How The College Pricing And Student Loan Systems Hurt Students

This is the first in a series of four articles. Read the related articles: Is College Even Still Worth It?, How To Save For Your Child's College Education: 6 Common Questions and 3 Education Experts On Ways To Improve College Pricing And Payment

Joseph Chanlatte’s father was the director of a university when political turmoil forced the family to migrate from Haiti for Brooklyn in the early 1980s. So even though both his parents were college-educated, when it came time for Chanlatte to apply, they weren’t much help with the American education system. On his own, he learned how to fund his schooling, which he began at a two-year junior college and finished at a four-year for-profit university.

He took out the maximum amount he could in federal loans — $64,000 — but, in order to make his final payment in 2007, his senior year, he took out one additional loan, a private one, for $10,000.

“I assumed the terms were the same as the federal loans,” he said. That mistake turned into what he calls his “financial prison.” Private loans offer worse terms than federal loans. Even if the interest rate is lower than the federal one, it is usually variable, wreaking havoc on a budget. The interest on Chanlatte’s $10,000 loan ballooned so much that, at one point, the balance was $19,000. In 2009 after he relocated to a new city, he was unemployed for about half a year and deferred his payments. “During that time, they did these capitalized interests that they kept adding onto the loan,” he said — $5,816.29 from March 5, 2009 to November 10, 2009. After he complained to the Federal Trade Commission and the Consumer Financial Protection Bureau, the interest rate, which at one point hit 16.3%, suddenly became a fixed rate of 12.25%.

Chanlatte, now 37, works at Dell as a software engineer in Austin, Texas, making $68,000 a year, but he still owes about $89,000 on his college loans. The debt has affected all his other big life decisions and made it difficult for him to get a mortgage or buy a new car. “The high debt has affected my credit rating where I can’t get a score that would enable me to refinance with a private lender,” he said. He’s ruled out his one-time dream of getting an M.B.A. As a single father, he has encouraged his daughter, a high school senior who has a perfect grade point average and is in the International Baccalaureate program, to get scholarships.

“As students, I don’t feel like the system educates us at all — not even enough, but at all,” he said. Speaking of his dreams of travel and other goals, he said, “I want to do so much but financially I am shackled.”

College is more expensive than ever. Using 2013-2014 dollars, full-time attendance at a four-year public college cost just over $7,000 in 1963-1964 and more than doubled to $18,100 in 2013-2014, according to the National Center for Education Statistics. The price tag for private institutions saw an even steeper rise, from $13,800 to $36,600. The high cost of post-secondary education and the hit-or-miss way in which we pay for it have had perverse outcomes: Instead of automatically being a ticket to a better life, college and the concomitant debt can be a drag on the lives of some bachelor’s degree holders, steering them away from their dream careers and causing them to delay big life moves such as getting married, buying a home and even saving for their own children’s education.

Despite the potential downsides, college is still a better investment than pretty much any other a person can make in his or her lifetime, with a 15% return, according to a study last year by the Federal Reserve Bank of New York. “There’s no better investment. There’s no investment out there that consistently pays, year after year after year, a 15% return,” said Mark Kantrowitz, senior vice president and publisher of edvisors.com, publishers of websites about planning and paying for college.

But as Chanlatte’s story demonstrates, this isn’t true for every college graduate. Students will realize that ROI only if they and their families are smart about how they pay, how much they pay and what they pay for. Unfortunately, this isn’t easy to do for several reasons, starting, on the cost side, with the opaque college pricing system and the lack of incentive for selective schools to rein in spending. On the payment side, the two biggest challenges are a student loan industry whose business model amounts to writing checks blindfolded (much like the mortgage industry before the crash) and a lack of education around loans and the value of a degree. But a few changes coming down the pike could pop the bubble.

A Page From The Airline Playbook

Tuition and fees have surged 146% from 1984-85 to 2014-15 at private nonprofit four-year colleges, and 225% over the same time period at public four-year institutions, even when accounting for inflation, according to The College Board. That fact may strike fear in the hearts of college-bound students and their families, but the great secret of college tuition is that most students pay far less than the advertised price. For instance, as The New York Times reported last year, at Amherst, tuition jumped a third from 2000 to 2014, but so did financial aid, meaning that out-of-pocket costs for students there have risen just 1%.

So why do colleges tout the sticker price if it’s misleading? “There’s a strong perception that a higher-priced college is a better college,” said Anya Kamenetz, NPR's lead education blogger and author of DIY U: Edupunks, Edupreneurs, and the Coming Transformation of Higher Education and the forthcoming The Test. Also, colleges, much like airlines, charge different amounts for different seats. “You get your acceptance letter, and then you get your financial aid package. So colleges can conceal the fact that they are actually charging people extremely different prices to go to the same school,” she said. Compounding the issue, she said is the fact that “they can withhold the details of financial aid packages so that families have no way to make timely decisions.”

The higher the tuition, the more wiggle room institutions have to create appealing financial packages for desirable students. “Tuition-discounting is used to admit high-performing middle-class students,” said Anthony P. Carnevale, director of Georgetown University’s Center on Education and the Workforce, adding that this policy benefits mostly middle-class students since only 5% of the student populations of the top 193 institutions come from the bottom 25^th percentile of the income distribution. (About 14% come from the lower half.)

“When [tuition discounting is] dressed up into programs, the [ostensible] reason the kid gets the discount isn’t because of the family income but because they’re a really good soccer player or a really good student,” he says. Colleges also like this system because families take a scholarship offer as a sign that the school really wants their child.

