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Continued from How Much Debt is Too Much Debt?

By Mark Y on Monday, December 10, 2001 - 10:30 pm: Edit

Calmom, I definitely agree with you...one of the big chunks that add to your EFC is home equity. The rules for private colleges state that 6% of your assets, including home equity, are to be added to the EFC. In many parts of the country, like New York and California, the average house can be $200,000 or $250,000 or more. That means that families with home equity of that value (although many still have outstanding mortgages) are forced to pony up $12,000 or $15,000 or more...before income is taken into consideration. That can really kill chances for any meaningful aid, as a family making $120,000 with $200,000 in equity will have to pay about $20,000 based on income and $12,000 based on equity, plus any other assets, and that could result in your EFC adding up to $40,000...too much for virtually anyone to swallow.

Now, colleges assume that one could tap into the equity for college expenses, but I personally do not think many people do that. Middle and upper middle income families are more and more likely to simply foist the debt onto their children and say "good luck, kid". That is why more and more students in higher income brackets are in debt.

Last week, I added a link...if you didn't see it, here it is: http://www.acenet.edu/resources/reports/student_borrow_90s.pdf. You may or may not be able to read it since it requires Adobe Acrobat. But one of the key components to this report, which shows student borrowing trends in the 90's, is that as recently as five years ago ('95-'96), only 18 percent of kids from $100,000+ families and 35 percent from $80,000-$100,000 families borrowed, and the average debt was about $8,000 and $10,000 respectively. Now ('99-'00), almost half of the $100,000+ and nearly 60 percent of the $80,000-$100,000 kids borrow, and the average debt is more than $15,000 and $16,000, respectively. Now, the "rich kids" borrow almost as much as those from low income households. Talk about equal opportunity debt. Just thinking about this rapid change is difficult to fathom. In five short years, the middle to upper middle class kids went from being virtually scot free after graduation, to carrying the weight of tens of thousands in debt.

By burningman on Monday, December 10, 2001 - 10:33 pm: Edit

Don't forget, everyone, that most middle class families today will be responsible for their own retirement. Except for teachers, school administrators, public safety workers, union-types, etc., defined benefit retirement plans are gone. What you save is what you retire on, plus a pittance from Social Security (if it isn't broke by then). College is a double whammy - they "tax" your savings, and the cost of college itself is a huge, huge drain. Just about the time families start to accumulate some much-needed capital, college comes along to deplete it. Face it, by the time your kids are done with college is kind of late to start building your retirement nest egg.

By Mark Y on Monday, December 10, 2001 - 10:40 pm: Edit

Indeed...I work for a retirement plan consulting company, and the numbers of defined benefit plans are shrinking, and they are generally for individuals rather than companies. The fact that parents are having kids so much later makes it that much more difficult to pay for expenses for college.

By California Mom (Calmom) on Tuesday, December 11, 2001 - 12:36 am: Edit

Dadster,
Our private EFC IS about $16,000 - exactly what you calculated; around $13,000 FAFSA. My son is getting that $20K grant against a high-end tuition of $27K - + $9000+ housing/meal plan + incidentals (books, transportation), etc. Same financials at a college with lower tuition = lower grant.

But I looked at tuition in my example because the cost of living in a dorm + meal plan at UC Berkeley is the SAME as at my son's LAC. The main differential for housing are local cost of living factors, not public vs. private. Books and incidentals cost as much as a public school as private. So the only cost differential to look at when making a comparison is tuition.

FWIW, my liquid assets are about $5000. There is no way I could have $40k in liquid assets. I do own a home, but I've got a 2nd mortgage on it, equity is not that high.

I sometimes think that people who are upper middle class are living in some sort of fantasy world in which they take a whole chunk of savings for granted. $40 liquid? 6 months' living expenses saved up that everyone is "supposed" to have? You are dreaming - that isn't how the people who are truly "middle class" in this country live. People who have that kind of savings and money to invest are affluent, whether they call themselves that or not, and if they have had that kind of money throughout their children's lives, they could have set aside money to save specifically for college. If they haven't, that's their choice.

The rest of us are trying to make ends meet each month and carrying a lot of debt.

I've looked at the figures again and again. If I had $10,000 more in annual income, I would qualify for LESS financial aid, but it wouldn't be $10,000 less. I would be slightly ahead of where I am now, even if I had to pay a bigger share of my son's college expenses.

I AM borrowing to meet the family share of the EFC, and in my mind it makes little difference if I get that from a PLUS loan or a home equity.

By Mark Y on Tuesday, December 11, 2001 - 10:32 am: Edit

Calmom, you're right about the room and board...people tend to forget that anyone living on their own has living expenses, so that you can't really blame the colleges for. In fact, oftentimes, R & B is cheaper than if someone is living in an apartment. Another thing people tend to forget is that when the kid is out of the house, household expenses (food, electricity, etc) are less...I would assume the average family saves at least $3,000-4,000 when a kid is away (so theoretically, every family can afford to contribute something if their kid is not at home; of course, that is not the case in many cases).

By burningman on Tuesday, December 11, 2001 - 01:15 pm: Edit

Calmom, I agree that most middle-class families don't have six months of income in liquid savings. This really underscores the fact that most middle-class families are living pretty close to the edge - spending most of what they earn, trying to stay above water. By the time the kids are of college age, having that kind of liquid savings, not to mention much more in retirement savings, should be the rule rather than the exception - but it's not!

The six months thing isn't completely arbitrary - just about every financial guide I've seen suggests about that much is needed to serve as a cushion in the event of unexpected job loss or other emergency. Higher level execs need even more, since a job search can easily last longer than six months and many entail unreimbursed relocation expense, etc.

