Financial Aid Woes Revisited A Year Later

It doesn’t seem that long ago that I wrote about the lender scandal and how it affected the public and loans. Now it is a year later and although we read less in the press about the scandal, concern about the current credit crisis, difficulties on Wall Street and the looming recession have many parents of college bound students worried about how college financing is affected. Of course it doesn’t help when we read in the paper about lenders leaving the Federal Family Education Loan Program (FFELP) and the tightening of credit in response to the sub prime debacle. But what does it mean for the average person out there?

I believe that there are both long term and short term consequences to be considered which will ultimately change the landscape in terms of college finance. Although these changes will force a change in the way we do business, it isn’t a call for panic. The simple answer to many parents’ concerns about the availability of loans is that federally subsidized loans offered within the Direct Lending and FFELP Programs will continue to be available to students. These are the loans you know as Stafford, Perkins and PLUS loans. Although we’ve heard about a number of lenders leaving the market, there are over a thousand lenders - banks, origination companies, and credit unions still offering these loans. In addition, many of these companies also offer private loans, which many feel will become more expensive.

Recent changes enacted by Congress reduced the subsidies lenders were receiving. In addition, the cost of participating in the FFELP program increased and significantly impacted on the profit margins. As a result, most lenders, in particular small lenders, have not been able to remain competitive in this market because they have had to pass on to the consumer fees that at one point they covered. Because many lenders have dropped out in response, the competition is shrinking and unfortunately, we know that it is competition which keeps prices low. When that goes away, the consumer suffers. While many people point to the Direct Lending Program as a solution, they forget that it was the option of more choice in lenders, improved service and competition by reducing or offering no fees that drove many schools to leave Direct Lending and participate in FFELP. (At the present time, 80% of the colleges and universities participate in the FFELP program.) This problem is further exacerbated by threats to financing these loans caused by a “frozen” auction rate securities system. With a disruption in this process, lenders find themselves unable to sell loans and therefore cannot finance new loans. While the larger banks have the ability to carry these loans on their books while financing new loans, smaller lenders who rely on the sale of their loans have found few takers in today’s market, hence putting many companies out of business. While this largely affects the lending industry, as discussed earlier, reducing competition leaves the public with limited choice in what was once a highly competitive market.

On the private loan side, the tightening of credit caused by the failure in the sub prime market has driven underwriters to tighten credit requirements and look more closely at schools that have struggled with higher cohort default rates. This affects many technical and proprietary schools as well as some community colleges. For individuals with low credit scores or students enrolled in the aforementioned schools, obtaining private loans will be more difficult.

We have also read about the continued increase in college tuition and the number of private schools that have announced changes in their financial aid offerings including the reduction or elimination of student loans. While this is a wonderful effort on their part, the number of colleges that have been able to do so is small and impacts a small percentage of students. For most students, there is little to no relief promised at the present time, other than threats to publish a list of the highest priced schools. Interestingly, applications and enrollment in these schools have not decreased in spite of this.

I advise parents to use this time to think strategically about college, the cost of college and the debt incurred. It is clear to me that in general, college tuition is going to continue to grow. The demand for an educated, highly trained workforce that will enable the US to maintain its economic advantage is critical. Therefore, a college education is requisite for most if not all young adults. With the demand for enrollment at state public colleges/universities increasing, tuition will continue to climb in order to accommodate growing numbers of students enrolling, as well as the updating and funding of new classroom and research facilities, and attracting and hiring faculty.

To meet this cost, the public must become savvy and strategic in looking at ways to finance college. There are several approaches that one can take. First, more and more students are saving on tuition by completing the first two years of their education in community colleges. The cost of tuition is significantly lower at these schools and allows them to save on the overall cost of a Bachelors Degree. This is especially appealing to students who may need to take remedial courses in their first term before enrolling in college level, credit bearing courses.

Some students are looking at part time or full time work along with college enrollment. This enables them to “pay as they go”, thereby reducing or eliminating college debt. While there are strong financial reasons for doing this, the evidence indicates that students doing this are less likely to complete their education on time, have more problems academically and become less involved in campus life.

Many people are concerned about increasing debt that many students incur to attend undergraduate and graduate school, often extending their payments out to 20 years post graduation. The public may need to start looking at ways of either reducing the amount they borrow or looking at ways they can shorten repayment of that debt. Congress has discussed possible ways of addressing this and has promised to consider loan forgiveness and income based repayment programs.

The one factor we are all faced with is how quickly the economic landscape can change and how it impacts on our daily lives. It also affects our decision making and is at the core of our values. In the coming months with a recession looming and fear that many of us can no longer take for granted the jobs or investment returns we enjoyed over the past years, we will all have to make tough decisions. The decision to go to college is an easy one; the way to pay for it will remain an uncertainty.

The Cost of a Dream

It's that time of year when I make the rounds of various college fairs, regional and local to talk to students about college. It is exciting to talk to so many young people and their parents who are focused on obtaining information about college, financial aid or just some words of advice and encouragement.

I am always amazed at the energy and optimism which continues to draw me back to this work every year. I also can't help but address the growing concern many families have about the cost of a college education, the growing indebtedness of college graduates and the frustration many families share around ensuring that their child can still attain the dream of a college education.

It is a complex problem at best and does not have a simple solution. This is especially true for the majority of families I speak to who have not saved or are insufficiently prepared to meet the cost of their child's education. There is nothing more frustrating than to talk with parents who have encouraged their child to study and work hard to attend college and fear that the dream of a college education may be beyond their reach.

