How to Afford the Biggest Investment of Your Life

By: Kate Rolfes

December 18, 2014

Executive Summary:

Throughout the following pages, you will read about the current state of the education system and its pricing. This system is currently highly flawed, drowning students in debt upon graduation thus deterring them from attending an institute of higher learning.

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This paper will examine the different systems and options for payment that are currently in practice to try to combat these incredible costs. These options range from federal work-study programs to privately held loans. Furthermore, the funding for education in Germany will be analyzed to examine how other countries are able to afford free higher education for their youth. The standards and curriculums of these schools must also be looked at. Finally, I will propose a more effective manner for students to pay for college and increase their financial literacy.

Table of Contents

Introduction 1

Paying for Higher Education in the United States2

The Issues with the Current System6

Looking at Solutions: Education in Germany7

Where Tuition Goes8

The Benefits of Receiving a Higher Education10

The Future of Education11

The Recommendation13

Introduction:

Today, students are constructing many creative ways to pay for their college education. I myself remember sitting in my bed October of last year, trying to decide what classes I wanted to take in the coming spring semester. As I stared at my spreadsheet and counted the requirements I had left I came to a fascinating realization; I could graduate a year early. Suddenly opportunity flashed before my eyes. If I were to graduate early I could afford to stay at Bucknell for my entire collegiate career. I had been working three jobs all fall, become an Residential Advisor, and kept my position as one of the top coxswains on the crew team in order to try to afford school. None of those ideas had allowed me what graduating early now presented. Thus throughout the last year I have taken CLEP exams that fulfill the extra credits required to graduate, overloaded by only half a credit and here I am, a third year senior. However, even with this plan, I have still had to take out student loans just like so many of my classmates and friends around the country. The current system is setting college students up for these loans while most of us have no idea what fixed versus variable interest even means. All we see is money now that is allowing us to remain at the schools of our choice. Then, six months after graduation, we receive gifts; those lovely checks in the mail that remind of us of the near indentured servitude we signed up for when we signed our names across the bottom of the page saying we would like to be able to afford college. This system is flawed. Students need more help not only understanding these loans but also other ways to pay for college. Furthermore, they need to understand what they will be facing upon graduation. After examining the ways federal and private loans work, the driving factors of tuition, and how other countries structure education for their citizens, I propose that the United States fund the establishment of a database of all the grants and scholarships to allow students to locate ways to fund their education. Furthermore, I propose the implementation of courses to teach students about the various kinds of loans and the methods of repayment.

Paying for Higher Education in the United States:

The average student loan for the graduating class of 2012 was $29,400, and that amount rises about 6% each year (Ellis). This amount also varies widely between private and public institutions and from family to family. “Public colleges have average debt ranging from $33,950 to $48,850 and private colleges have average debt ranging from $41,750 to $71,350 ("Student Debt and the Class of 2013”).”

One thing that does not tend to fluctuate however are the payment methods families and students use. Most take out private or federal loans and it is important to note the differences that exist between them. Without exception, when a student takes out a loan, the general requirements are that payments must begin six-months post graduation; but, if the student returns to school, the payments will be deferred (“Private Student Loans” 12). The key difference between federal and private loans is the interest rate. All loans received from the government are at a fixed rate of interest. In contrast for private loans students may choose between fixed and variable interest rates. For fixed rate loans the interest rates tend to range from 3.4% to 13.99% while variable rate loans range from 2.98% to 19% (“Private Student Loans” 12). The issue with variable loans is that the families and students do not fully take into account that the interest rate, though lower initially, could raise to whatever the loan-holder states. Thus a graduate could be paying 2.98% one month and then the average 7.8% interest the next month. This makes it difficult to be prepared for payments in a monthly budget, another concept that few graduates have experience with.

Other than applying for loans from privately held businesses, students may apply through the Free Application for Federal Student Aid (FAFSA) to receive loans. One such loan that is incredibly popular (see Figure 1.) is the Stafford Loan. For Stafford Loans, it is possible to qualify for either a subsidized or unsubsidized loan. With a subsidized loan the government pays the interest rates while the student is in school and until six months after graduation. However, the student is eligible to receive less money overall. In contrast, students can receive more money with an unsubsidized loan but will have to pay the interest that accrue while the student is in school ("Subsidized and Unsubsidized Loans”). Both subsidized and unsubsidized loans have fixed interest rates of 4.66% for 2014 making each a safer loan than those given out in the private sector with flexible interest rates ("Subsidized and Unsubsidized Loans”).

