June 22, 2007

Standardize Financial Aid Award Letters

By Mark Kantrowitz

The letters that colleges send students to notify them about their financial aid awards are cryptic and confusing. Families often find them to be difficult to understand and interpret. Key problems include the use of obscure terminology, incomplete cost information and limited disclosure of important loan terms. An award letter might highlight the total amount of aid while providing insufficient information to allow the family to figure out the bottom line cost. A lack of universal standards for financial aid award letters also prevents families from comparing aid offers from different schools on an apples to apples basis.

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Currently, there is no standard format for financial aid award letters, nor requirements for the content of award letters. Colleges are not required under federal laws or rules to send an award letter. There is, however, a haphazard set of regulatory and statutory notice requirements that colleges fulfill with the award letter, such as the notice of the amounts and types of Title IV aid, availability of financial aid and certain institutional information.

Every family wants to know how much their college education will cost and how they can pay for it. This means the letter should include the full actual cost of attendance, the total aid (broken down by type and timing), and the remaining cost. Unfortunately, many award letters seem to omit one or more of these elements, as has been demonstrated by Kim Clark of U.S. News & World Report at FinancialAidLetter.com.

Some of the more common problems with financial aid award letters include:

• Inconsistent reporting of cost figures. Some letters don’t mention costs at all and some include only selected costs. For example, some letters mention just tuition and fees instead of the full cost of attendance as defined in section 472 of the Higher Education Act of 1965. Even when an award letter includes the full cost of attendance, it may not break down the costs into the major components — tuition & fees, room & board, books & supplies, transportation and personal expenses — making it difficult to determine whether one or more cost components has been omitted. Some cost components, such as textbook prices and living expense budgets, may be underestimated or be based on old estimates. This makes the financial aid offer appear more generous.
• Masking the identity of award components. Sometimes award letters use cryptic acronyms, abbreviations and names for components of the financial aid package, making it difficult for families to determine what’s a grant, what’s a loan and what’s work-study.
• Incomplete disclosure of loan terms. Award letters rarely disclose the key terms of the loans, such as interest rates, fees and loan length, or even whether it is a student or parent obligation and whether the interest is subsidized or unsubsidized by the federal government. Financial aid award letters also sometimes fail to distinguish between need-based loans and non-need-based loans. There are good public policy reasons for including non-need-based loans and tuition payment plans on the award letter, such as raising awareness of often-overlooked options for financing college (e.g., the PLUS loan and the unsubsidized Stafford loan). But incorporating these loans into the financial aid package without clearly distinguishing them can mask gapping, where the college fails to meet the student’s full demonstrated financial need, and be misleading. For example, when a private student loan is branded as a college loan, a practice that has been criticized by Congress, it suggests that it is a low-cost loan, when in reality it is one of the more expensive forms of education financing.
• Masking the real price of college. Financial aid award letters often emphasize the net cost, which is defined as the difference between the cost of attendance and the need-based components of the award letter. The net cost roughly approximates the expected family contribution (EFC). In some cases award letters include non-need-based loans when calculating the net cost, making the college seem less expensive than it really is. A key problem with net cost is it treats loans like gift aid, as though they don’t need to be repaid. While low-cost loans provide cash flow assistance, and so are a form of aid, subtracting them from the cost of attendance hides how little support some students get. A better approach is to highlight the out-of-pocket cost, which is the difference between the cost of attendance and just gift aid. This more closely reflects the true cost of college.

Colleges need to take the lead in standardizing a set of disclosures for financial aid award letters in order to improve transparency and accountability. This will make it easier for prospective students to compare awards from different colleges and for current students to understand just what help they are receiving.

A standard could include the following requirements:

Cost of Attendance

• Use standard definitions of college cost components.
• Require all award letters to include total college costs, not just a subset of the costs.
• Require all award letters to include a breakdown of each major component of the cost of attendance, such as tuition & fees, room & board, books & supplies, transportation and personal expenses.
• Use realistic cost of attendance figures, based on actual costs, to prevent underestimates that provide a misleading picture of college costs.

Financial Aid

• Segregate need-based aid from non-need-based aid.
• Aggregate and label awards according to award types, such as grant, need-based loan, non-need-based loan, and work-study.
• Disclose the key terms of each loan, including the interest rate, fees, loan term in years, whether it is a student or parent obligation, and whether the interest is subsidized or unsubsidized. For example, a subsidized Stafford loan could be listed as “Subsidized Stafford (6.8% interest, 2.5% fees, 10 year term)".

Standardized Format

• Establish a standard reporting format for this information, akin to the Schumer box required on all credit card solicitations. Using a standard format would make it easier to compare award letters from different schools.
• The award letter could include additional information, but this disclosure box would establish minimum standards for the information to be included on the award letter.
• Summarize the family cost as the out-of-pocket cost in addition to the net cost.

The following design illustrates one possible approach to a standardized disclosure box. It presents just the summary information in a standardized format, establishing a minimal standard for the information that should be included in every financial aid award letter. It highlights the information that is most important to families and uses a standard format to make the award letter easier to interpret. Detailed listings of individual award letter components, such as Pell Grant and subsidized Stafford loan, would appear elsewhere in the letter, along with detailed disclosures of the interest rates and fees and other conditions of the award.

Such a standardized disclosure box is clear and easy to understand. It provides families with a realistic summary of the real cost of college. Colleges must adopt a nationwide standard for financial aid award letters to enhance the accountability and transparency of the information they provide to students and parents.

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