College Cost Conundrum: Why college is so expensive, what students can do

For the past three decades, the cost of college has grown at twice the rate of inflation, leaving students and their families with significant debt – and concerns about how to pay the price.

According to opening remarks at the College Savings Foundation 2012 Summit, held last December in Washington, D.C., “The explosive growth in college charges has placed unsustainable strains on the traditional financing equation we rely upon as a nation.”

Underscoring the problem, a recently released (September 2012) Pew Research Center survey indicated that one in five households owed student debt in 2010, more than double the share from two decades earlier. The 2010 number represents a significant rise – up to 19 percent – from the 15 percent  households owed in 2007. Current outstanding student debt tops $1 trillion and college costs are continuing to climb.

How should we, as a nation, rethink the economics of higher education? What are the factors that escalate the price of the American dream? And can the system be rewired to deliver first-class education in more affordable ways?

These were a few of the questions, Summit attendees debated as they addressed the college cost conundrum.

 

The college experience at all costs

Following the Summit, Roger Michaud, chair of the College Savings Foundation, offered insight into the problem as well as a few potential solutions.

He attributed the rise in college costs, at least in part, to the fact that “the largest freshman class in history is now applying for college.”

That influx of students has driven the need for physical growth on college campuses. For example, at the University of Missouri record numbers of freshmen – 6,560 in August – have pushed the need for housing and other services and driven up the cost of housing, tuition and related fees.

“It’s market driven,” explained Faith Sandler, executive director of The Scholarship Foundation of St. Louis. “The higher the demand, the greater the cost. There’s also some credence to the idea that a third party payer system (i.e. student loans) makes consumers less likely to challenge the institution. Delayed repayment (of student loans) may make the cost seem less real to students.”

Also driving up the cost is student expectation.

“Certainly the quality of the education being offered has been escalated,” Michaud said. “But so too have campus amenities.”

State-of-the-art recreation complexes, all-suite accommodations and, at some private universities, perks  such as maid service add not only to the college experience but also the cost.

“Colleges have taken on a great deal of debt to deliver ‘the experience,’” Michaud said.

But, as Michaud pointed out, the end result is that many families are having to have “tough, but necessary conversations about how much experience they can afford.”

“Maybe the novelty of the big name college goes away when you look at what is realistic and necessary to your degree,” Michaud said.

Sandler echoed that what her organization very often sees is “a young person setting their sights on a particular institution and parents wanting to do everything possible to make that happen for the child.”

 

Funding the dream

The Scholarship Foundation, well known for their ScholarShop upscale resale locations, provides direct financial support to students for postsecondary education as well as information that students and families need to make financially sound educational choices.

“We do a lot of counseling with families who are looking at the math. Every student needs an advocate to walk through the hard, cold facts of financial aid,” Sandler said. “And financial aid offices (at colleges and universities) are not impartial.”

She suggested that students and families jointly consider the following questions:

• What can we afford?

• What will we qualify for?

• What will be our long-term burden?

Parents have long been expected to be part of the college cost equation, but according to Sandler more and more parents may not even qualify for the loans that are packaged into a college’s student aid offer.

Michaud suggested that one of the best ways to combat college costs is for “students and parents to develop their own strategies to offset some of those college costs,” because changes to the college cost equation are not likely to occur any time soon.

“Any dollar saved will help offset the amount of debt that students, and often their parents, ultimately face,” Michaud said.

In the interest of full disclosure it must be noted that the College Savings Foundation is a not-for-profit organization with the mission of helping American families achieve their education savings goals. A primary focus of the Foundation is building public awareness of and providing public policy support for 529 college savings plans.

529 plans are state sponsored, interest-earning savings programs. Individuals can invest in any state’s 529 plan for themselves or a loved one. That means a grandparent in Missouri with a grandchild in Tennessee can participate in either state’s 529 plan on behalf of the grandchild. Then, when it comes time for college, the grandchild can use the money in the plan to pay for qualified higher education expenses across the nation. Meanwhile the grandparent can be earning a tax benefit on the money set aside.

“The average 529 plan at maturity is about $15,000,” Michaud said. “The trick is starting early and remaining committed.”

Michaud recommended savingforcollege.com as a place to start online and suggested that financial advisors can help families set and achieve goals. Information on Missouri’s 529 plan, known as MOST, can be found online at missourimost.s.upromise.com.

 

Graduating into debt

As important as saving is to offsetting the cost of college, it still doesn’t fix the underlying problem.

“Even the think tanks that really do the deep dive into the cost of education are struggling with solutions to containing college costs,” Michaud said. “It’s a serious problem.

