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Student Loan Crisis Echos the Mortgage Meltdown: An Independent Educational Consultant’s View of the Complications in College Financing

by Lisa Ransdell, Ph.D., IECA Associate Member (Colorado) 

A recent issue of the Chronicle of Higher Education features an important article that sheds light on one of the key reasons for the current crisis with student loans in the U.S.—a crisis that to me increasingly resembles the backdrop of the mortgage meltdown that launched the nation into the major recession that we still haven’t emerged from.

The article begins by describing one family’s dilemma: a female student and her single mom, who wanted to help her daughter pay for what is described as her dream college, in this case, NYU. As soon as I read that phrase, “dream college,” I got half of the picture. By not placing limits on what is affordable and reasonable, and by doing whatever it takes to satisfy the whims of a child who can’t possibly understand the implications of or perhaps even the reasons for the choices she is making, disasters can be made. With my clients, and in my blogs, and in the college-planning book that I am writing, my mantra has been for some time: first, determine what is affordable, and then set limits. Unfortunately, few families approach college planning this way.

Why is it that today’s parents are so inclined to shoulder any burden, make any unwise choice in order to finance the costly dreams of their offspring? I am reminded that this generation (my generation), is ironically the offspring of the ultra frugal “greatest generation,” and are many of the same folks who pursued real estate beyond their means and loan terms and credit card offers that defied logic. You would think we would have learned a lesson…

The other half of the picture portrayed in the article are loans, especially Parent PLUS loans, often the last resort of families who want to please a child in love with a college, especially when said college has offered little aid. Here is how the authors describe the process of the awarding of PLUS Loans:

“When a parent applies for a PLUS loan, the government checks credit history, but it doesn’t assess whether the borrower has the ability to repay the loan. It doesn’t check income. It doesn’t check employment status. It doesn’t check how much other debt—like a mortgage or other student loans—the borrower is already on the hook for.”

Sound familiar? Many of us are aware that student loans cannot be discharged in bankruptcy proceedings, but many students, parents, and even some grandparents are surprised when it proves to be difficult to keep up with loan payments during a recession, and there is little relief for them. I have even heard terrible stories about grandparent co-signers’ social security checks being garnished to keep the repayment stream flowing when the graduate and his or her family can’t keep current on monthly installments. So who is to blame for this mess? As with the mortgage crisis, plenty of people and institutions carry part of the burden.

Among them are colleges for their refusal to contain costs, banks and government agencies for their greed, and families, for their naiveté. One category that absolutely should NOT be implicated is that of professionals such as independent educational consultants (and high school guidance counselors, and financial planning professionals and others), who advise families on aspects of planning for college. However, I agree with my friend, financial journalist Lynn O’Shaughnessy, that some of us are insufficiently informed in this area. I acknowledge that when I started out as an IEC in 2007, I was initially ignorant about the importance of knowing the money side of college planning; however, I have been making up for this in the last few years with intensive research.

Right now one of my biggest (and most unexpected) dilemmas is getting families to listen to my advice about not paying more than is necessary for higher education, and not getting trapped by loan offers that are bad choices. I am amused that one criticism of independent educational consultants is that we are expensive and not worth what we charge. Ironically, it may be the case that those of us who include an emphasis in our practice on fiscal soundness may be one of the few bargains to be had in the realm of college planning!

 

6 Responses to Student Loan Crisis Echos the Mortgage Meltdown: An Independent Educational Consultant’s View of the Complications in College Financing

  1. Judy Zodda says:

    Bingo Lisa! You’ve hit the nail on the head! I too, when I started practicing in 2005, admit the last thing on my radar screen was whether or not a college made financial sense for a family. Admittedly, my clients were in different financial circumstances than they are today.

    Once the economy crashed when my own son was a senior in college, I made it my business to start learning about college financial aid. While I went down this road kicking and screaming because finances were not my “strength,” I soon found that in order to be effective for my families, it had to become front and center in my practice to make sure that my students and their families weren’t sacrificing their retirements, home equity, savings, businesses, or the student’s ability to repay loans, and that going to college didn’t mean just getting accepted, it meant first being able to afford going to college as well. My families are advised not to incur any more debt than what they anticipate their student will earn in the first job out of college! I feel good about my ability to find those colleges where students will not only get admitted, but can afford to attend as well, without jeopardizing their future lives with a heap of debt that has the potential to effect thier lives for their entire lifetime!

  2. Alan Haas says:

    Superb article, Lisa. I learned a lot! Many thanks.

  3. Brava, Lisa -

    My challenges have been convincing parents that they need to have an early and frank discussion with their student about what’s possible for college financially. If grad school is a possibility, they have to figure that in as well. And they need to understand certain principles.

    A maximum figure doesn’t necessarily limit where you can look or where you should apply – even though colleges cannot fund everyone, they might fund you. But it may surely limit where you will accept.

    What should be expectations in terms of need-based awards? If you think you can somehow scare up the money to pay for a college, the financial aid officer is likely to agree. And often he or she will think so even if you don’t. Colleges will expect you to liquidate or borrow on properties like boats and summer homes. They won’t expect to subsidize a grandparent’s medical bills. I’ve seen families ask for a bigger award so they can pay for a daughter’s wedding, and I don’t have to tell you how that goes over.

    What should be expectations in terms of merit-based award? Families need to recognize that colleges use “merit aid” as bait to attract students they want but whom they think may won’t come without some encouragement dollars. Accordingly, schools that are an academic reach for their student are unlikely to throw money their way.

