Beware of Colleges’ ‘Bait-and-Switch’ Aid Offers

Beware of Bait-and-Switch in College Financial Aid
By Liz Weston

LOS ANGELES — Families receiving college financial aid offers this spring should beware: what they see this year may not be what they get next year.

Some colleges make their most generous offers to high school seniors as a lure to attend, a practice known as “front-loading.” But those returning for their sophomore and subsequent years at university may get thousands of dollars less in grants and scholarships than they did as freshmen. Often, the free money is replaced by student loans.

About half of all colleges front-load their grants, according to financial aid expert Mark Kantrowitz, who analyzed data from the National Center for Education Statistic’s Integrated Postsecondary Education Data System.

“Colleges practice front-loading because it is cheaper to have higher grants during the first year, when it affects enrollment, than during all four years,” said Kantrowitz, publisher of, an education resource site. “Effectively, it is a form of bait and switch.” College administrators, however, balk at that label and at the idea that front-loading is common.

Why Aid May Decline

Most colleges try to offer consistent aid packages throughout a student’s career, and there are numerous reasons why grant aid may drop when first-year aid packages are compared to those offered to returning students, said Justin Draeger, CEO of the National Association of Student Financial Aid Administrators. “Higher education is subsidized by so many different sources, and those are constantly changing,” he said.

Grants may be reduced because of institutional factors, such as changing revenue or state funding, as well as individual factors, such as students taking fewer credits or failing to keep up a certain grade point average, Draeger said.

Some schools want to limit debt for freshmen, who are more likely than returning students to drop out. Also, limits on federal student loans are lowest for first-year undergraduates: $5,500, compared to $6,500 for second-year undergraduates and $7,500 for those in their third year or beyond.

“Schools will stuff more loans into the package as a rule because the federal direct loan [limit] goes up each year,” said Lynn O’Shaughnessy, author of “The College Solution” and a college consultant. “Also, schools don’t increase merit awards as their prices go up each year.”

$2,842 Average Drop at Private Schools

The drop in grant aid is particularly steep at private schools. Returning students at private, nonprofit colleges in 2012-13 averaged $2,842 less in grant aid than first-year students, according to The Chronicle of Higher Education, which used IPED data. The average drop-off was less severe for returning students at public colleges: $815.

Overall, the average net price for returning students — what families actually pay after grants and scholarships are deducted — is $1,400 higher than for first-year students, according to Kantrowitz’s analysis of National Postsecondary Student Aid Study numbers.

Colleges also do not advertise that they practice front-loading, which cannot be detected by using the net price calculators embedded into college websites. The calculators estimate only the first year’s cost of college after expected grants and scholarships are deducted. Loans are not considered by the calculators since they increase rather than decrease the cost of education.

Northeastern’s Promise

Only a handful of colleges offer four-year commitments to prospective students that their financial aid won’t drop, Draeger said. Northeastern University is one. The Boston institution not only promises grant and scholarship aid won’t drop, but that this free aid will increase at the same rate that tuition increases.

The university’s grant aid appears to fall when freshmen are compared to undergraduates overall, but school officials say that is because the school follows a cooperative education model that starts in the sophomore year, alternating classroom studies with six months of full-time work in career-related jobs.

Although guarantees are not common, Draeger said colleges have an ethical obligation to be clear in their financial aid offers which grants are renewable and under what circumstances.

When financial aid offers do not provide this information, families need to ask questions, said Martha Savery, Massachusetts Education Financing Authority and a former financial aid director for Harvard Graduate School of Education. “Families need to ask, ‘If all things remain the same, can I expect the same type of aid [in subsequent years],’ ”? Savery said. “Being a good, educated consumer is part of the process.”

The author is a Reuters columnist. The opinions expressed are her own.

Should the U.S. Make Billions From Student Loans?

A group of Senate Democrats, led by Elizabeth Warren of Massachusetts, urged the government to offer relief to distressed borrowers this week, even if that dampens the profit it makes from collecting on people with outstanding loans.

In a letter to Education Secretary Arne Duncan dated Wednesday, the six senators wrote, “It is not the job of the Department of Education to maximize profits for the government at the cost of squeezing students.” The letter noted that a recent Congressional Budget Office estimate indicates the federal government will bring in $110 billion from these loans in the next decade.

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Denise Horn, a spokeswoman for the Education Department, said in an e-mail that the department is reviewing the letter. “[We] look forward to responding,” she wrote.