Luckily for students there are other ways to pay for higher education other than loans (or their parents). Scholarships are available for a wide variety of scholastic and athletic achievements among other things. These can pay anywhere from a few thousand dollars to full tuition and can be the deciding factor for many seniors. Additionally, most students are eligible for federal aid such as grants and tax credits. Grants are often need-based while scholarships are merit-based ("Grants and Scholarships Are Free Money to Help Pay for College or Career School"). Traditionally, grants come from the university the student is attending but there are also many other options, such as the government offered Pell Grant which can pay up to $5,730 annually ("Federal Student Grant Programs”). Both scholarships and grants are highly beneficial to students because neither must be repaid. However, only certain students are selected for either of these benefits thus their effectiveness must be taken into consideration as well as where the grants are coming from.

Working in order to pay for higher education is another concept that has been integral to students for many years. Ranging from working at the local drug store to bar tending, students have long since discovered the best jobs for paying their tuition. Today, there is a new program in place by the federal government called work-study.

A participating institution applies each year for Federal Work Study funding by submitting a Fiscal Operations Report and Application to Participate (FISAP) to the U.S. Department of Education. Using a statutory formula, the Department allocates funds based on the institution’s previous funding level and the aggregate need of eligible students in attendance in the prior year. In most cases, the school or the employer must pay up to a 50 percent share of a student’s wages under Federal Work Study (In some cases, such as FWS jobs as reading or mathematics tutors, the federal share of the wages can be as high as 100 percent.). Students may be employed by: the institution itself; a federal, state, or local public agency; a private nonprofit organization; or a private for-profit organization (“Federal Work-Study Program”).

Furthermore, through the program students can either directly deposit money into a bank account or they may immediately utilize the funds to go towards paying tuition and fees. No matter how the student utilizes the money it is still making a difference towards allowing the student to remain in school.

Beyond receiving work-study, loans, or grants from the government, there are other systems currently in place to assist not only students but also their families. One such assistance available is the tax credit that families can receive while a child is attending college. According to the College Board, in 2012, “about $17.4 billion on federal income taxes though tax credits and deductions for college expenses was saved ("Total Education Tax Credits and Deductions over Time”).” This program is called the American Opportunity Tax Credit and is “available to taxpayers with adjusted gross income as high as $180,000 and accounts for about 90% of the tax credit total ("Total Education Tax Credits and Deductions over Time”).” Therefore, this program is highly beneficial to many students attending college and their families rather than simply benefiting those below a certain income; it addresses the middle portion of students who may be receiving some financial aid but are still struggling to pay for higher education.

Because there are so many programs in place by the federal government to try to address the rising issue of the costs of education, it is difficult to know which programs are contributing the most to students’ plight. Figure 1. represents how federal aid is broken down throughout its different programs and exemplifies that the most money goes towards fixed-rate Stafford loans. Such information provides the ability to determine where students could use the most help, and where improvements can be made.

Figure 1. (Federal Aid per Student by Type over Time)

Issues with the Current System:

How much of a difference does all of this funding really make? If a student attending a school where tuition is $30,000 and were to receive a Pell Grant, the maximum amount of work-study money, and a decent scholarship for $10,000, the student would still be left to pay $12,470. This is about four times more money than the average student makes during the summer months (assuming the student makes minimum wage of $7.50 and works 50 hours per week for 8 weeks). That means for a single year a student would have to save every dollar made during the summer (and during work-study), and would still only be able to pay off one year, leaving them still indebted.

This is ridiculous system because all the student is learning is that no matter how hard he/she works the debt is not going to go away. Thus the student becomes unmotivated to work and becomes complacent with having a large amount of student debt. This result is not beneficial to the individual, school, government, private lending firm, nor society. The individual is loosing money and becoming more indebted, the school has a less motivated student, the government and/or private lending firm is not receiving a return on its money, and society now has an individual that cannot afford to participate in the economy. As this becomes more and more the case, high school seniors will begin rethinking college attendance. Yet if different programs were in place that were less overwhelming for students, people would continue to attend college which would not only help them but also allow them to make gains for society that never would have occurred otherwise.

