Borrowing is a helpful, but not wholly ideal, bridge to combat rising tuition.
By Esther Pak�| 10-31-10�| 06:00�AM�|�E-mail Article
Despite the economy's recent deep recession, college costs have continued to tick higher, leaving families with college-bound children in the difficult quandary of figuring out how to pay for it. The reality is that with college costs so high, borrowing is also increasing, as the gap between families' available resources and the overall cost of attending college continues to widen. Unfortunately, recently published statistics by the College Board and the Project on Student Debt offer little comfort to families seeking to rely solely on loans to pay for college.
Bridging the Gap
So what options are available for families and students who can't afford to foot the college bill and are seeking to minimize debt? To help ease the burden of college financing, there are different types of aid and financing vehicles available. Students with low- and moderate-income backgrounds are the primary beneficiaries of federal aid, while state grants cater to a wider range of family incomes.
Esther Pak is an assistant site editor of Morningstar.com.
And educational savings plans like state-sponsored 529s can help families to start preparing early for future college costs, and are attracting millions of dollars. In fact, the total number of Section 529 accounts increased from 10.6 million to 11.2 million between December 2007 and March 2009.Here are a few non-loan options for families with college in the horizon:Start Saving Early in Educational Savings Plans: There are many incentives to being an early bird when it comes to college savings. Besides the obvious benefit of having time on your side to accrue savings (perhaps by making some lifestyle re-prioritizations or budget adjustments), starting early also gives you more time to sort through the various investment vehicle options that are out there. If you choose to invest in your state's 529 plan, you may be eligible for tax deductions. Or, you might consider the flexibility of a Roth IRA so that you can save for multiple goals (like retirement and college) at the same time. Christine Benz discusses various college savings options more in-depth here.Explore Alternatives: While traditional 529 plans are a fine choice for many, it is not a one-plan-fits-all deal. Other investment vehicles like Coverdells offer more flexibility since you aren't restricted to a state's specific plan, but rather investors�can choose from a�variety of investments,�from CDs to mutual funds. But Coverdells aren't without drawbacks and limitations. For example, annual contributions on Coverdells are pretty low at $2,000 per year, and are slated to drop to $500 in 2011. Investors also must be under a specific income level ($220,000 for married couples filing jointly). Read this article by Christine Benz to learn more about Coverdells and additional alternatives to saving for college that may better suit your circumstances and needs. Also, check out Christine's article helping late-starters�navigate college financing.Explore Federal Aid and State Grants: Eligibility for most federal and state grants will depend on your Expected Family Contributions (EFC), which is an index calculated using a government-established formula that colleges use to determine how much financial aid (grants, loans, work-study) you would receive as a student. Your EFC needs to be below a certain number in order to qualify for the Federal Pell Grant, for example. Eligibility for other aid programs are determined by taking into account cost of attendance, your EFC, and aid from any other sources. The outstanding amount is your remaining financial need.�The�useful FAFSA4caster�breaks down the application process for federal aid and allows students to begin the process as early as their junior year of high school to better understand what types and approximate amounts of federal aid�are available to them.Seek a Reasonable "ROI": The decision of which college to attend has many intangible factors, but there is a financial component to the equation: what is the likely return (i.e., salary and career mobility) on the tuition paid? Talk to your children about whether that very expensive school is a must for a certain career path. There may be cheaper ways to get your child to that ultimate career goal.
Tuition Is on Rise ?
As has been widely publicized, tuition rates are still on the rise. Once considered the most reasonably priced route to a college education, public universities have experienced the steepest rate of increase in tuition rates. That's because cash-strapped states and municipalities have forced students to shoulder an ever-larger share of their college costs.According to the College Board's report that was published as part of its Trends in Higher Education Series 2010, the rate of tuition growth for public four-year institutions was between 6.2% and 6.5%. In addition to tuition, the total cost of college also includes room and board, books and supplies, transportation, and other expenses; these costs vary widely between the public, private, for-profit, and not-for-profit sectors. As of 2009-2010, total average expenses to cover in-state students living on campus at public four-year institutions was $19,388, while a student enrolled in private not-for-profit four-year institutions would have wracked up over $39,000 in expenses.? And So Is Debt
Those spiking tuition rates have had a spillover effect on debt levels. The annual report from the Project on Student Debt estimates that college seniors who graduated in 2009 from public and private nonprofit colleges carried an average of $24,000 in student loan debt--an increase of 6% from the previous year. And according to a College Board report by Sandy Baum and Patricia Steele, among the two-thirds of all college graduates with debt, 25% borrowed $30,500 or more.The analysis of the latest data from four-year public and private nonprofit colleges confirms that debt levels of graduating students continue to rise, though with considerable variation among different states and colleges. Many of the high-debt states are in the Northeast, while the low-debt states are concentrated largely in the Western U.S. The most likely reason for this is that the Northeastern states have a larger number of students who attend private nonprofit colleges with higher-than-average tuitions, whereas the Western states have a larger number of students attending public colleges with lower-than-average tuition rates. And in general, private nonprofit colleges have higher tuition rates than public ones. But campus-to-campus, debt levels ranged from $3,000 to $61,500.Debt burdens