Eight Steps to Lower Your College Costs

The following is an excerpt from America, Welcome to the Poorhouse: What You Must Do to Protect Your Financial Future and the Reform We Need, courtesy of FT Press, imprint of Pearson. Originally published in "America, Welcome to the Poorhouse." I don't agree with everything that's written in this book (you'll be able to see pretty clearly where we differ), but it often offers an interesting perspective that I thought would start some discussion here.

In Collinge’s book, The Student Loan Scam, he provides heart-breaking, horrific testimonials of borrowers who were hounded to pay their debt. He describes a man who borrowed about $7,500 in the 1980s who subsequently was found to have a form of autism that prevented him from finding a job. Despite being declared totally and permanently disabled by the Social Security Administration, he was still getting collection calls from the lender two decades later. Another borrower tried to repay her loan in full in order to save on interest costs, and the lender refused; instead, it garnisheed her wages so that it could collect the full amount. Still others took desperate measures, including leaving the country and committing suicide.

Your first plan of action should be to protect your college-bound kids from having their lives destroyed if they fall behind or are unable to make payments and wind up having their credit rating destroyed—even being deprived of a job in some circumstances. First, seriously consider whether you, the parent, ought to be the borrower and not your son or daughter—especially if you and/or your spouse has a well-paying and secure job. Unfortunately, a student loan is especially risky if my prediction about the retirement crisis is on target: if the first wave of Boomers is supposed to be able to retire in 2011 but can’t afford to, my daughter’s graduating class of 2011 is going to have a tough time landing jobs. Saddling an unemployed graduate with loan responsibility could very well mean sharing the same nightmarish fate as Collinge’s.

On the other hand, if the parents’ job situation is shaky or their income is below $60,000 or so and the son or daughter is an A student majoring in medicine or engineering or a similar lucrative pursuit that will enable him or her to repay the loan, the student loan may be the way to go. What’s more, a few dozen wealthy colleges now offer “free rides” or “cheaper rides” to students from families with less than $60,000 in household income—and sometimes more (details at the end of this chapter)—so a loan may be unnecessary.

Until we get some genuine college cost reform in Washington, there are still steps you can take to lower college costs:

1. Take advantage of free money. Before we talk about cutting costs on borrowing for college, make sure that you take advantage of grants or scholarships.

Grants, scholarships: The bad news is that they are a small percentage of the total cost of college—and most kids won’t get them because there’s only so much money to go around. For example, in 2005 a mere 2.1% of students got tuition and fee waivers—which is essentially the same thing as a full scholarship. That same year need-based grants were awarded to more than 10% of undergraduate students but averaged only $3,300. That year merit-based grants were awarded to 7.9% of students, with an average award of $4,269, and federal Pell Grants were received by 26.8% of undergraduate students, with an average amount of $2,492—plus you probably won’t even qualify for the latter unless your household income is less than $50,000. In summary, at best you’re getting around $10,000 a year. But it’s better than nothing and it’s $10,000 less that you have to borrow and pay interest on for many years.

Most of Uncle Sam’s money—about $7 billion—is distributed through Pell Grants. To get this money, you need to file the Free Application for Federal Student Aid (FAFSA), the federal government’s instrument for finding out how much each family can pay for college. The FAFSA generates an expected family contribution that guides colleges in the distribution of federal funds and serves as a baseline for calculating eligibility. See the end of this chapter for the website that tells you how much of the bill you’ll be footing.

Merit aid: This is when the college gives you a “reward” for having good SAT scores so that you’ll apply and doing so will boost its rankings with U.S. News & World Report. Yeah, it doesn’t make sense but every little bit of money helps, $4,000 or so worth in this case. Keep in mind that SAT scores matter even more for merit aid than for admission; some schools even publish cutoff test scores for scholarships on their websites. So if your kid’s SAT scores are close to the cutoff, it’s worth spending the money to take the test again and potentially save you $4,000 or so.

