First, will be okay...eventually...

I know, it all sounds impossible. But more people are going to college than ever. And while many of them are accumulating debt faster than Congress, you can still get through this without an impossible financial burden. Just remember, that there will likely be no single source of money, you will have to be realistic on selecting the right school, and your major means everything. So, relax and start the journey, one step at a time...

Sunday, October 30, 2011

High Tuition? Blame Your Financial Aid!

Financial aid, tuition, college costsThere's an eye-opening article in Investors Business Daily on how expanding federal aid for college students may allow for the extraordinary growth in tuition, drawing a parallel to health care costs. The idea is that as more aid is available, the schools respond by raising tuition accordingly, much as health care costs are allowed to increase since the true costs are not borne by the beneficiary. If you only have a $15 co-pay for a doctor's visit, you will likely use it a lot more often - and maybe unnecessarily - than if you paid the full cost of $120 or so. This "false demand" allows for increased pricing. The more it is subsidized, the more the price increases. As written in the above article:
"By providing aid and subsidized loans, the government is trying to protect students, but the effect is perverse," said Jane Shaw, president of the John W. Pope Center for Higher Education Policy in Raleigh, N.C. "They increase demand and enable colleges to hike tuitions virtually without restraint."

I think most people see this relationship in the inverse - that is, they think they need more financial aid since tuition is rising so fast.

So where is this increased demand apparent? When people choose to attend college with no plan of how to use their major. When people decide to take out excessive student loans that can never be justified by expected future income in their chosen field (think of the person taking out $63,500 in student loans for a Master's Degree in Sociology). When most people agree on the value of a college education, (and 86% of college graduates agree, per a recent poll) but most people can't do the simple research and calculations to prove the economic value. And just because there is great economic value for a college education on the average, that doesn't mean that it is true in every case. It's not just any degree from any college in any major that makes financial sense.

With Obama's recently announced plan (to great disagreement) to enable greater student debt with reduced responsibility to repay these loans, this will allow for further tuition increases, and the spiral continues. According to the plan, those of lower income with student loan debts would have reduced monthly payments (no more than 10% of discretionary income, with the potential for loan forgiveness after 20 years of payments). So if you can't afford the debt after graduation, was the cost of the degree worth it?  And when you took out these loans, did you understand their costs and your ability to pay them back upon graduation?