Standardized Tests: Gateway to College or Barrier?

The standardized tests administered by third parties that most colleges consider for admission (ACT and SAT, for example) are an important discriminator for college admissions officers in determining preparedness for college study. Their importance has been downplayed over the years, however, as personal characteristics (including socioeconomic background and extenuating circumstances) and high school educational environment are given greater consideration (e.g., see the University of Michigan's evaluation guidelines).

Although they are not a very robust predictor (even ACT, Inc., will say that a better predictor of college success is obtained when combining the ACT scores together with high school GPA), and they are only one piece of the admissions puzzle, the yearly numerical scores are easily analyzed, make for a good news story, and result in many diverse opinions.

In looking at the ACT test scores, you can find many correlations, such as lower average scores for children of single parents versus married or divorced parents, regional differences, and differences by race. This leads to many claims of unfairness in the design of the test, intentional or not. So the question is this: does the ACT provide a gateway to opportunity by identifying the best and the brightest to attend the "best" schools", or are they an artificial barrier to entry that can be used for political (or other) purposes by leaving the disadvantaged behind?

INFOGRAPHIC: College Students Pay HOW Much for Beer?

An interesting infographic (click the image to enlarge) showing the breakdown of an average college student's budget. If you look at the tuition portion, it is 19% of their spending of $13,000 per year, or $2,470. For room & board it is 26%, or $3,380 per year. This represents 51% of the average tuition expense after all grants (the amount that needs to be covered by savings, income, and loans), and 41% of the average room & board expense (per the National Postsecondary Student Aid Study).

While this is commendable, the fact that 40% of their budget is discretionary seems a bit distrurbing to me. And I suppose the $50 per month on beer that they spend on average is consolation when they think of their student loans. Cheers!

(Click image to enlarge)

Student Loans: Path to Riches or Road to Serfdom?

All loans are financial vehicles where you leverage someone else's assets to (hopefully) invest in something that will have returns to you that outweigh the borrowing costs. For a business or government entity, that can mean issuing bonds to raise money to develop products or infrastructure that enables growth and returns which are greater than the net cost of the bonds, over time.

For student loans, that means that the returns in future employment, made possible by your college degree, will outweigh the student loan payments over your life. That calculation must include un/under-employment risk; that is, the debt is certain, but the long-term wage benefit is not, so the student loan should have substantial positive financial impact or you should have never signed for them in the first place. As explored in a previous post, the main factors in that calculation are the cost to obtain the degree, the value in the marketplace of your degree, and the employment opportunities in your field.

A recent ABC News report on student loan defaults has some very telling stories. There is a 24-year-old graduate of New Jersey's Fairleigh Dickinson University (tuition, fees, and basic room & board of $42,188 for undergraduate, and $38,700 for tuition for education graduate studies). She earned her Master's degree in Education, but hasn't found a full-time job as a teacher. Having financed most of her college education with student loans, she owes "close to $100,000", and works two part-time jobs as a substitute teacher and as a tutor at a learning center and pays what she can on her loans.

So let's do the math.

Children of Divorced Parents Pay The Price - Again

Children often pay the greatest price in a divorce.  There is the obvious emotional cost, with disruption of a familiar and stable home, reduced time spent with one or both parents, and nagging questions over whether they are to blame. But there is also the financial cost, as the mother is often the custodial parent and typically has reduced assets and less income potential. Child support only covers the basics, and saving for college may become out of reach. This leads to statistics like these: mothers are 35% more likely than childless homeowners to lose their homes, three times more likely than men without children to go bankrupt, and seven times more likely to head up the family after a divorce (see “The Two-Income Trap: Why Middle-Class Mothers And Fathers Are Going Broke,” by Elizabeth Warren and Amelia Warren Tyagi).

While child support obligations usually end when the child reaches the age of majority in their state, some states can direct child support above the age of majority, and may even mandate financial support for the child's college education. The best solution is to clearly cover college expense responsibilities in the divorce agreement.

The impact on financial support for these children is clear. A recent study shows that, on average, married parents contribute about 8% of their income to their child’s college costs and meet 77% of their children’s financial needs. In contrast, divorced parents contribute about 6% of their income and meet only 42% of their children’s financial needs, while remarried parents contribute 5% of their income and meet 53% of their children’s needs. Clearly, these students are at a financial disadvantage.

