More on the ‘bifurcation’ of higher education

Nicholas Lemann argues that elite colleges are actually priced too low.

Where higher education is actually underpriced is in the top-tier schools. That may sound offensive, but price is determined by what people are willing to pay, and the top twenty-five or so schools in the country could charge even more than they do. The number of applications to those schools continues to grow faster than their cost. (Ivy League colleges will charge about sixty thousand dollars next year.) That’s because the perceived value of their degrees continues to rise. Now that we know that either Obama or Romney will be President next year, we also know that, from 1989 through at least 2017, every President of the United States will have had a degree from either Harvard or Yale or, in the case of George W. Bush, both. That could be a three-decade accident, or it may be a sign of something lasting—the educational version of the inequality surge, elevating “one per cent” institutions far above the rest.
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The trend in higher education may be in the direction of sharper class distinctions, and Lemann thinks pumping more taxpayer money into more colleges will improve opportunity and help society.

In higher education, the United States may be on its way to becoming more like the rest of the world, with a small group of schools controlling access to life membership in the élite. And higher education is becoming more like other areas of American life, with the fortunate few institutions distancing themselves ever further from the many. All those things which commencement speakers talk about—personal growth, critical-thinking skills, intellectual exploration, breadth of learning—will survive at the top institutions, but other colleges will come under increased pressure to adopt the model of trade schools. Student loans open access to students, and give colleges more freedom. Obama and Romney will have plenty to disagree about, and it’s good that the interest rate on student loans isn’t on the list. For the federal government to pump extra tuition money into the system, in the form of low-cost loans, in order to spread opportunity more widely, and to allow more schools to provide more than skills instruction, seems like a small price to pay for the kind of society it buys.

I don’t think simply pumping extra tuition money into the system will bolster the growth of rigorous institutions that produce intellectual graduates with strong critical thinking skills.  The problem I see is a scarcity of high school graduates adequately prepared for those types of colleges.  Unless that changes, we’re likely to continue to see the growing bifurcation between elite universities and “trade schools”.

Mark Cuban on the higher education bubble

MARK CUBAN ON THE HIGHER EDUCATION BUBBLE:

This comparison between higher education and the newspaper business seems apt.

The Higher Education Industry is very analogous to the Newspaper industry. By the time they realize they need to change the costs to support their legacy infrastructure and costs will keep them from getting there.

Easy loans

Its far too easy to borrow money for college.  Did you know that there is more outstanding debt for student loans than there is for Auto Loans or Credit Card loans ? Thats right. The 37mm holders of student loans have more debt than the 175mm or so credit card owners in this country and more than the all of the debt on cars in this country. While the average student loan debt is about 23k. The median is close to $12,500. And growing. Past 1 TRILLION DOLLARS.

We freak out about the Trillions of dollars in debt our country faces. What about the TRILLION DOLLARs plus in debt college kids are facing ?

The point of the numbers is that getting a student loan is easy. Too easy.

You know who knows that the money is easy better than anyone ? The schools that are taking that student loan money in tuition. Which is exactly why they have no problems raising costs for tuition each and every year.

Purpose of college

As far as the purpose of college, I am a huge believer that you go to college to learn how to learn. However, if that gaol is subverted because traditional universities, public and private, charge so much to make that happen, I believe that system will collapse and there will be better alternatives created.

Reading this on Cuban’s blog, I was amused by his writing errors.  I’m sure he writes quickly and eschews basic spell checking.  Somehow, it’s entertaining to see “its” and “thats” with missing apostrophes in a billionaire business magnate’s writing.  The lesson might be that perfect grammar and correct spelling are not always essential for good communication.  There are probably a few other self-made billionaires who can’t be bothered to know when to use “it’s” instead of “its” *.

* Actually, I think the more common mistake is to add an unnecessary apostrophe.

Related articles

• ‘Higher Education Bubble May Explode in Taxpayers’ Faces’ (costofcollege.wordpress.com)

The student loan problem: ‘I’m not going to worry about it right now. I had to take that plunge.’

SOME HIGHLIGHTS FROM THE NEW YORK TIMES FRONT PAGE ARTICLE ON STUDENT LOANS

Statistics show it’s a growing problem, but not a crisis.

