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.”

…
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%

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

A new tool for comparing college financial aid award letters

If you’re at the point where you have several college acceptances in hand accompanied by financial aid award letters, what is the best way to compare the bottom-line net cost of attending?

A new tool for comparing college financial aid award letters was recently introduced by the Consumer Financial Protection Bureau.

For each school you select, the “Sticker Price” first-year Cost of Attendance (COA) that includes average tuition & fees, room & board, books & supplies, and other expenses,  is provided.  Then you can enter the actual financial aid amounts from your award letters to see your personalized net costs.  The worksheet allows you to compare up to three schools at one time.

Here’s an example of a worksheet.  (Click on image to enlarge.)

…
Keep in mind there are only three types of financial aid, as explained by Kalman A. Chany, author of “Paying for College Without Going Broke”

While the descriptions of the various aid programs will vary tremendously from college to college, there are really only three categories of assistance that will be in the award letter: gift aid (grants and/or scholarships), work-study job opportunities, and loans.

Be careful because the terminology can be confusing.

Sometimes the terms are confusing. Even the word “scholarship” can mean different things. Traditionally, a scholarship is based on merit; grants are based on need. Some schools, however, change the name of grants to scholarships to make you feel better about the award. Ask each college if the gift aid you have been offered is based on merit, need or a combination to determine the likelihood of getting such assistance in later years. Need-based aid is likely to vary from year to year, especially if a family does something to harm its chances of eligibility.

Even with the ever-increasing tools as well as the many sources of advice and facts, figuring out the college financial aid landscape for your own child can be a minefield of misinformation.

You can try using the new tool here:  Paying for College Cost Comparison Worksheet

Related:  When is an ‘award’ really a loan?

‘Thought freshman year was expensive? Wait till senior year.’

It’s usually prudent to assume that college costs will rise over the four (or five or six) years that your child attends college.  Grant-based financial aid is likely to remain stagnant or decline, while college costs are likely to rise.  This advice is from SmartMoney‘s 10 Things Financial Aid Offices Won’t Say .

“Thought freshman year was expensive? Wait till senior year.”

Your kid just got her award letter and scored a large four-year grant covering most of her tuition, with a small loan for the rest. So you’re set, right? Not necessarily. Two problems can get in the way. First, the amount of federally subsidized loans a student can borrow typically increases slightly each year; as a result, the college may expand the loans it offers in subsequent years and downsize grants. Second, many parents and students assume that four-year merit-based awards will keep pace with tuition hikes. That’s not always the case. “Not all schools can afford to be that generous,” warns Willamette’s Hoban.

Nationwide, the average private college price tag jumped 4.4% for 2009-10 from the previous year with the average total cost for resident students at private colleges now just over $39,000. Assuming a steady 4% annual price increase and, say, $15,000 in aid each year, the $24,000 difference you paid on your student’s freshman year could grow to $29,000 by senior year.

If your child receives merit-based aid, ask whether the college can adjust it for tuition inflation. And, make sure your child maintains a top GPA; otherwise, they could lose their merit scholarship.

Related article:
Your chances for merit aid are better at less selective schools

Postponing remarriage to get more college financial aid

There are a many “tricks” that will increase your odds of getting college financial aid, including postponing remarriage so that household income looks low.

I Do! (In a Few Years)
The Fafsa asks a seemingly absurd question: “Who is considered a parent?” Yet frequently families react with frustration when I explain how the government defines parents for financial aid purposes. If both parents are alive and married to each other, they check off the “married” box and include their information on the Fafsa.

If there has been a divorce or legal separation, you need to determine who the student lived with more than 50 percent of the time the previous year. That’s the custodial parent. Only the custodial parent’s income and assets appear on the Fafsa; the noncustodial parent’s income and asset information don’t (though a child support question and another untaxed income question can reflect household support).

This is true even if the divorce arrangement says the noncustodial parent has to pay for the whole expense, or things are split evenly.

Here’s the surprise for some stepparents: Let’s say mom, the custodial parent, marries stepdad. Both mom and stepdad’s income and assets appear on the form. Maybe when they married they had a deal: he would pay for his children, she would pay for hers. Not happening. Of course, I don’t recommend holding off on saying, “I do!” (again) until after all the children have their degrees, but be aware of the rules.

Related articles

• Boost your chances for college financial aid with these FAFSA tips (costofcollege.wordpress.com)

Your chances for merit aid are better at less selective schools

Less selective schools offer more merit money but less need-based money.  But if you qualify for need-based aid, your chances are generally better at the more selective schools.  [UPDATE: Tables revised to show corrected admission rates]

If you do not qualify for need-based aid, your chances for merit aid are generally better at less selective schools.  In the first chart above, moving down one step from the most selective private colleges more than doubles the average merit aid amount.  The standard advice is to apply to colleges where your test scores and grades would put you well within the top 25% of the student body to improve your odds for receiving aid.  Your statistics are viewed as a way to boost the school’s prestige.

