Reviewing a financial aid package from a college can be overwhelming.
Schools take tens of thousands of dollars worth of expenses and fit everything into a short document. Many families make the mistake of deferring to the Financial Aid Office’s assumptions without doing any additional investigation on their own.
Not understanding financial aid packages can lead to students borrowing too much money. While there are ways to fix a student loan that is too large, the ideal approach is to address it before the loan is issued.
Cost of Attendance, Estimated Family Contribution, and Other Terms to Know
The Office of Financial Aid will first calculate a student’s Cost of Attendance or COA. The important thing to understand about the COA is that it includes far more than just tuition and fees.
The Cost of Attendance will factor in the following:
- tuition and fees
- housing and food
- books and other supplies, including a computer
- transportation expenses to get to and from school
The Cost of Attendance may also include adjustments for study abroad programs, child care, and costs related to a disability.
The next number that a school will use is the Estimated Family Contribution or EFC. The EFC is calculated based upon calculations from the FAFSA.
The Financial Aid Office will then calculate the Financial Need of a student by using the following formula:
COA - EFC = Financial Need
The Financial Need will also be adjusted to account for merit-based aid such as scholarships.
Finally, the school will put together a package to provide the student with the resources necessary to meet their financial need. This package may include federal grants, work-study, student loans, and Parent PLUS loans.
An Important Detail on Financial Aid Calculations: Most financial aid calculations are done following a very rigid formula. This formula may be more accurate for some students than others. Finding more affordable housing, or being able to contribute more than the EFC may change a student’s need to borrow student loans.
Do I Have to Accept the Full Student Loans Offered by My School?
No. Students do not have to borrow the full student loan package offered by the school or the federal government.
In many cases, the formulas used by the school overestimate the assistance that a student may need. The idea behind an aid package is to help every student afford the cost of attendance. Students that have resources that are not factored into the EFC will find they probably don’t need the full student loan offer. This outside help could include college contributions from a grandparent or earnings from a higher paying summer job that has yet to start. Additionally, students that can live more frugally may need considerably less than the room and board number used in calculating the Cost of Attendance.
Students that wish to borrow federal loans smaller than what is offered by the school should contact their financial aid office so that adjustments can be made.
Borrowing Extra to Play it Safe
Many students and families elect to borrow a little more than they anticipate needing.
The theory behind this approach is reasonably sound. If a student borrows more than necessary, they can always repay the debt at the end of the semester.
Additionally, it is probably better to borrow a little more than necessary than it is to borrow not enough. No student wants to be broke a few weeks before finals.
While it is a good idea to leave a bit of a cushion, it is essential not to get carried away.
Borrowing Too Much is a Mistake
Assuming things go according to plan, the students that borrow extra still end up paying a cost. First, because interest accrues daily on most student loans, the debt will have generated some interest during the course of the semester. Additionally, in the case of federal loans, there are loan origination fees. Parent PLUS loans and Graduate PLUS loans have exceptionally high origination fees. These fees are accessed the moment the loan is borrowed, and early repayment does not reduce the fee.
The other problem with borrowing extra is temptation. Student loans should only be used to pay off essential expenses for attending school. Using the money to pay for non-essential items like travel can make repaying student debt nearly impossible. In the moment, it might not seem like a big deal, but by the time the true cost becomes apparent, it is far too late to fix the mistake.
Thus, while having a bit of breathing room on student loan borrowing is fine, students should not assume that the full student loan offered is necessary.
Final Thought: Understanding Aid Packages
Financial Aid Offices have a huge challenge. They need to process aid packages for thousands of students in a short period. By necessity, they are not able to factor in the unique details that apply to each individual student.
The aid package may be a good starting point for determining how much a student should borrow, but it certainly shouldn’t be the final say.