COLLEGE SAVINGS 101

Savingforcollege.com

New research shows why families who aren't saving for college will have to borrow
http://www.savingforcollege.com/articles/new-research-shows-why-families-who-aren-t-saving-for-college-will-have-to-borrow-754

Posted: 2015-04-16

by Kathryn Flynn

Financial Professional Content

A recent research paper from the Federal Bank of St. Louis Review titled “Student Loan Debt: Can Parental College Savings Help?” revealed that students whose parents planned ahead and saved for college ended up with lower student loan balances than their peers who had no money saved. In fact, college students who had funds set aside since they were high school sophomores were 39 percent less likely to have any student debt. Seems obvious, right? Yet, our country is drowning in around $1.2 trillion worth of student debt and that number continues to rise. What’s more, according to this year’s Annual College Savings Survey, only 41 percent of respondents have started saving for college. So why aren’t more Americans aren’t getting the message?

In a podcast interview with Savingforcollege.com, Melinda Lewis, Assistant Director of the Assets, Education and Inclusion (AEDI) department of the University of Kansas, and a co-author of the research paper, explained how college was once viewed as a public good, but is really now more of a private benefit. This means that the burden of college costs has shifted from society to the families of prospective students, at a time when tuition prices have been rising faster than inflation. The result is that many families, especially those with lower household incomes, are left with no other choice but to borrow to pay for college. But rising tuition prices aren’t the only culprit. According to Lewis, there are other factors causing this increased reliance on student loans:

State appropriations to public colleges are historically low

According to Lewis’s research, today’s students are responsible for a much larger share of tuition costs than previous generations. In fact, in 2011-12, state appropriations to public colleges and universities declined by a record-breaking 7.6 percent. However, some good news may be on the horizon. According to the newly released “State Higher Education Finance Report”, appropriations to higher education in 2014 were actually 5.4 percent higher than they were in 2013. But despite this modest increase, 25 states still receive a larger proportion of per-student revenue from tuition than from appropriations, and overall appropriations are down significantly from pre-recession levels.

Schools aren’t helping students who really need help

Pell Grants are a form of need-based federal student aid that does not need to be paid back. In 2003-04, Pell Grants assisted students from low-income families by covering 87 percent of average tuition and fees at a public four-year university. Ten years later that number sharply declined to just 19 percent. Yet according to Lewis, schools have been increasing the amount of merit-based aid they award, which is based on grades and test scores. Although all students have the same entitlement to merit-based awards, this type of aid disproportionately favors students from higher-earning households who grew up in environments with superior academics and extracurricular activities. For low-income students, less need-based aid leads to more unmet need, which Lewis’s team defines as “the hole that must be filled with student loans even beyond the point of reasonable affordability”

Household balance sheets have been deteriorating

There are also macroeconomic factors that are driving up reliance on student loans. In the last decade, we’ve experienced plummeting housing values and high unemployment levels, resulting in a steep drop in the net worth of many households. In fact, from 2007-10, middle class families experienced a 40.4 percent decline. Unable to save for college, these families were forced to rely on student loans to fund their children’s education. What’s more, taking on this type of liability can make it seemingly impossible to be able to accumulate wealth and repair a family’s balance sheet. Some argue that this erosion of household balance sheets may have a dire effect in the country’s overall macroeconomic health.

Financial Professional Content

A recent research paper from the Federal Bank of St. Louis Review titled “Student Loan Debt: Can Parental College Savings Help?” revealed that students whose parents planned ahead and saved for college ended up with lower student loan balances than their peers who had no money saved. In fact, college students who had funds set aside since they were high school sophomores were 39 percent less likely to have any student debt. Seems obvious, right? Yet, our country is drowning in around $1.2 trillion worth of student debt and that number continues to rise. What’s more, according to this year’s Annual College Savings Survey, only 41 percent of respondents have started saving for college. So why aren’t more Americans aren’t getting the message?

In a podcast interview with Savingforcollege.com, Melinda Lewis, Assistant Director of the Assets, Education and Inclusion (AEDI) department of the University of Kansas, and a co-author of the research paper, explained how college was once viewed as a public good, but is really now more of a private benefit. This means that the burden of college costs has shifted from society to the families of prospective students, at a time when tuition prices have been rising faster than inflation. The result is that many families, especially those with lower household incomes, are left with no other choice but to borrow to pay for college. But rising tuition prices aren’t the only culprit. According to Lewis, there are other factors causing this increased reliance on student loans:

State appropriations to public colleges are historically low

According to Lewis’s research, today’s students are responsible for a much larger share of tuition costs than previous generations. In fact, in 2011-12, state appropriations to public colleges and universities declined by a record-breaking 7.6 percent. However, some good news may be on the horizon. According to the newly released “State Higher Education Finance Report”, appropriations to higher education in 2014 were actually 5.4 percent higher than they were in 2013. But despite this modest increase, 25 states still receive a larger proportion of per-student revenue from tuition than from appropriations, and overall appropriations are down significantly from pre-recession levels.

Schools aren’t helping students who really need help

Pell Grants are a form of need-based federal student aid that does not need to be paid back. In 2003-04, Pell Grants assisted students from low-income families by covering 87 percent of average tuition and fees at a public four-year university. Ten years later that number sharply declined to just 19 percent. Yet according to Lewis, schools have been increasing the amount of merit-based aid they award, which is based on grades and test scores. Although all students have the same entitlement to merit-based awards, this type of aid disproportionately favors students from higher-earning households who grew up in environments with superior academics and extracurricular activities. For low-income students, less need-based aid leads to more unmet need, which Lewis’s team defines as “the hole that must be filled with student loans even beyond the point of reasonable affordability”

Household balance sheets have been deteriorating

There are also macroeconomic factors that are driving up reliance on student loans. In the last decade, we’ve experienced plummeting housing values and high unemployment levels, resulting in a steep drop in the net worth of many households. In fact, from 2007-10, middle class families experienced a 40.4 percent decline. Unable to save for college, these families were forced to rely on student loans to fund their children’s education. What’s more, taking on this type of liability can make it seemingly impossible to be able to accumulate wealth and repair a family’s balance sheet. Some argue that this erosion of household balance sheets may have a dire effect in the country’s overall macroeconomic health.

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