Officials target college financial aid letters

Financial aid letters don't always distinguish between grants and loans.

Financial aid award letters can be misleading.

In one common practice, for example, colleges highlight the total “out of pocket” cost for attending. The figure is intended to give students an estimate of how much they’d have to pay after outright awards, such as grants and scholarships are factored in.

But in calculating the “out of pocket” figure, some schools also reduce the total bill by the amount students would have to borrow even though loans accrue interest and ultimately push up a student’s costs.

The practices are troubling because families often use these aid letters to help determine which school to attend. The lack of clarity has also played a role in driving up the debt loads shouldered by graduates to record levels, federal officials say.

On Tuesday, the Consumer Financial Protection Bureau and the Department of Education announced a plan to simplify the aid letters so that families can assess a school’s true cost and make comparisons more easily.

Officials are asking for feedback on a draft of the form, available at

As it stands, the draft makes clear distinctions between scholarships and loans; it also includes key figures such as the estimated monthly payment and total debt upon graduation.

“The stakes have never been higher for students and their families to clearly understand the costs and risks of student loans,” said Raj Date, an official with the Consumer Financial Protection Bureau. “Having a simple, one-page financial aid shopping sheet would help students compare offers and choose the one that’s right for them.”

A final version of the form, expected in coming months, could also include the school’s graduation and loan defaults rates.

The Department of Education was required to develop the model form as part of federal education reforms in 2008. The adoption of the simplified forms would initially be voluntary, but Congress could vote to make it mandatory for schools that receive federal financial aid.

The push to standardize financial aid award letters comes at a time when student loan volumes have reached record levels.

The Institute for College Access & Success estimates that two-thirds of graduates have student loans, with an average debt of about $24,000.

One reason for the ballooning debt is that students don’t always realize how much their loans will end up costing them.

That’s partly the result of the “jargon-laden financial aid award letters using inconsistent terms and calculations,” federal officials said in the release announcing the initiative.

In testimony at a Department of Education hearing on the matter last month, financial aid expert Mark Kantrowitz noted that college is one of the few major life expenses that do not come with standardized disclosures about costs. That’s despite the $16,000 average total for tuition and fees at public schools, according to the College Board.

Kantrowitz, who publishes, noted that the financial aid letters don’t always distinguish between grants and loans and often don’t include basic information on loan terms, such as interest rates.

Yet if a student took out $24,000 in student loans, the interest charges alone would add up to $9,100 if repaid in 10 years. That’s assuming the favorable interest rate of 6.8 percent that federal student loans carry; interest rates on private loans can be higher.

Making matters worse, critics say schools play an ambiguous role in pushing student loans.

“The first financial adviser that a student runs into is a financial aid officer at the college,” said Anthony Ogorek, a financial adviser in Williamsville, N.Y. “Students needs to understand that these officers don’t have a fiduciary responsibility to them.”

Families have also been conditioned to believe that a college education is an investment that will pay for itself, Ogorek said. As a result students often take on huge debt loads without questioning whether it makes sense financially.

With many graduates now struggling to find work, the risk of taking on so much debt is becoming all too clear.

And unlike other types of debt, student loans can’t be discharged in bankruptcy; borrowers who fail to pay can have their wages garnished.

The plan to simplify financial aid forms is modeled after the approach that the Consumer Financial Protection Bureau took in revamping mortgage disclosures.

Earlier this year, the agency began its “Know Before You Owe” project to simplify the paperwork borrowers receive when applying for a mortgage. Critics say improved disclosures could have helped prevent many of the past problems surrounding the subprime mortgage crisis.

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