“Schools compete with each other to attract talented students… “If you want to recruit some of those kids, one way to do it is through merit aid.”

… “Universities compete based on prestige, so if they want to increase their rankings in U.S. News & World Report, an easy way to do that is to bribe high-scoring students to come to your university with non-need-based aid,”…

In addition to boosting prestige, colleges know that relatively small tuition discounts that attract higher-income talented students often yield them more net revenue than the more generous scholarships they offer to lower-income students.

“That’s a fairly significant percentage of what’s happening, especially for universities and colleges that operate on a tight margin and where tuition revenue is an important part of keeping the lights on,” said Jonathan Burdick, dean of financial aid and admissions at the University of Rochester. “In those circumstances, giving $5,000 against a $25,000 tuition charge is just like the discounting you’d see in a retail operation to bring traffic to the door.”

The Harvard Effect is a factor, causing some colleges to feel compelled to follow Harvard and Yale’s lead in price-discounting to affluent families.

Universities say they also have been forced to pay out more aid to people who don’t need it thanks to widely publicized changes in financial-aid policies introduced in recent years by highly selective universities including Harvard, Yale and Stanford, which raced one another to give grants to families with income as high as $200,000.

* Merit aid is defined as grants “awarded to students without financial need or awarded in excess of need”.

Source data is from College Board Trends in Student Aid 2011:

The ‘problem’ of extra money in your 529 plan

If you’re lucky enough to have left-over money in your 529 plan, there are ways to handle that problem.  Besides paying for traditional two- or four-year colleges, other options exist for 529 funds.

1. Vocational education - money in a 529 plan can be used to pay for postsecondary vocational or technical training at schools eligible for financial-aid programs administered by the U.S. Department of Education. This includes schools that teach a variety of trades, such as automotive and aerospace maintenance, hairstyling and computer skills. 
2. Graduate school – 529 funds can be used for postgraduate education
3. Change the beneficiary to another family member – siblings, first cousins, parents, or grandchildren
4. Leave the money in to grow tax-free – as long as there is a living beneficiary
5. Charity – donating the proceeds to charity allows you to take a tax deduction if you itemize deductions

Tax penalties waived if a scholarship covers college costs

Say there is money left over in a 529 account because your child got a big scholarship that reduced his or her college costs. In that case, money withdrawn would be subject to tax on the earnings but the 10% penalty would be waived, as long as the withdrawal doesn’t exceed the amount of the scholarship. The penalty on withdrawals also would be waived if the beneficiary dies or becomes disabled.

Related articles

• Recent developments among 529 plan providers (costofcollege.wordpress.com)

Psst – one of Duke’s so-called merit scholarships is actually need-based

Be wary of merit scholarships that take financial need into account.
…

THE DUKE UNIVERSITY SCHOLARS award is listed as a merit scholarship, but it is actually based on financial need.

In one section of their website, it is described as completely merit-based.

Merit Scholarships
Duke University also offers a limited number of merit scholarships. All applicants for admission are automatically considered for any available merit scholarship; specific applications are not required, and are not available. Our merit scholarship programs do not require that the winner demonstrate need; merit scholarships are based on the student’s academic and personal profile.

But if you read further on the University Scholars website, you see a contradiction.

As University Scholars are selected in part on the basis of financial need, it is imperative to file any required financial aid forms as early as possible, preferably by mid-February.
 …

THE UNIVERSITY OF ROCHESTER MERIT SCHOLARSHIPS take financial need into account in a more subtle way.

From the University of Rochester website:

Merit-based scholarships … are awarded to students who demonstrate outstanding academic achievement and potential, regardless of financial circumstances.…

We distribute merit-based aid regardless of a family’s demonstrated financial need.

However, in candid blog post Jonathan Burdick, Rochester Dean of Admissions and Financial Aid, wrote about the curious correlation between lower income and increased merit award amount.

We had a “progressive tax” in our merit. On average, each four dollars less in family income increased merit awards one cent. Not much impact per student, but noticeable overall.

Hmm, the lower your income the more merit money you receive.  In defending the correlation, Burdick explains that financial need is incorporated in a camouflaged way.

… needier students were on average more likely to have earned larger merit awards from the committee review process. I expect this result reflects the sympathy most reviewers might have for students whose essays and letters of recommendation describe tougher life circumstances. You don’t have to see a tax return to admire someone who has both achieved in school and comes from a single-parent home, or will be the first in the family to attend college, etc.

This was exactly my thinking, that the reviewers sometimes give extra “points” to students from families with lower incomes, euphemistically described as tougher life circumstances. Parents must decipher this information on their own, since colleges may claim that financial circumstances are not a factor in deciding merit awards.

Be forewarned.  Sometimes even when colleges insist that a scholarship is awarded solely on merit, family income does matter.

…
Related articles:

• Only two of the top ten universities give out merit scholarships
• Family income matters for ‘merit’ awards at the University of Rochester