By Mark Kantrowitz
When selecting colleges, not only do you want colleges with a good academic and social fit, but also colleges with a good financial fit. Unfortunately, complicated financial aid formulas and a lack of up-front pricing can make it difficult to tell which colleges will be more affordable.
There are several techniques for ensuring that a student is admitted to at least one college with a good financial fit. These include applying to a variety of different colleges, including a financial aid safety school, and using net price calculators.
FINANCIAL AID SAFETY SCHOOLS
Guidance counselors often advise students to apply to three types of colleges: reach, likely and safety schools. A safety school is one that is almost certain to admit the student. A reach school is a stretch for the student, where there is no guarantee of admission. Ivy League institutions are considered reach schools for all students, even very talented students, because the raw odds of admission are so low, with only about 1 in 10 students being admitted. A likely school is in the middle, where the student has a good chance of admission.
But given the failure of grants to keep pace with increases in college costs, it is important to add a fourth type of college, the financial aid safety school. The goal is to ensure that the student gets into at least one college with an affordable combination of costs and financial aid. A financial aid safety school is a college that the family could afford even if they got no financial aid. In-state public colleges often fall into this category.
NET PRICE CALCULATORS
Net price calculators can also help the family select colleges. Since October 29, 2011, all colleges have been required to provide a net price calculator on their web sites. The net price is the difference between the full cost of attendance and just grants and scholarships. (The full cost of attendance includes tuition and fees, room and board, books and supplies, and other expenses.) The net price is roughly the amount of money the family will have to pay from savings, income and loans in order to cover college costs. It is a reasonable basis for comparing the affordability of different colleges on an apples-to-apples basis. Debt at graduation correlates well with net price and debt incurred during the freshman year.
However, net price calculators suffer from teething pains that affect their accuracy and comparability. Some calculators use older data than others. There's also a tradeoff between accuracy and simplicity. Calculators based on the US Department of Education's template ask only ten questions and use two-year-old cost and financial aid data. Other calculators ask dozens of questions and use current data to yield a more precise and up-to-date estimate of the net price.
Thus net price calculators are useful for evaluating whether a college falls inside or outside the ballpark of affordability, but cannot distinguish between home plate and center field. Until the accuracy of the calculators improves, they should not be used to exclude colleges, but can be used to include colleges the family might not otherwise have considered because of a high sticker price.
An additional problem with net price calculators is that some colleges include a net cost figure in addition to a net price figure, confusing families. The net cost figure subtracts the entire financial aid package from the cost of attendance. But since the financial aid package includes loans, which do not cut college costs, the net cost does not reflect the real cost to the family.
Two other caveats concern front-loading of grants and outside scholarship policies. About half of all colleges practice front-loading of grants, where financial aid packages during the first year include a greater proportion of grants than in subsequent years. So in a bit of bait-and-switch, the net price during the first year may be much lower than in subsequent years. When a student wins an "outside" or private scholarship, every college reduces the need-based financial aid package to compensate. But colleges differ in how they adjust grants and loans. Some colleges reduce loans first, yielding a lower net price. Other colleges reduce their own grant funds first, yielding no improvement in the net price. So it is important to ask colleges whether they practice front-loading of grants and for details concerning their outside scholarship policy.
EARLY ADMISSION
There are two types of early admission: early action and early decision. Early decision commits the student to enroll if admitted. Early action does not. Usually a student can apply early admission to only one college.
While it would be nice to be admitted early to one's dream school and thereby avoid the need to apply to other colleges, realistically few students can be assured of getting into their dream college. A better strategy is to apply early action (not decision) to one of the "likely" colleges, where the student is more likely to be admitted but is not committed to enroll. This will eliminate the need to apply to safety schools (except perhaps to financial aid safety schools), saving money on application fees. It also makes the process of applying to the other colleges less stressful, potentially improving the chances of getting in.
This strategy can also give the parents bragging rights when their son or daughter is admitted to top colleges without applying to any safety schools.
