July 26, 2012
Student Loan Prevention: Part 1
One thing is crystal clear in the emotional fog of this exhilarating rite of passage: parents and their teenagers both need to get serious about limiting their dependence on student loans. Squared Away asked several experts on financing a college education for their best tips on minimizing total borrowing for college.
Some of their debt-cutting strategies are difficult to swallow. But since 2005, student loans have shot up 55 percent, to $24,301 per student, for an undergraduate degree that has, as one financial adviser noted, become “ubiquitous.” Yet college places an unprecedented financial burden on parents also saving for retirement and on graduates when they get their first full-time jobs. Debt prevention also requires families to face head-on the emotional roadblocks to an affordable education.
Squared Away came up with 10 debt-prevention strategies. Here are the first five ideas, with five more scheduled for next Tuesday. Links to Web resources are also sprinkled throughout the article.
- Aid Deadlines Are Crucial
Buy a calendar and red marker and closely track every single deadline for merit or need-based aid – they’re different for each college under consideration.
“If I could give you one piece of advice that would be it,” said Lyssa Thaden, a financial education manager for American Student Assistance, which educates and counsels student-loan borrowers.
Thaden listed four common mistakes that cost parents dearly, requiring them to borrow more:
- On Jan. 1 of each year, the federal financial aid – FAFSA – form that parents must fill out to determine eligibility for aid becomes available. But each college has a different deadline for when to submit the form to that institution. Missing a college’s specific FAFSA deadline means sacrificing merit or need-based money, Thaden said. That’s because most colleges have a set amount of money to hand out, and they divvy it up among incoming students who turn in their forms on time – there may not be much, if anything, left for stragglers.
- In addition to FAFSAs, parents should also fill out separate forms for each college, particularly for merit aid. Many parents are unaware of this, Thaden said.
- Students often fail to re-file for assistance between their freshman and sophomore years. That’s another “several-thousand-dollar mistake,” she said.
- And don’t neglect the myriad options for scholarships. Everyone from the local V.F.W. to churches may give out small scholarships that can chip away at out-of-pocket college costs – and the final debt load. Large employers from state governments to Siemens and Wal-Mart advertise grants to children of their employees. My cousin’s daughter received a four-year ride for college from the Lilly Endowment Community Scholarship Program, which funds Indiana high school kids – Eli Lilly & Co. is based in Indianapolis – “to raise the level of educational attainment in Indiana.” Who knew?
- Six Years is Not Four Years
A “four-year education” that takes six years to complete is a hidden cost that bloats borrowing beyond what parents or students had planned on. But high enrollment levels at some colleges, especially at popular state institutions, can make it difficult for students to get into the courses they need to graduate, increasing the money spent on courses, dorm rooms or apartments, and books. Advisers said that parents and students should seek up-front assurance that the student realistically can graduate in their major in four years.
Troy Onink, chief executive of the Pennsylvania college-advising firm, Stratagee, said one of his clients simply asked their prospective colleges about this. The admissions staff at a state college in California admitted to the family that it would take about six years to obtain a four-year engineering degree; but a private college assured the student that he could finish in four years, making it the less expensive option. Explore other ways to find this out, such as interviewing existing students, to ensure that the amount of time spent in college will line up with your financial plans.
- Application Strategies
No one can eliminate the headaches that, unfortunately, are integral to the extremely complex and labor-intensive research project required to apply to colleges. Parents and students pore over the comparative costs of the colleges they’re considering. [The federal government this week introduced a streamlined “shopping sheet” to standardize aid award letters.”] The college selection has other, less obvious impacts on out-of-pocket costs down the line, advisers said. Here are things to remember:
State colleges are the default option for most parents and students. That may be the first mistake if debt reduction is the goal, said Onink at Stratagee. State schools “have a flood of applicants so they can be more selective” when awarding merit aid. In other words, the chances of receiving merit aid at state colleges are probably lower for some applicants.
Some middle-class kids with good grades or SAT scores may actually be better off applying for a more expensive private school that needs to fill its rolls, he said. There may be less competition for merit aid. The private college “may be in a position – may being the key word – to admit a few more students at the lower end of the applicant pool,” said Onink, who also writes a Forbes column about admissions and funding.
