PRIVATE STUDENT LOANS
Mark Kantrowitz, publisher of FinAid.org and FastWeb.com and a well known financial aid expert has laid out ideas to help improve the award letters sent to prospective students from colleges.
If you are dealing with unexpected college costs right now as you look at a tuition statement, these points will hit home. Especially if you thought the costs would be much less after looking at the financial aid award letter provided.
That’s because financial aid award letters have become an integral part of the admissions process at schools over the past several years, but may not make sense to those unfamiliar with college funding options.
College is expensive, and admissions councilors realize this. Today, we see letters of acceptance combined with financial aid award letters in one comprehensive packet delivered to the student during the Spring before they plan to attend. In order to hit enrollment goals, colleges make these award letters available well before deposits are due in May. This way schools can make accurate forecasts for enrollment each year knowing that their students looked at the numbers and made a conscientious decision.
However, with high college costs, and many students and families lacking specialized knowledge in this field, there was bound to be some confusion. The following list from Kantrowitz was originally posted on Higher Ed Watch and outlines areas where this process can be improved and nationally standardized.
Every award letter should disclose the total cost of attendance, the total amount of gift aid (money that doesn’t need to be repaid, such as grants and scholarships), and the out-of-pocket cost (the difference between the cost of attendance and gift aid) for which students and their families are responsible. This information should appear prominently on the first page of the financial aid award letter in a standard location and format to allow families to comparison shop.
The award letter must include a detailed breakdown of the cost of attendance into the major cost components, such as tuition and required fees, room and board, books and supplies, transportation and personal expenses. Each of the allowances should be realistic, based on the actual average costs for similarly situated students.
The letter should also emphasize that the cost figures are just for one year and not the entire cost of the educational program.
All financial aid awards must be clearly identified according to the type of award (e.g. grant, scholarship, student employment, student employment, loan, installment plan) and grouped and sorted according to type of award. Gift aid should be listed first, as a discount on the cost of attendance. Student and parent loans should never be characterized as reducing college costs, Loans are not gift aid.
In addition, financial aid awards must be identified using the student aid programs’ standard names, not acronyms, abbreviations, or other cryptic terms, such as FWS (the Federal Work-Study program).
All student loan options should be listed together and ranked according to cost per dollar borrowed, with the lowest cost loans appearing first. The letter should make clear that these are loans that must be repaid, with interest. The loans should be presented as an option for paying the out-of-pocket cost for which students and their families are responsible. But they should not be represented as a form of financial aid, regardless of whether eligibility for loans is based on financial need or not.
Financial aid award letters must provide clear information concerning student loans and the cost of borrowing. Listing only the loan amount near the name of the loan — as some colleges do — increases the likelihood that families will assume that the award is a grant as opposed to a loan. These letters should include the interest rates, fees, and the loan term in years near the name of the loan. The loan information must also include monthly loan payments and total payments over the life of each loan using a ten-year repayment term.
The letters should also include information about the student’s cumulative education debt (including principal and all interest) and the corresponding loan payment under a ten-year repayment term. In addition, they should include a projection of cumulative debt at graduation and the corresponding monthly loan payment.
Financial aid award letters should disclose specific policies that affect out-of-pocket costs (the difference between the cost of attendance and gift aid), such as the front-loading of grants and the treatment of outside scholarships.
Front-loading of grants makes a college appear to be more generous than it really is by providing a much lower out-of-pocket cost during the first year and possibly replacing grants with loans or work study in subsequent years. Students and families need to know how costs and financial aid will change in subsequent years.
Each college has a different policy concerning the treatment of outside scholarships the students may win. This can affect the bottom line cost for a student who has won significant amounts of private scholarship money. These students need to know how much of the outside scholarships will reduce unmet need, how much will reduce the loan and work burden, and how much will reduce gift aid. Reductions in unmet need, loans, and student employment have a more favorable impact on the out-of-pocket cost than reductions in gift aid.
The standard for financial aid award letters should address the timing of the receipt of financial aid award letters and the deadlines, if any, for responding to the financial aid award letter.
Currently, most new students must accept offers of admission by May 1 each year. Colleges should send out award letters at least two weeks before that date to give them adequate time to compare and evaluate financial aid award letters before they decide where to enroll.
The lack of clear and accurate information on financial aid award letters causes consumer confusion about affordability and the real cost of college. This leads some students to decide against enrolling in college, some students to drop out of college when they run out of money and other students to graduate with unaffordable amounts of debt. Affordability is not the only reason to choose a college, but it is an important criterion that affects access, choice, retention and completion.
Making financial aid award letters more accurate and easier to understand and compare might improve access and completion at minimal cost to the taxpayer, and help drive down college costs through increased competition. And it will certainly help students and their families make a better- informed decision about one of the most important expenditures of their lives.
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