In the modern college era, many schools strategically use DISCOUNTING as a marketing tool. Therefore, there’s often a big difference between the sticker price of college — tuition, fees, books, room and board — and the net price, or what you actually will be expected to pay through your college savings or excess income (best case) or savings and loans (worst case). In fact, just over 80% of incoming freshman will get some sort of break off the sticker price.

Those of you who have been long-time readers know that I’ve been saying and proving this for my clients for years. Thankfully, those of you who haven’t, no longer have to take my word for it.

As of Saturday, courtesy of a federal law passed in 2008, all colleges will now be required to add ‘net cost’ pricing calculators to their websites. The calculators will provide parents with an estimate of their family’s expected net price (total costs minus the average amount in grants or scholarships that their student may receive).

No question this is a good start as an early planning tool, but it’s definitely not perfect. Here’s why.

1. Not all calculators are created equal. Some colleges are using the template created by the US Dept of Education. It asks only nine questions, including how many children the family has in college, family income, and whether the student is married or has dependents. Problem: These nine questions are all that the government is requiring colleges to ask, but there are 100 questions on the FAFSA and dozens of other factors that can seriously affect a family’s expected contribution (EFC). Those inputs can be as benign as your highest level education to as complex as how to value your business, personal & student assets. There are at least 575 colleges that engaged Student Aid Services, a private company, to provide them with much more involved versions of the calculator. Given the disparity, it’s difficult to get a reliable result and/or to make a true comparison nationwide.

2. Net Price is NOT necessarily the Net Cost To You. I agree with Mark Kantrowitz of FinAid.org who cautions that many calculators figure the net to you after including student and parent loans. That’s risky. Not all schools dole out financial aid equally. Some have no or low loan policies and will offer more grants (which you don’t have to pay back), whereas others offer loans. Though at first glance the net cost may look the same, if the school is discounting its price with student loans, the long-term costs can be astronomical. Make sure that you know which schools on your list are loan averse.

3. The Results Are Not Guaranteed For Four Years. The calculators will give you an ‘estimate’ of what you might pay for the first year ONLY. Your circumstances, the school’s and the federal government’s change year-to-year. Some schools will ‘front load’ grants to induce a prospect to come. You have to re-apply for financial aid every year, and therefore it’s very important to know the financial history of a particular school to anticipate whether your costs could go up in future years.

3. They Do Not Really Account For Merit Discounts. The calculators work best when determining need-based financial aid awards, but they are less accurate when factoring how merit scholarships (awarded by the Institution) can reduce the cost of college. Although the most selective schools like the Ivies only offer need-based grants, many other good, but less competitive institutions and even great public universities looking for out-of-state applicants to boost their net revenues — will give desirable applicants incentives (in the form of scholarships) to enroll. Why? Aside from the aforementioned bump in net revenue for publics, schools are very concerned about their yield (% of accepted applicants who enroll). Positioning your student to apply to schools that are interested in having them attend should be an important consideration in the Admissions process. Since merit is fairly subjective, the net calculators will do little to inform those decisions.

Overall, the calculators can be useful as guides to families engaged in early college financial planning and as a starting point for parents to make arrangements to cover the balance. They are not, however, set in stone. Much can be done to help you afford a college of your child’s choice. It’s best to take action early, but even if you have a 12th grader, you still have a very small window opportunity. If this is you, I don’t know what you’re waiting for. Early decision apps are due next week, regular decision at the end of December and financial aid apps open on Jan 1. Your action now can mean you will have the money this Spring to reward your child’s hard work by affording his college dreams.

Best,
Peter

P.S. I’m going to be discussing the college loan crisis and how to avoid this slippery slope with radio host Lisa Wexler on WFTC Newstalk Radio (AM 1400 Conn., NY) tomorrow (Wednesday) at 4:30 pm. Here’s the link to join the conversation: http://streaming.wstcwnlk.com/_players/coxradio/index.php?callsign=WSTCAM