The department should make it easier for people to use the few tools available for demanding a refund on their student debt, the senators wrote. Borrowers who believe that their college committed fraud or lied to them—about job prospects or graduation rates, for example—can file what’s known as a “defense to repayment” claim against the school, according to federal law. But Warren and other senators have railed against the department for not making it clear enough to students how they could make such a claim.

More broadly, the senators noted in the letter, the government has not used its power to cancel federal debts outright when the money went to a school that has been accused of abusing students. “Instead, the Department continues to gouge borrowers who struggle to meet their payments, subjecting them to debt collection, wage and benefit withholding,” the senators wrote.

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Some point out, however, that there are risks inherent in handing money to people who might just get a degree in basket weaving, without checking their credit score. Lenders typically expect to be compensated for such risks. The federal aid program, education expert Kevin Carey wrote in the New York Times this month, “lends money to students at below-market interest rates, regardless of credit history, with no money down, to purchase an asset that can’t be repossessed in the event of default.”

The government has a unique set of tools for extracting dollars from student debtors. It can take money from a person’s wages, tax return, and Social Security income to repay a student loan. Federal law also generally prohibits people from getting relief on their student loans in bankruptcy, which means that unlike other kinds of debt this one will get paid—voluntarily or not.

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President Obama has expanded programs that allow students to make payments based on their income, providing one escape valve for people in financial distress. In their letter, the Senate Democrats acknowledge that lifeline, but say they want the government to do more than just lessen the load. It ought to remove it altogether.

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Nelnet Reports Fourth Quarter 2014 Results

LINCOLN, Neb., Feb. 26, 2015 /PRNewswire/ — Nelnet (NNI) today reported GAAP net income of $73.6 million, or $1.59 per share, for the fourth quarter of 2014, compared with GAAP net income of $70.5 million, or $1.52 per share, for the same period a year ago.

Excluding derivative market value and foreign currency adjustments, net income was $74.3 million, or $1.60 per share, for the fourth quarter of 2014, compared with $70.1 million, or $1.51 per share, for the same period in 2013.  The company reported an expense from derivative market value and foreign currency adjustments of $0.7 million after tax, or $0.01 per share, for the fourth quarter of 2014, compared with income of $0.5 million after tax, or $0.01 per share, for the fourth quarter of 2013.

“We achieved record earnings in 2014 and are positioned well for success this year,” said Jeff Noordhoek, chief executive officer of Nelnet.  “Our focus continues to be on enhancing our customer experiences, growing in and around our servicing and payment processing businesses, and deploying capital effectively. In 2015, we expect to be able to make investments in diversification and private education loan partnerships, as well as continuing to find federal student loan portfolios to acquire.”

Nelnet operates three primary business segments, earning interest income on student loans in its Asset Generation and Management operating segment, and fee-based revenue in its Student Loan and Guaranty Servicing and Tuition Payment Processing and Campus Commerce operating segments.

The increase in earnings for the fourth quarter of 2014 compared with the same period in 2013 was due to an increase in net interest income earned from the company’s student loan portfolio and an increase in income from repurchases of the company’s debt.  This increase was partially offset by the expected decrease in net income from the company’s Student Loan and Guaranty Servicing operating segment and a decrease in income from gains on investments and investment advisory fees.

Asset Generation and Management

Historically low interest rates continue to provide the opportunity for the company to generate substantial near-term value and cash flow from its student loan portfolio.  For the fourth quarter of 2014, Nelnet reported net interest income of $112.5 million, compared with $108.7 million for the same period a year ago.  Net interest income included $49.2 million and $38.8 million of fixed rate floor income, net of settlements on derivatives, in the fourth quarters of 2014 and 2013, respectively.

In 2014, Nelnet purchased $6.1 billion of student loans, bringing its total student loan portfolio to $28.0 billion as of December 31, 2014.

The company intends to use its strong liquidity position to capitalize on market opportunities to acquire additional legacy Federal Family Education Loan Program (FFELP) and private education loans.

On January 29, 2015, the company acquired a $582.8 million portfolio of FFELP loans.  In addition, Nelnet has entered into agreements to purchase private education loans originated from certain forward-flow loan partners.

