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Drilling down into a college financial aid offer

If only choosing a college were as easy as picking a ripe fruit or vegetable. It’s complicated -- and often agonizing -- because of the financial aid offers that come along with acceptance packages. It’s often a apples and oranges kind of decision.

But sorting through aid offers, or “award letters,” can be streamlined if you understand what’s important. Plus, you can improve the final offer to reduce or eliminate debt entirely.

When it comes to breaking down the college offer, few people are more adept on how to view it through a family financial planning lens than Fred Amrein, a financial adviser based in Wynnewood, Pennsylvania, and developer of several software programs that help families plan for and afford college.   

Amrein has assisted many families in negotiating the college financing maze, but he looks at it a little differently than most of us. He focuses on cash flow and financial planning, that is, how will college bills be paid year by year, and how it will affect a family’s financial situation over time. It’s often a sobering picture. Here’s a summary of how he advises his clients:

Tally merit, need-based aid and debt. In the financial aid offer, you’ll see loans, grants, scholarships, work-study and possibly tuition discounts. The bottom line is your “Estimated Family Contribution (EFC).” If you can’t cover this amount through nonloan aid, you’ll be looking at going into debt.

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“A family needs to know that a need-based scholarship could change each year,” Amrein said. “On the other hand, a merit scholarship typically has strings attached that the student needs to be aware of, typically a certain minimum grade point average (GPA). If this isn’t maintained, the scholarship is lost.”

Of course, you can always negotiate for little or no loans by asking that a college substitute grants and scholarships for loans. They can do that if they’re able to tap their endowment or have access to aid programs within the college. You can also apply for -- and receive -- outside scholarships.

Colleges also may be able to offer merit aid, which is based on academic and other qualifications. You don’t need to show financial need to net this kind of nonloan assistance.

Identify “self-help money.” As with a lot of college financing terms, this category is somewhat fuzzy. Amrein said in this section of the offer, “Loans and work study are considered self-help money on the award letter and are dependent on a student’s financial need each year.”

While work-study is helpful, it’s not the same thing as a tuition discount or grant. Noted Amrein: “Work- study programs offer the undergraduate a part-time job each semester while they’re in college. Unlike the scholarships and loans, this money will not offset the direct college expense. The award is dependent on the student filing the FAFSA form and is dependent on need.”

By the way, FAFSA, the form that opens up the door to nearly all forms of need-based aid, is required by most colleges before you can even have a discussion about assistance. 

Also note that colleges may include a “PLUS” loan on the self-help section of their offer. It’s a loan that often gets parents -- in addition to students -- into debt for the college bill. Avoid it. “If a Parent PLUS loan is listed in this section, eliminate it for comparison purposes,” Amrein added.  

Project the four-year cost of college. Universities typically will show you only one year of college costs, but you need to look beyond that and ask questions about how to best allocate family resources over the entire time your student is in college. This is essential if you have other expenses during this period such as another child entering college.

Financial advisers like Amrein call this projection a “cash flow analysis.” How will you pay the bills with your predicted income stream and savings? If you’ll come up short when another child enters college, you can always ask for more grant aid. You can better prepare if you know how much money is coming in and going out during those years.

“Developing a four-year net cost and then reviewing cash flow can help identify the funding shortfalls,” Amrein advised. “The amount of the funding shortfall will help in identifying best borrowing options.”

Understand the debt structure. If you can’t cover the cost of attendance through income, savings and grants, then tread carefully with loans. Loans can quickly add up and prevent a graduate from becoming financially independent. 

The reason you need to understand the total cost of loans -- including interest -- is that once you sign up for them, they can’t be discharged easily. Interest will accumulate, and defaults can impair your ability to get vehicle loans, mortgages and credit cards. 

One more essential piece of the projection of college costs: Always try to look ahead to see if your post-graduate income based on the degree or profession chosen will allow you to live independently and meet your financial goals. Use a student loan calculator to crunch monthly loan payments.  

If you’ve done your homework, you’ll also be changing the language you use in finding the best college. Not only will your choice be a good fit, it will be cost-effective as well. 

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