A just-published report by researchers at the New York Federal Reserve Bank confirms what many have suspected: the driving force behind sky-rocketing college tuition is the increased availability of federal student aid.
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It doesn’t require a PhD to understand this. In fact, you don’t even need an undergraduate degree. Just think back to the main factor behind the housing bubble of 2007-08: easy money. Individuals who wouldn’t normally qualify for a mortgage were suddenly getting one. Demand went up and sellers responded by raising their asking price. Buyers paid more because, well, they could. (Until, of course, those adjustable rates began to get adjusted.)
The same phenomenon has been driving up the cost of college tuition. As the authors of this study point out:
…credit plays a key role in U.S postsecondary education; student loans outstanding are now second only to mortgages as a household liability…[Moreover,] student loans, much like housing finance, are often originated through government-sponsored programs. [Student loan issuance] grew from $53 billion to $120 billion between 2001 and 2012, with about 90%... occurring through federal student aid programs. [During the same time period, average] tuition rose 46%, resembling the twin house price and mortgage balance booms.(1)
While the bursting of the sub-prime housing bubble subsequently -- and painfully -- brought home prices down to more reasonable levels, colleges and universities don’t tend to reduce the cost of tuition. Each increase just becomes the “new normal.”
So, the burden is on students and parents alike to evaluate whether the education that a particular college offers is really worth the price.
It’s About Time
In the financial world, professionals look at a variety of factors when deciding whether or not something is a wise investment. One key metric is R.O.I. – Return on Investment. It’s a way of quantifying the potential return you will get for every dollar you invest and is especially useful when comparing different investments.
Since higher education is one of the biggest investments you will make in your lifetime, isn’t it time we started applying similar methods to judge whether specific colleges are worth the money?
Fortunately, as the saying goes, “There’s an app for that.” Iontuition, which offers free help with managing student loan repayment, has just expanded its online suite of financial tools aimed at college students. The latest feature – IonMatch -- allows you to search for colleges based upon the major you want to pursue and what you feel you can afford to pay. You can also reduce your choices to schools within commuting distance of home. See https://www.iontuition.com/ionMatch/Dashboard/Index.
Balaji Rajan, CEO of parent company Ceannate, explains that Ionmatch will allow you “to figure out what is it going to cost me to get this major? How much am I going to have to borrow?”
Interested in a certain school? Ionmatch will tell you what SAT score you’ll need to get in.
But the coolest feature is that, by tapping into federal and other databases, Ionmatch will also tell you the typical salary you will make when you graduate, which can help you judge whether the amount of debt you’ll have to take on to attend a particular school is worth it.
“We don’t get paid by loan providers. We don’t sell the data. We don’t sell financial products or services,” says Rajan. Iontuition’s income comes from colleges and universities who hire it to help students figure out the best way to manage their existing student loans.
Student loan debt now tops $1.2 trillion -- one trillion of which is in the form of federal loans. According to The Institute for College Access and Success (TICAS) Project on Student Debt, 70% of graduating seniors in the class of 2013 left with a diploma and an average of $28,400 in student loans. According to the study, this amount was “up two percent compared to their peers in 2012.” (2)
The implications of student debt can be life-long. It’s been blamed for a slowdown in first-time home-buyers, car purchases and is said to be a drag on the economy in general. A 2014 poll by Gallup found that having a high level of student loan debt -- $25,000 or more -- can negatively impact your physical as well as your financial health for many years after you graduate -- and the affect does not disappear after your loans are eventually paid off.
This is the time of year high school seniors start visiting campuses and filling out applications. But before that occurs, it seems to me it makes sense for parents to have a heart-to-heart about financial reality. Does your daughter want to be saddled with $30,000 in loans when she graduates? Does your son really need to go to a private college for an accounting degree when State U. has a fine reputation and costs $6,000/semester less?
It’s time for college-bound students to ask, “What’s my ROI?”