also vary depending on family income levels, but not how you might expect. A study published by the College Board focusing on middle-income students' ability to pay for college was particularly illuminating given the rise of tuition versus the stagnant average income for middle-income families (adjusted for inflation). It is often assumed that the lowest-income students are most likely to graduate with high debt. But in fact, middle-income students are less likely to qualify for federal aid and are more likely to have higher debt levels after graduation, the study found.For example, according to the same College Board report on middle-income students drawing data from 2007-2008, 62% of dependent Pell Grant recipients enrolled in public institutions had family incomes of $30,000 or less, and only 6% of the recipients had family incomes greater than $50,000. During that same time period, 39% from lower-income families ($32,500 and $59,999) received state grants averaging $3,200, whereas 22% from middle-income families ($60,000 and $99,999) received grants averaging $2,700. And, 64% of middle-income dependent students attending for-profit colleges and universities graduated with high levels of debt (amounting to over $30,000) versus 37% of low-income students.This growing, though not entirely surprising, debt trend is especially troubling given the stubbornly high unemployment rate. According to the same report by the Project on Student Debt, the unemployment rate for college graduates ages 20 to 24 was 8.7% in 2009--a substantial rise from the 5.8% unemployment rate in 2008. Given today's tough economic climate, it is more likely that paying back student loans will be even more challenging.But the College Board report's Baum and Steele are also careful to place the problem in the proper context by noting that over half of all associate degree holders and one-third of all bachelor's degree holders shouldered no educational debt. Thus, they argue that the issue is not that students are taking on too�much absolute debt. Rather, too many students are taking on too much debt relative to what they can realistically pay back after they graduate.
As has been widely publicized, tuition rates are still on the rise. Once considered the most reasonably priced route to a college education, public universities have experienced the steepest rate of increase in tuition rates. That's because cash-strapped states and municipalities have forced students to shoulder an ever-larger share of their college costs.According to the College Board's report that was published as part of its Trends in Higher Education Series 2010, the rate of tuition growth for public four-year institutions was between 6.2% and 6.5%. In addition to tuition, the total cost of college also includes room and board, books and supplies, transportation, and other expenses; these costs vary widely between the public, private, for-profit, and not-for-profit sectors. As of 2009-2010, total average expenses to cover in-state students living on campus at public four-year institutions was $19,388, while a student enrolled in private not-for-profit four-year institutions would have wracked up over $39,000 in expenses.? And So Is Debt
Those spiking tuition rates have had a spillover effect on debt levels. The annual report from the Project on Student Debt estimates that college seniors who graduated in 2009 from public and private nonprofit colleges carried an average of $24,000 in student loan debt--an increase of 6% from the previous year. And according to a College Board report by Sandy Baum and Patricia Steele, among the two-thirds of all college graduates with debt, 25% borrowed $30,500 or more.The analysis of the latest data from four-year public and private nonprofit colleges confirms that debt levels of graduating students continue to rise, though with considerable variation among different states and colleges. Many of the high-debt states are in the Northeast, while the low-debt states are concentrated largely in the Western U.S. The most likely reason for this is that the Northeastern states have a larger number of students who attend private nonprofit colleges with higher-than-average tuitions, whereas the Western states have a larger number of students attending public colleges with lower-than-average tuition rates. And in general, private nonprofit colleges have higher tuition rates than public ones. But campus-to-campus, debt levels ranged from $3,000 to $61,500.Debt burdens also vary depending on family income levels, but not how you might expect. A study published by the College Board focusing on middle-income students' ability to pay for college was particularly illuminating given the rise of tuition versus the stagnant average income for middle-income families (adjusted for inflation). It is often assumed that the lowest-income students are most likely to graduate with high debt. But in fact, middle-income students are less likely to qualify for federal aid and are more likely to have higher debt levels after graduation, the study found.For example, according to the same College Board report on middle-income students drawing data from 2007-2008, 62% of dependent Pell Grant recipients enrolled in public institutions had family incomes of $30,000 or less, and only 6% of the recipients had family incomes greater than $50,000. During that same time period, 39% from lower-income families ($32,500 and $59,999) received state grants averaging $3,200, whereas 22% from middle-income families ($60,000 and $99,999) received grants averaging $2,700. And, 64% of middle-income dependent students attending for-profit colleges and universities graduated with high levels of debt (amounting to over $30,000) versus 37% of low-income students.This growing, though not entirely surprising, debt trend is especially troubling given the stubbornly high unemployment rate. According to the same report by the Project on Student Debt, the unemployment rate for college graduates ages 20 to 24 was 8.7% in 2009--a substantial rise from the 5.8% unemployment rate in 2008. Given today's tough economic climate, it is more likely that paying back student loans will be even more challenging.But the College Board report's Baum and Steele are also careful to place the problem in the proper context by noting that over half of all associate degree holders and one-third of all bachelor's degree holders shouldered no educational debt. Thus, they argue that the issue is not that students are taking on too�much absolute debt. Rather, too many students are taking on too much debt relative to what they can realistically pay back after they graduate.
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