    In reading financial aid offers, the crucial figure is not the number of real dollars in their offer or the number of loan opportunities they offer you, but the amount that somewhere, somehow now or later, you will have to pay. If the college doesn’t tell you in its offer, I suggest asking a bank how big monthly payments would be if you borrowed that sum from them.

    No family should think about beggaring itself to send their kid to a college that’s more than they feel they can afford given their priorities and expenses. Certainly nobody should invade money they’ll need for retirement. Not only is beggaring not sound financial management, but no kid should have to carry the burden of being that grateful.

    And finally, every college search where finding the money is a concern needs a financial safety school – one the family can afford even if no financial aid comes through.

  4. Jeff Levy says:

    Lisa,

    You raise an issue which is in the cross hairs of the current debate over higher education policy: should federal student and parent loans be accessible to all families regardless of income and ability to pay, or should loan limits be imposed based on family income and FICO scores? Currently, the federal policy is unambiguous: almost anyone can borrow up to the entire amount of the cost of college regardless of their ability to repay. Some argue that this policy is responsible for the market pressure driving up the cost of college and use anecdotal evidence of families saddled with excessive debt as a reason to revamp federal student loan policy. I don’t believe this is advisable nor accurately describes this market.

    The article you reference in the Chronicle of Higher Education resembles many other public interest pieces on this provocative subject—a family borrows more than it can afford and finds itself drowning in debt. The obvious lesson? Loans are too accessible and all this free money drives up the cost of college, making it unaffordable for most families. Is this an accurate analysis? Unfortunately not.

    Looking at the specifics of this case, Aurora Almendral enrolled in NYU in 1998 when her single mother was earning $25,000 a year as a freelance writer. During her first two years, her mother borrowed $17,000 to pay the college bills, and unable to pay down the principle her debt has ballooned to $33,000. To understand why this situation arose, we have to look at NYU’s financial aid policy. I couldn’t find data dating back to 1998, but let’s look at NYU’s current financial aid profile. On average it meets 61% of need, and last year’s Cost of Attendance was $61,907. If Aurora’s mom earns a sufficiently low annual wage to qualify for an Expected Family Contribution of zero dollars, she would still be responsible to pay 39% of NYU’s total cost, or $24,143 per year, nearly 70% of her annual gross income if she were now making $35,000. And her daughter would probably have additional subsidized loans in her financial aid package, along with some grants. There is a reason why so many of these stories about excessive debt involve NYU. Its financial aid policy is usurious. It is an institution that is both extremely popular and profoundly unaffordable for families with need.

    The real lesson here is not that federal loans are too accessible. What we as informed independent educational consultants must bring to our families is guidance on which schools are affordable and which are not. For our students who will require need-based aid, we have a responsibility to populate their college lists with schools that meet between 90% and 100% of need or that tend to be generous with merit aid, and there are plenty of these as well as lower priced state universities.

    You equate the current student loan crisis with the mortgage meltdown of 2007-2008. While some similarities may invite comparison, these phenomena are profoundly dissimilar. The current mean outstanding student debt is about $24,000, and what I believe to be a more accurate snapshot of the average borrower—the median outstanding loan—is about $14,000, very much within the range of affordability for most graduates. The horror stories of families unable to repay loans in six figures represents a tiny percentage of current borrowers, although these stories are overrepresented in the media.

    Purchasing a home is not irresponsible; purchasing an unaffordable home is. Student loans must remain widely accessible to families with demonstrated need or we risk further polarizing our society into two irreconcilable groups–those few who can afford access to higher education, and the many who can’t.

    How do we help families determine the limit of responsible student debt? Sandy Baum is one of the leading authorities on this question. She is a Senior Fellow at the Graduate School of Education and Human Development at George Washington University as well as a leading higher education policy analyst at the College Board. She says that for graduates expecting to earn an average annual wage upon graduation, a monthly loan repayment of about 10% of monthly gross earnings is a reasonable and responsible amount of debt to take on. For a college graduate expecting to earn $45,000 per year following graduation (the average of all earners with bachelor degrees between the ages of 25 and 34 according to the National Center for Education Statistics), a loan of $25,000 at 6.8% (the current rate for unsubsidized student loans) requires a monthly repayment of $287.70. This represents less than 8% of gross monthly wages. This is the rule of thumb I use with families, and I believe a responsible amount to borrow to access the single most important and income-generating purchase a young person will ever make.

  5. Thanks everyone for the comments on this, and to you Jeff for the deeper perspective. I especially appreciated your final paragraph, pointing to monthly repayment amounts as a good final indicator of affordability. Just for the record, what I meant to imply about the relationship between the recession and the student debt crisis had more to do with consumer naivete and bad lending practices, and I definitely wasn’t pursuing the point that free money is driving up the cost of college — especially as loans are hardly free money! My larger point is that this is something we can help families with if we do our homework as IECs.

  6. Sandra Moore says:

    Jeff, Lisa, et.al…Yes, “affordability” is such a complex issue! If you haven’t yet seen it, check out the October 17 article by Kevin Kiley in Insider Higher Education about a new study (by the Cornell Higher Education Research Institute), which finds that, in addition to high college costs, certain admissions and financial aid policies, indeed, contribute to excessive student loan debt. Said University of Richmond business professor James Monks, an author of the study, “While the cost of attendance does play a statistically significant role in determining student debt levels at private institutions, admissions and financial aid policies [including need-blind admissions], graduation rates, and the mix of majors across students are also significant and important in determining student debt levels.” Here’s the (long) link to the article: http://www.insidehighered.com/news/2012/10/17/admissions-and-aid-policies-play-larger-role-tuition-driving-debt-paper-finds

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