While You Are Opening Those Financial Aid Award Letters...

US News and World Report interviewed Mark Kantrowitz of FinAid and FastWeb to help students and families compare award letters since they don't have a standardized template (isn't that an idea whose time has come?).  Here is his advice:

• Best way to determine cost of attendance to create an "apples to apples" comparison:  "Visit the financial aid section of the college's website. Sometimes they'll bundle everything together into one overall figure. The school's catalogue often has detailed information. You can also always call the financial aid office."

• Most important figure to calculate:  "Your out-of-pocket cost, which is what you get when you subtract only grants and scholarships—that's your free money—from your total cost of attendance, is more important. This is more important because everything else is money you're going to have to come up with on your own, either by working for it through work study, borrowing it, or taking it out of your savings or some other source. Loans aren't really financial aid. They might provide cash flow assistance, but they're not giving you money that doesn't have to be repaid."

• On how negotiations with colleges over aid typically work: "The process is driven by information and documentation. If you try to get schools into a bargaining situation, it's just not going to do any good. If there is a difference, you bring it to their attention. It's not that they're saying, "Oh, you're getting $2,000 more from this other college. We're going to match that offer." That really doesn't happen all that often. What is more likely is they say, "Oh, there's this piece of information you told to them that you didn't tell to us." Then they plug it in and out pops a new figure.

  Colleges don't really get into bidding wars. If they believe that you're going to have a 3.75 GPA and you're middle income and the difference is only $500, maybe you'll get it—if they think they have a good chance of getting you to enroll as a result. But if you're low income, you're already getting full aid. If you're high income, it doesn't really make that much of a difference."

  • Here is some useful information to know about college discounting practices based on a survey of business officers:  "The average discount rate for full-time freshmen increased from 39 percent in fall 2007 to 42 percent in fall 2008, and the average award covered more than half – 53.5 percent – of the “sticker price.” The discount rate represents the share of tuition and fee revenues colleges use to award institutionally funded aid...the report found that about 41.5 percent of the discounting aid – the largest percentage share of dollars – was given based on non-need criteria like academic merit. Need-based aid made up 36 percent, and 22.5 percent was awarded on a combination of need and non-need criteria, the survey found."

• On how to think about student debt:  "Another consideration is you need to compare the total amount of debt you're going to be taking on to pay for your education versus the starting salary for your field of study—that is, if you already have career plans. If the debt exceeds your starting salary, you probably should go to a less expensive school. If you borrow twice as much as your starting salary, you're at very high risk of default. You will have to use extreme measures like living at home with your parents after you graduate for the next two decades in order to avoid defaulting on your debt!

  There's another rule of thumb that I use. I take the 90th percentile debt at graduation by degree as a sign of overborrowing. For a bachelor's degree, that would be $45,000. For an associate's degree, $25,000. If you're borrowing more than that, you're probably overborrowing.

  • For that calculation to be meaningful, families need to complete a Higher Education Financial Plan to know the debt levels they will need to incur. 

• How to think about school default rates:  "A high default rate is a sign of one of two things. Either the students aren't graduating, or they are graduating but they're not getting jobs. For some colleges, students don't get jobs because the school serves students from a region with high unemployment rates, or some other demographic factor. But if it's a college that draws from a wide area of the country and it has a high default rate, then you should consider that maybe that says something about the quality of education.

From the Washington Post came five tips about evaluating a financial aid package:

"Most college bound students received their financial aid offers this week, and not everyone was happy with what they saw.

Schools in a tight money squeeze have responded by "gapping" more and more students -- that is, leaving a gap between what they need and what they'll get from the school. And most schools continue to rely heavily on loans instead of grants in awarding aid to students."

The article goes on to provide these five pieces of advice:

• Analyze your aid package and consider going back to ask for more.
• Pick and choose the pieces of the aid package that you want to take.
• Consider alternatives before you borrow a lot of money.
• Weigh private loans carefully
  • Focusing on the "as low as" interest rates for private loans is misleading since SLA estimates the average rate to be 9.5% to 10.0%, a far cry from the 4% figure cited in the article:  "You can get a private loan instead for slightly more than 4 percent, if a parent with a good credit score agrees to co-sign." 
    
    • Remember that Sallie Mae executives are still telling investors that their average rate on private loans is LIBOR + 10% (10.25%) with average FICO scores near 750. 
• Start paying interest ASAP
  • I certainly agree that it is a good idea but disagree with the statement that "Not every lender or loan program lets you do this, but several do."  Since private loans don't have prepayment penalties, all borrowers can make interest payments while in school therefore all lenders let you do this. 

