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The Money Side of the College Experience

Resilient Life
19
By Dawnrider 2054
Tuesday, January 14th, 2014

The Money Side of the College Experience

Resilient Life
By Dawnrider 2054 on
Tuesday, January 14th, 2014
19

Going to college in the USA has never been cheap, but those who haven’t been in the market recently may not realize how crazy it’s become.

Harvard now costs $59,950 per year (all except transportation), which is not as much as Northwestern ($63,228) or Amherst ($61,554), but more than Wellesley ($57,042), although Wellesley doesn’t include estimated personal expenses (i.e., pizza, cookies, beer) in their estimate.   

The smaller schools in smaller towns tend to be a bit less.  For example, at Lawrence University in Appleton, WI, the annual cost is listed at $49,722 not including personal expenses.

State schools are also less, although not necessarily for those from out-of-state.  At my state school, University of Illinois, it’s $28,204-$33,028 per year for locals and $42,346-$47,170 for non-residents.  Costs at the neighboring University of Kentucky are less $23,100 in state and $33,300 for out of state – but then, Kentucky’s academic reputation isn’t as good.  Many state schools recruit out-of-state and international students; is it for greater diversity, or the money?

And these annual student costs don’t cover a school’s expenses.  At the University of Illinois, the taxpayers are providing about half the money to keep the Orange and Blue on the field, while also picking up pension costs.  (And it’s not necessarily cheap to put U. of I. employees out to pasture.  According to United Taxpayers of Illinois, 93 of the State’s top pensioners are University of Illinois system retirees with annual pensions from $189,790 to $439,672.  Good work or non-work if you can get it.)

In 2012, Amherst College, Calvin Coolidge’s alma mater, was reported to have an endowment of $1.65 billion not bad, and one of 41 U.S. private colleges with endowments over a billion dollars.  The largest, as one would expect, is Harvard, with $30.44 billion, followed by Yale at $19.3 billion and Stanford at $17.3 billion. 

As the Amherst website states,

The college's actual cost of educating a student at Amherst exceeds the annual fee by more than 50 percent. However, income from our endowment and gifts help subsidize that amount significantly, even for students who do not receive financial aid.

One can wonder where all the money goes.  Adjunct professors and the various part-timers that populate the lesser schools come cheap.  Students are encouraged to pursue many lines of inquiry, but not that one.

Instead, students are encouraged to get into the best college that is right for them.  All students should go to college is now implied public policy, whether students (as the old-timers would say) are “college material” or not.  Cost is not supposed to be an issue; a nice way to think about it if you’re not the one paying, and not necessarily all that helpful, as every aspect of the college experience involves money (lots of it) being provided by one party or another.

The senior year at high school has substantially morphed into being about getting into college, with education essentially stopping for many high-school seniors once they are accepted mid-year.  That’s opportunity costs for the students, and associated labor costs (for the guidance counselors and teachers who spend their days marking time) for the high school districts.

For students and their financiers, it takes a bit more than pocket change to pay the college application fees ($50 to $75 per school), SATs and ACTs (each about $50), subject area SATs (at about $25), fees for AP tests (around $90), and additional fees to send the test scores of each test to each additional school.  And then there’s the cost of road trips to check out the schools.  Students from poor families have a hard time keeping up with the Joneses on this stuff.

On the other side are costs paid by the colleges for masses of direct marketing material (my daughter ended up with a six-foot pile), the salaries of admission officials, and the typical free lunch that comes with the school visit (which, by the way, is the only free lunch in the process). 

Eventually, certain students are accepted for admission by certain schools. 

It’s at this stage that things start to get serious, as, believe it or not, a lot of parents don’t have $60,000 or even $30,000 on hand to pay for a year of college.  In a weak moment, the parent might think that the local community college may seem to have its merits.  (Tuition at Oakton Community College, which serves part of the Chicago suburbs, is $95.34 per credit hour, or $3,000 to $3,500 for a full courseload for two semesters of classes.)  As one practical parent told me of her daughter’s enrollment at the community college, I want her to have enough money to move out when she graduates.

But go to college websites, and you’ll find that one is not to sacrifice the future of your child by sending them to a lesser school, as financial aid is readily available.

To get the money flowing, you first need to fill out the FAFSA (Free Application for Federal Student Aid).  The extensive application requires the parents to reveal substantial information concerning their income and assets.  There’s also a long section asking about possibly tangled family relationships.

At the well-heeled schools, one is also required to fill out the College Board (financial aid) Profile.  This worthy document goes a step further and asks the questions “the Gov’ment” deemed a bit too prying – What’s your house worth, how much do you owe on it, when did you buy it, how much is in each of your retirement accounts, and – by the way – are you getting an annuity?  I’m sure all of this information is secure once it gets onto the Internet. 

Once this is done, the first party to possibly kick in some money, despite being deep in hock itself, is the Federal Government. 

But before you go the route of the defense contractors and the other lobbyists, consider the possibility of dipping into one of the two other pots of lucre available at many of the schools.

The largest pot is dedicated to sports scholarships, as one would expect in this sports-crazed nation.  Most schools have sports teams, and those in Division 1 and 2 give sports scholarships.  Those in Division 3 do not, or at least not officially.