September is National College Savings Month: So?

By proclamation (actually, House Concurrent Resolution 270, passed by the 108th Congress on October 15, 2003), Congress endorsed September as College Savings Month, "... in order to raise public awareness about the need to save for educational expenses". This was at the request of the National Association of State Treasurers and the College Savings Plan Network (the people that bring you the state-run 529 plans.).

So?

Are we unaware of the need to save for college? I didn't think so. Most people see saving for college as similar to going to the doctor for a yearly checkup, or cutting out fatty foods from your diet. You know you have to do it, but the impact of NOT doing it today won't be felt for a while, so you put it off. And maybe you get to it too late.

But the parallel I want to draw is with seat belts. The regular acceptance by the driving public of the simple and unconscious act of fastening your seat belt took time, but has paid huge dividends. The reduction in fatalities in due to many factors, including miles travelled, car design, road design, traffic regulations and enforcement, as well as seat belts. But a Harvard study indicated that the increase in seat belt use seen in the chart below repesents a 10% reduction in fatalities. This is much cheaper and easier than buying a safer car, or paying for safer highways.


Source: NHTSA

Student Loan Default: It Might be the Borrower, not the School

The latest data on student loan default rates was published yesterday by the Department of Education, and you  can expect the typical hand-wringing headlines over predatory loan practices as well as the practices of for-profit institutions. But, as usual, the story is more nuanced when you look behind the headlines.

First, an historical perspective. In the 1987-1991 timeframe, the average total default rate was 19.3%, with a high of 22.4% 1990. In addition, the historical low was 4.2% in 2003. So the current rate of 8.8% is not out of the normal range. The full data from the above study (see chart below) shows that although there is a recent uptick (likely due to the recession), the current rate is far from it's peak of 20 years ago, and within "normal" range. The definition of default period from this study is, "The two-year period that begins on October 1 of the fiscal year when the borrower enters repayment and ends on September 30 of the following fiscal year", and timing of the recent recession falls right in that time frame. Since default can certainly occur after this two-year period, this measurement is likely an understatement of the true default rate.
 

Source: Dept of Education Study

13 Ways to Pay Less for College

Let's say you are the beneficiary of a 529 Plan, you found all possible scholarships and grants by filing your FAFSA and college applications early and applying to every scholarship you found with your on-line search (with that great GPA you worked so hard for), you worked your job all you could (full-time during the summer and 10-15 hours per week during school terms), and you are taking every tax credit and deduction allowed. Now that you have worked the funding side of the cost equation, how can you minimize the expense side of the equation? Here are some of the best ideas to reduce your costs, starting with the approaches with the largest cost savings.

1 - Go to a public school - in your state. According to the Department of Education, for the 2009–10 academic year, the average annual cost for full-time undergraduate tuition, room, and board was estimated to be $15,014 at public four-year institutions (in-state tuition rates) and $32,790 at private institutions. There - I saved you 54%.

2 - Start at a community college or regional campus of a public college for the first two years of a four-year degree. From the above study, the average 2-year public institution cost was $7,703, a savings of 49% off the four-year public school cost. You will need to check to make sure any credits you earn can be transferred to your target school when you complete the first two years. The latest recession has profoundly increased the attendance at 2-year public schools, with increased attendance across all income levels.

INFOGRAPHIC: Snapshot of College in America

In looking over the overview of college in America graphic below, a couple of things stand out. First, many people must not be prepared for or commited to college - why else would 1/3 drop out in the first year? Second, if 57% of college graduates take six or more years to complete a four-year degree, I hope they are spending that "extra" time working in something close to their field as an intern or co-op, or else they are decreasing the value that they get for their education.

Third, and most significant, if four of the ten most popular college majors end up providing graduates with jobs that they could have had with no college (or maybe a two year degree), are they going to school for personal enrichment, because they feel they have to (or are forced by their parents to), or do they just have unrealistic expectations?

