Overhaul of college financial-aid programs won't rein in the high costs
When Congress overhauled federal college aid recently, Democratic leaders crowed that the legislation was like the GI bill, which guaranteed free education for soldiers returning from World War II.
Bronx cheer. Sorry, it's not even close.
The bill, expected to be signed by President Bush, would do little to curb the cost of college, which will continue to outpace the consumer inflation rate.
While the legislation would increase aid to low-income students, give a break for students pursuing public service, and reduce subsidized federal-loan rates over time, it won't mandate that any colleges rein in costs. Nor will the government help colleges with higher expenses for utilities, salaries, and buildings.
The 35 percent surge in inflation-adjusted tuition and fees since 2001-2002 is the largest for any five-year period, according to the College Board, which has tallied education expenses for three decades.
Soaring college bills have forced more students to borrow. That's why business has been great for the $85 billion college-loan industry. With the federal government guaranteeing as much as 98 percent of the value of some loans in case of default, profits have been solid.
Since the default rate is generally less than 3 percent, lenders know that most of these loans will be repaid. Congress also provided extra carrots in the federal programs as subsidies.
That would shrink under the legislation, and the $20 billion in savings would go to other programs. On Stafford and consolidation loans, "special allowance payments" to lenders would be cut by 0.55 percent and 0.85 percent for Parental Loans for Undergraduate Students, usually known as Plus.
Subject to lending limits, the common Stafford loans come in two types: subsidized and unsubsidized. The former are awarded based on financial need; the latter are not.
The good news is that rates on subsidized Stafford loans will be pared. They will drop from 6.8 percent in the 2006-2007 year to 3.4 percent by 2011-2012. The total Pell Grant for low-income students will rise from $4,800 in 2008 to $5,400 in 2012.
Mark Kantrowitz, publisher of Finaid.com, a financial-aid service, said he expects the subsidy cuts will present a mixed bag for students, perhaps reducing discounts from consolidation lenders, who have the tightest margins. "The lenders will scale back their loan discounts for new loans starting Oct. 1, but not eliminate them entirely, due to the ongoing need to compete with direct loans."
Most of what's driving college costs higher is greater demand and little resistance from families in paying ever-loftier bills.
Then there's the power of demand-side economics coupled with a surge in the college population. Enrollment reached record highs in 2005 and 2006, with more than 17 million students attending, according to the National Center for Education Statistics.
Yet states, which provide more than half of the funding for US public colleges, haven't been able to keep pace with burgeoning enrollment and institutional expenses. Education support may even weaken as state revenues drop as a result of the housing bust and lower economic growth.
While states struggle to keep up, Congress failed to relieve the rampant confusion that students and families face when applying for loans.
The US Education Department and the private sector have yet to produce an efficient and useful way of comparing all available loan packages side by side.
How can you find the best deal when you need to compare multiple tiers of rates based on credit scores, discounts, and payment plans?
If you are shopping for college loans, you have to do it the old-fashioned way: Compare each offer by hand. Better yet, make a spreadsheet.
Look at total costs. Seek discounts and the lowest rates. Many institutions will offer deals or waive upfront charges.
Always start with the federal loans before considering private offerings. The least-expensive ones are through the Perkins and Stafford programs.
John F. Wasik is a Bloomberg News columnist. He can be reached at jwasik@bloomberg.net. 