EVALUATING AWARD LETTERS
After the student is admitted, the college will send the family a financial aid award letter. Typically these letters arrive in late March or early April, before the May 1 national candidate's reply date.
When comparing college costs, calculate the net price based on the award letters. A college with a lower net price will be less expensive. For example, consider two colleges, one with a $50,000 price tag which awards the student a $10,000 merit scholarship and one with a $30,000 price tag that does not award the student any aid. The net price of the more expensive college is $40,000 even with the merit scholarship, much more expensive than the $30,000 college.
Generally, if the net price differs by $1,000 or less, the student will enroll at the college with the better academic and social fit. If the net price differs by $5,000 or more, the student will enroll at the less expensive college. In between these two extremes, most families agonize over the decision.
If the net price represents more than a fifth of the family's total income, it will be difficult for the family to afford the college. The student and parents may end up overborrowing to pay for the college. Total student loan debt at graduation should be less than the expected annual starting salary, and ideally a lot less. If total student loan debt is less than annual income, the student will be able to repay his or her loans in about ten years. Parents should borrow no more than they can afford to repay in ten years or by retirement, whichever comes first.
There are, however, some problems that make it difficult to calculate the net price from an award letter. Award letters tend to blur the distinction between grants and loans. Often the grants and loans are mixed together, without subtotals for each type of aid. Usually there's nothing more than an award name and an award amount, with no information like interest rates, monthly payments or total payments to signal to the family that a loan is a loan. The name of the award might not mention the word "loan" (or even an abbreviation like "LN" or "L"). Some award letters highlight a net cost figure instead of a net price figure. Some award letters do not mention the college costs or only mention direct costs, such as tuition and fees. Other award letters underestimate certain costs, such as textbooks, transportation and housing.
CUTTING COLLEGE COSTS
The most effective way of cutting college costs is to enroll at a less-expensive college, such as an in-state public college or a "no loans" college. No loans colleges are elite colleges with generous financial aid policies that replace loans with grants in the financial aid package. A list of no loans colleges may be found at www.finaid.org/noloans.
Students who enroll at in-state colleges can save on college costs by living at home. Students who enroll at out-of-state colleges can save by minimizing the number of trips home from school.
Buying used textbooks and selling textbooks back to the bookstore at the end of the semester can save some money.
About half of college costs are related to living expenses, as opposed to tuition and textbooks. For example, a $10 pizza a week will cost $2,000 by the time the student graduates. If the student pays for the pizza with student loan money, it will cost about $4,000 by the time they repay the debt. Live like a student while you are in school so you don't have to live like a student after you graduate.
File the Free Application for Federal Student Aid (FAFSA) at www.fafsa.ed.gov every year, even if you got no aid last year. The FAFSA is used to apply for financial aid from the federal and state governments and most colleges. The formulas are complicated enough that the only way to tell whether you are eligible is to apply. For example, the number of children in college at the same time has a big impact on the amount of financial aid a family will receive.
Borrow Federal first, as federal loans are cheaper, more available and have better repayment terms than private student loans. Federal student loans, for example, offer generous deferments and forbearances, income-based repayment and public service loan forgiveness. Federal loans are not just for poor people. The unsubsidized Stafford loan and Parent PLUS loan do not depend on financial need.
Search for scholarships at free web sites like Fastweb.com. But beware of scholarship scams. If you have to pay money to get money, it's probably a scam. Never invest more than a postage stamp to get information about scholarships or to apply for scholarships.
Additional advice may be found in the Quick Reference Guides on financial aid, which can be found at www.finaid.org/quickref.
ABOUT THE AUTHOR
Mark Kantrowitz is an alumnus of the first year of the Research Science Institute in 1984 and a member of the board of trustees of the Center for Excellence in Education. Professionally, he is publisher of Fastweb.com and FinAid.org, the leading web sites about planning and paying for college. He is also the author of two Amazon.com bestsellers, the most recent of which is Secrets to Winning a Scholarship.