03/26/2013 11:40 am ET Updated May 26, 2013

Facing the Gap in the Financial Award

The coming weeks will bring gasps from students and families involved in the final phase of choosing a college -- usually when they open the financial aid award letter from a college and see their expected out-of-pocket cost. I am pretty sure these gasps are audible (sort of like a dog whistle) to every enrollment manager and dean of admissions across the country, as more and more families struggle to come to terms with the question, "How do they expect us to pay that much?"

The most frequent outrage is when a college's financial assistance results in a "gap" between the family's Expected Family Contribution (EFC), which is an estimate provided after a family completes the FAFSA, and remaining cost to attend the college after financial assistance is considered. Often they've been left with the impression that through financial assistance, a college will make up the difference between EFC and cost of attendance. When this does not happen, they are confused and sometimes even angry. I understand the confusion and even the anger, and expect a family might ask, "Why do they call it an expected family contribution if they really want more?"

Generally speaking, colleges are not very good at explaining all of this to students and families. Truthfully, the EFC establishes a family's eligibility for federal financial assistance, as opposed to what a family actually is expected to pay for college. Perhaps the following illustrations will address the issue more clearly.

Johnny Doe's family has an EFC of $15,000, and demonstrated financial need of $30,000 -- to be more precise, he is eligible for financial aid up to $30,000. Johnny has been accepted to three colleges, all of which have a price of $45,000 annually. However, each of these colleges has a vastly different resource base, market position and approach to financial assistance.

College One, a very prestigious college with a huge endowment, promises to meet 100 percent of a student's demonstrated financial need in grant assistance. Johnny's award might look something like:

$45,000 Cost
$30,000 in grant aid (likely a combination of scholarships, grants and other assistance that does not need to be paid back)
$5,500 Federal Stafford Loan
$9,500 Out-of-pocket cost to attend (with an EFC of $15,000)

College Two, a nationally recognized college with a moderate-sized endowment, promises to meet 100 percent of a student's demonstrated financial need:

$45,000 Cost
$24,500 in grant aid (a combination of scholarships, grants and other assistance that does not need to paid back)
$5,500 Federal Stafford Loan
$15,000 Out-of-pocket cost

College Three, a regionally oriented college with a small endowment, does not have the resources to meet 100 percent of demonstrated financial need:

$45,000 Cost
$20,000 Grant
$5,500 Federal Stafford Loan
$19,500 Out-of-pocket cost

I know what you might be thinking: "How can there be three different costs to attend a college that has the same price for the same student? " Simply put, the different approaches are largely related to financial resources and market position.

Colleges in group one can afford to provide large grants and meet 100 percent of demonstrated financial need for two reasons: 1.) large endowments, and 2.) distinguished reputations that attract a very large number of students who are willing (and able) to pay the full cost of attendance. These colleges enjoy the strongest market position. There probably are fewer than 100 of these colleges nationwide and they are pretty difficult to get into.

Colleges in group two can afford to be fairly generous because they also enjoy a sizable proportion of students who are willing to pay the full cost of attendance. They use financial aid to support needy students and expand their market share. These are likely to be small, fairly affluent liberal arts colleges, and there may be 150-200 of these. These colleges are increasingly difficult to get into, and also are beginning to explore whether or not they can continue to meet 100 percent of demonstrated financial need.

The third group is a more complex and much larger group constantly guided by trying to balance being affordable with being attractive to students. This group does not have the financial resources of the first two groups, and has to make judgments about the amount of financial aid needed to enroll a student. These colleges are more likely to use merit- or talent-based scholarships to attract students who are very desirable, and then (through the gap) may ask for a greater financial commitment from students who demonstrate a greater likelihood of enrolling.

This is a dramatically different calculation than meeting a student's demonstrated financial need, as the other groups are committed to doing. For many students who apply to colleges in this larger group, they will see a gap between the EFC and the cost of attendance after financial aid is applied. This gap is due to the fact that these colleges cannot afford to offer more financial assistance and cover their cost structure. This is increasingly common, and has resulted in financial aid leveraging practices that help colleges determine how much aid they can (or should) offer to enroll a student. The formulas used are based on data from prior years, and difficult for families to understand.

I don't know that this will prevent any forthcoming gasps, but I think it's important for students and parents to better understand how it is possible that a student with an EFC of $15,000 considering three colleges with the same price would be expected to pay $19,500 at one and $9,500 at another. For some families, the cost difference may be acceptable because of the strong perceived value in a more expensive college choice -- ranging from overall prestige to specific offerings and characteristics. In other cases, the family might make a decision based primarily on cost to attend rather than the overall value of attending a college.

I suspect that most reading this will want to know why the process can't be simpler and more predictable, and out-of-pocket costs more comparable. I don't have a good answer, but I do think it's critically important for students and parents to realize that the differences are dependent upon market share, resources and mission.