Personal Finance Trends: College Costs and Student Loans
For more than a decade, the rising costs of college have outpaced the rate of inflation. From 2011–12 to 2012–13, tuition and fees increased an average of 4.8 percent for four-year in-state public colleges and universities, according to the College Board's Trends in College Pricing released in 2012. And for the decade leading up to 2012–13, public four-year institutions saw tuition and fees increase at an average annual percentage increases of 5.2 percent. In real dollars (adjusted for inflation), this translates to a rise from $5,213 to $8,655, or $3,442. Meanwhile, the average inflation rate for the years 2002–12 was about 2.4 percent.
The College Board also notes that as college costs have increased, family incomes have decreased, which makes rising tuition levels even more problematic as families try to make ends meet. Students are more frequently turning to student loans to help finance their education. But the problems that come with taking on student debt are growing almost faster than tuition.
By helping students understand the various postsecondary options available as well as ways to finance that education with alternatives that expand beyond student loans—for example, scholarships, grants, work-study programs, and college saving plans—educators can make a bottom-line impact on students. And as part of this effort, educators can give students the facts about student loans and help them understand the consequences.
Student debt levels
The unintended consequences of student loans
Increasing student loan debt levels have eaten into the overall financial capacity of the individuals. These debt levels can impact an individual's ability to obtain other types of loans. Carla Jarrell, who works for a financial institution in Tennessee and serves as president of the Tennessee Jump$tart Coalition for Personal Financial Literacy, said that lenders at her institution have had to turn down individuals for mortgages based on their high student debt levels.
In addition, the number of seriously delinquent (90 or more days delinquent) student loan balances grew from $4.3 billion in the first quarter of 2003 to more than $30.35 billion in the third quarter of 2012. The Kansas City Fed's 2012 report on student loans suggests that unemployment and underemployment are significant factors related to these delinquencies. The report also suggests that another factor contributing to the delinquencies may be that current and future repayment capacities are not criteria in the federal student loan lending process.
In response to this data, Jarrell said, "People often take out student loans with the anticipation that they will be gainfully employed following graduation. If students are incurring student debt, they need to have an ultimate career goal in mind and game plan for achieving that goal."
Analyzing the options and costs
Maria Edlin, assistant center director for the Middle Tennessee State University Center for Economic Education, suggests that teachers can help students understand how to get from where they are to where they want to be. "First, have students complete an interest inventory. Then, based on their interests, have them use the Bureau of Labor Statistics' Occupational Outlook Handbook to explore career opportunities, necessary education levels and costs, job outlooks, and other relevant information for those careers." Edlin went on to say that students need to have an understanding of trends for industries and careers as well as what it takes to achieve their career goals.
Teaching about college costs
The Higher Education Bubble Is Going to Burst. In this video from the from the Real Clear Politics series, Glenn Harlan Reynolds talks about how cheap and available credit for education is creating an "education bubble" similar to the housing bubble. He also suggests that a college education may not necessarily be a "ticket to future prosperity."
Katrina's Classroom: Financial Lessons from a Hurricane. A free, DVD-based curriculum developed to teach middle and high school students and their parents the importance of being financially prepared, especially in times of crisis. Lesson 4 and the video "Back to School" explore the importance of higher education.
To Get the Right Answers about College, Ask the Right Questions. In this lesson, students discuss the typical costs a college student faces. Students learn about the various types of education loans available. In the assessment, students complete a "Free Application for Federal Student Aid" (FAFSA) form and write an essay that identifies a plan for obtaining money to cover college expenses.
Learn to Earn: Education and Training. Students learn about the relationship between level of education and earning potential. Students research a job they might be interested in to determine the qualifications needed for it and the potential income. Additionally, students weight the costs and benefits of preparing for the career path and identify the costs and benefits associated with this decision. This lesson is in the Money Principles unit of the Money Circle Curriculum.
Major Financial Decisions: Financing College. These tools from the Richmond Fed include questions for the student to consider about going to college as well as a college cost calculator and a student loan repayment calculator.
By Jackie Morgan, senior economic and financial education specialist, Nashville Branch
January 30, 2013