A family (or individual) that hasn't accumulated significant assets (or accrued strong pension benefits) by the time the kids reach college age is going to have a rough go of it financially when they would like to retire. Accumulation of major sums while the kids are in college is unlikely, and by the time the last one is out (and any parental loans are paid off), there may not be that many years left for the magic of compound interest to do its stuff.

The fact that colleges penalize savers (they are obviously trying to measure the ability to pay in a fair way, but in effect they exact a penalty on those who have accumulated assets) doesn't help middle class people deal with the reality they will face as future retirees.

By California Mom (Calmom) on Tuesday, December 11, 2001 - 05:13 pm: Edit

Oh, I understand that financial planners recommend 6 months' worth of liquid savings - it's just that is a far cry from reality for many families. Generally, my liquid assets are about the equivalent of 1-2 months income. That doesn't mean that I would be destitute or at a loss for a short-term emergency; it's just that I would have to borrow in that circumstance.

I am in my late 40s, and quite frankly, I don't plan to retire. Obviously, I can't work forever, but I certainly expect to be working at least part time through my 60s.

I assume that when my kids are grown I will be able to reduce expenses in part by selling the 3-bedroom house, and living in a one-bedroom apartment or condo. I don't expect to have the same "quality of life" when I am older, but then again, I don't really see the point of living in a house by myself with empty bedrooms.

There's nothing wrong with having saved. If I had been coming from a stronger financial base, it seems to me that I could have put aside a few thousand dollars each year to save for college. If I was fortunate enough to have, say, $50,000 in savings, I wouldn't feel upset that the colleges expected a small percentage of that to go toward tuition. That would be the whole point of having savings.

Again, a family who has money and savings may have to pay MORE for college, but they still are financially better off than the family with no savings who pays less. The colleges do NOT expect all the savings to be used; they calculate a small percentage of the family nest egg - a larger percentage if the nest egg happens to be in the child's name.

If I have no savings, pay $15,000, and am able to come up with $5000 out of current earnings and borrow the rest, at the end of the year, I have no savings and am $10,000 in debt.

If a family with the same income but with $20,000 in savings is asked to pay $18,000, and they also come up with $5000 out of current earnings, withdraw $5000 from savings, and borrow the rest, at the end of the year, they have $15,000 in savings and are $8,000 in debt. They might think it is unfair that they have to pay more than me, thinking I am being rewarded for my imprudence and failing to save money, but in the end, they are still financially better off than I am.

Similarly, I am financially better off than the family who has only $25,000 annual income, even if they are given a financial aid package that requires them to pay and borrow very little. I mean, I'd rather earn $50,000 and be $20,000 in debt, than earn only $30,000 and be debt-free, because part of my higher earning capacity means that I have the financial ability to carry a certain amount of debt. I don't like it -- but the reality is that my ability to carry debt is what enables me to buy a house or a car ---- or a college education for my children.

By burningman on Tuesday, December 11, 2001 - 05:42 pm: Edit

It sure is better to have income and savings than NOT have them, I couldn't agree more, Calmom! You never reach the point of diminishing returns, where you'd be money ahead if only your salary or savings were lower!

Part of the issue may be envy, of course. I hate sitting on an airplane and finding out the guy next to me paid $199 for his seat while I paid $729 for mine. There may be good reasons for the difference, but it's still annoying.

The issue that started the whole thread, though, is the middle income family that is earning a high enough income to have a big EFC, but whose high fixed expenses make it difficult to come up with the EFC from current income. If they lack significant savings, their only option is loans. One can argue that they are living too high on the hog, or that they should have done a better job of saving money... but who knows what the circumstances are? Maybe they are spendthrifts, or maybe a career detour of some kind made things tighter than planned. Whatever the reason, the kid has a high EFC and insufficient liquid resources... leaving big loans or attending a less costly college as the alternatives.

By amd on Tuesday, December 11, 2001 - 07:56 pm: Edit

"Part of the issue may be envy, of course. I hate sitting on an airplane and finding out the guy next to me paid $199 for his seat while I paid $729 for mine. There may be good reasons for the difference, but it's still annoying."

I think that 'envy' may be too strong. Perhaps 'helplessness' may be a better word.

Going to your example, I have options if I want to reduce my costs (such as staying over a Saturday, booking 14 days in advance, etc.) Thankfully, my price is not determined by my FAFSA and PROFILE results. When it comes to colleges, no amount of early planning is going to get me a better rate (short of hiding assets etc, which I don't know how to do.) Going to a cheaper college is not the same thing. The destination (and the ride) is not quite the same. When I first realized that my kid cannot go to an Ivy because of financial reasons, I was bummed out for a couple of months.

By burningman on Tuesday, December 11, 2001 - 10:26 pm: Edit

The part that burns me up about the way aid is calculated is that the $35K schools make a great show of saying, "Don't worry, if you get in, we'll make sure you can afford to attend." In reality, there are lots of circumstances where attending simply isn't affordable.

Amd, I'd still encourage your kid to apply to the schools of his/her choice to see what the eventual aid package looks like. (Things change - while I wouldn't wish a dramatic financial reversal or job loss on anyone, these things happen and do wonders for your EFC.) Just prepare him/her for the possiblity of acceptance but not enrollment due to financial limits.

By ThePrincipal on Wednesday, December 12, 2001 - 01:56 pm: Edit

With all due respect to the the various contributors to this discussion, how does one separate the real middle-class hardship cases (assuming such things exist) from the whining free-spenders? When I hear how families with $80K or $100K in income are just covering expenses, my first inclination is to say, "try surviving with a smaller house, an older car, and cheaper entertainment." I know a few places like San Francisco and New York City are very high cost, but these are the exceptions. I really believe that in the vast majority of locations in the country a family with that kind of income can live reasonably well, and still have money left over for savings and college funds. We are just too consumption and status oriented - we get promotions, and feel obligated to adjust where we live and what we drive to our new, higher status jobs. Then, we are surprised to find that we don't have money left over to educate our kids.

