It's crunch time for high school seniors: May 1 is College Decision Day, the day most college-bound students will let universities and colleges know whether they will be enrolling. For students agonizing over multiple offers, a big factor in choices will (or should be) financial aid. After all, the less you borrow as a student, the less student loan debt you'll have to repay after college.
But those financial aid letters students have received can be confusing at best, and downright deceptive at worst. One parent told me about the worst one her daughter received: "It showed the parents' out-of-pocket cost after the small award, plus the maximum federal student loan, plus a big Parent PLUS loan … and it looked so reasonable," she said. Her daughter didn't fully understand that it would mean a big chunk of debt for both the parents and the student to repay after college.
When reviewing financial aid offers, here are five student aid gotchas to watch out for:
1. Loans in Disguise
Financial aid awards will often lump loans together with grants and scholarships and sometimes may not even use the word "loan" to describe money that will be borrowed. But a loan is a much different animal than grants and scholarships that don't have to be repaid. "When I hear colleges talk about how loans make school more affordable, it's misleading," says Mark Kantrowitz, senior vice president Edvisors.com, which offers free tools to help plan and pay for college. "Loans really provide cash-flow assistance," he explains. It's not free money, even if it feels that way. "In most cases loans increase costs because they charge interest," he says.
Lynn O'Shaughnessy, a higher education expert who teaches parents how to cut the cost of college at TheCollegeSolution.com, is especially concerned about parent loans listed as aid. "They'll stuff a big Parent PLUS loan in there, but they shouldn't even be in financial aid letters," she insists. Interest rates are high, and any parent can apply for one. "Be careful if a big chunk of your award letter is a Parent PLUS loan," she says.
2. Front-Loaded Grants
Grants and scholarships may make the first year look affordable, but that equation can change in subsequent years. How do you know if a school "front-loads" grants? It can be hard to tell, admits Kantrowitz. One approach is to ask the financial aid administrator what will be required to renew the awards in subsequent years. He also suggests using the government's College Navigator website which lists average grants for the first year and all other years for each school. "It's not perfect," he says. But if you see a substantial decrease after the first year, that can be a red flag.
3. Missing Costs
If you simply compare tuition costs, you'll likely be missing some key items, including room and board, meal plans, travel, books and "other" fees (a category that can rival a cellphone or cable bill in the number of add-ons). Be sure essential costs are listed and try to make sure they are realistic, Kantrowitz warns. "Some have a textbook allowance of $250 and in some courses a single textbook can be $250," he says. When aid letters don't list the total cost of attending that institution, awards may seem more generous than they really are.
4. Missing Expected Family Contribution
Your Expected Family Contribution (EFC) is basically a proxy for how much a family is expected to pay, at a minimum, for one year of college and it's generated when a student fills out the Free Application for Federal Student Aid (FAFSA) or the CSS/Financial Aid PROFILE (which many private schools use). Just as you don't have a single credit score, you're likely to end up with multiple EFCs for private colleges. "Every school that uses the PROFILE can create its own EFC because there are hundreds of questions they can add," says O'Shaughnessy.
If the EFC is not on your award letter, ask the school what number it is using. "Schools just don't like to tell people what their EFC is because parents would then be able to tell if the financial aid package is a good deal," O'Shaughnessy says. She gives the example of a student who is awarded $25,000 in grants. On the surface that may appear like a generous award, but if the total costs are $50,000 and the family's EFC is $5,000, it's not. (What that would mean is the gap between what was owed each year and what the family would need to pay would be $25,000 per year — for a family whose realistic ability to contribute is closer to $5,000 per year.)
5. Missing Bottom Line
The net price is the cost of attendance minus any grants you get from any sources. Some aid awards will list the true net price, but others will throw in loans. "You need to know how much you will pay after all the free money is deducted," says O'Shaughnessy. It's also possible to appeal a financial aid award if you think it's too low or if your circumstances have changed since you filled out the FAFSA.
If you end up incurring large amounts of debt to pay for school, it can be difficult and painful to dig out. If you have a high monthly payment or you've fallen behind, student loan debt can make it difficult to get a mortgage or other lines of credit. You can see how student loans are affecting your credit by checking your credit scores, which you can do for free on Credit.com.
So read those letters carefully and if the true cost isn't clear, don't be afraid to ask questions. After all, this is your future you're looking at — in more ways than one.
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