* About two-thirds of bachelor’s degree recipients borrow money to attend college, either from the government or private lenders, according to a Department of Education survey of 2007-8 graduates; the total number of borrowers is most likely higher since the survey does not track borrowing from family members.

By contrast, 45 percent of 1992-93 graduates borrowed money; that survey included family borrowing as well as government and private loans.

For all borrowers, the average debt in 2011 was $23,300, with 10 percent owing more than $54,000 and 3 percent more than $100,000, the Federal Reserve Bank of New York reports….

Students and their families are often clueless, failing to consider the ramifications of their actions.

Even discounted, the price is beyond the means of many. Yet too often, students and their parents listen without question…

Many students and parents don’t have a firm understanding of the cost of attending college, or the amount of debt they will incur….

“Ultimately with everything in financial aid, from start to finish, the student and their family need to take responsibility and monitor their aid,” Melanie K. Weaver, the director of financial aid at Ohio Northern, said in an e-mail. “With over 3,000 on aid it is difficult for our office of 10 staff members to stay on top of every student.”…

“As an 18-year-old, it sounded like a good fit to me, and the school really sold it,” said Ms. Griffith, a marketing major. “I knew a private school would cost a lot of money. But when I graduate, I’m going to owe like $900 a month. No one told me that.”…

Ms. Potter figured she would have to borrow about $10,000 a year. But the tuition increased every year, and because she didn’t declare a major until her junior year, she needed five years to graduate.

A social worker, she now owes $80,000…..

“Maybe at the time I was a little naïve,” said Mr. Frank, 22, a senior who owes $80,000. “Everyone was like, ‘You can get grants, you can always get loans.’ I wanted to play football really bad, and I hoped eventually I’d get a football scholarship.”…

“I didn’t quite think in terms of money”…

“I kind of ignored the fact that I had to pay all these loans”…

An opaque pricing and financial aid system adds to the problem.

Instead, college pricing is complicated by constant tuition increases, a vast array of grants and loans and a financial-aid system that discounts tuition for most students based on opaque formulas. “No one has a vested interest in simplifying the process but families,” said Mark Kantrowitz, the founder of FinAid, a Web site devoted to explaining college financial aid. “It obscures the price of a college and makes the choice of college not depend on the price but other factors.”

Factors contributing to the growth in student loans

… as with the housing bubble before the economic collapse, the extraordinary growth in student loans has caught many by surprise. But its roots are in fact deep, and the cast of contributing characters — including college marketing officers, state lawmakers wielding a budget ax and wide-eyed students and families — has been enabled by a basic economic dynamic: an insatiable demand for a college education, at almost any price, and plenty of easy-to-secure loans, primarily from the federal government.

Until recently, college administrators might have ignored the problem.

“I readily admit it,” said E. Gordon Gee, the president of Ohio State University, who has also served as president of Vanderbilt and Brown, among others. “I didn’t think a lot about costs. I do not think we have given significant thought to the impact of college costs on families.”

The goal of “college for all” means more taxpayer funds for student loans

To that end, the Obama administration has given out more grants and loans than ever to more and more college students with the goal of making the United States first among developed nations in college completion. The balance of federal student loans has grown by more than 60 percent in the last five years. And in 2007, Congress made sure the interest rates on many of those loans were well below commercial rates; currently, a debate over keeping those lower rates from doubling in July is roiling lawmakers.

While the student loan problem is not a crisis, it is a drag on the economy.

Economists do not predict a collapse of the student loan system, which would, in essence, mean wholesale default. And if there were one, it would be unlikely to ripple through the economy with the same devastating impact as the mortgage crash. Though now larger than credit card and other consumer debt, the student loan balance remains smaller than the mortgage market, and most student loans are issued by the federal government, meaning banks wouldn’t be affected as much.

Still, economists say, growing student debt hangs over the economic recovery like a dark cloud for a generation of college graduates and indebted dropouts. A study of recent college graduates conducted by researchers at Rutgers University and released last week found that 40 percent of the participants had delayed making a major purchase, like a home or car, because of college debt, while slightly more than a quarter had put off continuing their education or had moved in with relatives to save money….

State government spending on higher education has increased, but not as much as in other areas.