2. Is your kid Harvard- or MIT-worthy but you’re short on cash? Apply to a “rich” college that will subsidize most or all of the cost. Most likely thanks to Sen. Chuck Grassley’s (R-IA) efforts to put a harsh glare on colleges with rich endowments who charge sticker-price tuition, more than 60 colleges have either replaced loans with grants or eliminated tuition altogether for those falling under certain income ceilings, most often under $60,000—some offer free education for everybody, regardless of income, under certain circumstances. See the end of this chapter for some sample colleges and the link on the internet to the complete list.

3. Consider a state school, especially if you live in one of the 35 states that offer merit programs. While the price tag for many state colleges has risen because of shrinking budgets due to economic doldrums, there are still a few bargains around. For example, Georgia’s HOPE Scholarship allows any high-school student with a 3.0 GPA in core subjects to get free tuition at the state’s public schools or up to $3,000 a year at its private ones—a fantastic deal. The reason Georgia can still afford to do this is that the revenues come from the state’s lottery. Not all states are as generous as Georgia—the average grant is around $1,000—but it’s worth checking out. The following website contains links to each of the state programs: http://www.nassgap.org/links.aspx.

4. Consider one of the best bargains around: community colleges for the first two years, or maybe even all four! The average annual community college tuition is $1,500 to $2,000, compared to $5,000 to $20,000 at four-year public schools and $30,000 to $50,000 at private four-year universities. What’s more, some colleges have articulation agreements that make it easier for students to transfer from a community college to a four-year institution. Even better: some states, like California, Florida, and Pennsylvania, guarantee that students who receive an associate’s degree will be admitted into one of the state’s public four-year colleges. It gets even better: As of 2009, 17 states, including Nevada, Florida, Texas, and Washington, have allowed community colleges to award bachelor’s degrees, so you’ll be saving big bucks for all four years of schooling, as long as your son or daughter doesn’t mind commuting to college—as opposed to living there. Even if you live in a state that offers only a two-year program, community colleges are definitely a deal to consider. The only downside for students—depending on the personality of your son or daughter—is that it may be tougher to make friends at their new four-year college if they’re transferring from another college. Many students may have already joined clubs or sororities and have made “ties that bind.” Make sure that the community college of your choice has an articulation agreement.

Great resource for community colleges: http://www.ccweek.com. If you click on “Top 100,” you will see how your local community college stacks up.

Resources for four-year community colleges: Unfortunately, I couldn’t find a website with this information; presumably your child’s high-school guidance counselor will keep up-to-date on whether your home state permits community colleges to offer four-year programs and which of those that do are within commuting distance.

5. Most of us will have to borrow to afford paying for college—so keep your borrowing costs as low as possible. Unfortunately, while a home-equity loan was a good option for my Dad, it may be a risky approach these days, given the melting housing market. So what options do you have? First, consider the federal direct lending program—and make sure your child does not apply to any college that Sallie Mae has convinced to drop the loan program, which means you’re likely to be stuck with a high-cost “opportunity” loan. There are two components: a loan that parents take, and one for students. The Parent Loan for Undergraduate Students (PLUS), a federal loan program for parents of college students, is the best deal around that Sallie Mae doesn’t want you to know about; that’s why less than 10% of the population has them. You can borrow up to the amount of college expenses, regardless of income. The Stafford loan is a federal loan taken by the student. While its interest rate is currently lower than on a PLUS loan, 6.8% versus 8.5% for the PLUS loan, there are limits on how much can be borrowed. (Don’t ask me why the rate on the parent loan is higher since parents have better credit ratings.) That’s why the best course of action is for your son or daughter to borrow up to the Stafford limits and you the parent take out a PLUS loan for the rest. Two websites with more info on the Stafford and PLUS loans are http://www.parentplusloan.com/ and http://www.staffordloan.com/.

6. Whether you, your kids, or both of you wind up being the borrower, have a serious talk with your kids about choosing a major that will lead them to a career that will make the investment worthwhile. Whenever one of my kids’ friends tells me they are majoring in English, I have to bite my tongue—what kind of well-paying jobs can you land with an English degree? Some colleges actually charge more for majors that lead to low-paying jobs, such as education, fine arts, and journalism. (As a former journalist, I can attest that this is a poorly paying profession unless you’re the next Katie Couric or Anderson Cooper.) In fact, if your child is seriously interested in careers in low-paying or hard-to-get professions such as these, he or she should definitely consider a state school/community college so that your/your child’s debt load will be lower. Better yet, convince your kid to opt for a career that will enable him or her to pay back the loan. A good resource for hot job growth can be found on CNN Money’s website: http://money.cnn.com/magazines/business2/nextjobboom/. Promising careers range from physician’s assistant to computer software engineer to college instructor (most likely because college professors often have tenure and pensions so that they can afford to retire).