Student Loan and Guaranty Servicing

Under the company’s servicing contract with the U.S. Department of Education (Department), the volume of student loans serviced and the number of borrowers serviced increased 21 percent and 11 percent, respectively, as of December 31, 2014, when compared with the end of 2013. The company was servicing $133.6 billion of loans for 5.9 million borrowers on behalf of the Department as of December 31, 2014, compared with $110.5 billion of loans for 5.3 million borrowers as of December 31, 2013. Revenue from this contract increased 12 percent to $32.3 million for the fourth quarter of 2014, up from $28.9 million for the same period a year ago.

The growth in government servicing revenue partially offset the continued expected run off of the company’s commercial servicing portfolio and the impact of federal legislative changes that reduced the revenue earned by guaranty agencies for collections. As a result of these changes and run-off, total revenue from the company’s Student Loan and Guaranty Servicing segment decreased 10 percent, or $6.6 million, to $56.5 million for the fourth quarter of 2014, from $63.2 million for the fourth quarter of 2013. As the volume of loans serviced under the Department servicing contract continues to grow and loans serviced under the legacy commercial programs continue to run off, the company expects the operating margins to tighten.

Tuition Payment Processing and Campus Commerce

For the fourth quarter of 2014, revenue from the company’s Tuition Payment Processing and Campus Commerce segment was $24.7 million, an increase of $5.7 million, or 30 percent, from the same period in 2013.  The increase in revenue was the result of the acquisition of RenWeb in June 2014, in addition to growth in managed tuition payment plans, campus commerce transaction volume, and new school customers.  Operating margin for this segment decreased in the fourth quarter of 2014, compared with the same period in 2013, due to lower margins on new services and the amortization of intangible assets from the acquisition of RenWeb.  Amortization of intangible assets in this segment was $2.1 million and $0.8 million for the fourth quarters of 2014 and 2013, respectively.

Operating Expenses

The company reported consolidated operating expenses of $114.9 million for the fourth quarter of 2014, compared with $111.6 million for the same period in 2013.

Year End Results

GAAP net income for the year ended December 31, 2014 was $307.6 million, or $6.62 per share, compared with GAAP net income of $302.7 million or $6.50 per share, for 2013.  Excluding derivative market value and foreign currency adjustments, net income in 2014 was $284.2 million, or $6.12 per share, compared with $272.5 million, or $5.85 per share, for 2013.  The derivative market value and foreign currency adjustments were income of $23.4 million, or $0.50 per share, during 2014, compared with income of $30.1 million, or $0.65 per share, for 2013.

Non-GAAP Performance Measures

The company provides additional non-GAAP financial information related to specific items management believes to be important in the evaluation of its operating results, including specifically, the impact of unrealized gains and losses resulting from changes in fair values of derivative instruments which do not qualify for “hedge treatment” under GAAP and foreign currency transaction gains or losses resulting from the re-measurement of the company’s Euro-denominated bonds to U.S. dollars.  The company believes these point in time estimates of asset and liability values related to financial instruments that are subject to interest and currency rate fluctuations, and items whose timing and/or amount cannot be reasonably estimated in advance, affect the period to period comparability of the results of the company’s fundamental business operations on a recurring basis.  Accordingly, the company provides operating results excluding these items for comparability purposes.

Forward-looking and Cautionary Statements

This press release contains forward-looking statements within the meaning of federal securities laws.  These statements are based on management’s current expectations as of the date of this release and are subject to known and unknown risks and uncertainties that may cause actual results or performance to differ materially from those expressed or implied by the forward-looking statements. Such risks include, among others, risks related to the company’s student loan portfolio such as interest rate basis and repricing risk, the use of derivatives to manage exposure to interest rate fluctuations, and the uncertain nature of expected benefits from recent FFELP loan purchases and initiatives to purchase additional FFELP and private education loans; the company’s funding requirements to satisfy asset financing needs; risks related to the company’s ability to maintain and increase volumes under the company’s loan servicing contract with the Department to service federally owned student loans; changes in the educational credit and services marketplace resulting from changes in applicable laws, regulations, and government programs and budgets; risks related to the recent reduction in government payments to guaranty agencies to rehabilitate defaulted FFELP loans and services in support of those activities; and changes in general economic and credit market conditions. For more information, see the “Risk Factors” sections and other cautionary discussions of risks and uncertainties included in documents filed or furnished by the company with the Securities and Exchange Commission, including the cautionary information about forward-looking statements contained in the company’s supplemental financial information for the fourth quarter ended December 31, 2014.  All forward-looking statements in this release are as of the date of this release. Although the company may from time to time voluntarily update or revise its forward-looking statements to reflect actual results or changes in the company’s expectations, the company disclaims any commitment to do so except as required by securities laws.




