Game show college planning
If you’ve been to college recently, or you’re the parent of a student, you know how planning for college has become a bit like the game show The Price is Right. The rules can be confusing, the price is hard to guess, glitter and glamour distract, and you’re just hoping the payoff will be big.
But unlike the game show, students and parents are playing with their own money. In 2008, families took on more than $86 billion in college loans, and the average undergraduate finished school with more than $23,000 in debt. Higher education is now one of the most important investment decisions middle-class Americans make.
In areleased today, MassINC says it time to help families become better consumers in the higher education marketplace. Using what author Tony Broh calls the “College-Bound Decision Tree” for a typical middle class family, the report catalogs all the complicated decisions parents and students make as they save for college, select a college, and pay for college. Unfortunately, right now the tree looks more like the Price is Right Plinko board. Families fall, randomly bouncing off the pegs, landing where they may.
Start with the savings branch. Your child’s a newborn and you’re not getting much sleep, you’re struggling with child care bills, and adapting to your new life. But family members have given you money for the newborn’s college fund. What do you do with it? If you open a government “529 plan,” there will be large tax benefits. But currently you must choose from 118 different “529 plans.” They are managed by different brokerage houses and have different investment strategies, different fees, and varying records of performance. Too many parents are put off by these complicated choices and opt to save in a regular savings account. These families miss out on the tax benefits and higher returns a well-managed “529 plan” would provide.
When students reach the select-a-school branch, it gets trickier. It’s hard to compare the prices of different schools because families don’t know what they will actually pay until a student is accepted and the school prepares a financial aid package. Even then, tuition can increase considerably after the first year.
Trying to measure quality is even more challenging. Popular guidebooks have rankings and other measures. But these are often based on reputation and other data that can be difficult to accurately compare. Using the limited data available, it’s easy to demonstrate that there are large variations among schools on the value they provide across a range of relevant measures, from graduation rates to student-faculty ratios to exposure to the most academically prepared students. With insufficient information, families have a hard time deciding with any confidence to pay more (or less) based on a school’s long-run value.
Sorting through the available loan products is the most complex choicefamilies face. These decisions can have a dramatic effect on the price of college, yet neither colleges nor lending institutions routinely explain the total price of a loan or the probable monthly payments after graduation. Depending on the loan terms, various scenarios that may occur after a student completes their coursework — including loan consolidation, forgiveness, forbearance, and default — will have varying impacts on the overall price of college.
Fortunately, we’re starting to make some gains toward a more consumer-focused approach to college. The Higher Education Act passed in 2008 requires colleges to put price estimators on their websites. These new tools will give families a better sense of how much a school will actually cost based on their individual financial circumstances beginning in 2011. The act also requires lenders to make Annual Percentage Rate (APR) disclosures starting this month. Up until now, lenders have had no obligation to show families the actual cost of a loan with an APR combining interest and fees.
States are working to provide the public with clearer information by maintaining websites that give families a clearinghouse for reliable information. The College Foundation of North Carolina is one of the best. Massachusetts is building a similar web-based platform. At a smaller scale, the state has already successfully created a website to help students transfer between public institutions. Families can save considerably by taking advantage of the two- to four-year transfer option.
Ben Forman is the research director at MassINC.