lower graduation rates at a college may indicate that students are not graduating in four years. It is important to have a discussion about the cost associated with not attaining the desired degree in four years and the cost of another year of school. When looking at the retention and graduation rates, make sure that the data is current. Always check the year of the statistics given by any institution.
The family needs to evaluate each college and see if their child’s personality will thrive in the environment at that institution. Be comfortable with the decision. A state school may be more cost effective, yet you need to determine if your child will survive in a classroom of 400. The best way to save money is to graduate on time.
Comparing Financial Award Letter Approach Summary
During this period, the emotion and stress of the college decision is high. Taking the PayForED approach, will equip a student for success and minimize the risk of excessive student debt. We often recommend that students talk to peers that are in college or have recently graduated to ask about their experiences. It may help in their decision process.