Financial Games Colleges Play – WSJ

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Every spring, colleges send two sets of letters to millions of prospective students. First the good news: an acceptance letter. Then, a few weeks later, a “financial-aid award letter,” theoretically explaining how much college will cost.

Parents and students are supposed to use this second letter to make one of the biggest financial decisions of their lives. But the task is often nearly impossible, as shown by an analysis from my colleagues at the think tank New America, working with uAspire, a nonprofit that provides financial-aid counseling.

The study, published last week, examined 11,000 award letters sent in 2016 by more than 900 colleges. It found most of them use obscure terminology, omit vital information, or present financial calculations that appear deliberately deceptive. Many letters are confusing in their own unique ways, making it difficult for students to compare colleges.

For wealthy families, award letters are often simple: There’s little or no financial aid. But for lower-income students, the letters describe a complex mix of federal grants, institutional scholarships, work-study opportunities, and different kinds of loans. This may be particularly confusing for first-generation college students, whose parents have no experience with these programs.

Each school can create its own format for award letters, since there is no mandatory standard. In 2012 the Education Department and the Consumer Financial Protection Bureau created a recommended version, but most colleges don’t use it. Imagine trying to compare boxes of macaroni at the supermarket if more than half the manufacturers designed their own nutrition labels.

Take the letters in the study that included Pell grants. Of the 515 colleges that awarded them via nonstandard letters, more than a third provided no information about how much attending school would cost. The letters highlighted grants and scholarships as a way of convincing students to enroll, but without listing tuition or explaining how much money students would owe.

Temple University sent one low-income student a letter saying it was pleased to offer a combination of grants and loans totaling $25,909 for freshman year. The letter failed to mention that Temple costs $33,048 a year to attend, including tuition, room, board and living expenses. A student could easily enroll, show up in the fall, and only then figure out the $7,000 shortfall.

The letters that did disclose costs were inconsistent. Some listed only tuition. Others included room and board. Others added books and estimated living expenses. The recommended letter includes all of the above, providing a total “cost of attendance.”

Seventy percent of colleges with nonstandard award letters created further confusion by lumping together grants and loans, as if both were freebies. Northern Arizona University sent one low-income student an award letter that said “Total Financial Aid Offer: $30,890.” This amount was also the annual cost of attending, so the letter subtracted one from the other and concluded: “Total Unmet Need: $0.”

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That sounds a like a free ride, but $25,075 of the aid came from loans—mostly federal debt that the student’s parents would have to take out, contingent on a credit check, at 6.31% interest plus an origination fee. The University of Arizona did something similar. It told a student the cost of attendance was $48,200 a year, then subtracted $5,815 in grants, $5,500 in work-study opportunities, and $36,885 in loans. “Net Costs After All Aid” were “$0.00.”

Talk about deceptive. Say you buy a car with a $25,000 sticker price. The dealer gives you a $2,000 manufacturer’s rebate and a loan for the rest. Was the “net cost” $0.00? The recommended award letter solves this problem. It subtracts any grants and scholarships from the cost of attendance to calculate the “net cost.” Only then does it add in loans.

In theory, parents and students can perform these calculations manually to find the true bottom line. But many letters deliberately make that difficult. Of the 435 colleges that offered a “Federal Direct Unsubsidized Loan,” only 18% described it that way. The others used 136 different terms, including “Direct Unsub,” “Fed Direct Unsub L,” and “Fed. Direct Unsubsidized Add.” One merely wrote “Unsubsidized.” These phrases are jargon. They don’t even include the word “loan.”

There’s a solution: Require all colleges to use the recommended award letter. The Department of Veterans Affairs already mandates this for financial-aid letters going to students benefiting from the GI Bill. Congress should expand that protection to every college applicant. Providing consumers with consistent, transparent information is a goal embraced by Republicans and Democrats alike. Cars have window stickers that list fuel-economy ratings and the manufacturer’s suggested retail price. Mortgages come with a standard form showing an itemized list of costs and fees.

So far the higher-education industry has resisted such regulation. The National Association of Student Financial Aid Administrators has a code of conduct requiring its members to disclose the cost of college attendance and to label loans accurately. The association does not, however, independently audit colleges for compliance. The group’s president,

Justin Draeger,

tells me his organization would support new federal policies to require consistent labeling, as well as to prohibit colleges from lumping together grants and loans. But his association, perhaps reflecting the opinions of its members, officially opposes requiring all colleges to use the recommended award letter.

Selecting a college is one of the most complicated and important financial decisions many people ever make. Right now, students don’t even have enough information to understand what they’re choosing. That’s a shame, and it goes a long way toward explaining why so many students leave college with debt they can’t afford to repay.

Mr. Carey directs the education policy program at New America.

Appeared in the June 14, 2018, print edition.



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