Looking at Solutions: Education in Germany

In looking for solutions to a problem that involves nearly every member of the educated population is quite difficult. Nevertheless, a good spot to look to begin to discover a solution is at how other countries are attempting to solve the issue of affordability of higher education. One excellent example is Germany. There it is possible for citizens and foreigners alike to receive free education. This concept sounds like heaven to anyone currently facing mounting student debt. The manner Germany is currently affording to abolish tuition fees is that each higher education institutions receive a budget which is complemented by additional agreements between higher education institutions and the state concerning the intake of additional numbers of students and the money to compensate the loss of income from tuition fees (Kehm).” Unfortunately these smaller budgets are reflected within the research funding for both professors and students available at schools. “Still, compared to other countries in Europe, German higher education institutions continue to be rather generously funded by their states – an estimated 80 per cent of their overall budgetary needs (Kehm).” There is also a price to pay in regards to the students the german institutions attract because of this lesser research funding and government controlled budget:

No German institution is among the leaders in global rankings, and money is part of the problem. The United States spends nearly twice as much per student as Germany does. Two-thirds of American universities' revenues come from private sources, compared with just 15% in Germany. The federal government is pumping in money through programmes like the “excellence initiative”, which promotes mainly research at a few select universities. But it so far has done little to improve teaching, which is what students tend to care about. Meanwhile states are cutting basic financing, notes Margret Wintermantel, head of the German Rectors' Conference ("Mediocre, but at Least They're Free”).

Because German universities are not yet up to the par of other countries, it is unlikely for foreign students to flock to these schools. The opportunity costs of going to a less prestigious school with less personal attention but for free do not outweigh attending a school with personalized attention that costs a small fortune. Until students cease to think in this manner or foreign schools become better students will continue to choose high cost domestic universities.

Where Tuition Goes:

The case of free education available in Germany raises key points in what Americans value the most in education. This notion also covers where the loads of tuition money students pay goes. According to Brinkman, the most highly valued aspect of education is the student to faculty ratio (Brinkman 265). Such an idea is highly sensible because a smaller student to staff ratio means more individualized attention within the classroom, more assistance with understanding concepts, and better personal relationships with professors. It means more work for the professors. The other top aspects that influence cost the most within education, especially liberal arts schools, are the size of enrollment, curricular emphasis, and number of courses (Brinkman 265). Furthermore, all of these aspects are what contribute to better student to faculty ratio. This proves students are looking for good schools with excellent professors. Once again, the opportunity costs for the better education are worth the money. This concept is also reflected in Figure 1. where the faculty-student ratio is rated a near perfect level of significance, solidifying its place as the top factor influencing price.

Figure 2. (Brinkman 270)

Beyond paying more for more individualized attention, students also are paying for factors beyond tuition that greatly contribute to the price of education. All of these factors must also be taken into consideration when a student is considering which school to attend. Students must pay for room and board, food, health care, books, and transportation to and from school among many other hidden costs. For me, these costs average out to about $11,000 annually, which makes up about a quarter of my annual costs for Bucknell. This estimates I spend $2,250 to get home for breaks, and to school in the fall and winter, spend $300 on books each semester, $7,000 on room and board, and $900 on food. These are the costs students strive to control but have the most trouble with because there is very little aid available for these costs and the costs change every semester. These are the elements that are driving students to choose schools with more financial aid and are closer to home because it is near impossible to front these flat rate costs as a college student, no matter if the student is attending a public or private institution.

Benefits of Receiving a Higher Education:

Attending college offers more than four years of interactions with professors, learning, drinking, and friends. To most, going to college means finding a better job and making a better living than what the student had had previously. Graduates are 14% more likely to be employed and be working full time (Baum 16), and should earn 64% more than the median earnings for those with high school diplomas (20). To put this into perspective, Figure 2. breaks down different degree achievements and how they translate into salary. For example, there are 18% more people with a Bachelor’s Degree earning $72,500 or more than those with Associate Degrees, and 25% more than those with a High School Diploma. In contrast, 24% of people with a High School Diploma are earning between $1 and $17,499 while only 12% of the population that received a Bachelor’s Degree is in that earnings bracket. These significant deviances in salary are life changing and can all be achieved through simply receiving a higher education. Such deviations in salary lead to greater class mobility, better jobs, and better participation in the economy. It also means a new generation will be born that will know the benefits of education, will seek to fulfill those goals, and will become better more involved citizens right from the start.