By California Mom (Calmom) on Wednesday, December 12, 2001 - 03:11 pm: Edit

amd, if you don't qualify for financial aid, and you are "bummed out" because you can't pay for an Ivy, I think that somewhere along the line you need to reevaluate your priorities. I mean, I drive a compact car and live in a working class neighborhood in a small tract home, and it never bothers me at all that I can't afford a Mercedes or live in a huge house in a rich neighborhood. I know that's simply out of reach, but the reality is that my house is warm and cozy, and the little car can get me anywhere on any road that a luxury car can.

If you do not qualify for needs-based financial aid, then some where you have assets that can be drawn upon, either sold or borrowed against, that would enable your kid to go to whatever college you choose. If you are not willing to take on $120,000 worth of debt, that's fine -- but it is still your choice, and you are making it because you recognize that the private college cost doesn't add that much value for an undergraduate over the public college cost, despite the prestige.

My son turned down his first choice college because they did not offer any financial aid. So we know how it feels.

But on the other hand, we don't feel that we are *entitled* to financial aid. Rather, we feel lucky that so many colleges do offer it, and that my son ended up with several very good choices.

I do feel very strongly that my EFC is not easy to meet, and sets unrealistically high expectations. But as I said, I don't think there's an entitlement for my son to get a college free education at whatever college he chooses. It happens to be something I'm willing to take on debt for, just as I was willing to take on a mortgage or a car loan.

The reality in our state is that my son could get an almost-free college education if we set our sites lower -- the CSU system is very inexpensive for California residents, and he could have lived at home while attending a local state university or community college. My son was also offered a full ride at two out-of-state public universities. We made the choice to aspire for a higher-status education, and we will have to pay for it. I wish we didn't have to pay so much, but again it is our choice.

By ThePrincipal on Wednesday, December 12, 2001 - 05:32 pm: Edit

My point exactly, Calmom. People become accustomed to a lifestyle that involves spending most of what comes in, and then are shocked that college is so expensive and that the college expects them to pay so much. More realistic lifestyle expectations = less sticker shock. Earlier in the thread, there was reference to financial planners and their recommendations for ready cash. The same money gurus ALSO recommend that parents start saving for college as soon as the kid is born. (Not that I've actually followed this recommendation very well...)

By Mark Y on Wednesday, December 12, 2001 - 07:46 pm: Edit

I think I mentioned this before, but the ultra-elite schools are probably the only goods in the world in which demand increases as the price increases (going back to ECON 101..it's a Giffen good). If you go back to the 50's, 60's and 70's, Harvard and Princeton and those schools were so much cheaper...after overall inflation, these schools would cost as much as a state college would cost today. In other words, if the 1965 Harvard tuition increased at the CPI, it would be about $10-12,000, including room and board, which is what State U. costs in 2001.

However, guess who went to Harvard and Princeton in 1965? The ultra-wealthy. Even though these schools were so much cheaper back then, middle class kids opted for the state university rather than the Ivies and similar institutions. Now, with tuition so much higher, middle class kids are flooding these schools with applications, despite the price.

Now, a question I am posing is: does the exorbitant tuition actually make these schools more attractive? Could it be a case where the extreme price actually gives families and especially students a reason to go into tens of thousands of dollars in debt just because they know that the big prices means great quality? Because every year, after the tuition goes up, these schools get more and more applicants, and it just seems like it's going against common sense.

By Dadster on Wednesday, December 12, 2001 - 09:28 pm: Edit

Mark, I don't think that it is purely price driven. There have been examples of consumer goods that "repositioned" themselves by raising prices dramatically, but I think the elite schools were already positioned at the top of the heap.

Instead, I think it is merely a case of demand exceeding supply, which permits price increases without loss of market share. As long as most of the top schools stay in balance, they can all raise prices faster than inflation without losing applicants. If one of the lesser elite schools decided to lower their prices, however, it might make them suspect - people might think they were cutting corners in some way that might affect quality.

Reminds me of pro baseball and arbitration. A true "franchise player" sets a price level, and then every .225-hitting infielder demands almost the same, and gets it.

By California Mom (Calmom) on Wednesday, December 12, 2001 - 11:06 pm: Edit

The problem with the theory about the elite colleges charging so much more is that all private colleges, even those that aren't elite, charge a lot of money. The main differences are regional -- colleges in rural areas tend to have lower tuitions that urban areas, the midwest and south is less expensive than west coast and northeast. But paying more for college does not equate with more prestige.

By Dadster on Thursday, December 13, 2001 - 11:01 am: Edit

I think it's a game of follow-the-leader, California Mom. The driving forces are a need for more money (how many private colleges have too much?) and also, on the part of some, to show that they measure up to the best-known schools. "We charge as much as Harvard, and you can be admitted!" might be their unwritten motto...

The top elite colleges actually have the financial resources to cut tuition or even eliminate it, but they don't have to, so they don't. Other private schools definitely need the tuition money, and are happy to keep pace with the top schools.

By burningman on Thursday, December 13, 2001 - 02:28 pm: Edit

Middle-class whining: I take exception to the suggestion that middle-class people should just suck it up and pay the bills. The system as it exists is stacked against reasonably successful middle-class people. If our family has a high-five figure income, and if we have managed to put away a modest financial cushion, we might well end up paying the full cost of a college education - even at a $30K+ a year college. Our idiot neighbor, who goes through life spending everything and saving nothing, and missed out on the last two promotions because he IS an idiot, might end up qualifying for thousands more in grants. If he gets laid off, his kid will probably get a free ride. My diligence gets penalized. This situation creates a sense that people are treated unfairly, and makes middle class people look for ways to beat the system.