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Financial Aid Guide for Families

By Paula Pant, contributor

College is a big expense. According to the College Board, the average annual cost of tuition and other expenses for the 2013-14 academic year is $30,094 for private colleges and between $8,893 and $22,203 for public colleges, depending on whether the child attends an in-state or out-of-state school. That’s a steep number, and it only represents one single year.

Tuition and fees also historically outpace inflation, which means that if your child is still several years away from applying for college, your cost could be considerably higher.

Most families aren’t able to cover the full cost of their children’s college experience, which means financial aid will play at least a part of their college planning. If you’re thinking about applying for financial aid for your college-aged student (or thinking ahead for a child who’s got some time left to go), here are the fundamentals you need to know.

Start Planning Early

Don’t wait until your child’s senior year of high school to start thinking about how you’ll pay for his or her college education. There are lots of factors that affect how much that education will cost, such as what major your child is interested in pursuing, whether he/she wants to attend a private school or a public school, and whether he/she wants to stay in-state or not.

Start opening up a dialogue with your children around sophomore year (the time most students take the PSATs) about what they envision for their college careers and what they’re doing now to prepare (such as keeping their GPAs high in order to increase their likelihood of winning scholarships). If everyone is on the same page, it will be easier to develop a plan and avoid the stress of any eleventh-hour decisions.

Know Your Expected Family Contribution

Certain financial aid programs are need-based, meaning only students who demonstrate a certain level of financial need may qualify for them. If your household income and Expected Family Contribution (EFC) are too high, it can restrict the amount of financial aid your child is able to receive.

If you’re concerned about this, you may want to sit down with a financial planner to discuss strategies for maximizing your child’s eligibility. On the flip side, if you know you won’t be able to contribute very much, be aware that it opens your child up to additional financial aid opportunities.

Conduct Research

We won’t lie; there’s a lot of terminology out there, and it can be overwhelming at times. Grants vs. loans, subsidized vs. unsubsidized, federal vs. private… If you’re having trouble making heads or tails of it all, reach out to your child’s guidance counselor, check out trustworthy sites like, and, and speak to the financial aid office at your child’s future college (if they’ve already been accepted).

Here’s a quick primer:

The U.S. Department of Education (DOE) issues four types of direct federal loans: Direct Subsidized, Direct Unsubsidized, Direct PLUS and Direct Consolidation (the last one is a combination of the first three). The DOE also supports the Perkins Loan Program, targeted at students with “exceptional financial need”; colleges, rather than the DOE, issue those loans. You might hear lots of chatter about the Federal Family Education Loan (FFEL) Program, but this program ended in 2010.

Non-governmental lenders like banks, credit unions, schools and state agencies provide private student loans. These vary broadly based on the borrower’s credit history, income and other lending criteria.

Consider Alternate Funding

Don’t forget that traditional financial aid like loans and grants aren’t the only options available to cover the cost of college. In fact, as a financial planning rule-of-thumb, you should look towards student loans as a last resort — not the first.

Scholarships (both from colleges and private organizations), work-study programs and part-time jobs can all help your child pay for tuition and other expenses without having to take on any student loan debt. Maximize these opportunities first and foremost. Reputable federal websites like can help you connect with lists of scholarships, which you can sort based on criteria such as GPA, community service history, athletic performance, major, city and state of residence, and demographics.

Don’t fall into the common trap of believing that you’ll get “a scholarship” — imagining a solitary silver bullet that will cover all costs. In reality, you’ll more likely get “many scholarships,” each in increments of $500 or $1,000 that, added together, will slowly make a dent in your overall costs.

Consider Alternate Arrangements

You can cut the costs of your children’s education by considering alternate scenarios for their college experiences. Can they attend a local college so that they can live at home and save money on room and board? Can they attend a less expensive, two-year community college to get their basic credits taken care of, then transfer to a more prestigious four-year school to finish their degree? Can they take enough Advanced Placement (AP) and College Level Examination Program (CLEP) courses during high school that they can skip a semester of college — thereby saving one semester’s worth of expenses?

If you’ve done all you can to secure financial assistance and find you’ve still fallen short or will be stretched too thin, it’s worth thinking of alternate arrangements that might help ease the burden.

