How do we read an award letter?

Question:

What are some tips for how to best evaluate an award letter?

Answer:

The best approach involves calculating the net price for each award letter. The net price is the difference between total college costs and just the grants, scholarships and other gift aid (money that does not need to be repaid). This is the amount of money the family will have to pay from savings, income and loans to cover the college costs. Think about it as a discounted sticker price.

The net price is not the same as the net cost. The award letter might present a net cost figure, which subtracts the full financial aid package from the cost of attendance. But the financial aid package may include student employment and loans, which do not cut college costs. Loans have to be repaid, usually with interest.

Before calculating a net price, the family will have to gain some clarity on what’s what on the award letter. First, determine the full cost of attendance at the school. This includes tuition and fees, room and board, books, supplies and equipment, transportation and miscellaneous/personal expenses. Some colleges do not list the full cost of attendance on the award letter and some list only the direct costs, such as tuition and fees that are paid to the school. Others may list the full cost of attendance, but underestimate the allowances for textbooks and transportation. Next, figure out what’s a loan and what’s a grant. Some award letters jumble them all together, without clearly identifying loans as loans. The most common types of student loans include the Direct Subsidized Loan, Direct Unsubsidized Loan, Perkins Loan, and PLUS Loan. Then, subtract the total grants, scholarships and gift aid from the total college costs. This is the net price.

If two colleges have a net price that differs by less than $1,000, most families will choose the college that is a better match according to other criteria, such as a better reputation, a better academic fit and/or a better extracurricular/social fit. If the net price differs by more than $5,000, most families will choose the less expensive college. In between, families agonize over the decision. Net price tends to correlate well with debt at graduation, so a student will likely graduate with less debt if he or she enrolls at the college with the lower net price.

There are, however, two caveats about the net price. First, the net price is just for one year. The net price can differ in subsequent years. About half of all colleges practice front-loading of grants, which gives the student a better mix of grants during the freshman year than during the sophomore, junior or senior years. This means the net price will be lower during the first year than during subsequent years, a form of bait and switch. Families can ask the school whether it practices front-loading of grants. If they don’t get a straight answer, they can look at the average grants for freshmen and for all undergraduate students using CollegeNavigator.gov. If there is a significant difference, the college practices front-loading of grants. Second, when a student wins a private scholarship, the college will reduce the need-based aid package. But, colleges have flexibility in how they reduce the financial aid package. If the college replaces loans and/or student employment with the scholarship, the student’s net price will decrease. If the college reduces its grants first, the net price will remain unchanged.