If EVERYONE pays the same amount, then the system is fair. People who can't afford a Lexus usually don't drive one, and don't whine about it. But if rich people, poor people, and a good percentage of middle-class people ALL got to own a Lexus, either via their own wealth or by a subsidy from the car maker, it might well make some of the remaining middle class people want their Lexus, too.

By California Mom (Calmom) on Thursday, December 13, 2001 - 04:44 pm: Edit

What's this "financial cushion" stuff? Is it worth $80,000? Because if it is, then you already have my son's 4 years' worth of financial aid in the bank. I'd gladly trade places with you, if I can have your current income, too.

If you aren't willing to spend it, that's fine. But no matter which way you look at it, you are a lot better off than a family whose yearly income is $40,000 less than yours.

By burningman on Friday, December 14, 2001 - 04:11 pm: Edit

I'm not complaining about my finances, CM. But, getting back to the original idea of this thread, it's largely families in our part of the middle class who are in line for the huge loans that MarkY originally talked about. Not rich enough to pay from current income, but not poor enough to get significant grants.

By Mark Y on Friday, December 14, 2001 - 07:06 pm: Edit

Exactly, Burningman...as I have been saying all along, the upper middle class kids really are the ones that are in big trouble. The family that makes $50,000 will have an EFC of about $7,000. Say for argument sakes the family can only afford half of that. If the kid takes out half of that in loans, and takes out the usual debt that the school offers, the debt at the end of four years would be perhaps $25-30,000, which is an extremely high amount, but it could be doable providing the kid is willing to sacrifice a decent car or savings into a 401(k) for ten years (which is quite a long time, mind you...). However, a family making $100,000 would probably have an EFC of about $22,000, so if the kid borrows half of that, plus the normal loans, the debt at the end would be $60,000 for a bachelor's degree, which is mind-boggling and absurd. Yet hundreds of thousands of kids just blindly sign their life away each year and take on this sized debt.

As I mentioned, in the last five years, the upper middle class debt has caught up to the lower class debt, and nearly as many "rich kids" are taking out loans as the "less fortunate". But I suspect that the "rich kids" have even bigger loans than that, since the survey does not include the "alternative" loans, which are likely taken out more by the upper middle class. Notice I quote "rich kids", because although the income bracket is as low as $100,000, which is definitely not "rich", it is the highest bracket in the survey. But even the truly rich kids take out enormous loans. I have heard of at least one kid whose parents make $500,000 a year, and he had to take out $35,000 in loans...

By Dadster on Friday, December 14, 2001 - 08:05 pm: Edit

Mark Y: I have heard of at least one kid whose parents make $500,000 a year, and he had to take out $35,000 in loans...

That's outrageous! Of course, despite his billions, Warren Buffet makes his daughter live in a cheap apartment with a black & white TV. Probably made his kids use loans for college, too!

By California Mom (Calmom) on Friday, December 14, 2001 - 08:16 pm: Edit

Mark,

Your post is very cogent and explains what is going on.

I think that the problem is that the more well-off families are expected to contribute some cash to the whole process. That is, the concept is NOT that the family with $100,000 borrows $22,000 annually, but that they can afford to pay some (if not all) of that $22,000 out of current income and savings. It is assumed that the $50,000 difference in annual income should be enough to cover the $15,000 difference in financial aid that your example postulates.

I honestly cannot understand how a family with a $500,000 annual income has not managed to put aside adequate reserves to pay for college over the years. I believe you, but where is that money going?

The college financial aid people are acting on two assumptions. One, which isn't always fair, is the assumption that current income is somewhat reflective of past income, so that the family that makes $100,000 in 2001 is seen as one that was probably reasonably well off in past years, too.
The other assumption -- which is fair, in my mind -- is that a family with discretionary income should have been able to put away some money in savings for college over the years.

It seems to me that the upper middle class have made a choice of "not to plan" for college. Then they look at their less-fortunate neighbors and bemoan the fact the neighbor's kids are getting more financial aid, without taking notice of the fact that the neighbor's kids take the bus to the local public high school and have after-school jobs bagging groceries, whereas their own kids are driving late-model cars to a prestigious private school, and making travel plans to exotic destinations for the summer.

But I kind of have an idea of who these people are. We used to know a lot of them, back when we were all young and starting out. Back then, we called our well-off, free-spending friends "Yuppies". We quickly learned that we couldn't afford to hang out with them; one dinner out at a local restaurant was enough to run through our entire monthly food budget.

By Mark Y on Friday, December 14, 2001 - 08:50 pm: Edit

I am sure that not many families with incomes at that level make their kids borrow, but to be perfectly honest with you, there are families with incomes that are extremely high that are scared stiff over the cost of college. I remember reading about Senator Chuck Schumer, who makes near $200,000 as a senator, and his wife, who is the head of some major NYC department and probably makes a high salary as well, are often staying up late at night worrying about how they will send their kids to college. Even though he may have said that for political reasons, I do not doubt this. The costs are so tremendous today, that if you have three kids in college at the same time and they're all going to Yale or Harvard, even a family earning $500,000 is going to have half their post-tax salary wiped out by tuitions. These families probably forcing their kids to borrow tremendous amounts, so that is one explanation to why the kid had to borrow $35,000 despite his family being rich. However, I do condone the parents for not having foresight, since with a salary of $500,000 a year (assuming they have had $500,000 for a while), you should be able to save for Harvard and Yale, even for three kids. But as you know, Americans are not savers. Despite all these 529 plans and prepaid tuition accounts and things like that, most people do not take advantage of that.

