The recession and ongoing economic crisis are turning college, the longtime American dream, into a financial nightmare for more families.
Although 67% of families have begun to save for college (up from 58% five years ago), the typical family is now on track to cover only 16% of projected college costs (down from 24% in 2007), according to Fidelity Investments' 2011 fifth annual College Savings Indicator study.
Families with annual income at or above $150,000 plan to save an average of $70,560 by the time their oldest child is 18, according to "How America Pays for College 2010," an annual report from student loan company Sallie Mae. Meanwhile, the price tags for tuition, fees and room and board are topping $50,000 at a growing number of elite private schools.
The combination of market volatility and rising college prices has left even some of the most diligent savers with unforeseen shortfalls. "With these two factors together, there's no one answer to financing the whole pie," says Andrea Feirstein, founder and managing director of AKF Consulting Group, a leading consultant in the 529 college savings market.
One strategy that has been receiving more traction, she notes, is choosing less expensive schools. During the 2010-2011 academic year, 22% of students from families with annual household incomes exceeding $100,000 attended public, two-year schools, up from 12% a year earlier, according to Sallie Mae's 2011 report.
Nearly half the families (48%) in the Fidelity study plan to have a child live at home and commute, up from 38% in 2007. Four years ago, 34% of families encouraged a child to attend a public institution, and that number has risen to 44%. Meanwhile, more families are pressuring their children to graduate in fewer semesters. Four years ago, only 13% of families were encouraging their children to graduate sooner. That number has also risen to 44%.
Students who've turned down admissions to elite schools in favor of public colleges so they won't be buried in debt were the subject of a recent Wall Street Journal article.
With Americans owing nearly $1 trillion in student loans (more than they do in credit card debt), it's important to be cost-conscious-especially if the children plan to go on to graduate school. The problem is that some families may be making ill-informed decisions by focusing on the wrong numbers, not recognizing there is free college money out there and there are better loan options.
"It's more important to get informed than it was three to four years ago. We're closing doors on our kids," says Perry DeFontaine, the president of Freehold, N.J.-based independent college advisory firm College Insights and a financial advisor with MetLife's Barnum Financial Group.
Rather than sticker prices, DeFontaine and others say parents should look at net prices-what's paid after grants, tax credits and deductions. Only about one-third of students pay for college without grant assistance, according to the College Board's "Trends in Pricing 2011" report.
Rick Darvis, a co-founder of the National Institute of Certified College Planners (NICCP) and the owner of College Funding Inc. in Plentywood, Mont., says the average tuition discount at private colleges in the U.S. is 40%.
Smart Shopping
So how can families find this money? DeFontaine says the trick is to learn the financial aid process for each school a child may apply to, including the required forms and deadlines. Parents should also fill out the Free Application for Federal Student Aid (FAFSA) form each year.
"Colleges are the gatekeepers of all the money, theirs and the government's," he says. Since July 1, 2010, all new federal education loans have been made through college financial aid offices under the Direct Loan program.
In 2010-2011, undergraduates received $178 billion in student aid, per the College Board's "Trends in Student Aid 2011" report. The biggest pieces were federal loans (39%), federal grants (27%) and institutional grants (17%). Grant aid rose 70% from the 2005-2006 school year to the 2010-2011 year.
While most grant aid is geared toward lower income families, 26% of families earning more than $100,000 a year reported using grants in 2011, up from 12% in 2010, according to the 2011 Sallie Mae study. Grants and scholarships accounted for 25% of this group's college funding sources in 2010-2011, up from 19% the previous two years.
Grant aid beyond financial need is more likely to be offered by less selective public and private schools looking to attract students with strong academic credentials and other qualities.
Students also can increase their chances of receiving free money by applying to off-the-beaten-path schools instead of the brand names most families focus on, says DeFontaine. There are plenty of good options among the U.S.'s 3,000 four-year colleges and universities-and employers and graduate schools know about them, he says.
And don't automatically dismiss private schools, he says, because the cost savings of the publics may be less than anticipated.
