How You Pay for College Almost as Important as What School You Choose

by Andrea Murad

Published February 03, 2012

While many high school students are focused on getting into college, their decision on how they are going to pay for it can make a difference on how they start their financial life after graduation.

The cost of a college education has been steadily rising over the last several years—outpacing inflation at a time many families are facing financial hardships. The average cost for undergraduate tuition, fees, and room and board at in-state four-year schools is $17,131, and $38,589 for private four-year schools for the 2010 academic year. Students paid for college with more than $235 billion in grants, scholarships, work-study programs, $8 billion in private student loans, and $104 billion in William D. Ford Federal Direct Loan student loans, according to the College Board.

The Department of Education expects students to encumber more debt in the years to come, with federal student loan volume estimated to increase to more than $116 billion during the 2011 academic year.

“An undergraduate degree is one of the most expensive purchases you’ll make during your life, and you’re being asked to do this at 18 years old when you’re most vulnerable,” says John Hupalo, student loan industry expert. “Students and families should think of themselves as consumers of education.” Hupalo advises families to know what resources they have available, whether it’s savings, grants, scholarships, work/study programs, or student loans and compare them to the cost of school and the salary goal after graduation.  

Experts recommend that parents start discussing finances during the application process, and calculate the total cost of undergraduate study by multiply the first year of expenses—tuition, fees, room and board, health insurance, transportation, and entertainment—by four.

When narrowing down schools, the right academic program may make a difference. “Certain schools are better known for certain programs,” Hupalo says. “If you’re going for just the brand name and not the program, it may be more economical to go for the program and not the brand name.” He advises students to consider the job prospects for a particular program or major rather than a university name, as “you don’t want to be underemployed after you graduate.”

The cost should also play a factor. “What you can afford might dictate the kind of school a student attends, whether they start at a junior college and transfer or attend a public instead of a private school. Matching the school fit with affordability is very important,” says Ted Beck, president and CEO of the National Endowment for Financial Education.

Paying for College

Once a school has been picked and the cost totaled, Beck recommends students exhaust all grants and scholarships options before borrowing money with student loans. “Loans should be the last piece used to finance your education, especially for undergraduate study.”

Parents and students can apply for federal aid with the Free Application for Federal Student Aid (FAFSA). “Completing a FAFSA makes you put numbers on paper and can help you start to figure out what you can afford,” says Beck.

Experts recommend students take out federal student loans over private ones if possible. Although a private student loan may have an initially lower variable interest rate, long-term, private student loans tend to be more expensive than federal student loans and don’t offer the same benefits including, repayment protections and loan consolidation.

If loans are taken out, experts say it should be clear from the start who is responsible for repayment-regardless of whose name they are in. “A child has to understand that their names will be on the loan note. Have an adult discussion about expectations and be very clear,” says Beck.

The William D. Ford Federal Direct Loan (DL) program offers undergraduate, graduate, and professional students a few loan options: Federal Direct Stafford Loans where the government pays a student borrower’s interest while in school and six months after graduation; Federal Direct Unsubsidized Stafford Loans where interest is capitalized when the borrower is unable to make payments; Federal Direct PLUS Loans for undergraduate parents or graduate and professional students; and Federal Direct Consolidation Loans that help to lower a borrower’s payments by extending the repayment term to up to 30 years depending on the loan balance. Stafford and PLUS loans have 10-year repayment terms.  The interest rates are fixed at 6.8% for Stafford loans and 7.9% for PLUS loans, while the rate on consolidation loans are a weighted average of the borrower’s underlying loans.

Students should keep loan balances as low as possible. When determining how much to take out, experts advise students take into account their degree and job prospects.

“It’s a good idea for parents and students to consider what the total debt will be after graduation, that they get a sense of how much the payments will likely be and the total interest owed and accrued depending on how they pay off the loan,” says Haley.

As a general rule, a student’s debt at graduation should be less than their annual expected salary to be able to repay the loan in less than 10 years, otherwise the borrowers may be forced to use repayment plans for some relief from high monthly payments, says Mark Kantrowitz, publisher of FinAid.org.

“There’s a difference in income according to degree,” he says. “Science degrees pay more than liberal arts degrees, and you need to be more careful how much you’re borrowing if you have a liberal arts degree.”

“It’s tricky to start to think what your monthly payment will be and what that percentage of your income the payment will be four years out,” says Haley Chitty, director at the National Association of Student Financial Aid Administrators. “You can make some assumptions depending on your career to help determine a reasonable amount to repay.”

Since borrowers do not have to make payments until six months after graduation or enrolled less than halftime, loan balances generally increase because interest is capitalized, or added back to the principal balance. A student who borrows a $5,000 unsubsidized Stafford loan, for example, will accrue $340 in capitalized interest after one year ($5,000 times 6.8% times one year), increasing the loan balance to $5,340, with that same loan accruing $1,360 in capitalized interest after four years ($5,000 times 6.8% times four years), increasing the loan balance to $6,360. Calculated based on a 10-year repayment plan, a borrower will owe $57.54 each month for the $5,000 loan, $61.45 each month for the $5,340, and $73.19 for the $6,360 loan.

