Choosing a College: The Financial Aid Award Letter
By Joe Messinger, CFP®
February 13, 2019
UPDATED 2/12/2019 High school seniors and their families are waiting on pins and needles in mid-February. They have acceptance letters from several colleges, but they might not know a very important key to the decision–how much it will cost! Colleges send out financial aid award letters to provide all the details. The letters are not always straightforward and easy to read so we’ll revisit the topic to dig deeper into what they are telling you.
A funny thing happens when applying for college. The acceptance letter may come right away in late fall to December. Yay! Little Susie or Johnnie is accepted to XYZ University. But an important question remains. How much will it cost? Families may have an idea, but no actual numbers until they receive the financial aid award letter.
Letters are sent out mid-February through March depending on the university and will spell out the amount of the first year’s tuition, room, board, and fees as well as any gift money (grants or scholarships) and possible loan and work study numbers.
With the financial aid award letters in hand, families now try to figure out the best financial fit. Should be easy right? What’s the bottom line number? Nope. Families need to be aware of some fine details to understand these letters. Colleges will write them up differently. Apples to apples comparisons may be difficult.
As a family receives their financial aid award letters, the key is to know how to decode them. Understand how you will pay for all 4 years of college down to the penny including the total amount of loans required and the resulting monthly payment upon graduation. Be aware of a couple of things in this process to ensure you don’t get in over your head:
1) Look out for “front loaded” financial aid award letters.
What does a “front loaded” financial aid award letter look like? 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 gives you a $2,000 or $3,000 scholarship but only for the freshman year. When looking at the total cost, it may seem lower but only for the first year.
Front loading is a tactic used by colleges and universities to make it appear that every year is going to have this discount applied. Be cautious and understand what all four years will look like.
2) If the scholarship is renewable, what are the criteria to keep it? And is it for 4 or 5 years?
A renewable scholarship usually requires students meet certain criteria based on their GPA–often maintaining a 3.0 or a 3.2. If they meet the GPA requirement, they keep the scholarship from year to year.
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 a student is in a 5-year program or if most students in that major don’t get done in 4 years, make sure the aid award renews in the fifth year. If it doesn’t, the financial plan will need to account for that missing aid in the fifth year.
3) Determine what is self-help vs. gift aid. What is money that a student must work for or pay back later and what money is truly a gift that a student doesn’t have to pay back?
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 amount owed.
Self-help include loans and work study programs. Parents can become 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. It doesn’t really lower the bottom line!
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. Parents need to approach Parent Plus loans with hesitation. Most parents of college-bound students are in their 40s to early 50s, and they would like to retire someday. A Parent Plus loan is essentially a new mortgage. When you are looking at an aid package, identify whether loans are part of the offer realizing that it is money the student will have to pay back at some point. (Check out our blog on student loans for those numbers and things to consider.)
Also pay attention to work study. Students work during college, and they earn a stipend. They can apply that money to their tuition bill, or they can keep it. It is considered need-based financial aid though and is not taxable. Give careful consideration to work study. Is it the right fit for a student? Will they work hard their freshman year? Will that money actually be used for tuition or will it be for living expenses outside the cost to attend school?
4) What is the total loan amount, and what will be the loan 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 education over all four 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.
Is the college under consideration worth it? Knowing how much the total loan will be can help decide. If a graduate anticipates a starting salary of $40,000, the total student loan amount should be less than $40,000. If above that, a student has paid more than they expect to earn their first year.
In addition, try to use only federal loans and not private ones. (Read our blog comparing federal and private loans here.)
The maximum a student can borrow in federal loans is $27,000 over their four years of schooling. $27,000 in student loans is manageable but is also a serious debt for someone just starting out. Finding schools with a net cost that doesn’t have a student taking on more than $27,000 is a great goal.
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 plus years because they make twice as much interest. But does a future grad still want to be paying off student loans when they are in their 40s? Knowing the monthly payment makes it real! Here is a good online tool to estimate a student loan payment.
5) What is the net price 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 really mapping it out for the full cost of all four years. Don’t forget to anticipate tuition increases. What is the cost of attendance today and what will be the cost in future years?
We know most schools are going to increase costs and tuition over those four years—raising their price anywhere from 3 to 6% per year. Factoring those annual increases in is important. (Some schools are now touting tuition locks for all 4 years–factor that into your decision as well!)
Lay out the tuition 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.
Now, is the net cost the right fit? An example we like to use is shopping for a new car. New cars come with lots of options in every class. For some, the added amenities of a luxury sedan like a Lexus or a Mercedes are well worth the premium price tag. But for others, a Honda or Toyota suits their needs just fine. We challenge people to think about whether the extra cost or premium is worth going to a certain institution. Is it worth $50,000 more for that degree in that major to potentially get XYZ job?
Sometimes the answer is absolutely “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. Most families need to figure out where the best value is, where they can get the best education for the lowest cost to give their child the best opportunity to have a successful career down the road.
Side note on private scholarships
Private scholarships received from sources outside the college will not be reflected on the financial aid award letter. How will private scholarships affect financial aid? It depends. In general, a merit scholarship from the college that the student has earned based on their merit will not be impacted by their outside private scholarships.
On the flip side, if a 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 as much as dollar for dollar. This practice is called “scholarship displacement,” and some states are working to reverse this. You can read more about it in our blog.
If a student is a need based candidate and is earning private scholarships, try to work with the institution. If asked, many colleges these days will lower the amount of need based loans instead of the gift aid. Lowering the loan amount is a better option.
Let’s wrap it up!
Overall, comparing your financial aid award letters side by side is about getting down to an apples to apples comparison.
- How much money is scholarships or gift aid that doesn’t need to be paid back?
- How much is self-help (work study or loans)?
- How much will need to be paid back (loans)?
- What is the net cost for all four years down to the penny? (Remember inflation.)
- How much can a family afford to pay from their monthly cash flow?
- How much can a family afford to pay from their assets?
The Consumer Financial Protection Bureau has put together an extremely useful tool to help families compare financial aid offers side by side. As they roll in, be sure to compare them apples to apples and understand what the decision will mean when the student graduates.
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.