Another reason why I think even these well-off families force their kids to borrow goes for many people who are not as wealthy; they feel that they should not be responsible for the kid's education, and that the kids should fend for themselves. Many parents are stuck in a time warp back into the 1960's, when they went to school and when they worked their way through it and felt it wasn't so bad. However, these parents tend to forget that tuition was so much cheaper than. They don't realize for some reason that the tuitions of today are astronomically higher than when they went to school, and that even working 30 hours a week won't even cover a third of what a private college costs, whereas back then, 10 hours a week covered basically everything.

Speaking of the sixties, I have one more point to make (for now :-)). I don't care how much financial aid is being alloted; the only way to end this madness of rising debt is for colleges to reduce tuition. That is the best financial aid of all. However, that will never, ever happen unless students get proactive, stop whining about their loans, and do something about it. Every time you hear of tuition increases, it's the same old story...the student says he or she will stick it through, but he or she will need more and more loans. I know the students care, but they aren't showing it. And just now as I speak, I hear a local college, Seton Hall, is raising tuition 12% next year.

And that brings me to my final sixties reference: As Sonny and Cher would say, the beat goes on...

By Roger (Roger) on Monday, December 17, 2001 - 10:19 am: Edit

Well, to throw another log on the fire, here's a brand new article from the Indianapolis Star: As College Costs Rise, Families Feel the Pinch.

A lot of the discussion here has been about the elite schools with $30K+ costs. While those tuitions cause some students to rack up six figure debts, the Indy Star article notes that even state schools are creating big debtors. They highlight one Indiana University undergrad who will have $60,000 in loans by the time she graduates, and report that overall student loans for the major Indiana public universities are up 500% since the mid-eighties.

Much of the article reinforces the discussion above - strong demand supports high prices, the fact that kids can't "work their way through school" now, etc. Just another data point to support Mark Y's conclusion that debt is getting out of hand - and not just at the most costly schools. You might say this is even more perplexing, since it is affecting modest income families with kids at state schools. It's one thing to say, "nobody has to attend an Ivy if they don't want to pay the price" - but here we are talking about the ability of regular kids to get a reasonable college education.

By California Mom (Calmom) on Monday, December 17, 2001 - 04:34 pm: Edit

Actually, the financial aid awards from state schools did expect my son to carry more debt.

In our case, the private schools are more, but at his current college the student debt is limited. Of course, the difference is made up with PARENT debt -- and a knowledgeable parent certainly can advise the student to turn down some of the student loans. But I think psychologically, there's a tendency to take the loans that the colelge gives you, especially when the supplementary loan is a subsidized Perkins with a very low interest rate (I believe its 5%).

For a student who qualifies for need based aid, including loans, at both state and private colleges, the state school may very well end up being much more tilted toward loans than grants.

By Mark Y on Monday, December 17, 2001 - 06:06 pm: Edit

Roger, it is very perplexing, especially considering how until this past year, state school tuitions have not increased much (at least compared to the early 1990's), yet at the same time, the debts have increased 50 percent from the class of 96 to the class of 00. What scares me is that the recent *DRAMATIC* tuition increases will make the average debt loads go way into the stratosphere in the next few years. As much as you feel sorry for the class of 1999 or 2000 or 2001, one must really save that guilt for those seventeen year olds in high school right now. The next few years are going to get really ugly.

By the way, the debts for the young lady in the article, at least from what I see, are combined with her parents, so she probably will not personally owe $60,000. Yet, it is getting to the point where this borrowing is ridiculous. But the government doesn't seem to want to do anything, except cut taxes for the wealthiest two percent of Americans (whose "poorer" members are starting to become tuitioned out of college themselves)

Calmom, you're correct on that...some prestigious liberal arts colleges, like Amherst and Swarthmore actually do not put a lot of big loans in their packages; the catch is that the EFC is high and the kid probably has to wind up borrowing more anyway...

By amd on Tuesday, December 18, 2001 - 08:02 am: Edit

I will be sending one kid to college the next four years and another one the four years after that. (Given their ages, there is no way to change this, assuming that they go to college right after high school.) This will cost me (at least) twice as much compared to the (hypothetical) scenario where they both go to college the same four years. If I have to dip into savings (i.e., since my EFC takes into account my assets also), this is hardship on me. I would rather have a system that gives me credit for the number of kids I have (and will be sending to college) instead of the number of kids currently in college. (Perhaps one reason we don't have this is the complexity involved; the subsequent kids may not go to college at all, it is hard to include future costs versus the present - it is easier to just consider just the present and the past.) The current appears to be considerate of the 'various needs' of people but only in a superficial way. (It also has the sanction of the government, much like the taxes.) When I go to buy a car or a house, the price I pay has nothing to with may 'EFC' (based on income and assets) - it is college costs that are different.

amd

By amd on Tuesday, December 18, 2001 - 08:12 am: Edit

I want to add that I am not feeling sorry for myself. Most likely my kids will end up in state universities - given these particular universities, these are perfectly acceptable options. However, this being the case, I wish we had been spared the ups and downs of 'elite college admissions'. Being spared this and enjoying their senior year more are truly benefits.

amd

By Dadster on Tuesday, December 18, 2001 - 09:23 am: Edit

Interesting idea, amd. You are absolutely correct that your EFC is based on your current situation, and if your two kids don't overlap your total EFCs will be approximately double what they would be with 100% overlap. This goes back to the (perhaps obsolete) concept that families pay for college from current income. If this assumption is true, than the current system correctly assesses ability to pay by looking at the family's financial condition each year. If, on the other hand, a large portion of the cost is being paid for with asset drawdowns or, in particular, debt, then taking cumulative college expense into account in calculating EFC might be appropriate.

