This is the time of year when colleges send financial aid offers to students for the next school year. With a short time left for next year’s freshman class in making the ultimate decision on where to go, knowledgeable financial advisors can be a big help in helping clients and their kids evaluate competing financial aid offers.
If nothing else, your clients may feel the need to fund their child’s education even before their own retirement and you can act as an objective third-party. Here are a few tips to help your clients look at financial aid offers. (For related reading, see: 5 Ways to Get Maximum Student Financial Aid.)
Review the College’s Math
College financial aid has its own jargon; it can be confusing. In a typical financial aid letter, the term "net cost" might be used to depict the total cost of attendance. This figure will generally include the cost of attending less the total amount of financial aid offered including grants and loans.
Student loans don’t cut the cost of attendance; they are just a means to finance the cost. It’s much like taking out a loan to purchase a car — the cost of purchasing the car isn’t reduced. The payments are just spread out over time.
You and your clients should go through the school’s math and come up with a true net cost of attendance, which would take all of the costs and subtract any money offered that does not have to be paid back. This includes any grants and scholarships.
How Much Are Loans?
Much has been written about the student loan debt problem facing many of today’s college graduates. A key factor to consider in comparing multiple financial aid offers is how much of each is comprised of loans.
College debt can mean the difference between your child being able to get off to a good financial start after graduation or being saddled with debt for years — perhaps even decades — after graduation.
The aid package that is received can be appealed to the school if there is a valid reason such as a change in the family’s financial situation. For example, if one parent lost his job or if one dies or if the family has incurred unusually high medical expenses — these would all be valid reasons to ask the school to consider offering a more favorable aid package. (For more, see: Student Financial Aid Changes: 2015-2016 and An Intro to Student Loans and the FASFA.)
Be Clear of Aid Package Timing
A point of confusion for many families is the duration of a school’s offer. Is the offer for the first year only? Some colleges may front-load their offer, providing more aid in the first year to get the student “hooked in” and making them reluctant to transfer after their first year even if it means borrowing more than they had planned.
Students and parents need to complete a new FAFSA form each year, essentially reapplying. Before accepting any school’s financial aid offer and committing to attend, clients should contact the school to clarify if the award should be expected to remain fairly consistent — assuming the family's circumstances don’t change — or if it is likely to decrease in subsequent years.
Even if the answer turns out to be that the award is front-loaded, at least the client will be making an informed decision and can create a back-up plan to cover any potential shortfalls during the last three years of school. (For related reading, see: Pay for a College Education with Retirement Funds.)
Make Sure the Amount Is Optimal
When reviewing aid packages, it never hurts to go back to the school to verify that your student has been offered as much grant or merit aid as possible. If the student is talented or has special skills in an area that fits a need for the school, they may have the ability to make this happen. This may be even truer for private schools. As with any financial or business transaction, it never hurts to ask for better terms.
At the end of the day, it is important for the student to understand how much debt he or she will have to repay after graduation. It’s great to get into to the school of one's dreams, but that dream can become a real nightmare after graduation when the reality of amount of debt hits home. This is made worse if the student finds himself unemployed or underemployed for any length of time.
The Bottom Line
Funding a college education gets tougher each year. All families should apply for financial aid regardless of their financial situation. But keep in mind that financial aid award letters can be confusing, especially when comparing multiple awards. Financial advisors can play a big role in helping clients evaluate aid awards and helping them to balance their desire to help their kids with their need to save for retirement. (For related reading, see: Types of Financial Aid and College Loans.)