In the late 1970s, higher education in Ohio accounted for 17 percent of the state’s expenditures. Now it is 11 percent. By contrast, prisons were 4 percent of the state’s budget in the late 1970s; now they account for 8 percent. Federal mandates and court orders have compelled lawmakers to spend more money on Medicaid and primary education, too. Legislators could designate a greater percentage of the budget to higher education by raising taxes, but there is no appetite for that….

Colleges aggressively market themselves as affordable.

Colleges are aggressively recruiting students, regardless of their financial circumstances. In admissions offices across the country, professional marketing companies and talented alumni are being enlisted to devise catchy slogans, build enticing Web sites — and essentially outpitch the competition.

Affordability, or at least promising that the finances will work out, is increasingly a piece of the pitch.

After all, colleges are not in the business of turning away students.

… And most colleges aren’t much help. Student debt is not their primary concern in the end — the loan money usually gets deposited directly with the colleges, so they get paid either way — and the main job of the admissions staff, after all, is to admit students.

One recommendation:  a standardized form

While there are standardized disclosure forms for buying a car or a house or even signing up for a credit card, no such thing exists for colleges.

For-profit schools are a particular problem, but keep in mind they serve more disadvantaged students.

… Students at for-profit colleges are twice as likely as other students to default on their student loans. Moreover, among students seeking a bachelor’s degree, only 22 percent succeed within six years, compared with 65 percent at nonprofit private schools and 55 percent at public institutions. (For-profit students, however, tend to do better at obtaining associate degrees and certificates.)

Leaders of the for-profit industry defended themselves, saying they were providing higher education for lower-class students that traditional colleges had left behind. “The reality is the type of students we attract have no other opportunity,” said Steven Gunderson, head of a leading trade organization. “We are the ones that provide a path to the middle class.”

It ultimately comes down to the students’ responsibility.

But even with more information, students and their parents seem willing to pay the ever-escalating price of a college degree, which remains the key rung up the ladder of economic mobility.

Denise Entingh, 44, dropped out after two quarters at Columbus State Community College because she didn’t want to wait any longer to get into the nursing program. So she signed on at the Hondros School of Nursing, a for-profit college that advertises “No Waitlist!” on a billboard a few blocks from Columbus State.

Ms. Entingh said she expected to borrow about $45,000 to get a bachelor’s degree in nursing from Hondros, which costs more than three times as much as Columbus State.

“It scares the hell out of me,” she said of her debt load. “But I think it will be all right. I’m not going to worry about it right now. I had to take that plunge.”

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Whew!  After all that, I may not want to write anything else about student loans for the next six months!
(But I probably will.)

* CORRECTION:  The original article misstated the percentage of students who had borrowed as 94%.

Related articles

• Still paying down student loans when you’re middle aged or older (costofcollege.wordpress.com)

A roundup of pending federal college financial aid changes

Some changes in federal financial aid for college students are coming soon.

Pending higher student loan interest rates are in limbo.  Unless Congress acts to delay this change, the interest rate for subsidized federal student loans will double to 6.8% in July.  Although both parties agree on keeping the lower rates, disagreement on how to pay for this benefit has stalled action on this issue.

In addition, the maximum eligibility period for Pell Grants will be cut from eight to six years starting with the 2012-13 school year.

More new developments in federal financial aid affecting high school graduates heading for college this fall:

• If a student’s family income doesn’t exceed $23,000, their expected family contribution will automatically fall to zero — this has been reduced from the previous maximum income of $32,000.
• To qualify for federal student aid, students applying in higher education for the first time must have either a high school diploma or a recognized equivalent such as a GED, or have been home schooled. This erases a previous option of passing an approved test or completing at least six credit hours or 225 clock hours of post-secondary education.
• Direct subsidized loans will not be eligible for an interest subsidy during the six-month grace period after graduation, meaning interest will begin to accrue as soon as a student graduates or leaves college.
• Graduate and professional students are no longer eligible to receive subsidized loans, but can qualify for up to $20,500 in unsubsidized loans each year.
• The U.S. Department of Education can no longer offer borrowers repayment incentives, except interest rate reductions to borrowers who agree to have payments automatically electronically debited from their bank account.

Related:

• Why the extra Stafford loan subsidy should expire as originally planned
• Political battle looms over doubling of student loan interest rate to 6.8%

‘changes in tuition were not driven by changes in state appropriations’

What have been the primary reasons for rising college costs?  Andrew Gillen says declining state funding is not one, and has research to back it up.