The situation could be even more extreme. A family that has already put five kids through college and now has one more to go will be evaluated in exactly the same way as a family sending their first and only child off to school. Of course, this gets into the whole "historical analysis" can of worms - it's hard enough for colleges to analyze your current financial status without having to figure out how you got there.

By amd on Tuesday, December 18, 2001 - 01:07 pm: Edit

Dadster,

Thanks for understanding what I was saying - it is too bad that you don't get to make financial aid policy

"this gets into the whole "historical analysis" can of worms - it's hard enough for colleges to analyze your current financial status without having to figure out how you got there"

No doubt it is hard. However, there are a couple of organizations (FAFSA and CSS) whose full time job is to figure out these things. Besides, brainpower should be an available commodity in colleges. One can simplify the system while making it fair to more segments of the population.

Perhaps people could be given several choices. One may be whether they want assets kept 'out of the system' or not. Another may be whether past EFCs actually spent included or not. I am looking at the possibility of turning down a couple of elite colleges (i.e., the hard won admissions at these) for financial reasons. I would be more inclined to spend the $40000/year if I get credit for it for my other kids, in the EFC for them. If they decide to go to a cheaper college, fine, nothing is lost. If they decide to go to similar expensive colleges, the EFC is reduced.

These are not well-thought out ideas but off the top of my head views. Perhaps the fundamental problem is that the $40000/year is ridiculous. A solution is for customers to revolt and stay away from these. Even though my older kid is a senior in hs only thisnyear, I have been thinking about all these for more than 5 years now. I had come to terms with the idea of my kid not going to an elite school, after some heartache. However, at the moment the desire for elite colleges is coming from the kid and not me. Further, each time I hear something negative about the state school (I recently heard that the school I have in mind has the reputation of being the #1 party school in the whole country), the confusion and helplessness starts all over again.

amd

By Domer97 on Tuesday, December 18, 2001 - 02:01 pm: Edit

>>the school I have in mind has the reputation of being the #1 party school in the whole country<<

This is a negative??? Reasonable tuition and #1 party school sounds better than an overpriced ivy full of grinds any day! What more could you ask for, amd??

By California Mom (Calmom) on Tuesday, December 18, 2001 - 03:22 pm: Edit

amd - your kid who is talking about elite colleges needs a wake-up call, and you should keep in mind that there is a large range of choices between "state college" and "elite". I think that if Consumer Reports rated colleges instead of US News, you would see a reshuffling of the deck -- I bet all those 2nd and 3rd tier and "regional" private colleges would be coming out on top.

In fact, probably the best thing that the US News rankings and intense focus on the elite colleges does is create a tremendous incentive for lesser ranked colleges to offer attractive aid packages to strong candidates. The smartest thing that a student who is Ivy-league caliber can do is to use his credentials to get a better and less expensive education elsewhere.

I say "better" because academically, there is nothing an Ivy league college can offer an undergraduate that isn't offered at dozens of lesser-ranked colleges, except for the designer label. All your son has to do is figure out what he wants and then find out where he can get it.

Your solution of a customer revolt is already underway. The secret is that good students don't pay full sticker price to go to private colleges, but they don't buy into the Ivy hype either.

By amd on Tuesday, December 18, 2001 - 07:43 pm: Edit

Calmom,

There are indeed 'a large range of choices between "state college" and "elite"' - my son has applied to some of them; I didn't mean to give you the impression that we are looking only at the extremes.

It is going to be interesting to see how these shake out and how these compare with the "state college". I will mention some of these by name too, in case any of you have any helpful comments. These are: Kalamazoo, Grinnell, Carleton, and Rice. (We live in Indiana, by the way.) Rice and Carleton are (almost, if not actually) elite.

amd

By amd on Tuesday, December 18, 2001 - 07:47 pm: Edit

Domer97,

Yeah, yeah, yeah, yeah

You guys actually spent $1.5 milllion to get a coach for 5 days? (Sorry Roger, in case you are a Domer fan.)

amd

By Mark Y on Tuesday, December 18, 2001 - 08:40 pm: Edit

There is no revolt, unfortunately, and in fact, it appears as though there will not be one anytime soon. If you look at the early decision apps going out at the elite schools, they are all at record highs, despite the fact that the economy is not as good as it was, and despite the fact that tuitions are ramping up again (I hear that Boston U, which is already in the mid $30K's will likely announce a huge tuition increase for next year because their budget is running a "deficit". I just find it amazing how so many more kids today compared to the sixties are applying to schools like Harvard. Weird...

By Mark Y on Tuesday, December 18, 2001 - 09:50 pm: Edit

One other thing I'd like to add about student debt...another reason why I think that students are graduating with so much more debt than just a few years ago is that they are oblivious to the ramifications. This new generation of students, "Generation Y", is discussed in the media as a "sunny" generation, with big dreams and plans, unlike their older siblings, the "Generation X", who graduated college more than five years ago. I suspect that this "sunniness" is backfiring, as these students are borrowing so much money and they figure they'll be able to pay back that $40,000 or $50,000 on a teacher's salary, because since they're "Gen-Y", everything's going to work out in the end, since they're so optimistic. On the other hand, "Gen-X" was a very apprehensive and cynical bunch, and while they took out loans, they played it safe since they knew that they probably would not earn a lot, and did not take out as much.

If you don't believe me, just go to the archives of college papers or the like...you will see what I mean. I remember reading an article from 1996 about college students majoring in engineering worrried to take out loans because they had taken out $5,000 already for their first two years. Now, the average sophomore is saying that she's borrowing "only" $10,000 a year, and is looking forward to a profitable career as a journalist. To anyone under 25, and especially those who haven't graduated yet, student loans are play money.