First, what's considered need varies by the price of a school. So a student with an expected family contribution of $20,000 is more likely to receive aid at a pricier private school. Second, many public schools have been hiking prices as states slash spending. In-state tuition and fees at four-year schools jumped an average 8.3% for 2011-2012 led by California (21%), Arizona (17%) and Washington (16%), says the College Board.
The sharp rise in applications to public schools is also making it much harder to get accepted, so students should carefully select safety schools, says DeFontaine. Meanwhile, private nonprofit four-year schools, which need to fill seats, have limited tuition and fee increases to an average 2.6% per year beyond inflation over the past decade (while the increase has been 5.6% for public schools).
Loan Considerations
Nearly half of all parents (48%) are looking to education loans to pay for college, according to the College Savings Foundation's (CSF) fifth annual 2011 State of College Savings Survey.
Federal government loans are currently the most attractive for their rate (6.8%) and terms, says Peter Mazareas, the chairman emeritus of CSF and the founder and president of Strategic Advancement Group Inc., a consulting firm in the college savings and financing sectors.
Traditional Stafford loans, which start at $5,500 for freshmen and rise to $7,500 for seniors, are available to anyone who fills out the FAFSA. Subsidized Stafford loans, which have their interest paid by the government while a student is still in school, require income eligibility.
Federal PLUS loans, for parents of dependent undergraduate students, are very easy to obtain and require no collateral, says Darvis. Repayment starts immediately, but if a parent dies or becomes disabled during the repayment period, the loan is forgiven, he says.
Some parents prefer using home equity loans for college expenses since their rates are 4% or less (about half that of a PLUS loan) and interest can be deducted. But Darvis suggests using caution since the home is collateral. Also, home equity loans' variable rates can rise if inflation heats up.
Mazareas says borrowers should be judicious when selecting private student loans. The advertised rates are often for borrowers with credit scores of 750 or higher. More than 65% of these loans are issued between June and August, which suggests that the borrowers likely have failed to plan and focus.
"Parents make desperate decisions," he says. He suggests they visit FinAid.org, a free source of comprehensive financial aid information.
Mark Kantrowitz, the publisher of FinAid and FastWeb, a free scholarship matching service, says there are now 23 lenders offering private student loans. He has posted a chart on FinAid.org comparing the loans' limits, terms, interest rates and fees.
Kantrowitz, who calculated the $1 trillion student debt figure, says students should aim to borrow a total sum that's less than their anticipated first-year annual salary. "Every $1 saved is $1 less to borrow; every $1 borrowed is about $2 by the time it's repaid [based on typical borrowing patterns]," he says.
Don't put too much faith in the net cost calculators that colleges are now required to post on their Web sites. "They'll let you know if you're in or out of the ballpark, but they're not good enough yet for comparing individual colleges," says Kantrowitz, who expects improvement over time.
Meanwhile, he suggests that students and their parents ask schools about their policies concerning the front-loading of loans and outside scholarships. And look out for scams. "You should never have to pay more than a postage stamp to get money," he says. He recommends searching for college scholarships as soon as possible and says students can apply for some of them while still in elementary school.
Don't overlook educational tax credits either, he says. They've improved under the American Opportunity Tax Credit introduced in 2009.
Advisor Alert
Mazareas, who's trained thousands of advisors over the past decade, says it's time for them to take a more proactive role in helping their clients plan for college costs. This includes helping them understand which private loans are competitive and when to use 529 plan assets or other funding sources.
"In the past, their role focused on savings/investments for college. In the future, by necessity, it will be to coordinate savings with debt [and competing/conflicting government tax incentives] through a comprehensive college financing plan," he says.
More advisors are getting on board. Darvis says his institute has seen a 20% rise in college planning certification candidates over two years ago. College Insights and the Barnum Financial Group, DeFontaine's two organizations, have teamed up to create the BFG Center for College Planning.
Advisors should start asking clients where their kids may want to attend college when the kids are high school freshmen or even in middle school, says Mazareas. There's a lot to talk about.