Establish Good Lending Practices

Teaching children about the value of money early helps them understand how much they have to work to make a student loan payment. Hupalo suggests teaching children in high school how to run a household to help them be able to manage their money during and after their undergraduate education.

“Student loan debt will be with you for life, and there’s no way out except to repay these loans,” says Haley, because private and federal student loans are nondischargeable in bankruptcy. According to the Educational Credit Management Corporation, only 276 of the approximate 72,000 borrowers who filed bankruptcy in 2008 tried to discharge their student loans. Of the 134 resolved cases, only 29 borrowers had a full or partial discharge of their student loans.

“There are unintended consequences to your financial future if a student doesn’t understand the implications of student loan debt,” Hupalo says. To collect on defaulted federal student loans, the Department of Education can garnish wages, tax refunds, and social security benefits, as well as blocking professional or state license renewals, such as legal, medical, nursing, and teaching.

Once in school, if your family situation changes because a parent looses a job or their income changes, experts recommend talking to your school’s financial aid office and reapplying for help by resubmitting the FAFSA. Schools want their students to complete their education and pay back their loans. If too many students from a school default on their student loans, the school won’t be able to participate in federal student loan programs, according to the Department of Education.

“Always do what you’re really passionate about, but consider the economics of it and that might influence where you go to school and how you pay for it,” says Beck. “College can be a really great experience in a young adult’s life, but you have to consider the cost.”

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In my book, Tips and Strategies for Finding the BEST VALUE in a College: Financial Aid Solutions for Mid-Income Americans (coming to Amazon within the next few weeks), I stated that there is no oversight for schools when they complete the surveys for the popular magazine college ranking issue.  And look what we have here...
As colleges obsess over rankings, students shrugBy JUSTIN POPE | Associated Press – 6 hrs ago

When US News & World Report debuted its list of "America's Best Colleges" nearly 30 years ago, the magazine hoped its college rankings would be a game-changer for students and families. But arguably, they've had a much bigger effect on colleges themselves.

Yes, students and families still buy the guide and its less famous competitors by the hundreds of thousands, and still care about a college's reputation. But it isn't students who obsess over every incremental shift on the rankings scoreboard, and who regularly embarrass themselves in the process. It's colleges.

It's colleges that have spent billions on financial aid for high-scoring students who don't actually need the money, motivated at least partly by the quest for rankings glory.

It was a college, Baylor University, that paid students it had already accepted to retake the SAT exam in a transparent ploy to boost the average scores it could report. It's colleges that have awarded bonuses to presidents who lift their school a few slots.

And it's colleges that occasionally get caught in the kind of cheating you might expect in sports or on Wall Street, but which seems especially ignominious coming from professional educators.

The latest example came last week at Claremont McKenna, a highly regarded California liberal arts college where a senior administrator resigned after acknowledging he falsified college entrance exam scores for years to rankings publications such as US News.

The scale was small: submitting scores just 10 or 20 points higher on the 1,600-point SAT math and reading exams. Average test scores account for just 7.5 percent of the US News rankings formula. Still, the magazine acknowledged the effect could have been to move the college up a slot or two in its rankings of top liberal arts colleges. And so it was hard not to notice Claremont McKenna stood at No. 9 in this year's rankings, which to people who care about such things sounds much sweeter than No. 11.

"For Claremont, there is I would think a psychologically large difference between being ninth and 11th," said Bob Schaeffer of the group FairTest and a rankings critic. "We're a top 10 school,' (or) 'we're 11th or 12th' — that's a big psychological difference. It's a bragging rights difference."

If it was an effort to gain an edge, it backfired badly. Another popular list, Kiplinger's "Best College Values," said Friday it was removing Claremont McKenna from its 2011-12 rankings entirely because of the false reporting. The college had been No. 18 on its list of best-value liberal arts colleges.

Competitiveness may be naturally human, but to many who work with students, such behavior among fellow educators is mystifying. Contrary to widespread perceptions, they say, students typically use the rankings as a source of data and pay little attention to a school's number.

"When I started in this business, I thought, 'The rankings are terrible,'" said Brad MacGowan, a 21-year-veteran college counselor at Newton North High School outside Boston. "But spending all this time with students, I just don't hear that much about them. I'm sure it's colleges that are perpetuating it."

It's hard to know how common cheating like that reported at Claremont McKenna is, given that while US News cross-checks some data with other sources, it relies largely on colleges themselves to provide it. Modest forms of fudging through data selection are undeniably common, especially in law school rankings. The most high-profile case of outright cheating involved Iona University in New York, which acknowledged last fall submitting years of false data that boosted its ranking from around 50th in its category to 30th.

