The Next Horror Movie Plot: College Costs and Student Loans

I’m running scared. Why, you may ask. The answer is simple: My daughter is going off to college in a few months. She graduates in two weeks. That means there is one thing, and only one thing, on my mind: How the hell am I going to pay for college?

This is the reason that a number of articles today related to student loans and college costs have caught my eye. First, there was a long article from MSNBC on how soaring college costs have hobbled a decade. The essence of this article is that the next loan bubble to “pop” will be the student loan bubble, and that college costs have gotten out of control. Another article from USA Today talks about how student’s lament the total amount of debt, while Congress fiddles debates how to address the problem. Then there’s the article in the LA Times about the student loan blues, about how students lament taking on so many loans for college. Lastly, Friday’s Planet Money (which I haven’t listened to yet) is on the subject of figuring out the real cost of college: the “sticker price” is often not what families pay. (and of course, for those attending state colleges, this all ties into the state budget woes I’ve previously written about).

So, as this week’s bills are paid, it is time for another rant.

College costs have gotten to be ridiculous, but even more ridiculous is our system of “financial aid”. From the point of view of someone who is solidly middle class, this system seems to be designed to provide little help. If you really can’t afford college — that is, you have true financial need with nothing saved — you’ll get loads of need-based aid. College will be cheap. If you are truly rich, you don’t care what college costs. If you are middle-class? If you are in the position of having a good salary, but a large mortgage and not enough saved? Many private universities offer what are referred to as “merit” scholarships — supposedly academic, based on essays and such. Are they? It is odd that all the colleges seem to offer just about the same amount of “merit” aid. Further, that “merit” aid is reduced if you get other scholarships. I’ve come to a belief that this “merit” aid is just a fancy coupon: a way of reducing the sticker costs for those that take the effort to apply for it.

The financial aid letters don’t help. They convince a parent that college is all paid for! But when you read the letters, you see that the bulk of that payment is expected to be student loans… and even more expensive parent loans. This is the loan bubble. Colleges push the loans, and students taken them on and parents take them on. Student loans are unique among loans: there no requirement to have the ability to pay (unlike a car loan, where if you don’t have the income, you can’t buy that $300K car).  There needs to be some form of caps on the loans, based on the intended career of the student, so they don’t get into a position where they owe more than they could make in a reasonable time.

Am I arguing that student loans shouldn’t exist? No. Low-interest and interest deferred loans for students are reasonable, with caps. I’m inclined to use those for Erin, even if we pay them off for her. Helps her credit rating, and if they approve the 3.x% interest rates, the pricing is reasonable. If one doesn’t overextend, possibly using HELOC (home equity loans) may make sense as well, especially if combined with a refinance, as the interest is deductable. But normal parent loans at 7+% are ridiculous, as are private student loans at equally high rates. Further, as I noted above, there needs to be a cap on student loans based on the expected career annual earnings five years after eventual graduation with the final degree. You shouldn’t be able to borrow more than you can reasonably pay back. That’s what created the housing bubble; that’s what’s creating the scholarship bubble.

We also need to address the pricing side of the issue. I think colleges have gotten off track with their pricing, and need to learn to have “everyday low prices”. Much as one complains about the high costs of public colleges, for the middle class, often a UC education at full ride is cheaper than a private education with scholarships. We need to use the money we’re setting aside for scholarships to lower the price for everyone, and make “merit” and “need-based” scholarships in place for the truly merited and truly needy.

We also need to simplify the private scholarship process. Just as we’ve gone to a combined financial aid application, there should be a combined scholarship application where you indicate all the relevant aspects (ethinicity, club membership, and all the other special factors), submit standard letters of rec, submit a standard essay, submit transcripts to one place and it farms it out to all the applicable organizations… who can then follow up with additional questions after doing their triage. It would help them award money to qualified candidates, and help candidates find organizations.

We also need to fix the community college problem. Community colleges can be a great choice to save money. There are, however, two problems (which are related). First, there is the peer problem: all your friends are going to prestigious universities, and you are going to Podunk Community College. The pressure (and the college counselors) force you to apply to the more expensive school for the earlier years. There’s also the problem that there’s no guarantee of transferring into a prestiguous college from a community college. The answer is to having a binding transfer program: a joint application to 4-year institution and a community college, where there is clear coordination and agreement that if a particular program plan is met with appropriate grades, the student can transfer after the general education portion (first two years) is satisfied and can complete at the 4-year institution. This doesn’t exist yet, and would go a long way to reducing education costs.

With respect to general education, colleges also need to pool resources to eliminate redundancy. Again, community colleges can work as a resource here. There’s no reason that general education courses should not be combined across universities that are close to each other. This is what industry does when it does time sharing, and it maximizes effectiveness.

Of course, I haven’t addressed the question of whether most students that go to college belong in college. That’s because I do believe college is important. It teaches critical thinking; it provides a skill base that will serve the student well in the future. Although college is no guarantee of success, surveys have shown that having an AA or BS degree does make someone more likely to be employed than someone lacking a degree, and to be employed in a job that will pay better. The question is: does the increase in pay offset the cost of the education? I think the jury is still out on that one, and the answer changes as college costs rise.

I know I’ve been ranty this morning. One of the reasons I love blogging is that it allows me to work out issues by writing about them, and to share my concerns (which reduces my stress). I thank you for reading, and welcome your opinions.

Music: Emotion (Barbra Streisand): Time Machine