Apply Yearly

Don’t make any assumptions about your eligibility. According to, your child should apply for financial aid each year, “even if you think you won’t get any. More than two-thirds of families qualify for financial aid.”

If you’ve had a change in your financial situation, you may find your child is eligible for additional aid they didn’t qualify for in previous years. After all, it never hurts to try.

4 Questions to Ask Before Enrolling in a For-Profit Online Program

Prospective students can be forgiven for wondering whether they should enroll in an online, for-profit degree program.

The industry went through a rough patch, enduring criticism for high student loan default rates, low graduation rates and dubious recruitment practices.

Yet despite the bad press, students shouldn’t discount online, for-profit programs. While the programs vary in quality, some provide an education that rivals their nonprofit peers, experts say. And new federal regulations, called the gainful employment rule, will kick in this summer, giving students more protection by weeding out for-profit programs that graduate students with high debt-to-income ratios.

Before students enroll in the programs, experts suggest they ask the below questions to determine whether enrolling is a wise idea.

Learn three facts about [for-profit colleges and student debt.]

1. How much will I be spending? “Make sure you understand the financial commitment you are making,” says David Deming, associate professor of education and economics at Harvard University’s Graduate School of Education. For-profit schools in particular can be really good at helping students get their financial aid packages taken care of, he says. “The danger is that you allow someone to help you so much that you don’t actually understand what is happening.”

Students should calculate what their student loan payment will be after graduation, he says. And then they should check the Bureau of Labor Statistics’ employment outlook reports to make sure they will be earning enough to comfortably pay back their loans. “Don’t count on the idea that these schools are going to watch out for you and only enroll students who are going to succeed — it’s not realistic,” he says.

The good news is the federal regulations, which kick in the summer, will require schools to release the debt-to-income ratios of their students. Those that don’t meet a certain standard will lose their federal aid.

2. Am I getting the right credential? Before students sign up for an online, for-profit program, they should make sure they know what kind of credential and accreditation they need to enter their job or profession, says William G. Tierney, professor of higher education at University of Southern California’s Rossier School of Education.

Not all online, for-profit schools have regional accreditation, which some employers may prefer over national accreditation, says Betty Vandenbosch, provost at the for-profit Kaplan University, which offers online and on-campus programs. Students may also want to look into whether their program needs programmatic accreditation from an organization, she says.

Programmatic accreditation from groups such as the Association to Advance Collegiate Schools of Business can guarantee a level of quality in the eyes of employers.
Students can determine whether an accrediting agency is legitimate by ensuring it is recognized by either the Council for Higher Education Accreditation or the Department of Education.

Discover how to vet [a for-profit online program.]

3. What does the school’s job placement record look like for your particular field? If students are investing in online, for-profit schools with an eye toward joining a specific field, they should do as much research as possible into the school’s job placement rate within the industry, says Kevin Lang, an economics professor at Boston University who has studied for-profit schools.

Students should also ask about job placement rates in their specific community, not just nationally, Kaplan’s Vandenbosch says.

When the gainful employment regulations go into effect, schools will be required to release their job placement information. But for now, Lang says, it can be hard for students to get straightforward facts.

If an institution doesn’t provide that job placement information, Vandenbosch says students should ask why.

4. How will employers view my credential? Whether a student’s online, for-profit degree will be respected by employers really varies case by case, experts say. Some employers are more interested in whether someone has a specific skill set, Lang says. But still others may believe there is a stigma associated with the online, for-profit status.

According to Deming’s research, for example, applicants with a bachelor’s degree in business from a large, online and for-profit school are about 22 percent less likely to receive a callback from a potential employer than applicants with similar degrees from nonselective public schools.

“This is not the same thing as saying that the degree has no return in the labor market,” he says. The degrees can still give students advantages, he says, such as setting them up with internships or helping them earn a license.

Explore why [transfers to for-profit colleges earn less than others.]

Austin Mahoney, who got an online bachelor’s degree from Kaplan and started his online master’s degree in information technology there this month, says he’s not at all concerned about how his academic credentials will fare in the job market.

The Mount Pleasant, Texas resident works in Web development for a school district but hopes to do similar work for a major company someday. He stands by his education, which he says he chose for the course variety, the cost and the challenging academics.

Trying to fund your online education? Get tips and more in the U.S. News Paying for Online Education center.

Devon Haynie is an education reporter at U.S. News, covering online education. You can follow her on Twitter or email her at