High school students planning for college can look forward to multiple questions - and not just those they might confront on standardized tests. In addition to getting into college, students and their families have to figure out how much college will cost, and how to pay for it.
Understanding college costs, and navigating their way through the many sources of financial aid, can seem as daunting as any term paper, and the nation's recent credit crisis has made the task even more challenging. This article addresses those challenges, focusing on the financial needs of college-bound students, from what makes up the overall cost to what types of student loans are available, as well as the rising cost of college and the impact of the credit crisis on student loans.
The expense of attending college extends far beyond tuition and fees. Typical costs also include room and board, books and supplies, transportation and other miscellaneous expenses.
The share of a student's overall college costs represented by each of these categories of expense varies by type of institution (private or public, two-year or four-year) and whether a student attends an in-state or out-of-state school. According to a 2007-08 College Board survey, published tuition and fees constitute 67 percent of the total expenses for students enrolled in a four-year private college. This compares with 60 percent for out-of-state students enrolled in a public college, 36 percent for in-state public students and 17 percent for students attending a public two-year college.
College students choose from a variety of options to pay for the overall costs of their higher education. According to a 2008 Sallie Mae-Gallup study, parents pick up the largest portion, paying 48 percent of the overall cost. On average, a student covers 33 percent of the cost himself or herself, using income, savings and loans. Grants and scholarships account for an average of 15 percent, with support from friends and relatives making up the rest.
The study, which involved interviewing hundreds of families with college-aged students during the 2007-08 academic year, provides further detail about the source of the funding. Of the 48 percent parents contribute, 32 percent comes from income and savings and 16 percent from loans. Not surprising, perhaps, students' contribution is weighted differently - only 10 percent comes from income and savings, with 23 percent coming from loans. Overall, then, students and their parents pay for a significant share of the cost of college - close to 40 percent - by borrowing money. The types of borrowing that parents and students typically use include private and public educational loans, home equity loans, credit cards, other types of loans and withdrawals from retirement accounts.
The sources of funding families choose also vary with the family's level of income.
On average, higher-income families - those with income of $100,000 or more - pay a greater share of college costs with income and savings than do middle-and lower-income families. Middle-income families - those with income between $50,000 and $100,000 - rely on loans for a larger share of their college costs than higher-or lower-income families. Lower-income families, on average, obtain scholarships and grants for a greater share of their college costs than the other two groups.
The Sallie Mae-Gallup study reaffirms the importance of loans for many families, for whom savings and income alone typically are not enough to pay for all college costs. While students and their parents use many types of loans to pay for college, this article focuses on educational loans. Educational loans can be divided into three broad categories: federal student loans (Stafford and Perkins), private education loans and parent loans.
Federal student loans are the most common educational loans students and their families use to finance higher education. These loans typically have lower interest rates than other types of loans, with no credit check or collateral required. They come in two basic forms - the Stafford loan and the Perkins loan. Each is available for both undergraduate and graduate students. Perkins loans are always subsidized by the federal government, whereas Stafford loans can be both subsidized or unsubsidized. Stafford loans are more widely used; Perkins loans are meant for students in extreme financial need.
Private education loans are another source of funding available to students. Private lenders commonly use students' credit scores when issuing these loans, which are often used when federal loan amounts are not enough to pay for costs.
Parents also take out education loans for their dependent children in the form of the Parent Loan for Undergraduate Students (PLUS). Loans through this federal program can be used to cover any costs not already met by the student's financial aid package.
Both the government and financial institutions provide funding for student loans. Financial institutions - banks, credit unions, thrifts and other lenders, including a variety of nonprofit organizations formed specifically to make student loans in different states - participate in student lending either by making student loans directly or by providing the funds for federal loans such as Stafford and PLUS through the Federal Family Education Loan (FFEL) program. According to the web site www.FinAid.org, there are over 2,000 education lenders nationwide, although most of the volume comes from the top 50 lenders. That top 50 includes most of the big banks, as well as several nonprofit organizations. Sallie Mae, once a government entity but now private, is the largest lender.