Changes in state funding and college tuition do not track closely over a ten-year period.

It is clear that the two bars are not equal. The 2003-2004 changes are the only ones that fit Fethke’s story, while the rest show a tenuous relationship (correlation of 0.21). Particularly striking are the increases in tuition even when state appropriations were increasing (2000-2001 and 2004-05 through 2007-08). The conclusion is that historically, changes in tuition were not driven by changes in state appropriations. Examining longer time periods rather than yearly changes does strengthen the connection, but it is still nowhere near 1 to 1 (e.g. a one dollar change in appropriations is associated with only a $0.06 to $0.15 change in tuition in the long run).

I don’t doubt that declining state funding contributes to rising tuition costs, but I agree that other factors figure more importantly in the equation.  Gillen has argued that increases in financial aid are a major cause of higher tuition, describing an updated Bennett hypothesis arising from the dysfunctional competition in higher education.  I plan to write about that soon.

This recently released report – The Great Cost Shift: How Higher Education Cuts Undermine the Future Middle Class – highlights state cuts as a reason for tuition increases.  However, in my quick review I did not find that the evidence presented was sufficiently compelling to prove it as the most important factor.

Burned by college net price calculator estimates

Price calculators were supposed to make estimating the cost of going to college easier. But some families are feeling burned by them….

Net price calculators (NPC) became a mandated tool on all college websites last fall, but the Wall Street Journal reports that some estimates have turned out to be inconsistent with the actual costs families learned about this spring.  There can be several reasons for the inaccuracies, including errors in entering data, changed personal circumstances, outdated college costs, and flawed calculator design.

Families should understand that the NPC estimates can be a useful first step in comparing affordability among various institutions, but should not be relied upon for total accuracy.  It’s important to review the final report carefully for questionable results, such as the example where an NPC produced an ”estimated out-of-pocket cost” of $0 while also including loans amounting to more than $20,000.  Contact the college when you discover questionable numbers like this.

Some tips on interpreting NPC resuls from The Institute for College Access & Success:

• Be wary of estimates that include unrealistic amounts of self-help. We have found calculators that subtract $20,000 or $30,000 worth of expected loans to get to what might be called a “final” or “out of pocket” cost figure of zero. This can make colleges look more affordable than they really are. It may look like you will have no out-of-pocket costs, but the costs are just delayed.
• The results are only estimates and colleges can calculate them differently, so use them to make ballpark comparisons between colleges. Don’t draw conclusions based on differences of several dollars or even several hundreds of dollars – talk to the schools’ financial aid offices to find out more.
• The estimates are only for your first year of college and apply to a particular academic year (e.g., 2011-12). If you expect to enter college at a later date, know that the college’s costs and financial aid policies may change.
• Not all grants and scholarships are available for all years of college. You can contact the college’s financial aid office (or try searching its website) to find out whether you can expect the same amount of grant assistance after your first year.
• As all net price calculators are required to tell you, the estimates are not final or binding financial aid awards. To get an actual aid offer, you have to apply to the school for admission and fill out the FAFSA (Free Application for Federal Student Aid, http://www.fafsa.ed.gov/) to qualify for federal financial aid, and you may have to fill other applications for aid from your state or college. Net price calculators can help you decide whether to take those next steps.

Outside scholarships may cancel out financial aid given by your college

Do not assume that an outside scholarship will reduce your out-of-pocket college expenses.  This cautionary note comes from SmartMoney‘s 10 Things Financial Aid Offices Won’t Say.

“Outside scholarships help us, not you.”

Sure, you’re proud of the five scholarships your high school senior won from community groups and a local church, but don’t be relieved just yet. Unless you weren’t counting on any financial aid at all, those scholarships might not make a dent in the total amount you’ll owe. Why? Federal guidelines mandate that outside scholarship money be considered a resource in meeting financial need. This means you can’t use the scholarship dollars toward your expected family contribution, and the college can reduce the amount of aid coming your way. “Many parents mistakenly think their cost will be diminished and then are disappointed to learn that it will actually be the grant from the school that is diminished, thus saving the college money and not the family,” says Parnell Hagerman, associate head at the Oldfields School in Glencoe, Md.

