Sept. 12, 2011
[The U.S. Department of Education is holding a public meeting today to discuss ways to improve financial aid award letters. Among those testifying is student aid expert Mark Kantrowitz, who has written extensively on this subject. Today at Higher Ed Watch, Kantrowitz explains why he believes the federal government needs to set mandatory standards for these letters. In a future post, he will offer his recommendations for what those standards should look like.]
By Mark Kantrowitz
The letters that colleges send students to alert them of their financial aid awards should be focused primarily on the needs of students and their families. Students and their families need and want clear, correct, complete, and comparable college cost and financial aid disclosures when they are deciding which school is the best fit. Unfortunately, most colleges’ award letters do not currently satisfy these needs.
All too often, in fact, 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.
But why would colleges send award letters that are so misleading? The reason is that many institutions treat the financial aid award letter as a marketing and recruiting document, not a counseling tool. The goal from the college’s perspective is to make the college seem more affordable than it is. Colleges often accomplish this by obscuring the difference between loans and grants, which can lead to over-borrowing. In such cases, the design of the financial aid award letter is driven by the college’s pecuniary interests and not the student’s best interests.
Financial aid award letters need to be standardized both to protect the best interests of students and their families and to make them easier to understand and compare.
There currently are no mandatory standards concerning the information that should be included in financial aid award letters or how they should be formatted. There have been, however, several voluntary industry standards. The National Association of Student Financial Aid Administrators (NASFAA) first published an Award Letter Evaluation Tool as an informal but detailed set of best practices in January 2001. Several national professional membership organizations for college financial aid and admissions personnel -- including the American Association of Collegiate Registrars and Admissions Officers (AACRAO), the National Association for College Admissions Counseling (NACAC) and NASFAA -- require colleges to provide accurate information about college costs and financial aid in their ethical standards.
Despite the existence of these voluntary standards for more than a decade, the most problematic practices persist.
In late 2010, Fastweb conducted a survey of nearly 600,000 students and parents about financial aid award letters. Of the respondents, more than half (51 percent) said that they had found it difficult to compare financial aid award letters from different colleges. Almost seven-eights (84 percent) agreed that these letters should be standardized. The respondents also revealed serious problems with the letters they had received. For example, they said that their award letters often:
- Left out cost of attendance: Nearly a third (29 percent) of respondents had award letters that omitted the cost of attendance of the college entirely. Of those who had received letters that did provide a cost of attendance figure, almost three- fifths (58 percent) said the document did not provide a detailed breakdown of the costs that were included.
- Underestimated costs students would face: Of those with award letters that included cost of attendance figures, almost three quarters (73 percent) felt that the colleges had underestimated transportation expenses students would incur; and more than three-fifths (62 percent) felt that the estimates for books and supplies were too low.
- Did not indicate the share of costs that would be borne by students and their families: Nearly two-thirds of the respondents reported that their financial aid awards did not indicate what the “out-of-pocket” costs for students and their families would be. The out-of-pocket cost is the difference between the total cost of attendance and all gift aid a student receives. Gift aid is money that does not need to be repaid, including grants, scholarships, tuition waivers, and housing waivers.
- Included misleading information about financial aid: A fifth (21 percent) of respondents said that their award letters did not distinguish between grants and loans, even though loans need to be repaid with interest. A fifth (21 percent) indicated that their award letters used Parent PLUS to make it look like the students wouldn’t have any unmet need. This is deceptive because parents are on the hook for repaying these loans, and only families with good credit records are eligible to receive them.
- Did not include student loan terms: Three fifths of students and parents said their financial aid letters did not include basic information about loan terms other than loan amounts. Less than a third (29 percent) of financial aid award letters mentioned interest rates; only 14 percent mentioned the total loan payments students would have to make; just 13 percent estimated what their monthly payments would be; and only 12 percent estimated the total amount of interest they would be charged over the life of their loans.
Paying for a college education is one of the few major life cycle expenses without standardized statutory disclosures concerning costs and discounts. Cost disclosures are required for automobiles, real estate, credit cards, mortgages, retirement plans, investments, and private student loans. These disclosure requirements were established by federal and state laws, not by voluntary industry best practices.
The persistent problems identified by the survey demonstrate the need for a mandatory standard for financial aid award letters. The design of cost and financial aid disclosures must be focused primarily on what is in the consumer’s best interests. The needs of students and their families must come first.
Mark Kantrowitz is the founder and publisher of FinAid.org,a leading source for financial aid information, advice and tools; and publisher of Fastweb.com, a free scholarship matching site. He has written extensively on issues surrounding financial aid and student debt. His views are his own and do not necessarily reflect those of Higher Ed Watch or the New America Foundation.