Colleges That Promise "No Loan" Financial Aid Packages: Too Good to be True?
A deep dive into how "no loan" aid packages really work and who benefits most
For the last 50 years, the story of higher education in the United States has been a story of growth. The overall number of colleges and universities has increased, the total number of students and percentage of the 18-24 year old population attending college has increased, and tuition costs1 have increased dramatically, especially in the private non-profit and for-profit sectors.
Unfortunately, what largely hasn’t grown in the last 50 years is the amount of state support for higher education or the “purchasing power” of the Pell Grant (a maximum Pell Grant award once covered 75% of the average cost of attendance and now it covers closer to 30-40%). Not surprisingly, this correlates pretty darn neatly with the increase in the number of students who rely on student loans to help finance their educations.
Currently, there are nearly 43 million Americans who carry federal student loan debt, with an average loan balance of $37,8532, making student loans the second-highest consumer debt category (behind mortgages). Student loan debt is also one of the biggest worries many parents have about their children’s college experience, with one recent survey finding that 68% of parents reporting that they are concerned about their child’s future loan debt compared to their post-college earning potential. Given that less than 30% of parents report that they plan to be able to fully cover the cost of their child’s college education, many families will have to plan for a financial aid package that includes student loans.
Unless, perhaps, their child is one of the lucky ones who might benefit from attending a college or university that bills itself as a “no loans” institution.
Given that the idea of a “no loans” financial aid package might sound too good to be true, let’s do a quick (well, quick-ish) dive into how these programs work and which students are the most likely to benefit from them.
What Are No-Loan Aid Packages?
While the details may vary a bit from school to school, the essential concept is the same: the school promises to offer accepted students a financial aid package that meets 100% of their demonstrated financial need without loans. This means that the student’s aid package will be made up of a combination of federal and state grants (if they qualify), institutional aid, private scholarships (if the student has them) and possibly work-study funds. Students may still have uncovered expenses like books and supplies and some schools will also require some minimum level of family contribution.
What’s the Catch?
There is a reason that “demonstrated financial need” is in bold up there! “No loan” promises don’t mean that the college is no cost or, in some circumstances, even more affordable than other institutions. Generally, these programs don’t promise to cover all the cost of tuition and fees for all students and many have income cut-offs and/or require some level of family/student financial contribution. The income cut-offs can vary widely, with schools like Duke University only promising “no loans” for students whose families make less than $40,000 a year to Colgate University offering no loans for families making up to $175,000 per year.
However, depending on the student’s SAI from the FAFSA, they may not offer any aid at all and not all students will receive the same amount of institutional aid.
For example, let’s imagine a hypothetical “no-loan” school that costs $70,000 a year. Now, let’s imagine two students (we’ll call them Simone and Theo, because I’m done having babies and I miss getting to name people) who both complete the FAFSA and plan to enroll in our hypothetical school. Simone’s family has an adjusted gross income of $40,000 and limited assets. Her SAI is 0 and she qualifies for $10,000 in federal/state grants and doesn’t have any private scholarships. Because her SAI is 0, she will have demonstrated financial aid of $60,000 a year after grants are applied and the college will meet that with $60,000 in institutional funds.
Theo’s family, on the other hand, has an adjusted gross income of $150,000 and more assets (according to FAFSA and the CSS if the school uses it) so his SAI is 50,000. For Theo, who won’t qualify for federal and state grants, his “unmet need” is only $20,000, so his institutional aid will only be a fraction of what Simone was offered and his family will be expected to cover the majority of his tuition and fees.
Now, if Theo’s family doesn’t actually have $50,000 a year to contribute to his education (the FAFSA is an imperfect tool, especially for those who live in high cost of living areas, those with multiple kids in college, and some farmers/small business owners), well… Theo might just end up taking out loans anyways.
Which Schools Offer Them?
The colleges and universities that are most likely to offer “no-loan” guarantees are typically higher cost and highly selective institutions with large and well established endowments. The truth is that these are also the types of institutions that are disproportionately enroll students from wealthier families, so they are well positioned to offer these guarantees, knowing that it’s likely that many of their students will not qualify for substantial institutional awards because they won’t have high levels of demonstrated unmet need.
Who is Most Likely to Benefit?
The students who benefit the most from these programs are students who are high academic achievers from low-income families. Students from middle income families who don’t have a lot of capacity to meet their expected financial contribution, on the other hand, may be better served at institutions that offer federal loans as part of their aid packaging.
So… what’s the bottom line?
“No-loan” programs sound really appealing (and have been shown to increase application numbers after schools announce them), but parents and students should make sure to ask the following questions before getting too excited about them:
What are the income guidelines?
Is it “no loans” for all students or based on demonstrated financial need? If based on demonstrated financial need, is that based on SAI or is the CSS Profile required as well?
If a student can’t meet their family’s expected contribution, will they still have the option to request federal loans? Or will they be required to take out (costlier) private loans?
Students should also keep in mind that other colleges may have better financial aid options for them, even if those options include loans, so they should be sure to compare financial aid offers closely.
But keep in mind that tuition discounting has also increased so some portion of that tuition growth is on paper more than in reality
Note this is an average across all institutional types. Students attending community colleges typically have much lower debt levels (around $10,000) while students who attend for-profit colleges typically have higher debt levels (around $40,000 for undergraduates and significantly higher for graduate programs)