How We Pay for College Is Broken
The September unemployment numbers released recently by the Labor Department confirmed what most of us already know: having a college education matters in getting a job.
Some 75 percent of Americans with a bachelor's degree are either working or looking for a job (the so-called participation rate), compared to just 58 percent of those with a high-school diploma. Even some education after high school matters in a fast-changing economy: The participation rate for those with some college or an associate's degree is 67 percent.
Despite those numbers and the higher lifetime earnings that come from having a degree, fewer people are actually going to college today compared to just a few years ago. Enrollment has dropped by nearly a million students since 2011. Only 4 out of every 10 young Americans were enrolled in college in last fall.
The big problem, of course, is the rising price of college. In 2012, the average college-tuition bill ate up more than 40 percent of median earnings in the United States. In 2001, it accounted for less than a quarter of a family's paycheck.
The way most Americans pay for college — a patchwork system of loans, grants, and scholarships from colleges — was largely created generations ago, when fewer people went to college and when the price tag of a college was a lot less.
Sure, colleges need to cut that price tag (or at least put curbs on the big increases), but what we really need to do is fix how we pay for college. Here are four ideas:
Know the Real Cost of College Much Earlier
Emotion steers the college choice for too many students. The college search starts as early as middle school for some students these days. By the time they reach their junior year of high school, they often have their hearts set on a particular campus. But unlike other major purchases in life — a home, a car — many families know little about what they will actually pay for college, and more important, exactly how they will finance it until a few weeks before a final decision needs to be made in the spring of the senior year of high school.
One way to fix this is by asking families to provide their household income from two years earlier rather than the prior year on federal financial aid forms. The use of prior-year numbers could allow families to know about federal financial aid as early as the junior year in high school, which would make those summer visits to campuses much more fruitful.
Know the Total Cost of College, Not Just One Year
About half of all colleges practice front-loading of grants, where students get a more generous mix of grants and scholarships during their first year than during the sophomore, junior, and senior years. Mark Kantrowitz, author of Filing the FAFSA and a nationally known expert on financial aid, calls this practice a "bait and switch" since students are often attached to a school by their sophomore year so there's pressure for families to stretch to pay the higher prices.
One way to fix this is for colleges and universities to follow the lead of the University of Dayton, which outline four years of expenses as well as grant aid and financing options. So in other words, you know the four-year price tag, not just one year since most students go to school for four years.
Make the Financial Aid Awards Easier to Understand
Not only do families learn very late what college will cost them (and, of course, just one year), but deciphering those offers is almost impossible and so is comparing offers across multiple schools. Each school uses different formats, difficult-to-understand abbreviations or mixes together loans and grants, blurring the lines between the two. The worst offenders suggest students are getting a great deal.
A simple fix is to mandate a standardized letter much like when we buy a car or a house or sign up for a credit card. The Education Department has unveiled such a Shopping Sheet, but it's only voluntary for schools to adopt right now.
Restructure Savings and Loan Programs
When we buy a house or car, we have an option for a fixed interest rate, which allows us to have the same payment over the life of our loan. But when it comes to paying for college, how much we have to save in advance, pay while in college, and then put toward loan payments after graduation can vary widely. What if we had one simple payment for each of those cycles in paying for college: before, during, and after?
This interesting idea comes from Nate Johnson, a former policy analyst for the state of Florida and now a higher-education policy consultant. It would be a simple 10-year, flat-payment plan that would start four years before college and end four years after. Before college, the payment would go toward savings; during college toward tuition not covered by savings or loans; and after college toward paying off the loans. State and federal governments could cover some of the costs based on family income.
"It would provide a different frame to think of college costs since so many people tend to overestimate or underestimate the costs," Johnson told me.
Having more people with a post-high school education is critical for future of the U.S. economy. Getting there will require fixing how we way to pay for college.
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