“On average, college students graduating from state schools do so with around $25,000 in student debt. However, some estimates put that number at $200,000 just six years from now. These are scary numbers.”

Michaud points out that already escalating student debt, complicated by a challenging job market is causing college graduates to “put their lives on hold.”

“They’re graduating from college and moving back in with Mom and Dad,” Michaud said. “They’re putting off milestones such as getting married, buying a car, buying or renting a house or apartment, and starting a family.”

With all those delays in personal economic development come delays in national economic development. What’s more, those delays are lasting longer than ever before.

A 2012 survey by the College Savings Foundation showed that 23 percent of those surveyed expected student debt repayment to take between 10-20 years – up 2 percent from a 2011 survey – and 9 percent expected it to take more than 20 years.

In some cases, parents are paying off their student loans just in time to take on student loans for their children.

Sandler said her advice to students and parents is: “If you have to consider a parent PLUS loan or unsubsidized loan you need to stop and reconsider your choices.”

“The biggest impact on the repayment process is the size of the principle,” Sandler cautioned.

A variety of repayment plans and loan rehabilitation options do exist, but they come with a cost.

Pay-As-You-Earn, the newest repayment plan option, came online in October of 2012 to offer some relief to recent graduates who are entering the job market with “record student debt” and who are facing near record unemployment rates.

To be eligible for Pay-As-You-Earn, borrowers must have taken out their first federal student loan after Sept. 30, 2007, and at least one after Sept. 30, 2011. Only direct (federal) loans qualify.

As with all loans, extended repayment plans, such as Pay-As-You-Earn, come with penalties such as increased interest paid over time, and default comes with serious consequences.

Student loan default implications include:

• Credit report damage (7-year minimum).

• Wage garnishment.

• Seizure of federal and state tax refunds.

• Seizure of portion of any federal payment.

• Legal action in federal district court.

• Title IV (federal student aid) ineligible.

• May lose state occupational license.

• No mortgage loans.

• May have difficulty obtaining car loans.

• May be unable to rent an apartment.

• May be turned down for jobs.

• Collection costs.

Given that the consequences associated with defaulting on student loans are so significant, it’s surprising to learn that loan default rates are increasing for most schools and that the nation is experiencing increasing loan delinquency rates.

 

Taking control

On Feb. 21, the Consumer Financial Protection Bureau (CFPB) announced that it is gathering information to develop options for policymakers to make the repayment of private student loans more manageable for struggling borrowers.

The CFPB is reacting to the fact that private student loan borrowers, who wish to pay their loans but face high payments, lack alternative repayment and refinance options.

In a press release, CFPB Director Richard Cordray said, “Too many private student loan borrowers are struggling with unwieldy debt that prevents them from climbing the economic ladder.”

According to the CFPB, unlike distressed borrowers with federal student loans, private student loan borrowers generally do not have long-term forbearance, income-based repayment, or rehabilitation options if they default.

The result, according to a July 2102 report submitted to Congress by Cordray and Secretary of Education Arne Duncan, is more than $8 billion in defaulted private student loan balances, representing 850,000 distinct loans, with even more in delinquency.

As it works to develop more flexible repayment options and relief for graduates, the CFPB is seeking input on a variety of issues related to repayment affordability, including:

• How student loan burdens might impact the broader economy and hinder access to mortgage credit and automobile loans.

• How distressed borrowers manage their student loan obligations.

• What options currently exist for borrowers to lower their monthly payments on private student loans.

• Examples of successful alternate payment programs in other markets and which features could apply to this market.

• The most effective mechanisms for communicating with distressed borrowers.

Members of the public, including financial institutions, colleges and universities, professional associations representing health professionals and educators, housing finance experts, students, and families are encouraged to submit comments.

The formal Notice and Request for Information in the Federal Register, along with information on how the public will be able to electronically submit comments, is located on the CFPB’s website (consumerfinance.gov). Comments will be accepted until April 8.

 

Final advice

As experts in higher education continue to search for real solutions to rising college costs, Michaud and Sandler suggest that the best bet for students and families is to stay in control.

“Start saving now,” advised Michaud. “It’s never too late or too early to start.”

“Select a school that is both educationally appropriate and ultimately affordable. Regionally, tuition increases have been pretty much held in check over the last four years,” Sandler said. “So staying close to home can have definite advantages. The whole romantic notion of packing up and moving to some faraway location is less and less achievable. That’s not to say that college is less achievable. Students and parents just need good advice along the way.”