Figure 3. (Baum 25)

The Future of Education

In recent years, higher education has taken an interesting turn. Just twenty years ago the world could not fathom companies and products like Google. Now, students cannot imagine what research papers would be if they could not use Google and the Internet. The Internet has become an integral part of education with features ranging from online databases to specialized homework help. This makes me wonder, what might education look like in 2034? I believe the answer lies in online courses. These courses would allow students to be anywhere while attending the schools of their choice. This would allow students the possibility of being home which would cut out the costs of room and board, and food. Furthermore, if lectures were videos posted online, the students could watch them within a specific time frame but tailor that time to their schedule, allowing them to work in order to pay for their education.

Another drastic impact technology could have on the costs of education are the salaries of professors. If professors were given the same freedom as students to be wherever they like when they record their video lectures then suddenly the costs of classrooms goes down and the maintenance for those buildings. Furthermore, professors would now be able to reach more students, which would bring down the costs. After all “one of the greatest costs in higher education is faculty.  The notion that faculty can increasingly reach a greater of number of students in their ‘classrooms’ means the per unit cost of teaching a student could start to decrease, but only if you can achieve similar or better learning outcomes, and simply moving lecture content online will not solve the cost problem ("5 Ways Technology Will Impact Higher Ed in 2013").” It would take a lot of research and test studies in order to determine the amount of curiosity students have for online courses, how effective they are, the costs, and if the students find that the courses are as difficult as traditional courses. Likewise I share this concern. Over the summer I was able to take an online course to count towards my degree at Bucknell University. The course lasted from mid-May until the first week of August and never required more than an hour of work each week. It was not challenging and I wish I would have taken the traditionally taught course at Bucknell. Although it is necessary to take into account the different standards at different schools, it is difficult to believe that students would agree with online education.

However, online education is gaining popularity among those who never could afford higher education otherwise. An excellent example is the new Starbucks College Achievement Plan. Through this program employees are able to receive financial reimbursement for their education and are also provided with an enrollment coach, financial aid counselor and an academic advisor. To students at other universities that are currently facing mounting student debt by themselves, it seems as though Starbucks employees have received the golden ticket. They have advisors in every facet that is difficult to navigate, do not have to commute to school, have a steady job that is paying for other expenses, and will graduate with little or no student debt. For the future, the College Achievement Program is an excellent role model for what online education could provide for those who cannot afford a more traditional model of education.

The Recommendation:

There are a million different solutions to the escalading costs of higher education. Some would say make the government pay; some would blame students saying they are not working hard and should chose schools they can afford. As someone who has worked multiple jobs on campus and been a Residential Advisor in an attempt to cut costs, I can attest that this is a nigh impossible task and no part of it comes from lack of working hard. My proposal for assisting the costs of education is to develop a search engine where students can easily look for grants, and scholarships. Currently nothing like this exists and that is part of the problem, students lack access to this information. There are millions of dollars in grants and scholarships that could be assisting students in paying for their education but they are all too hard to find. This would allow the students to take initiative to find way to pay for their own education. This option also keeps the government out of involvement, which keeps federal costs down.

Aside from developing this search engine, I propose students must take courses in personal finance while applying to college, once during sophomore year of college, and once during senior year. The initial course would cover applying for student loans and what the different loans are. This would allow students to become more educated on the differences between fixed and variable rate loans and what these mean. It would also give seniors in high school the opportunity to learn more about what the government offers in terms of loans, grants, and work-study programs. This knowledge would make the students more involved in the financial aid process rather than simply leaving it up to their parents. Once the students were in college, they could receive a brief refresher course on the different opportunities and how to adjust their aid if their circumstances have changed. Finally, senior year of college, students would be able to learn about how their interest has been accrued throughout the past several years, when they are expected to begin making payments, who to contact for help if they are struggling, and how to pay off their debt in the most efficient way possible. A program such as the one I propose would provide students with enough education about finances that they would begin to feel much more comfortable with the process and have a better handle on their loans.

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