Source: Online Colleges and Universities



Repaying Your Student Loans and other Facts of Life

So you needed to close the gap in funding your college education with an education loan. You are not alone - 65.6% of graduating college seniors have student loans, with an average outstanding balance of $24,145 as of 2008, the latest comprehensive data available. As discussed in a previous post, loans can be an excellent way to fund your college education, as long as you don't overextend yourself and you understand your obligations. A typical 10 year student loan at 6.8% interest (the current unsubsidized federal student loan rate) would reqiure a monthly payment of about $278. This represents  6.7% of the average college graduates starting salary of $50,034, a bearable burden if your degree enabled you to get started in your career.

For federal student loans, you will need to start repayment after either graduation, if you leave school, or if your attendance is less then half-time, but only after a grace period expires. For Stafford loans, the grace period is six months and for Perkins loans it is nine months.

For undergraduate federal parent (PLUS) loans, the repayment begins within 60 days of the date that the loan is fully disbursed (there is no "waiting" period until graduation or other event). A graduate student PLUS Loan borrower can defer repayment while the borrower is enrolled at least half-time, and for an additional six months after the borrower is no longer enrolled at least half-time. However, be aware that interest  during these periods will be added to the loan balance if it is not paid by the borrower during this period. Similar rules are also in place for Parent PLUS Loan borrowers. Your loan servicer will provide information about repayment and will notify you of the date loan repayment begins.

The Full Ride (or Otherwise): Athletic Scholarships

Athletic scholarships are another way for institutions to award merit-based aid. As sports programs are considered educational programs by these schools, they can form part of the institutional grants awarded by the schools. While athletic scholarships are based primarily on athletic merit, the amount of the award can also be partially based in need, as part of the overall grant from the school.

One of the most often heard scholarship awards is the "full ride" - being awarded a full-tuition scholarship at a four-year university for athletic skill and achievement. You will see "signing days" in the news, where recruits commit to particular schools, and many high schools will spotlight these individual's accomplishments as evidence of their excellence. While these full-ride scholarships are rare, athletic scholarships can be another piece of the college funding puzzle, though for only a small portion of students.


From the National Postsecondary Student Aid Study (NPSAS), for the 2007/8 school year, only 0.7% of total undergraduates receive any athletic scholarship (full or partial), with an average award of $7,390. Since 48% of all undergraduates are exclusively full-time and the average tuition is $22,400, this means that only about 1.5% of full-time undergraduates receive any athletic scholarships, equal (on average) to about of 1/3 their tuition (excluding room & board). This does not leave a lot of room for the "full ride". It also shows how small (in total) the contribution of athletic scholarships are compared to other grants, and how most of these award are partial scholarships.


There are two dominant athletic associations that act as governing bodies for their member schools, the NCAA (1281 member schools) and the NAIA (290 member schools). There are three major divisions within the NCAA, but only the Division I (DI) and II schools may offer athletic scholarships. NAIA-member schools can provide scholarships in both NAIA DI and DII. The first step to securing any athletic scholarship is to register (early in the student's junior year) at their free online eligibility center (see links for NCAA registration and NAIA registration). More details can be found in these NCAA and NAIA publications.

Free Money for College?!?

How many times have you seen this in a pop-up or on-line ad? The truth is, there is a lot of "free" money out there for college, as long as you can qualify and as long as you can find it. In fact, a Department of Education report released in May, 2009 shows that 64.4% of full-time/full-year undergraduate students receive some form of grants, which is a greater percentage than the 52.9% who take out loans. Part-time students show a lower percentage receiving grants (43.5%).

First, a little vocabulary lesson. Scholarship and grants are financial aid that does not get repaid. Traditionally, the term "scholarship" refers to awards based on specific criteria (such as academic, athletic, or artistic skill and accomplishment), and "grants" refers to awards based on financial need. However, the term "grant" is often used to include both categories. Most grants are awarded based on the information you submit in the Free Application for Federal Student Aid (FAFSA), as long as you meet the (various) deadlines for FAFSA submittal. So fill it out early!

So who awards these grants and how? Broadly speaking, there are four categories: federal grants, state grants, institutional grants, and private grants. Federal grants are Pell Grants, Federal Supplemental Educational Opportunity Grants (FSEOG), and a small number of grants and scholarships from other federal programs (military service, teachers, etc). State grants and institutional grants are any grants, scholarships, or tuition waivers funded by a state or by the institution attended. Private grants include grants and scholarships from private sources outside of the institution, including tuition aid from employers.