NASFAA's Example Award Letters are a Good Start, but They Could be Better.

Direct and indirect costs, subsidized and unsubsidized loans, net cost and remaining cost--what do these terms mean? Students and families are left to navigate jargon such as these on their financial aid award letters, which colleges and universities use to notify students about the total cost of the academic year, how much grant or scholarship aid they will receive, how much in loans they are eligible to borrow, and what remains for them to pay out of pocket. But the truth is: not all letters communicate the information effectively and correctly.

An analysis of award letters from over 500 institutions released by New America and uAspire last summer found that more than one-third of letters omitted cost information entirely. Many letters from different institutions used different names to refer to the same types of loans and grant aid, making comparison of award letters almost impossible. And many didn’t even make a clear distinction between what was free money--grants--and what were loans that would have to be repaid.

Given the pressing need to make higher education financing information more transparent and accessible to students and parents, colleges and universities need to do more to improve their award letters. To guide them on the issue, the National Association of Student Financial Aid Administrators (NASFAA), the membership organization of financial aid administrators, recently released a set of example award letters that follow its code of conduct on financial aid award letters. But even though the examples do a fine job of disclosing cost of attendance, using standardized grant and loan terminologies, and breaking down the listings of grant and loan aid, they still misrepresent some critical information.

The example letters follow the same structure of the Department of Education’s financial aid Shopping Sheet, in which costs and aid are listed into separate sections. Updated from the Shopping Sheet, the cost of attendance section is divided into two separate parts: direct (i.e., tuition and fees that are paid directly to the institution) and indirect costs (i.e., books, room and board, and transportation, which are usually paid to a third party). Next the letter lists out the grant aid (or gift aid)--all financial grants and scholarships that students don’t have to pay back. Then the prospective student’s net cost is calculated by subtracting the total amount of grant aid from the total cost of attendance. The letter is also clear about the assumption on which it makes the aid allocation. In this case, the student is dependent, who enrolls full-time with zero expected family contribution (figure 1). Loans and federal work-study are then factored into the aid package to get the remaining cost (equal to the net cost minus loans and work-study). Along the right-hand side, the institution spells out the calculation of net cost and remaining cost. Definitions for all the terms are found on the second page (figure 2).

The structure of the example letters mirrors most of the recommendations that New America and uAspire made in our analysis of award letters, which include using standard terminologies, separating grant aid from loans, and disclosing full cost of attendance, net price, and remaining cost to students.

But the example letters also fall short in some ways. The practice of listing Parent PLUS loans alongside other federal student loans can be misleading. Parent PLUS loans, unlike federal student loans, are loans made to parents, who have to apply for them directly, pass an adverse credit history check, and are solely responsible to pay them back. Parent PLUS loans also carry higher interest rates and origination fees compared with undergraduate student loans. Listing Parent PLUS loans in line with student loans can mislead students and parents to think that both loans--and the risk of taking them--are essentially the same. Since parents can borrow as much as the full cost of attendance in PLUS loans, factoring parent loans into the student’s loan eligibility and remaining cost as in the NASFAA example letters makes the education seem much more affordable than it really is. In this case, the student’s remaining cost is listed as zero--but that’s after nearly $40,000 of intergenerational loans in a single year. Unfortunately this practice of listing PLUS loans is in fact relatively common in real-world award letters. In our research, we found that 15 percent (out of more than 500 unique letters) listed Parent PLUS loans as a line item together with other aid. Continuing this practice in the example letters, NASFAA may send a wrong signal to colleges that it’s okay to do so.

The listing of federal work-study eligibility is problematic too. Work-study is money students earn with an on- or off-campus job to help pay for educational expenses. But those jobs are contingent on job availability and whether the student can secure the job. Moreover, federal work-study funds are paid out as income, over the course of the academic year. This means that the amount of work-study aid listed on award letters is not guaranteed. Yet even though work-study money isn’t available until the semester begins and must be earned, NASFAA’s examples would count work-study dollars as a given in the calculation of remaining cost. As it turns out, zero remaining cost doesn’t mean zero estimated bill--the student needs to pay in advance for the bill in August before he or she can earn any eligible work-study money.

NASFAA’s institutional members serve 90 percent of all undergraduates--it indeed has a big role to play with financial aid award letters. Over the past years NASFAA has been taking substantive steps towards making more transparent and easy-to-understand award letters. In 2012 it organized a task force to consumer test different formats of award letters. Following the task force’s findings, NASFAA updated its code of conduct to include minimum requirements for award letters. Last summer in its annual conference, NASFAA announced its support for disclosure of total cost of attendance and net cost, urged the government to work in partnership with financial aid professionals to develop common and consumer-tested terms, and supported the separate listing of loans and grant aid.

The example letters are NASFAA’s newest steps in the right direction. But by listing Parent Plus loans and work study alongside other aid and counting them in the remaining cost calculation, these example letters may have missed some key points of helping students and their families understand their true costs of college. As the effort to revamp financial aid award letters gains momentum, more steps need to be taken to make sure new award letters, such as the examples provided by NASFAA, fulfill their purpose of correctly and effectively communicating financial aid eligibility to students and their families.