Can you afford your top college choice?

As someone who gave up a pound of flesh and all of my twenties to work my law school loans off in Big Law, I caution families to avoid taking on large amounts of debt to pay for school, especially for undergrad when grad school looms ahead. Some debt is reasonable and may make sense in terms of the student’s future career. A lot of debt is almost always a heavy millstone that can affect her financial decisions for decades into the future. Proceed with care.

Many questions arise when you read a college’s financial award letter, but what you must focus on is the bottom line: After all is said and done, what will I be paying? The formula is simple:

COA - GIFT AID = EFC

In other words, the total cost of attendance less the amount of grants (whether through financial aid, merit aid, or scholarships) equals the amount of money the family must come up with each year through loans, savings, or cash flow.

Let’s break down those components in more detail:

COST OF ATTENDANCE (COA)

Just totaling up all the college costs can be confusing. Not only will you be charged tuition but also student fees, medical insurance, a meal plan, housing, and other costs. Some of those costs you can control-- schools typically add in estimated travel and living costs-- but many you cannot (tuition, fees). All these charges together comprise the COA.

GIFT AID

Scholarships, merit aid, and need-based grants (from the school, government and outside sources) all fall under the category of “free” money to the student, not to be repaid. THIS IS THE BEST MONEY. You can subtract those from the COA.

Important questions to ask about grants from the school and outside sources:

Are these grants guaranteed for all years of college? If so, are they contingent on a certain GPA and/or number of semester credits?
If my student needs more than four years to complete college, will this money still be available?
Does the college “stack” scholarships and grants, or will outside scholarships be deducted from any award the school provides?
If my family’s financial situation changes, will the student lose some or all of these need-based grants?

Everything remaining after you subtract GIFT AID from the COA is the EFC.

Components of the expected family contribution (EFC) can include any of the following:

WORK STUDY

You may see work study allocated as part of your aid package. This is neither a guarantee of a job on campus nor a gift. It is an expectation that the student will earn money to pay for a portion of college costs.

LOANS

This is money you will borrow and have to pay back.

Federal loans

There are two types of federal loans available; one based on family income (subsidized) and one for which any student can qualify (unsubsidized). The most important distinction between the loans is that the government pays the interest on the subsidized loan until the student graduates (and through a grace period after graduation); unsubsidized loans, in contrast, accrue interest while the student is still in school.

These are considered the SECOND BEST TYPE OF MONEY, as the interest rates, set by Congress, tend to be lower than those of any other available loans, and because those who qualify for subsidized loans get the added bonus of not accruing interest during the student’s schooling.

A final note on federal grants and loans: these are available only to U.S. citizens and residents. A gaping hole in aid eligibility exists for undocumented student residents.

Direct PLUS loans

These are disbursed by the federal government and are available for graduate school or to parents of students for undergraduate school. The maximum amount available is based on the net cost of attendance at the school after grants and other federal loans are applied. These interest rates tend to be lower than those of the final category, private loans, but not necessarily.

Private loans

Numerous private lenders provide loans for education. These are usually considered the least attractive way to borrow money, but with interest rates being what they are right now, some families are choosing these over PLUS loans.

Now that you understand how to read the award letter, you know how much the college is expecting your family to pay, whether through loans, cash, or a combination thereof. If you ran the net price calculator through College Board or on individual college sites to determine your EFC before applying, your aid award letter may be roughly what you anticipated.

Even if you did run those calculators, however, not every school promises to “meet need,” that is, make up the difference between the COA and the EFC, so you may be holding an award letter that literally doesn’t add up. (Only a small subset of schools pledges to meet 100% of financial need).

Stay tuned for next week’s post to learn how to compare award letters and negotiate for what you need.