But most rankings critics say by far the most pernicious failure of colleges isn't blatant cheating, but what they do more openly — allowing the rankings formula to drive their goals and policies.

Colleges, they argue, have caved to the rankings pressure in a range of ways. A big one is recruiting as many students as they can to apply, even if they're not likely to be a good fit, just to boost their selectivity numbers. And they've showered shower financial aid on high-achieving, and often wealthy, kids with high SAT scores.

In the mid-1990s, roughly one-third of grant aid, or scholarships colleges of all types awarded with their own money, was given on grounds other than need (typically called "merit aid'). A decade later, they gave away three times as much money — but well over half was based on merit.

Yes, some colleges recruited better students, but there was a price to be paid. Consider a 2008 study by The Institute for College Access and Success that examined the $11.2 billion annually four-year colleges were awarding in grant aid. Of that, $3.35 billion was awarded as merit aid. That would have easily covered the $2.4 billion in unmet need-based aid that the colleges said their low-income students still faced.

Rankings critic Lloyd Thacker, founder of the group Education Conservancy, calls that a shift in financial aid from "charitable acts to competitive weapons." Or, as Schaeffer describes it, "they end up giving the money to rich white kids."

The vast majority of students attend college within three hours of home, so national rankings have little meaning. What matters? Usually more mundane or subjective concerns. One student who went to MacGowan's office last week for a college planning meeting, junior Bridget Gillis, said she'd yet to even see a college ranking guide. Her criteria: "If they have my major, if it's a nice campus, how big it is, if they have the sport I want to play in college (field hockey)."

The latest version of a huge national survey of college freshman conducted annually by UCLA's Higher Education Research Institute asked students to list various factors affecting their choice of college. Rankings in national magazines were No. 11 for current college freshmen, with roughly one in six calling them very important, well behind factors such as cost, size and location.

Those findings may be somewhat misleading. The leading factor cited, by almost two-thirds of students, was their college's "academic reputation," which can be hard to disentangle from its ranking. A reputational survey ranking accounts for 25 percent of a college's score in US News, and fame from a high US News rankings contributes to reputation, even if students say the ranking itself wasn't a factor. Such circularity is one of many things critics dislike about the US News methodology.

But the survey data do suggest students generally heed the magazine's advice not to use the rankings to make fine-grained distinctions between schools.

"As someone who is asked every year to comment on the rankings, it seems to me that who cares most is the media," John Pryor, who directs the UCLA survey, wrote in a blog post last year. "Second would be college presidents and development officers. Way down the list seem to be those who are actually trying to decide where to go to college."

Thacker says the rankings do have negative psychological effects on students, though usually only the top 10 to 15 percent who are applying to competitive colleges. But it has affected a much broader swath of colleges that have been unable to suppress their competitive urges for the educational common good.

"It has more an impact on colleges, presidents and trustees than it does on students," Thacker said. "The colleges have shifted resources and changed practices and policies that were once governed by educational values to serve prestige and rank and status."

That effect, he says, is dishonorable, even if some colleges at least feel guilty about it. More than 80 percent of college admissions officers surveyed for a report last fall by the National Association for College Admission Counseling felt the US News rankings offered students misleading conclusions, and roughly the same proportion agreed they caused counter-productive behavior by colleges. Yet more than 70 percent said their schools promoted their ranking in marketing materials.

The fact that the highly regarded dean apparently involved in the scandal at Claremont McKenna may have been driven to submit inflated test scores is an indicator of the scale of pressure that surrounds the rankings, said David Hawkins, director of public policy and research at NACAC, the counseling group. That pressure comes from all corners of the university — trustees, alumni, presidents, even politicians,

"It's clear from the (Claremont McKenna) story that admission offices are under pressure," he said. "The key question is, how do you stop the madness?"

Bob Morse, who oversees the US News rankings as director of data research, says many of the behaviors the rankings have incentivized in colleges are benign. He points to universities like Northeastern and Southern California that have moved up in recent years through concerted efforts to improve their stats in variables that go into the formula — but which also are good for students. Things like more small classes, programs to boost retention, higher faculty-to-student ratios. And why, Morse asks, should colleges be criticized for casting a wider recruiting net?

But even Morse, who says colleges paid the rankings little attention when they debuted in 1983, says he's been shocked by how seriously they now take their standing, and the lengths they go to move up.

"None of those things when we first started we had in mind would even happen or even could happen," he said. "It's evolved in ways that have taken on a life of their own. To us, it's proof people are paying attention."

College Admissions and Affordability: Good and Bad Advice
http://www.forbes.com/sites/troyonink/2011/05/27/college-admissions-and-affordability-good-and-bad-advice/
The contributor, Troy Onink, makes some excellent points about parents using either BAD ADVICE or NO ADVICE when determining whether they can afford a particular college.