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Financial Aid

Improving Financial Aid Award Letters

What’s probably wrong, and how to make it right
University Business, Nov 2011

Are the financial aid award letters your institution sends to returning and prospective students clear, correct, complete, and comparable to other institutions’ award letters? The federal government thinks that too many are misleading and difficult to compare.

That’s why Congress mandated the U.S. Department of Education to convene a group of students, families, high school guidance counselors, financial aid administrators, registrars, business officers, and nonprofit consumer groups to make recommendations to improve financial aid award letters and develop a model format based on those recommendations.

Inherent Challenges

College costs and financial aid packages are inherently complex and can vary widely for different students. It is a challenge for administrators to accurately predict how much each student will pay, let alone convey this information in an award letter.

The reality is that institutions will never be able to accurately distill all the cost factors and scenarios onto a single award letter that is easy for students and families to decipher. Schools must make tough decisions to highlight the most useful information without overwhelming students and parents with too much information.

Students may end up choosing a school that looks more affordable but winds up costing more.

Ultimately, financial aid award letters must be supplemented with additional information and counseling to ensure students have a reasonable understanding of how much they will be expected to pay.

The challenges presented by the award letter means there will always be room for improvement.

Common Criticisms

Consumer groups and financial aid policy experts have highlighted several areas where financial aid award letters often fall short.

“All too often ... colleges send award letters to prospective students that understate costs they’ll incur at the institution; overstate the generosity of the financial aid packages they offer; and obscure or misrepresent the true bottom-line price they will have to pay,” Mark Kantrowitz, a student aid policy expert,  recently wrote in a blog post.

The Institute for College Access and Success (TICAS) agrees with Kantrowitz’s assessment. In a letter to Department of Education officials, TICAS stated that there is room for higher education institutions to improve the clarity and comparability of aid letters and to make them more consumer friendly. Specifically, TICAS and Kantrowitz point out that too many letters:

  • Only include some of the costs and fail to state and/or underestimate the full cost of attendance (COA)
  • Do not indicate the out-of-pocket costs for students and their families
  • Don’t sufficiently make a distinction between gift aid (grants and scholarships) and work-study and loan aid that must be earned or repaid with interest
  • Don’t highlight the gap between gift aid and the COA
  • Don’t include the terms and conditions of loans included in the aid package

“These differences can make the letters difficult to understand and compare, requiring students and families to search through college websites or elsewhere for crucial information such as the full cost of attendance and make guesses about the impact of different types of aid on the amount the student and family will actually have to cover,” TICAS wrote in a letter to the Department. “Students may end up choosing a school that looks more affordable but ends up costing more in the long run because most of the financial aid package consists of loans.”

A Better Letter

Administrators have an opportunity to improve both the effectiveness and comparability of award letters by standardizing the terms used and including key elements that students can compare between institutions.

Trying to compare award letters between different schools that call the same federal loan program by different names is impossible. What is called an “unsubsidized Stafford loan” at one school may be called a “William D. Ford Direct Stafford” at another and simply a “Direct Loan” at a third.  The National Association of Student Financial Aid Administrators has urged the Department of Education to produce a consumer-friendly online glossary to help institutions standardize the terms on award letters.

In addition, each award letter should provide four key elements to clearly illustrate the costs of education and help students compare award letters from different schools:

  1. Cost of attendance. Student budgets are essential to successful financial planning by families, and effective budgeting requires an understanding of true costs. Schools should be given discretion to break down direct and indirect costs in a manner that is most helpful to their students.
  2. Estimated costs after subtracting gift aid (net cost). This information conveys the amount that the student and/or family will be responsible to pay out-of-pocket or through “self-help aid” (loans and work study). Creating standard terminology to identify this amount would be helpful for students who are comparing costs between schools.
  3. Self-help aid and estimated remaining costs. Standard terminology and definitions would be useful to identify the financing or work-study that is being offered to help cover remaining costs.
  4. The cost of borrowing. Clearly noting current and projected costs of borrowing helps students understand that loans only defer payment of education expenses.

Voluntary versus Mandated Improvements

As the Department works to fulfill the Congressional mandate, some are calling for the federal government to require all institutions to use a standardized financial aid award letter to ensure students can understand and compare letters. Kantrowitz, a vocal proponent of a mandated standardized letter, notes that there are currently no mandatory standards concerning the information that should be included in financial aid award letters or how they should be formatted. He also notes that voluntary industry standards have not been sufficient to protect the best interests of students and their families and to make these letters easier to understand and compare.

Voluntary industry standards have not been sufficient to protect the best interests of students and their families.

NASFAA President Justin Draeger agrees with Kantrowitz that financial aid award letters can and should be improved, but highlights the negative unintended consequences of mandating a standardized letter.  If all colleges and student populations were the same (or even similar), then a standard award letter could be useful, he says. Because there is so much variety, institutions need the flexibility to design unique award letters that highlight information that is most relevant to their student demographic. A cooperatively designed, optional form that models at least one good approach would be a useful catalyst for institutions to review their practices in light of their students’ needs.

The Department of Education has not indicated if it will mandate a standardized form, but Draeger remains optimistic that institutions can take steps to address some of the concerns about award letters to avoid unintended negative consequences that could come with new award letter regulations.