I grew up believing in the value a college education. The fact is that a college education is the great equalizer and can open up the doors of opportunity to the poorest people in our nation as well as immigrants or anyone seeking to improve their job prospects by obtaining a college education. And in fact that has been true for millions of first generation college graduates who have gone on to obtain jobs in education, business, the health field, law, etc., We all have our own success story or can recount the story of our parents, relatives and friends. And today, these are the same dreams shared by so many parents and young people I meet.

The problem is that the times of "free college" or low tuition that could be covered by grants is over. At a college fair down in Maryland, I met with a couple who were surprised by the cost of college. Their son had wanted to attend a small private college in a neighboring state and the cost was $22,000 dollars. They had never saved for their son's education assuming that he would either receive an athletic scholarship or get enough grants to cover the cost of college. When I explained to them how financial aid is determined, they were floored. Both parents had no idea how expensive a college education is and did not have the resources to deal with it. While they understood and placed a high value on a college education, their lack of experience and knowledge about the process left them woefully unprepared to meet their Expected Family Contribution.

For the new parent, the answer is simple. Start saving early. Take advantage of any and all savings programs that allow you to put money away for college. Have a plan for not just college financing but a strategy for helping your child to be as competitive as possible for college. In the past, many parents sought athletics as a vehicle for helping their child to obtain scholarships for college. But that is not the only way. There are many more scholarships that look for talent, community service and academic achievement. Make sure your child participates in activities or opportunities that may make them eligible for scholarships, grants and internships. Find out about your employer's educational benefits. Do they offer scholarships? Be aware of the deadlines. Help your child research scholarships as they get closer to senior year. Look at the church, local service organizations, professional or social organizations you belong to. Do they offer scholarships?

Work with a financial planner to help identify ways of saving or investing, to add to your nest egg and overall financial resources. Do you have equity in your home that you can borrow against? What other resources are available to you for long term and short term finance options? By planning early, you can be much better prepared for the sticker shock that a college bill creates. And remember that there are many other costs outside of tuition, fees, room and board. Don't forget books, computers, travel/commuter expenses, laundry, spending money and telephone. Have you factored in these expenses when your child leaves home?

Sit down with your college bound child and have the talk about finances. As much as we want to encourage and support our children, this does not mean that we offer a blank check. The conversation should start early and include honest discussions about your child's career goals, the education needed, the cost of that education and a plan by both parent and child to address those costs.

• Should your child be encouraged to work and set aside part of their earnings for college?
• Are they looking for internship opportunities in their field of interest which may offer mentoring and scholarship opportunities?
• Are they taking a course of study that makes them more competitive?
• Are they taking advanced or AP courses that they can use to earn college credit?
• Are they willing to take loans for college and if so, do they understand their responsibility for paying off that debt as well as the consequences if they don't?
  

Even if you've decided to shoulder the cost of college, does your child understand their responsibility to attend class, keep up their grades, live on a budget and be responsible in keeping extraneous bills low? Many parents assume that their children are equally motivated to attend and complete college, although that is often not the case.

Out of all of the students who enroll in college, almost half will fail to graduate within 6 years. What happens to these kids? While many may eventually return to graduate, the fact is that they are leaving school without the advantage of the college degree but with the debt that was incurred while they were a student. It is one thing to graduate with 30,000 dollars in debt and repay that debt with what you hope is a good paying job. It is a very different scenario if you are struggling to pay back that same debt without the benefit of a college degree. Is your child aware of this? I spoke to a father who lamented that his college graduate daughter was waiting tables at a local restaurant with a degree in Anthropology. She had $25,000 in college debt. A broken ankle on a skiing trip forced her out of work and behind on her loan payments. These are the stories we hear about. Should she have not gone to college? Should she have not taken out loans? Should she have majored in something else? I wish I could say yes, but that is not the right answer.

A college graduate's lifelong earnings is estimated to be a million dollars more than a high school graduate. So obviously, there is monetary value in the degree. There are many doctors, lawyers, teachers, social workers, accountants and nurses who would not have been able to go to college if they had not taken out loans. And yes, there are Anthropology majors who are working as professors, teachers, writers, social workers, and a whole slew of professions.

The key is in planning. College students, research careers in your chosen profession. Take advantage of opportunities to work in fields related to the course of study. Leave employment options open. Instead of that job in “fast food”, look for internship opportunities close to your career. Even if the pay is poor, experience is often what it takes to get your foot in the door. Use loans wisely, live on a budget and look for ways to reduce college costs. Living on campus? Become a resident advisor or look into college work study. You don't eat breakfast? Skip the 3 meal a day option in your meal plan. You can save money taking the two meal option or better yet, cook your own meals. Although it seems like everyone is going, can you afford the Spring Break trips every year? And, attending a college "in state" can save you at least half the tuition you'd pay to attend a similar school "out of state". Learning to live on a budget as a student will teach valuable lessons for later.

These seem like common sense solutions and in fact that is what they are. There is no easy solution for the family that wants their child to go to college but just can't afford the price. Many families have to make harder choices. Maybe it means staying home and commuting to school to save on room and board. Maybe it means starting at a community college and transferring later. Maybe it means working and going to school part time. These are all choices that some families and young people make every day. But they make these decisions because a college education is a big investment.

So ultimately I tell parents and students that the final decision remains with them. We all know the success stories and of course we read in the paper about the failures. But each story is different and written by the individual. In my line of work, I choose to believe in happy endings.