There’s more that applicants need to know about the process. As most parents already know, each student’s eligibility for need-based financial aid equals the difference between the college’s cost of attending and how much the family can afford – as determined from the financial information they enter into the FAFSA form. However, colleges cover varying percentages of each student’s need. The elite schools like Harvard University typically meet 100 percent of need if the student is admitted, while state schools may meet, for example, only 50 percent. “Each school is unique,” said Fred Amrein, a college-funding specialist outside Philadelphia.
The college’s policy of meeting need with grants – ie, “free” money – may be more important than its actual sticker price. Colleges have different strategies for dividing up the aid between grants and loans. The Ivy League colleges and some other elite institutions offer only need-based aid – and no merit aid – but the University of Chicago does offer merit aid.
As an example, one school with a policy of covering 80 percent of need may cover only half of that in grants, with the other half in loans. Another college that covers 75 percent of need may provide 90 percent of that in grants and just 10 percent in loans – and this college may have a higher sticker price but will turn out to be the lower-cost option. This strategy is even more important for parents with more than one kid in college at the same time.
Aside from hiring people like Amrein, who can crunch federal data to determine individual institutions’ grant-versus-loan information, the information is not easily obtained. However, colleges provide vague answers, because they want to create “a hopeful situation” in parents’ minds to encourage more applicants, he said.
- A Radical Concept: Cost Matters
Baby boomers acquired dreamy ideas about college, formed in the days when it was affordable. Brimming with expectations for their childrens’ futures, they minimize, or are in denial about, the cost – until it’s too late.
Although parents are very aware that college will be expensive, “They keep procrastinating and think, ‘We’ll figure it out,’ “ said Deborah Fox of Fox College Funding LLC in San Diego. Suddenly, she said, their child is a junior in high school, and “the college application stuff really starts. They get shocked.”
To minimize debt, cost should be the priority when determining the viable options – not after the prospective student has been accepted and has her heart set on one school. Advisers said it can also be dangerous to begin the search with sentimental favorites such as where mom and dad went or how nice it would be to go to a college near the ocean or the mountains. Emotional draws are a difficult thing to resist when the acceptance letters come in.
Baltimore financial adviser Timothy Maurer hammered home this point in a recent interview on National Public Radio. “The kids visit three different campuses and say, ‘This is the one that feels good.’ We as parents have the sense that it’s our duty to provide our child with this education that’s going to put that starry look in their eyes and inspire them on to great heights professionally,” he said.
His job as a financial analyst, Maurer said, is “to bring it back down to earth. That diploma for an undergraduate degree is almost ubiquitous. … You have to be very, very careful about how much of your life and how much of your money you’re going to invest in that educational experience.”
- Community College Anyone?
Here’s the worst-kept secret in America: community college is a bargain. A friend of mine in her mid-50s who is worrying about her impending retirement recently emailed me about her 15-year-old daughter who already “refuses to go to a community college.”
Middle-class kids expect to go to a four-year school. But there’s no shame in doing two years at a community college and transferring junior year to a four-year school. There are other advantages, besides cost. A student may not be mature enough to attend a four-year institution right after graduating from high school – community college can build confidence or allow a student to explore their priorities or future goals, advisers said.
A couple years at a community college can also improve a student’s chances of getting into college – or a better college – if he or she fooled around in high school and didn’t make good grades. The grades on the community college transcript will be all that matters on an application for a four-year institution. And the money saved commuting for two years might, if necessary, easily fund an extra semester or a third year at the four-year institution.
And there’s no harm done: When the graduate applies for jobs, he or she puts the four-year institution’s degree on that resume – no one, certainly not the employer, has to know.
The five remaining debt-prevention tips will appear in Squared Away next Tuesday. They will include “Get Practical” and “Summer Fun?”
Readers can sign up for Squared Away’s weekly alerts by clicking here.
- College Data Resources:
To get a handle on how much aid is provided, by institution, the U.S. Department of Education recommends its College Navigator (on the left side of the web page) as the easiest tool to use. Here’s what’s available, according to the department:
- the number who received aid
- the percent who received aid
- the total amount of aid received
- the average amount of aid received
To find out more requires data mining. Information and raw data are available by clicking here. (Click on “Look up an institution.”)
To browse a smorgasbord of information from the Department of Education’s website, start here.
If any readers dive into these websites, let us know how it went! Comments are also welcome at the end of this blog post.