But applying for outside awards can help students if they re looking at a financial aid package that features more loans than grants. Ask your college if it can reduce the loans first, says Patty Hoban, aid director at Willamette University in Salem, Ore. In that case, a few scholarships could still save thousands of dollars in interest. Secondly, it can reduce work-study, which is need-based.

Always check with the individual school.  It can be confusing because colleges vary in exactly how they treat outside scholarships.

Most schools have favorable policies that first apply the outside scholarship to unmet need, and then reduce self-help (loans and work-study) before touching institutional grants.

Go to the FinAid article on Outside Scholarship Policies for more details.

CollegeConfidential discussions include parents sharing their stories about how financial aid packages were affected by outside scholarships:
…Merit aid cancels out need-based aid
…Outside awards and structure of aid package

Why the extra Stafford loan subsidy should expire as originally planned

Both political parties want to extend indefinitely the “temporary” lower interest rate of federally subsidized Stafford loans, a move estimated to cost taxpayers $30 billion over five years.

The same President Obama who once pledged we were done “kicking the can” on tough decisions is pandering for the youth vote (on Jimmy Fallon, no less) by insisting we extend the largesse. Meanwhile, in a discouraging development, the same Mitt Romney who insists we have to slash spending and reverse course on Obama’s “government-centered society” quickly caved and joined Obama’s call to extend the break.

Politics is ugly to watch sometimes.

Frederick Hess makes some good points that bolster my view the government should let the extra subsidy expire.

The Stafford is a middle class entitlement. We’re not talking about Pell grants for poor students. We’re talking about whether students can get an even bigger subsidy on already-subsidized loans.

Everyone has an offset to “pay” for the extension. Newsflash: we’re borrowing a trillion bucks this year. None of this is paid for. Any cuts we find could trim that debt. We need all those cuts and to let the 3.4% rate expire.

We really need to stop suggesting that it’s okay renege on obligations when we decide we no longer like the terms of contracts we voluntarily signed. It’s been a meme the last few years, especially with Occupy Wall Street, and it makes it really hard to teach students to honor their obligations.

Related articles

• Should the Lower Interest Rate on Stafford Loans Be Extended? (usnews.com)
• Political battle looms over doubling of student loan interest rate to 6.8%

Federal Direct PLUS or home equity loan for college costs?

If you will be borrowing to pay for part of your child’s college costs, is it better to take out a federal Direct PLUS parent loan or a home equity loan?

Of course, there’s no single right answer for everyone because each option offers some advantages.  You should only consider a home equity loan if you have plenty of equity in your home.  Also remember that the window for taking out a PLUS student loan closes when your child finishes college but there is no similar time constraint on a home equity loan.  Here are a few points to keep in mind when deciding which is better for you.

Direct PLUS student loan

• Fixed interest rate of 7.9%
• Keeps home equity available for other borrowing needs
• Automatically insured against death and disability
• Interest may be tax deductible depending on income level
• No collateral needed
• Payments may be deferred until after student graduates
• Eligible for Public Service Loan Forgiveness (PSLF) and Income-Based Repayment Plan (IBRP)
• High (4%) loan origination fee
• Harsh default penalties – not dischargeable in bankruptcy and wages can be garnished without court order

Home equity loan or line of credit (HELOC)

• Lower interest rate, but HELOCs typically have high rate caps
• Interest may be tax deductible, with some limitations and exceptions (deduction not allowed when using AMT method)
• May be discharged in bankruptcy
• Ties up home equity, making it unavailable for other borrowing needs
• Risk of creating negative equity in home, limiting options to move and causing other problems.
• Default puts home at risk for foreclosure

More information at these links:
The Federal PLUS Loan vs. Home Equity Loans
Federal Plus Loan vs. Home Equity Loan

Stricter Pell Grant rules raise standards for ‘satisfactory academic progress’

Under the new rules, students lose their eligibility for aid such as Pell Grants if they’re on academic probation for more than one semester and do not file a successful appeal. The previous limit was two semesters. This is on top of the existing SAP requirements: a cumulative GPA of at least 2.0, successful completion of a certain percent (usually 67 percent) of classes attempted, and completion of no more than 150 of the number of hours required for a credential.

This seems fair.   (Until it’s my child who’s failing . . .)

These standards also apply to other types of federal financial aid.
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New Pell rules cut off failing students

Federal Student Aid:  Satisfactory Academic Progress (SAP)