Student Loans

A Parent’s Guide to Deciphering College Financial Aid Letters

A new study states 40% of college financial aid letters are inaccurate and misleading—so much so that students and families wind up spending much more cash that they planned on college costs.

The data comes from New America and uAspire, a nonprofit leader in college affordability, which examined over 11,000 college financial aid letters.

The study reported the seven most confusing things about financial aid award letters.

  1. Confusing Jargon and Terminology: Of the 455 colleges that offered an unsubsidized student loan, 136 unique terms for that loan, including 24 that did not include the word "loan." Want to learn more about how to get a student loan? Read this.
  2. The Omission of the Complete Cost: Of 515 letters selected, more than one-third did not include any cost information with which to contextualize the financial aid offered.
  3. Failure to Differentiate Types of Aid: 70% of letters grouped all aid together and provided no definitions to indicate to students how grants and scholarships, loans, and work-study all differ.
  4. Misleading Packaging of Parent PLUS Loans: Nearly 15% of letters included a PLUS loan as an "award," making the financial aid package appear far more generous than it really was.
  5. Vague Definitions and Poor Placement of Work-Study: Of institutions that offered work-study, 70% provided no explanation of work-study and how it differs from other types of aid.
  6. Inconsistent Bottom Line Calculations: Just 40% of letters calculated what students would need to pay, and those 194 institutions had 23 different ways of calculating remaining costs.
  7. No Clear Next Steps: Only about half of letters provided information about what to do to accept or decline awards, and those that did had inconsistent policies.

Washington, D.C.-based New America calls for federal government mandates that require college financial aid letters to be user-friendly and transparent. The group also wants state governments to "adopt common award letter terms, calculations, and formats across their systems of higher education."

While public policy groups take aim at opaque and confusing college financial aid letters, there are good steps students and families can take on their own to make better sense of financial aid letters and save significant cash in the process.

Job one is to make sure you understand the difference between grants, scholarships, and loans.

"The first thing you look for on a financial aid award letter is what is free money (usually labeled as grants or scholarships) and what is not," says Paul Compeau, founding partner at BridgeWise Financial Partners, a boutique college financial aid services company. "In your initial evaluation, don't count loans, work-study, or any other self-help as part of the evaluation and comparison of the offers."

Ask some pertinent questions of college financial aid officers and staffers, too.

"Many schools, (65% of private and 27% of public, according to Money Magazine) participate in financial aid leveraging," Compeau says. "Some schools will offer you a larger amount of grants for your freshman year, and then reduce the offer once your student is attending the college. Be sure to ask what the criteria are to renew each scholarship each year."

Also, know that federal student loans are also usually packaged as "aid" in financial letters—yet that's really not the case.

"This is terribly misleading," says John Hupalo, founder and CEO at Invite Education in Boston, Ma. "These are loans that need to be repaid."

The focus on student loans in a financial aid letter should be a big priority for students and families, Hupalo states.

"Parents and students sometimes fall into the trap that the financial aid that has the largest total sum of all "aid" is the best package," he says. "That may be false if the Financial Aid Award Letter has little free money and is heavily weighted with loans."

Additionally, students and parents need to remember to refile the FAFSA form each year in order to be eligible for the federal grants and loans included on college financial aid forms. "Their college may also require the CSS Profile (the form most colleges use to make financial aid decisions outside of aid from the federal government) to be re-filed to maintain the college's grants and scholarships," Hupalo notes.

It's common for colleges and universities to close the gap between the aid they are able to award and the amount a family can pay with high-interest parent loans called PLUS loans, says Rhiannon Schade, Director at Collegewise, a collegiate admissions specialist firm in Millburn, N.J. "If you see these in your award, research them carefully before proceeding, since they are typically high-interest loans, and the repayment terms are not very flexible."

Schade reminds students and parents that college loans that need to be repaid are still considered financial aid and are listed as a line item on financial aid letters. "This lowers the immediate out-of-pocket cost typically listed at the bottom of the letter and makes universities look more affordable than they actually are," she states.

Want to learn more about how to repay your student loans? Read this.

Make no mistake—misreading or miscalculating financial aid data on college aid forms can have long-term, and highly negative, financial ramifications for students and families.

Read those letters carefully and if necessary, hire a professional money manager or college planning advisor to go over the form for you.

Otherwise, the financial lesson you get by not paying close attention to college financial aid letters is one that can grade out poorly—and stick with you for years to come.

Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.

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