7. Needless to say, don’t consult U.S. News & World Report’s rankings when considering a college. A much better guide is America’s Best Value Colleges, published by the Princeton Review.

8. If your child has stellar grades and SAT scores, consider the universities that are now offering great deals—replacing loans with grants even if your household income is $200,000 or more in some cases. This is one area where Congress has tried to do right and basically shame some of the richer private colleges into shaking their money trees. Here are some examples: Stanford University, which eliminates the parental contribution for families with annual incomes below $60,000; Yale University, ditto; Dartmouth College, which offers free tuition for students from families earning less than $75,000; Princeton University, which replaces loans with grants for all students who qualify for financial aid (you have to go online and apply to find out); Columbia University, which replaces loans with grants for families with incomes below $60,000; and Harvard University, which dramatically reduces the amount families with incomes below $180,000 have to spend. This is only a partial listing, because colleges are updating their criteria all the time. To find out current offerings, visit the following page on FastWeb.com: http://www.finaid.org/questions/noloansforlowincome.phtml.

Comments

[Anthony]

I can agree with all of those... except why is #7 "needless to say"? I think it needed to be said, because, quite frankly, I didn't know that it was a better resource!

[TK]

English majors, eh? I'll let you know that this English major made and makes a fine living the last few years in such fields as marketing and technical writing. An English major can also go into teaching and the degree is a solid background for law school.

I enjoy your blog, but pick on another major.

[Foobarista]

"Real" liberal-arts majors can often do well with advanced degrees, but pretty much any major that ends in "studies" is training for professional activism.

That's fine if that's your thing, but professional activism generally doesn't pay very well unless you have the connections and luck to parlay it into a job as a Congressional staffer, lobbyist, or hotshot NGO type. Even there, you'll do far better with a law degree and high rank.

So, if you choose a "Studies" major and are preparing for a lifetime of Fighting the Man, don't come out of college owing The Man six figures...

[English Major]

Sorry, but the English major knock is not convincing. I was an English major/Music minor, and I am pulling in close to 70k per year. I credit both of these courses of study with a considerable amount of my success.

First, as an English major, I learned to write. Few people in the business world can write well, and those who communicate effectively with the written word stand out. Whenever I go for an interview, I call ahead and ask if they would like to see a writing sample. If they say yes, I provide a 3/4 of one page piece of writing on a key issue in the industry.

What about music- that's a real stretch, right? Not entirely. Solo music performance teaches you to prepare, prepare, prepare, and to deliver results in a one-shot environment with potentially hundreds of people watching. I have performed for crowds as large as 3,000. When you've been through that situation, swallowed the butterflies in your stomach that sometimes feel like badgers who haven't eaten in three days, and knocked the piece out of the park...well, dealing with senior management doesn't faze me much.

Finally, a note on community college for 2 years- that can be a great plan. 4 years for the cost savings? If you can finish up the last two years at a rigorous 4-year college that is strong in your chosen field, I'd say it's worth the money. Why? You'll meet other talented people in your future field. They'll push you to excel, and provide a strong networking base when you get out in the job market.

My college networks have helped me out more than once in the job market, and part of that help has been the level of talent of the peers I found at school. The higher they land in the earnings chain, the more powerful your network is for earnings after you graduate.

[mysticaltyger]

The only thing I question is the value of transferring from Community College to a 4 year college. I'm not saying it can't work. But I often see people drift in community college and never make it to a 4 year school. I think you have to be extra focused to pull this off. And a lot of times, it seems community colleges and 4 year colleges conspire to make the transfer process difficult and expensive. Not true in every case, but this is still pretty common. I'm sure it also depends on the state where you live.

[Jim]

Like Anthony I also don't see why it goes without saying that US News & World Report college ranking shouldn't be used as a reference.