Though discounting tuition sounds great, it also presents a problem — the high sticker prices scare off low-income students who aren’t aware of the practice. Forbes’s Lucie Lapovsky ran the numbers on what aid a student with, say, a family income of $32,000 might receive at her dream school, Columbia University, versus less prestigious schools. Columbia had a sticker price of about $47,000 for the 2013-2014 school year, which might cause this student’s family to never even consider applying. But what all families, but especially lower-income families whose children may be first-generation college students, should look for is the net price — the amount the family spends after grants and scholarships (not loans, which must be paid back). Each college’s website must feature a net price calculator, but colleges don’t always make it easy to find. (Collegecost.ed.gov contains links to every school’s calculator.) For this hypothetical student, a run through net price calculators at Columbia and a number of less prestigious schools reveals that Columbia would not only cover the cost of tuition, but also chip in $14,000 for room and board and other expenses, making it actually the least expensive university for this student to attend.

The other downside of this smoke-and-mirrors way of pricing college is that it gives schools little incentive to keep costs low, which is surprising given that both public and private universities have seen revenue decline since 2000. At public universities, state and federal funding has dropped around 20% since 2000, while private universities saw their donations, investments and endowment revenue plunge during the recession. “States are covering a smaller share of what it takes to provide a public education than they used to and that translates to higher tuitions and fees,” says Lauren Asher, president of The Institute for College Access & Success. “That’s a big driver of rising costs and student debt. The costs students and families are expected to pay is rising faster than available grant aid or family income, so they’re increasingly turning to loans to fill that gap.” Even after recent increases, the maximum Pell Grant (which does not have to be repaid) covers less than one-third of the average cost of attending a public four-year college, the smallest share in more than 40 years. As recently as the 1980s, it covered more than half. “The total cost of providing a public college education has risen more slowly than the share of that cost that students and families are expected to cover via tuition and fees,” says Asher.

But if the loss in revenue was the only reason for colleges to push up tuition rates, one would expect that they would at least keep their costs level. But surprisingly, public and private schools (not community colleges) have increased their spending per student since 2000. Why, if revenues had slumped, would colleges spend even more? In short, because colleges with star faculty, climbing walls and other amenities boost their prestige and ranking and attract more applicants. All that makes them more competitive, which, in turn, allows the colleges to choose only the best students — and the best students are the ones who come from the wealthiest families. “People say, well, colleges should cut costs, and most of us don’t disagree with that, but there’s another way out, which is just to become more prestigious, and then you can charge whatever you want,” said Carnevale. “So, once the government decides to get out, it becomes more of a market. And the market goes to the most prestigious institution.”

Lending A Bad Hand

Aside from hidden prices and spiraling spending at schools, costs are exacerbated by the reckless way in which student loans are awarded. Because student loans cannot be discharged in bankruptcy, “lenders don’t have any reason to apply any discipline when they’re lending out money to students,” said Kamenetz, though she does note that after financial crisis, lenders did tighten their requirements. “They don’t have to do any consideration of whether that student has a good chance of getting a degree or whether that degree has a good chance of getting them a good job. It’s basically play money with no consequences.”

Carnevale, who also drew a contrast between taking out student loans versus buying a house, in which a buyer would be thoroughly vetted, said, “What’s missing in the college conversation is that the process is — there is no process. The money is just there and then you grab it and figure out what to do later on…. And that young in your life to get burdened like that is really cruel.”

Financial aid is also not presented in a standardized way, making it difficult for parents and students to make apples-to-apples comparisons. Kantrowitz believes that standardized aid offers should be mandatory. “If you have clarity, it will have an influence on consumer behavior, which will in turn, put pressure on the colleges,” he said.

The Evolving Syllabus

One of the first changes could be more information for students and parents about the value of their degree. The bipartisan Student Right to Know Before You Go Act would require colleges to tell prospective students graduation rates, graduates’ employment rates, average post-graduation earnings by program, average federal loan debt upon graduation and more. Whether or not the bill passes, Carnevale says that several states such as Virginia, Florida and North Carolina have already built websites that show earnings returns from public institutions, and that the government could also use the information to withhold funding from or even shut down for-profit schools that don’t deliver.

Technology also has yet to unleash changes in education. The initial promise of Massive Open Online Courses to open up higher education to the masses for free turned out to be overhyped (90% of MOOC students drop out), but technology’s potential to disrupt education remains. “I think it’s completely wrong to think this will displace face-to-face teaching,” said Tyler Cowen, professor of economics at George Mason University and co-creator of Marginal Revolution University. However, “You’ll have some version of online come along in accredited fashion which won’t look anything like these utopian visions, but within a small number of years, it’ll be 10% of all credited enrollment, and 10% of revenue being redirected will have a huge impact on a sector that already could not control its costs,” he said. The consequence could be “some real carnage” that halves the cost of some classes.

But what might have a greater impact on the current college pricing system is a less new-fangled trend: That fewer and fewer can afford to pay these rising prices. “Private schools are deeply discounting their offerings and a very large plurality of them — less than half but a very large number — are seeing declining or stagnant revenue,” said Kamenetz. “So the strategy of raising prices has worked very well for 30 to 40 years, but it may be hitting a ceiling and there may be more discipline imposed on the market because people can’t pay.”

This is the first in a series of four articles. Read the related articles: Is College Even Still Worth It?, How To Save For Your Child's College Education: 6 Common Questions and 3 Education Experts On Ways To Improve College Pricing And Payment