Coverage: The implications of rising college tuition

While students on college campuses across the country as well into their semesters, the rising cost of going to school continues to be a hot topic with the media.

The Pittsburgh Tribune had a story this weekend by Debra Erdley talking about how hard it is for parents and students to understand loans:

Little about student aid is transparent. Private universities sometimes undercut public universities with aid packages. It’s rarely clear which schools base aid on financial need and which offer merit aid, regardless of need. Some schools require as many as three financial aid forms.

“It is probably more complicated to do the paperwork for student loans and scholarships than to do your income tax,” said John T. Delaney, dean of the Katz Graduate School of Business and the College of Business Administration at the University of Pittsburgh.

And sticker prices that colleges advertise don’t necessarily reflect what a student will pay.

Seven in 10 Pennsylvania college students graduated last year with an average debt load of $31,675, according to the Institute for College Access and Success’ Project on Student Debt.

Even parents who opened college savings accounts are stunned that the cost of college rose twice as fast as inflation over the past 15 years.

This year’s maximum federal Pell grant for Pennsylvania’s neediest students is $5,730, and the maximum state PHEAA grant is $4,210, leaving a gap at even the lowest-cost institutions.

Financial aid officers say some parents dip into retirement money, take out home equity loans or seek federal Parent PLUS loans to cover costs.

Lauren Mills of IowaWatch.org pointed out that it’s not just students being saddle with large amounts of debt. Their parents are also taking out loans to help pay college costs:

Families often turn to private loans that parents cosign or to federal parent PLUS loans taken out in a parent’s name when grants, scholarships and federal student loans aren’t enough to cover college costs.

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When comparing private loans and the federal parent PLUS loans, Jensen said, the PLUS loans are generally easier to get. Borrowers don’t have to prove income, employment or the ability to pay back the loan, which can be taken out for the full cost of attendance minus other aid. However, the borrowing parent must have a clean credit history.

Sara Harrington, assistant director of student financial aid at the University of Iowa, said 40 to 45 percent of parents of UI students request PLUS loans. But Parent PLUS loan debts don’t turn up on reports of a graduating class’ average or total debt.

The federal government released national Parent PLUS Loan default rates for the first time in March, which showed the rate has tripled in recent years, reaching 5.1 percent for borrowers that entered repayment in fiscal year 2010.

The PLUS loans have variable interest rates, which fluctuate over time and can reach up to 10.5 percent. Because the loans are in parents’ names and cannot be transferred to the student, it is the parents, not the student, who face repercussions if the loans go into default.

Parents who opt to cosign a private loan with their student or who take out a private loan in their own name can sometimes get better rates if they are credit-worthy. But finding those loans can be difficult.

Bloomberg reported in a story by Jeanna Smialek that debt is also weighing on Generation X, making retirement that much more difficult:

Most college-educated 30- and 40-somethings earn more than their parents did at the same age, yet they’re saving less. Student debt is partly to blame.

While 82 percent of Generation X Americans with at least a bachelor’s degree earn more than their parents did, just 30 percent have greater wealth. A smaller share of workers without college education — 70 percent — have surpassed their parents’ incomes yet almost half had higher wealth, according to a Pew Charitable Trusts report released today.

Lackluster saving among the cohort, those born between 1965 and 1980, has come as student-loan balances persist into middle age. Generation X’s financial straits could come with economic aftershocks, making it difficult for parents to afford college for the next generation and forcing workers to hold onto jobs longer or lower their living standards as they age.

“They may not be financially secure as they approach retirement,” said Diana Elliott, research manager at Pew’s Economic Mobility Project. “To the extent that Gen Xers are still paying student-loan debt, don’t have the wealth accumulated to invest in themselves, they also don’t have that money to invest in their children.”

A short piece on The Wall Street Journal’s opinion page reported that the cost of student loans continues to rise:

The Congressional Budget Office has released its monthly budget review, with an update on federal revenues and spending for the first 11 months of fiscal year 2014, which ends Sept. 30. Chip Dickson at Discern Investment Analytics spotted the bad news inside: The net cost of student loans had increased by $20 billion. As a result, Department of Education outlays through August of this fiscal year rose to $58 billion from $38 billion in the same period of fiscal 2013.

To be clear, these numbers don’t reflect cash out the door. They reflect changing Administration estimates of the costs taxpayers ultimately will bear from loans made in prior years. While the 2013 revision signaled a better deal for taxpayers than anticipated, this year’s revision signals the opposite.

Either way, it’s a problem and one that will only show its true economic damage in decades to come. As fewer people turn to college, or spend more time paying for it, that’s less money in savings and more working time. Large student loan debt also tends to cause people to put off major purchases, such as buying houses. While none of this is shocking, what is surprising is despite all that’s being written about it, no one has come up with a truly workable plan for fixing the problem. And with colleges not cutting costs, the upward trend is unlikely to change anytime soon.