Because of Title 9, for each male sport scholarship, there’s one on the female side.  The big-time, manly sports programs – football and basketball – tend to exploit the boys with long practices, inevitable injuries, scarce professional careers, and little book-learning.  But things may be different for girls, who may actually have the opportunity to be a “scholar athlete” of sorts.

Next, and from a smaller pot, are the merit scholarships.  At the most prestigious schools, however, these are no longer available all the students are meritorious, as one admission officer intoned.  For those aspiring to become one of the best and the brightest, aid is based on financial need.  

The second-best schools, in their attempts to stay in the game, may provide merit scholarships, which typically equal one-third to one-half of tuition, reducing annual costs to the $35,000 to $40,000 per year range.  This makes these private schools financially competitive with the better public universities.

If one is okay with $35,000 to $40,000 per year, one need not hit the “SEND” button on the FAFSA or College Board Profile.  However, once the button is pressed, the school’s financial aid office becomes the conduit for the river of funds that float the students through their undergraduate years. 

For those who qualify for financial aid (or filled out the forms in such a way as to qualify), first are the Pell grants, a gift up to $5,500 per year from the Federal Government to scholars of all stripes of for education costs. 

Next are the Federal Government’s Stafford Loans $3,500 yearly for freshmen, $4,500 for sophomores, and $5,500 for juniors and seniors for those in need.

Then, for those with exceptional need, there may be Perkins loans $5,500 per year.  The Stafford and Perkins loans have very favorable loan repayment terms. 

However, even with all three – Pell, Stafford and Perkins – that only gets the freshman to $14,500, about half the cost of University of Illinois, or a quarter that of Harvard.

It’s at this point that the school may dip into its piggy bank.  Like a chef’s best recipes, the exact calculation of how much you get remains a secret of the admissions office.

In an admittedly non-exhaustive search, I found only one book (a 2008 publication), Pay for College without Sacrificing Your Retirement by Tim Higgins, which makes a stab at showing how financial aid is determined.  Apparently the student’s (i.e., parent’s) Expected (annual) Financial Contribution (EFC) is equal to up to 47% of parental income and 5.6% of parental assets (both above a certain level) plus 25% of any assets in the child’s name.  The assets assessed for contribution may or may not include things like home equity and the value of an annuity.

An interesting facet of this calculation is that the EFC is calculated collectively for all the students that the parents may have in college at a particular time, so that parents of three children each spaced four years apart and stretching over twelve years of college might end up contributing three times as much as the parents of triplets. 

For students with parents of limited or no means, college can be quite a good deal.  One fellow we know reports that Harvard is covering all but $2,000 of his freshmen year costs.  A young woman we know is spending $9,000 for her freshman year at Northwestern.  In Chicago, a poor scholar with good test scores may find that it costs a lot less to go to Northwestern than the University of Illinois, which has little to give other than what can be funneled through the Federal programs described above.  A parent with a few bucks might be a little resentful paying $55,000 per year to send their child to the private college, knowing that the roommate might be going for only $5,000 or $500, for that matter.

With so much money on the line, there’s a tendency to want to game the system legally (shifting assets/income, low-ball estimates of asset values), illegally (not quite telling the truth on the FAFSA or College Board Profile, unreported “cash” income) or questionably (having a child adopted by a poor relation).  As with the “liar loans” that were so popular with home loan seekers a number of years ago, I haven’t heard of anyone going to jail for falsely filling out the FAFSA or College Board Profile.  I do know, however, that I do not want to be the first.

Despite filling out of the forms in the most advantageous way possible, some students won’t qualify for the federal programs for the needy, merit scholarships, or sports scholarships, at which point the parents and students may receive financial aid from the school itself, based on the EFC.   Private colleges, individually and collectively, report that on average, around half of tuition money is never collected, a result of the sports and merit scholarships and direct financial aid.  The other half of tuition money comes from the student/parent/relative’s wallets, the federal government’s programs for the needy (Pell grants and Stafford and Perkins loans), and the now titled and federally backed Direct Loans.  Since the Direct Loans are guaranteed by the federal government, they are available to any shaky borrower (which describes pretty much every student) for both tuition and living expenses.  Being federal claims, however, they are hard to get rid of during bankruptcy. 

According to the U.S. Department of Education, National Center for Education Statistics, Project on Student Debt, 71% of The Class of 2013 (bachelor degree programs) will graduate with debt averaging $29,400.  Over the past twelve years the average debt is up 67.5% (versus a CPI increase of 31.4%), while the percentage of students owing something is up seven percentage points, from 64% to 71%.  

Debt of $29,400 is less than the average cost of a new car ($31,252, August 2013), which would seemingly be manageable if the graduate can get a decent job.

However, there are apocryphal tales of students owing a lot more.  One friend heard (an urban legend? or perhaps not?) of a recently graduated poetry major owing $100,000, who will undoubtedly be waxing poetically on debt.  The WSJ ferreted out a recent law school graduate (Cutting Down Student Debt, May 10, 2013) who owes $300,000. 

