An Inside Look at College Financial Aid Letters

Financial aid letters are landing in email boxes. Here’s how to handle them.

Given the average cost of college is $35,531 per student annually, according to the Education Data Initiative, it’s no wonder parents want to wring every dollar they can out of college financial aid.

The problem is, however, that a legion of moms and dads don’t fully understand financial aid letters, which start rolling out in late March every year. Lack of knowledge of financial aid letters means missing out on budget-saving college financing opportunities in the process. Another problem – colleges are doing a lousy job of being transparent with college financial aid packages.

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According to the U.S. Government Accountability Office, most colleges “aren’t following best practices for providing clear and standard information in their financial aid offers.”

According to GAO's review of financial aid offers from a nationally representative sample of colleges, “nearly two-thirds of colleges follow half or fewer of the 10 best practices and no college in GAO's sample followed all 10.”

The GAO said colleges should estimate the net price — how much a student will need to pay to attend that college — by deducting only grants and scholarships from all key costs (e.g., tuition, fees, housing and meals, books, and living expenses).

However, GAO found that “an estimated 91% of colleges do not include or understate the net price in their aid offers.”

Parents Need to Take Action On their Own

While the GAO puts pressure on colleges and Congress to prioritize transparency, financial aid experts say parents need to up their financial aid game, and that starts with a crash course in college financial aid letter research.

Launch that process by first understanding what colleges expect to gain from financial aid letters.

“Typically the letter is used to entice the student to accept and attend the school,” said Mitlin Financial advisor and founder Lawrence Sprung. “Merit money and financial aid may be used as a tool to further appeal to the student and family. Ultimately, parents should weigh offers by all the schools accepting their student and weigh which offer provides the best return on investment.”

It's also worth noting that college acceptance letters aren’t the same as financial aid letters, which may confuse already-anxious students and parents.

The college acceptance letter. “The acceptance letter will let you know that you have been accepted, it may give information on upcoming events you can attend and will let you know the deadline to enroll,” said SoFi certified financial planner Kendall Meade

The college financial aid letter. A financial aid letter, on the other hand, will let you know your financing options.

“In the financial aid letter, you can expect to find the total cost of attendance, any scholarships or grants (aid that you do not have to repay), work-study options, any federal loan options you may have, and sometimes your EFC (i.e., expected financial contribution),” Meade told TheStreet.com. “This will also leave you with the amount left over that you will have to pay out of pocket or through private loans.”

One key metric in any college financial aid letter is the net cost, and parents benefit from knowing so.

“With a financial aid letter, you’re looking to compare against the offers you receive from other schools, so always look at net cost,” Meade said.

The net cost is the total cost minus any aid you will receive that you do not have to pay back such as scholarships and grants. “You don’t want to include loans or the money that you will have to pay back. This can help you to compare the cost of one school to another,” Meade noted.

Out of Pocket Against Total Loan Amounts

Parents of college students should also look at two additional key financial aid factors, how much they need to spend out of pocket per year and how much student loan debt they will have after four years.

“If students and parents look at one of these factors in a silo, they might make the wrong financial choice,” said Nat Smitobol, master admissions counselor at IvyWise, an educational consulting company.

Mom and dad should also look for signs the family is getting a bad financial aid letter.

“The government decides what a family can pay for college through the FAFSA,” Smitobol noted. “Very rarely does a family agree with that, especially if they fall in the middle class.”

If there's a large gap between what the family qualifies for on the FAFSA and what they receive from a particular school, that’s a bad financial aid package.

“Unfortunately, many financial aid packages fall in this category and this is why the third-party loan system, like Parent Plus Loans, is such a big business,” Smitobol said.

Also worth noting is that some colleges only offer financial aid for a student's first year or do not guarantee the same package for all four years.

“Students should be sure to thoroughly read their offer to determine whether their loan and grant amounts will change each year and ask questions if this is not clear,” Smitobol added.

If you don’t get the financial aid package you expected, take action.

"Parents should get on the phone with the financial aid office if they think there is a gap between their financial need and the financial aid package,” Smitobol said. “Financial aid officers are only human and can be very understanding. There have been many, many cases where they have been able to help make adjustments.”

One technique that works particularly well is telling the school that it is their student's first choice (but only if this is true) and that they would love to go there if it works out financially.

“Parents can also share better offers from another school and name the other school,” Smitobol added. “Even if the school they are trying to negotiate with is not able to match the other offer, they may be able to adjust their financial aid package a bit.”