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Are Colleges Getting the Cost of Living Wrong?

As students prepare to either start or return to college, a percentage of financial aid packages are increasingly inconsistent with estimates of how much money students really need. Researchers have found that nearly half of universities and colleges that administer aid inaccurately estimate living expenses. One-third of institutions underestimate living expenses for students by about $3,000 or more. Conversely, more than 11% of schools that administer aid overestimate student financial needs by $3,000 or more.

Although the amount of money students need varies by demographic location, cost of living projections are the basis for how much aid and loan money many students obtain. Those who base their accepted aid and loans on an inflated cost of living projection may take out more money than they need and face unnecessarily high loan repayments. Those who base their accepted aid and loans on underestimated cost of living may come up short and be forced to drop out of school that year or turn to credit cards to meet financial obligations.

Another issue is that some colleges and universities create front-loaded award packages that are hefty for an entering freshman but shrink during the sophomore, junior and senior years, even though tuition often increases during these years.

Where are the Calculations Going Wrong?

Many families who use net price calculators to determine the costs after grants only see first-year awards, but the aid may significantly drop in subsequent years or costs may increase after the freshman year, both of which result in a much higher cost if students wish to remain at the school. The New America Foundation examined data reported by the U.S. Department of Education and found that of full-time freshmen during the 2012-2013 school year, over 75 percent received grant aid, while the awards for upperclassmen and sophomores was significantly smaller. We borrowed the graphic below to illustrate the point.

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If you note that aid significantly goes down after the first year of college, advise students accordingly. They may need to consider a higher loan amount in the following years. If they are aware of potentially higher costs, they may also be motivated to apply for more scholarships and grants to help. Plus, you’d rather be a partner now than the bearer of bad news in the future, right? If costs at your school drastically increase between freshmen and subsequent years, consider talking to your director about allocating some grants to persistent (returning) students.

Different Costs, Same Locations

Many colleges in the same locations or areas have vastly different cost of living projections. For example, Drexel University students who live off campus are encouraged to budget $18,541 or higher, while Peirce College has an estimate of $7,790. Both are in the same city. These rates include housing, food, transportation, and personal expenses. It’s highly unlikely that both schools could be right when they’re based out of the same city – so whose students will end up basing their aid and loans on incorrect data?

Working on the Problem

As a financial aid administrator, it’s important to make sure the college’s cost of attendance (COA) is accurate. Most colleges and universities have a few different versions of the COA to account for multiple living scenarios and variations in tuition, but these costs are either significantly higher or lower than the estimates, causing an imbalance in financial preparation, which often drives students to obtain loans for these unanticipated costs.

It’s no secret that financial aid opportunity is higher for students who attend schools that have a higher estimate for living costs, but the impact on students who may need a student loan and don’t have accurate information is detrimental. “Students are capped at the cost of attendance. It leads to ugly conversations between students and college financial aid officers, where the student says, ‘I don’t have enough money,’ and the financial aid officer says, ‘You have to learn how to budget,’ says Sara Goldrick-Rab, a sociologist at the University of Wisconsin-Madison.

Getting the COA right the first time is key to assisting students and alleviating excessive financial burdens. A careful review can make the difference in family financial preparation.