In the last 10 years, the cost of higher education has risen faster than the cost of the "market basket" of goods, a list of common consumer goods and services whose prices are used to form the consumer price index and thus track the rate of inflation. Figure 1 shows the year-over-year increase in the U.S. Consumer Price Index for education and the total market basket of goods. The cost of education has risen at an average rate of 4.5 to 7.5 percent annually since 1998, outpacing the range of 1 percent to 5.5 percent for overall inflation during that period.
Figure 2, from a College Board survey, illustrates the rising trend of college costs for both public and private four-year colleges over time in constant 2008 dollar terms. The costs included in these trends are tuition expenses, fees and boarding costs. The cost for private institutions has risen at a faster pace than for public institutions over the last 30 years. The average published cost at four-year private institutions for the 2008-09 academic year was $34,132, compared with a cost of $15,434 in the 1978-1979 academic year. The cost for a four-year public school, on the other hand, was much lower: $14,333 in 2008-09.
College costs have risen steeply since the 2000-01 academic year, especially at public institutions. The costs have risen by a total of 33 percent, even after adjusting for inflation over this eight-year period. These rising costs put a huge burden on students, especially in today's slow economy.
(SOURCES: Annual Survey of Colleges, the College Board, Integrated Postsecondary Education Data System (IPEDS), U.S. Department of Education, National Center for Education Statistics)
The current financial crisis has presented extraordinary challenges for families with college-bound students. As noted earlier, savings and personal borrowing, on the part of parents and students, account for the largest share of higher education financing. But as the overall credit market has tightened, loan volume has dropped sharply. (One study notes that 60 private lenders originated $19 billion in personal loans in 2008; by the end of January 2009, 39 of these lenders had stopped lending and the rest had tightened their lending standards.) Borrowing by parents, especially through home equity lines of credit, has diminished significantly as house prices have dropped. Bank lending to consumers for personal expenses, such as college, has also slowed down.
As a result of this contraction, the Department of Education has seen a 10 percent increase in federal student aid applications. This trend led Congress to introduce legislation in 2008 to keep college financing channels open for families with college-bound students. President George W. Bush signed the legislation into law as the Ensuring Continued Access to Student Loans Act (ECASLA) on May 7, 2008.
ECASLA contains a variety of measures designed to ensure higher education financing during the current turmoil in financial markets. The measures are anchored by a loan buyback program, in which the Department of Education buys back federal education loans from private lenders in order to inject liquidity into student loan credit markets. The buyback program targets Federal Family Education Loans (FFELs), which include the popular Stafford and PLUS federal loan programs.
FFELs have been quite popular in the past. For example, during the 2007-08 academic year, 7.5 million students and their families took advantage of this type of financing, totaling roughly $91.8 billion. However, in early- to mid-2008, this market dried up, with major private lenders ceasing to make FFELs because they weren't profitable. The loan buyback program was seen as an essential vehicle to get credit flowing in this market again. Subsequent to the initial passage of ECASLA, President Bush signed a one-year extension on ECASLA's loan buyback provisions so that the Department of Education could buy back FFELs through mid-2010.
ECASLA also increased the unsubsidized Stafford loan limit by $2,000. Furthermore, the bill increased the scope of the Academic Competitiveness Grant (ACG) and the National Science & Mathematics Access to Retain Talent Grant (SMART) so that students who had already been receiving federally funded Pell Grants could avail themselves of these additional funding sources. In addition, ECASLA gives parents the option to defer repayment of PLUS loans until six months after the student finishes at least part-time enrollment at an institution of higher education. The bill also expands eligibility for PLUS loans to parents who are delinquent on medical or mortgage payments. Further, ECASLA allows the Department of Education to designate institutions for Lender of Last Resort (LLR) loans upon approval from the Secretary of Education, which increases the ability of individual schools to expand student loan access.
Although the ECASLA legislation is a positive first step in ensuring credit for families with college-bound students, federal lawmakers and the administration of President Obama may need to revisit this issue as weakness in the financial sector continues.
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