Bankrate.com lists items that are not found on award letters that students and families should be aware of:

• Not everything is shown:  "Aside from scholarships and grants, Ferguson [Nicole Ferguson, director of financial aid for Sierra Nevada College] says that other forms of financial aid, such as private loans, loan forgiveness programs and educational tax credits, won't be included on the award notification either."

• Your end of the bargain:  "When we give financial aid, we give it one year at a time and they need to reapply for it every year," says Davenport [Dan Davenport, director of student financial aid for the University of Idaho]. "Award letters don't give multiyear information on Pell grants, federal or private loans, so you're not really seeing a full financial picture."

• PLUS loan not a big plus. "The PLUS loan is a federal loan all parents can take out if they pass a credit check," says Vaughn [Chris Vaughn, director of new student financial planning at Mansfield University]. "Some schools list it as financial aid and some don't. So if one school is offering a $20,000 PLUS loan and another isn't, it doesn't really mean you're getting more aid."
  • This rang true for me as I had a friend going through the process of evaluating offers for their son aske me why one school was offering the PLUS and another school was not. 

• Preferred lender list not always preferable.  "These products might be the best option for your family, but they might not be," says Kendra Feigert, director of financial aid at Lebanon Valley College in Annville, Pa. "Families need to do their own research beyond what the aid office is saying."
  • Here is SLA's survey which found one in seven financial aid administrators considering a PLL for 2010-11. 

• Plan for the present, future:  "Besides financing an education with grants and loans, families can pay as they go by enrolling in a payment plan. "Schools usually don't list financing options they have available," says Feigert. "If a school has different kinds of tuition payment plans, that's usually not on the award letter."
  • Here is an SLA post describing tuition payment plans. 

The Wall Street Journal provides a cautionary tale of why families need to get their updated tax information and  to schools in March to have an accurate picture of the aid they can expect and to avoid having aid rescinded:

"They submitted their Free Application For Financial Aid, or Fafsa, documents by the early February due date, but hadn’t updated the information after filing their taxes in early March. The award letters make their way out from colleges to the entering freshmen by April 1, and the prospective students have to commit to a school, with a deposit, by May 1. That’s when the schools ask for updated tax information to justify the scholarships offered in the award letters. If the tax information improves the financial situation of the family, the college can rescind the financial aid."

US News and World Report takes aim at "the lie" behind the Expected Family Contribution, in this post:

"The federal government calculates what it calls an "Expected Family Contribution" for students who complete a Free Application for Federal Student Aid. Anyone with access to a dictionary would conclude that means the government has figured out how much the student's family should be "expected" to "contribute" to the student's college expenses.

Many students and parents get unpleasant surprises when the government sends them their EFC because the government's formula for figuring out what families should be able to afford is unrealistic. The federal government expects parents to contribute at least 22 (and, for wealthier families, as much as 47) cents of every dollar above an arbitrarily low family budget. For example, a single working mother would be expected to start contributing for every dollar she earns above about $30,000 a year. That means a mom who makes about $50,000 a year could be expected to "contribute" more than $3,000 a year to her student's college expenses. But if that mother happens to live in an expensive city such as New York, Boston or San Francisco, she's probably spending half her take-home pay on rent alone. Add in necessities such as transportation, health insurance, and food and the Economic Policy Institute's "Basic Family Budget Calculator," shows that there often isn't $300 left at the end of the year, let alone $3,000.

[Read about how the government came up with such unrealistic budgets.]

The EFC is further undermined when students go to college. More than 97 percent of colleges don't have enough financial aid money to guarantee that every student will only have to pay their EFC. The average public four-year college tells families earning about $56,000 a year that they have to kick in about $2,000 more than the federal government's "Expected Family Contribution." [See the list of colleges that claim they provide enough aid to meet a family's need.] Many colleges award big scholarships to the students they are trying to lure because of athletic skills or top grades. So yes, the government does calculate a contribution that it thinks families should contribute to college costs. But that expectation is often painfully unrealistic. And the percentage of students whose college bills actually match their EFC is surprisingly small. Many talented students end up paying less than their EFC. And millions of less fortunate students are, unhappily, expected to contribute much more than their often unaffordable EFC. Justin Draeger, the National Association of Student Financial Aid Administrators' vice president for public policy, confirms: "the EFC that tells you nothing. It doesn't tell you how much you're going to have to pay...The whole thing is broken." Of course, the best fix would be to provide enough aid so that students could actually afford college. But in these cash-strapped times, a no-cost improvement would be to call that number something like "Family Financial Strength Indicator," and thus stop giving students the false impression that the EFC is what they will be expected to pay."