Total outstanding student debt stood at $966 billion in 2012 versus something around $250 billion in 2003.  Apparently schools have few moral qualms regarding students and student debt. The aggregate indebtedness (up about 300% over nine years) doesn’t jibe with the average reported debt (up 67% over twelve years) for those receiving bachelor's degrees.  Perhaps the additional hundreds of billions of this may reflect a ballooning of graduate/professional school debt as undergraduates find their degrees relatively worthless (perhaps because their education was relatively worthless, but that’s another matter).  Part may be attributable to students who load up on debt for a year or two but don’t graduate, particularly at the “For Profit” undergraduate institutions which are no-money or low-money-down kinds of places. 

Many would-be scholars have difficulty paying back these loans.  One way out, according to the government website, https://studentloans.gov/myDirectLoan/index.action, is through Income Based Repayment (IBR), which is calculated based on the borrower paying 15% of their discretionary income, with discretionary income defined as income over 150% of the poverty level.  At present, this 150% cut off point in the continental 48 states is $17,235 for a single person or $35,325 for a household of four.  A single fellow making $30,000 per year under IBR would pay a maximum of $159.56 per month.  (i.e., 15% of $12,765).  Another provision of IBR is that after twenty-five years of monthly payments, the balance of the loan is forgiven.  

In comparison, the average outstanding loan balance of $29,400 at a 4% interest (a present direct loan rate is 3.86% for undergraduate loans) requires a monthly loan payment of $302 if amortized over ten years or $157 if amortized over 25.  For the graduate who can find a decent job, these payments are likely no big deal.  For those who can’t find a decent job, it’s a different matter as for one who spent, say, $200,000 for graduate or professional school, with a typical loan rate of 6.8% or so. 

For these debtors, whose dreams of a high paying position are only dreams despite their expensive advanced degrees, the IBR can be a way out.  Amortized over 25 years, the monthly payment for a $200,000 loan at 6.8% is about $1,400; the break-even point (where the IBR payment of 15% of discretionary income equals the amortized payment) for a single person is around $130,000 in annual salary.    

Moreover, for those that work for a non-profit or for the government, the loan balance can be written off after ten years rather than twenty-five.  Workers whose salaries depend on the kindness (or coercion) of others take care of their young under the IBR.  There’s a lot of fine print in the description of all these programs, so anyone hoping to duck his or her obligation to the U.S. Treasury should read carefully. 

Under typical banking rules, the federal government would be setting aside reserves for expected losses on these loans.  If they did, the annual federal deficit would be tens of billions of dollars a year higher, so clearly this is not a route anyone wants to go.

If a student/parent works hard, is flexible, seeks out bargains, and has a bit of luck (or is wealthy), one can make it through the minefield of college finance and emerge at a good spot on the other side.  Like many things, it shouldn’t have to be this way, but, as with many things, it is what it is.  One can hope that someday, someone will do something about it. 

The WSJ has had a number of articles over the past year or so concluding that colleges need to get their costs down.  A recent article (January 4-5, 2014, Page C1) suggests that one culprit for the high college costs may be administrative bloat.  The article also references a number of schools that have taken efforts to cut costs and/or others that have experienced declines in enrollment.

Stats from the National Student Clearinghouse Research Center indicate that there has been a decline of enrollment from 20.1 million enrollees in Fall 2011 to 19.5 million in Fall of 2013.  However, their data also shows that all of this decline has been in the four-year “For Profit” sector (down 256,000 to 1,321,000) and at the two-year public schools (down 421,000 to 6,498,000).  In comparison, the four-year State and private universities collectively are up 41,000 enrollees (to 11,558,000), which leads me to think that major changes in financing the “traditional” university experience (four-year public or not-for-profit schools) are not going to happen any time soon.

So what should one do?

Conclusion

One hates to make suggestions or give advice, but here are some thoughts.

If you are flush, pay whatever it costs and be grateful that you can.  If you don’t want to be grateful, cackle gleefully.

If you have something less, suggest that your student become a “scholar of fortune,” going for the best deal at a place to which he or she wouldn’t mind being associated.  Channel your own (or others') college experience and relive some of those classes which were near-wastes of time; there are few indications that the college experience has improved in that regard.  Don’t use up all of your ammo in your student’s first battle as an adult. 

Most people will end up filling out financial aid forms to determine the EFC (Expected Financial Contribution), and, on the positive side, to get a discount on costs.   Be aware that there are legal ways to minimize the EFC and maximize the discount; the devil, as always, is in the details.  Since that’s the case, it’s probably fair to say that there may be an advantage to knowing the details!

My family feels that we ducked a bullet regarding the money side of college for my first-born.  My older daughter found a good school that she wouldn’t mind going to (Cooper Union in New York City) that has a tradition of not charging tuition to any student a tradition, however, that ends with the Class of 2017. 

Many colleges at some point in their history didn’t charge tuition, and state school tuitions used to be low.  However, as some school administrators may admit, somewhere along the line, mistakes were made.  Burdening millions of young people with tens of thousands in debts seems to be a major mistake in the making.  You probably don’t want to see your student similarly mired if you can help it.

~ Larry Jakus

– Peak Prosperity –

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