Home > Students > 5 Expensive College Financial Aid Gotchas

Comments 0 Comments

It’s crunch time for high school seniors: May 1 is College Decision Day, the day most college-bound students will let universities and colleges know whether they will be enrolling. For students agonizing over multiple offers, a big factor in choices will (or should be) financial aid. After all, the less you borrow as a student, the less student loan debt you’ll have to repay after college.

But those financial aid letters students have received can be confusing at best, and downright deceptive at worst. One parent told me about the worst one her daughter received: “It showed the parents’ out-of-pocket cost after the small award, plus the maximum federal student loan, plus a big Parent PLUS loan … and it looked so reasonable,” she said. Her daughter didn’t fully understand that it would mean a big chunk of debt for both the parents and the student to repay after college.

When reviewing financial aid offers, here are five student aid gotchas to watch out for:

1. Loans in Disguise 

Financial aid awards will often lump loans together with grants and scholarships and sometimes may not even use the word “loan” to describe money that will be borrowed. But a loan is a much different animal than grants and scholarships that don’t have to be repaid. “When I hear colleges talk about how loans make school more affordable, it’s misleading,” says Mark Kantrowitz, senior vice president Edvisors.com, which offers free tools to help plan and pay for college. “Loans really provide cash-flow assistance,” he explains. It’s not free money, even if it feels that way. “In most cases loans increase costs because they charge interest,” he says.

Lynn O’Shaughnessy, a higher education expert who teaches parents how to cut the cost of college at TheCollegeSolution.com, is especially concerned about parent loans listed as aid. “They’ll stuff a big Parent PLUS loan in there, but they shouldn’t even be in financial aid letters,” she insists. Interest rates are high, and any parent can apply for one. “Be careful if a big chunk of your award letter is a Parent PLUS loan,” she says.

2. Front-Loaded Grants

Grants and scholarships may make the first year look affordable, but that equation can change in subsequent years. How do you know if a school “front-loads” grants? It can be hard to tell, admits Kantrowitz. One approach is to ask the financial aid administrator what will be required to renew the awards in subsequent years. He also suggests using the government’s College Navigator website which lists average grants for the first year and all other years for each school. “It’s not perfect,” he says. But if you see a substantial decrease after the first year, that can be a red flag.

3. Missing Costs

If you simply compare tuition costs, you’ll likely be missing some key items, including room and board, meal plans, travel, books and “other” fees (a category that can rival a cellphone or cable bill in the number of add-ons). Be sure essential costs are listed and try to make sure they are realistic, Kantrowitz warns. “Some have a textbook allowance of $250 and in some courses a single textbook can be $250,” he says. When aid letters don’t list the total cost of attending that institution, awards may seem more generous than they really are.

4. Missing Expected Family Contribution

Your Expected Family Contribution (EFC) is basically a proxy for how much a family is expected to pay, at a minimum, for one year of college and it’s generated when a student fills out the Free Application for Federal Student Aid (FAFSA) or the CSS/Financial Aid PROFILE (which many private schools use). Just as you don’t have a single credit score, you’re likely to end up with multiple EFCs for private colleges. “Every school that uses the PROFILE can create its own EFC because there are hundreds of questions they can add,” says O’Shaughnessy.

If the EFC is not on your award letter, ask the school what number it is using. “Schools just don’t like to tell people what their EFC is because parents would then be able to tell if the financial aid package is a good deal,” O’Shaughnessy says. She gives the example of a student who is awarded $25,000 in grants. On the surface that may appear like a generous award, but if the total costs are $50,000 and the family’s EFC is $5,000, it’s not. (What that would mean is the gap between what was owed each year and what the family would need to pay would be $25,000 per year — for a family whose realistic ability to contribute is closer to $5,000 per year.)

5. Missing Bottom Line

The net price is the cost of attendance minus any grants you get from any sources. Some aid awards will list the true net price, but others will throw in loans.  “You need to know how much you will pay after all the free money is deducted,” says O’Shaughnessy. It’s also possible to appeal a financial aid award if you think it’s too low or if your circumstances have changed since you filled out the FAFSA.

If you end up incurring large amounts of debt to pay for school, it can be difficult and painful to dig out. If you have a high monthly payment or you’ve fallen behind, student loan debt can make it difficult to get a mortgage or other lines of credit. You can see how student loans are affecting your credit by checking your credit scores, which you can do for free on Credit.com.

So read those letters carefully and if the true cost isn’t clear, don’t be afraid to ask questions. After all, this is your future you’re looking at — in more ways than one.

More on Student Loans:

Image: iStock

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team