By Dadster on Tuesday, December 18, 2001 - 10:10 pm: Edit

Hmmm... I guess the "sunny generation" is sort of the reverse of the "depression generation", Mark Y? Many people who experienced the Great Depression remained frugal for the rest of their lives, often avoiding debt no matter how minimal.

By Mark Y on Tuesday, December 18, 2001 - 10:15 pm: Edit

Yes, indeed Dadster, and remember...the people born in the twenties and thirties, who saw the Depression firsthand, knew how to save, unlike most Boomers, who spend like it's going out of style. And since the Boomers spend and borrow, their Gen Y kids do the same...at a much younger age and when their economic futures are in doubt.

By California Mom (Calmom) on Wednesday, December 19, 2001 - 02:10 am: Edit

AMD, I know a couple of people who are Grinnell alumni, one recent, one a while back, and they absolutely love the school. All I hear is good stuff. So definitely take a serious look; I know that Grinnell gives good financial aid, and they also leverage their aid -- that means they will give strong merit awards to good students who they think need some extra persuasion to come.

That being said, I took one look at materials from Grinnell and knew it wouldn't work for my son. He ended up only looking at schools that were located near urban centers. But it definitely is worth a serious look.

By Dadster on Wednesday, December 19, 2001 - 10:58 am: Edit

The economic futures of the Boomers themselves may not be so great, Mark Y. They are far more likely to have to rely on their own financial resources for retirement, and the pleasant retirement lifestyles of boomer parents may be a thing of the past. (Especially after they finish paying off their PLUS loans!) You are right - values are developed both by personal experience and by upbringing. Gen Y members and their parents may have little experience with coping with debt with limited income.

By Mark Y on Wednesday, December 19, 2001 - 06:36 pm: Edit

Actually, Dadster, I suspect that many of the PLUS loans are actually paid off by the students after they graduate (PLUS loans can be deferred for four years).

By momom on Thursday, December 20, 2001 - 09:21 pm: Edit

Mark Y,
You are constantly referring to the perceived common practice of foisting PLUS loans onto the backs of graduating students. Really, I think this is probably quite rare. After all, the loans are in the parents names, not the students. It is their debt. And PLUS loans can't be deferred under any circumstances that I know of. Payments begin within a certain amount of days after first disbursement. We will have plenty of PLUS loans to pay for our son's education, and he will have plenty of his own loans to contend with. We have discussed this at length with him, and we do not expect him to pay our PLUS loans. However, if he becomes really financially successful, we're not against him paying us back. LOL

By Mark Y on Friday, December 21, 2001 - 09:47 am: Edit

Mommom, I am not saying all parents foist these loans onto their kids, but many do...I know of at least five cases where this is true, and obviously there are many more. It seems weird because parents are actually risking their own financial futures by doing this, and there is absolutely no obligation for the kids to pay them back, yet many do so. It may make sense if the family is making $30,000 a year and the kid is expected to make 50,000 as a computer scientist. But in most cases, at least from what I have seen, the family is living comfortably, and the kid is majoring in theater.

By Dadster on Friday, December 21, 2001 - 10:04 am: Edit

Interesting, Mark Y. I had no inkling that parents would take out a Plus loan and then expect the kid to pay it back. With no legal requirement for the kid to pay, though, this is ultimately the parents' loan. If the kid doesn't have the money to pay, they won't have any option but to pay it off themselves. Seems like a CitiAssist type loan might be more appropriate for those families. Is there a generic name for that class of student loans?

By Mark Y on Friday, December 21, 2001 - 01:22 pm: Edit

What loans? The Citiassist loans? Those are the "alternative" loans that everyone's taking out these days...those are the worst kinds of loans that have higher interest, higher costs, and just add to the debts of the students, who already have taken out tens of thousands in loans.

Washington State now is pondering 15-20 percent tuition increases...stay tuned...

By burningman on Friday, December 21, 2001 - 01:32 pm: Edit

Either way, the debt is bad news - will it be paid by struggling recent grads (or not so recent, since some of these loans will last for many years), or by parents who should be saving for retirement?

By Mark Y on Friday, December 21, 2001 - 01:43 pm: Edit

It really depends...as I said, there are families making well into the six figures who foist the big debts onto their kids (like the young lady from Wellesley who I discussed way back in the beginning) who want to be teachers; those parents I have little sympathy for, and there are parents who make $25,000 and foist big loans on their kids who want to be computer engineers; that makes somewhat more sense, although the fact that anyone is taking out the big debts is ridiculous in the first place.

By Dilemma on Sunday, March 24, 2002 - 08:50 pm: Edit

one more middle class dilemma re financial aid...have about $50K in bank saved for college but now I am just about out of work...university says won't make much of a difference because of savings...(oh, like others here I did not qualify for any aid)...am I nuts to figure out a way to make a private education work or send to state u? difference is about $18K per year..realize there are lots of questions to answer....

By Dadster on Sunday, March 24, 2002 - 08:57 pm: Edit

Is the $50K in the student's or parent's name, Dilemma? Parental savings are "taxed" at a much lower rate, and would probably increase your expected family contribution by $3,000 or so. Also, there are age-based savings exclusions that might help. $50K in the student's name will be a killer.

If you have a major employment situation change, be sure to discuss this with the individual aid offices. The "official" numbers are historical, but most schools can adjust for a provable loss of work, etc. In some cases, they may do a half-year review.

By Dilemma on Monday, March 25, 2002 - 05:13 am: Edit

thanks d - $$ in student's name so the dilemma continues - college also states that there are no guarantees of aid beyond freshman year - if you did not get in year one then you will not get in future years - then what? am I rationalizing by looking at big picture or just nuts?

