Consider Financial Fit When Choosing Colleges

Advice about creating a college list often centers on selecting colleges based on whether the colleges are likely to admit the student. If the student’s academic performance is below, at or above the normal range for students previously admitted by the college, the college is identified as a reach, match or safety school.

But, students and parents need to consider financial fit in addition to academic fit. It does the student no good to get in to the school of his or her dreams if he or she cannot afford to enroll. If a student enrolls in his or her dream school despite an unaffordable cost, the student will wake up to a nightmare in which he or she will either be forced to drop out of college or graduate with too much debt.

How to Determine Financial Fit

The first step in determining financial fit is to compare the net price of each college with the family’s financial resources. The net price is the difference between the college’s cost of attendance and the gift aid (grants and scholarships) available to the student. It is the amount of money the family will have to pay from savings, income and loans to cover college costs.

Net price correlates strongly with debt at graduation. Although student loans make it easier to pay college bills by stretching them out over time, they do not cut college costs. When determining whether a college’s net price is affordable, cumulative student loan debt for the student’s entire education should be capped at the student’s expected annual starting salary. Borrowing anything more is unreasonable and will put the student under a lot of financial stress after graduation. Likewise, parents should borrow no more for all their children than they can afford to repay in ten years or by the time they retire, whichever comes first.

The composition of the financial aid package matters. Some colleges have generous “no loans” financial aid policies where the financial aid package will consist solely of grants, scholarships and student employment.  Some colleges do not meet the student’s full demonstrated financial need. Most colleges have summer work expectations and/or minimum student contributions. But, students don’t need to worry about these details. Instead, the net price simplifies the analysis by determining the discounted sticker price - how much the college really costs the student and his or her family.

Every college is required to have a net price calculator on its web site that can give prospective students a personalized ballpark estimate of the college’s net price.

This net price, however, is for just the freshman year in college. The net price in subsequent years may differ significantly. About half of all colleges practice front-loading of grants, which provides a more favorable mix of grants versus loans for new students than for returning students. Use to compare the percentage receiving grants and the average grants for first-year students and all undergraduate students. Add the difference to the net price to adjust for the impact of front-loading of grants.

Students who have won a lot of private scholarships should ask about the college’s outside scholarship policy. When a student wins a private scholarship, it reduces the student’s financial need. The college must reduce the need-based financial aid package to compensate. Some colleges will use the private scholarship to replace loans, which reduces the net price. Others will reduce their own grant or scholarship funds. This displacement causes the net price to remain unchanged, yielding no net financial gain to the student.

Apply to a Mix of Colleges

It is best to apply to a variety of colleges to increase the student’s chances of getting in to a college with an affordable net price.

Students should also apply to at least one financial aid safety school. A financial aid safety school is a college that not only will admit the student, but where the student could afford to enroll even if the student got no financial aid.

The student should also apply to an in-state public college or university, which will often be one of the least expensive options.

Location can also affect college costs. Living expenses represent about half of college costs at public colleges. Some colleges are located in expensive cities, while others are located in more affordable regions. Travel to and from college can add to college costs if the college is located nearby or halfway across the country. Enrolling at a nearby school may also allow the student to save on room and board expenses by living at home.

Avoid Early Decision

Do not apply early decision. Early decision admission commits the student to enroll at the college, before the student has an opportunity to determine whether the student and family can afford to enroll at the school. While most early decision schools will allow students to break their commitment if the financial aid package is insufficient, by the time the student learns about the actual net price of the college, as opposed to the early estimates from the college’s net price calculator, it may be too late to apply to other colleges.

Early action, on the other hand, is a non-binding form of early admission. The student is not required to withdraw applications to other schools if he or she is admitted by the early action school. Students who apply early action are able to compare the college’s actual net price with the net price of other colleges before deciding which offer of admission to accept.

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