By Dadster on Monday, March 25, 2002 - 08:49 am: Edit

Dilemma, try calculating your expected family contribution under different scenarios. The $50K in the kid's name is going to hurt your aid, for sure. The first year impact will probably be $17K or so. Combine that with your own income & assets, student income, etc. and you are looking at a hefty EFC and no meaningful aid award unless it's a REALLY expensive school!

Whether a private school is worth the additional expense is a philosophical question that you need to answer in terms of your overall financial situation, how the public and private colleges compare to each other, and how you think your son will thrive in each environment. As your son's assets are depleted, your aid potential could go up (depending on family income and other assets). On the other hand, you don't want to bankrupt your family (or saddle your son with really huge loan amounts) to attend a particular school.

By dilemma on Monday, March 25, 2002 - 11:09 am: Edit

d - appreciate the words - it's one my wife, son and I are discussing -

By dilemma on Wednesday, April 10, 2002 - 08:53 pm: Edit

would appreciate advice here....received aid package of $5K grant and Stafford Loan (unsubsidized)...spoke to Financial Aid office - FAO tells me that even if I stopped working today, my aid would not go up but maybe my loan would go from unsubsidized to subsidized...in a quandry...school expects $17K out of son's accounts and $14K from us...(this is before $5Kgrant money)...this is all well and good but my job is almost kaput - my wife is in a commission job...have already depleted almost all savings...ok ok you do not need to hear my tales...another question - do packages really change from year to year?? should I make trip up to school - would it make any difference or am I just going to humiliate myself with hearing NO in person....in a dilemma as to next steps with financial aid office....thanks

By Dadster on Wednesday, April 10, 2002 - 09:37 pm: Edit

Packages DO change from year to year. You do a new FAFSA and any other applicable forms, and they run the numbers. The money in your son's name is a real killer... As it is depleted, it will have less of an impact, though.

Some schools can even adjust their packages mid-year if an employment change or other significant event occurs; sometimes, they like to see the 1040 in January, since the award for the current year is based on last year's income data. From what you know, is your parental contribution based more on your income or assets?

I don't think it will be a humiliating trip if you go to the aid office unless you are trying to put one over on them. If you have real issues, they should listen. (On the other hand, they aren't going to be sympathetic about your late model car payments, vacation costs, etc., if you have these kind of expenses.) An in-person appeal will show your son's interest and at the same time show them that financing is a major concern and a potential obstacle to your son's enrollment. Good luck!

By burningman on Wednesday, April 10, 2002 - 09:41 pm: Edit

Question for you financial aid experts: is there any reason why dilemma can't pay all of the first year's tuition balance from the kid's savings, and deplete that fund more rapidly to make future aid awards higher?

By California Mom (Calmom) on Thursday, April 11, 2002 - 06:31 am: Edit

Answer: Yes, spending down the $50K in the son's name is allowable and is probably the best strategy for increasing financial aid eligibility in future years.

I think it might be helpful if dilemma shares the name of the college, as others might be familiar with the financial aid policies of that college. If the college guarantees full need based aid, then dilemma should be relatively safe with the strategy of spending down kid's account first. The problem is figuring out if college X will be fair in future years.

I think, given the circumstances, the son needs to be part of the decision making. I am assuming that like most kids, the son probably has a choice between the preferred, private (high tuition) college and a signifantly cheaper public college in the home state. I think given the circumstances, the parent should sit down with the son, tell him that the $50K is his to use for college, but that because of the job situation the parents cannot help him his first year of college and cannot be certain of how much they can help in future years. The son needs to be the one to choose whether to spend $31K this year (leaving only $19K remaining, from which a 2nd year EFC of $6k would be expected), or to conserve resources and choose a different school.

It's a tough choice, and I don't think it is one that parents who are in financially strong positions should impose on their kids -- but this is different. The parents' income has plunged, they have depleted their own savings -- and at the same time they had the foresight to save in their son's name. The son should be grateful he has a college fund of $50K - if he works summers, that is enough to probably get him through a public U. The parents should not feel guilty for letting down their son, as they have not -- even though the financial aid system is structured in a way that penalizes the son, if this money had not been put aside, then the son might have no money at all to use for college. So basically, $50K is a lot better than 0.

Anyway -- just my 2 cents.

To dilemma: good luck. I really do think you should put this decision in the hand of your son - you've got a family going through financial hard times and it is time for everyone to pull together.

By Enochs on Monday, April 15, 2002 - 08:19 pm: Edit

In part one of this thread, Mark Y complained about the mainstream media ignoring the issues of rising tuition costs and increasing debt loads of middle-class families and students. If the rest of you agree, and have stories (either your own, or those of friends or relatives) that you think ought to be told, try contacting me.

I'm a reporter with Bloomberg News, and I'm looking for students or parents willing to talk about how the rising cost of tuition (or rising debt burdens required to pay that cost) are affecting them -- especially if they are slashing other spending to cover tuition or to pay off loans.

I need to talk to people by Wednesday, at the latest, so if you think you have a story to tell that would fit what I'm looking for, please call or email me. Or if you know someone whose story might fit, please pass this message along to them. I'll be happy to return calls on my employer's dime.

Liz Enochs
Bloomberg News
(415) 743-3525
(email is lenochs, followed by 'at' sign, followed by Bloomberg.net. I hope that's clear enough for folks; I write it that way to try and steer clear of spammers.)

By Howfam (Howfam) on Saturday, December 21, 2002 - 04:01 pm: Edit

As the year winds down (and options for "shifting" in time for the FAFSA "snapshot" decrease), I'm wondering if I am better off leaving a home equity loan alone, or taking money out of an investment account money market fund and paying off the loan (even temporarily). I understand that reducing "savings" could be beneficial in terms of my FAFSA numbers, but is that better than having the additional debt due from an equity loan? (or do I have it ALL backwards?)