One of the most positive financial aid developments in recent years involved the creation of the no-loan student aid package for the most needy students. It has been a much-heralded concept, described by many as having the potential to truly transform college attainment rates for financially strapped families.

But amidst today’s falling endowments, the concept that blossomed over the last five years has led at least two colleges to take a step back on their pledge. More importantly for students, experts insist many more schools will give careful consideration to reversing their pledges as well over the next few years.

Meeting 100% Need

For years, while many schools have insisted that they will meet 100% of a student’s financial need, those schools have included lending as part of the aid package. In other words, the pledge to meet 100% student need involved only a guarantee that student loans would be available should the student need them.

The result has been students and their parents often borrowing large sums of money to close out what was a significant hole in the 100% need funding process.

The no-loan student aid package took the 100% pledge to a more honest level. Students with significant financial aid needs received an aid package that covered the cost of school without mandating students take out loans.

While some schools took the step to its full conclusion, another group took a slightly different approach. Called the limited-loan schools, these institutions capped the total amount that financially needy students would have to borrow over the course of four years.

While still not meeting 100% need through grants, scholarships, and work study options, students attending a limited-loan school would know up front just how much they would be asked to borrow over the course of four years.

More than seventy schools have begun offering no-loans packages. Some of the colleges eliminating loans from the financial aid packages of all needy undergraduate students included: Princeton University, Davidson College, Amherst College, Harvard University, Pomona College, Swarthmore College, Haverford College, University of Pennsylvania, Yale University, Bowdoin College, Stanford University, Wellesley College, Columbia University, Claremont McKenna College and Vanderbilt University.

Endowment Headaches

Such a no-loan or limited-loan pledge came from these schools ever-growing endowments. From 2004-2008, the four-year rate of return on investments was 15.3%, 9.3%, 10.8%, and 17.2% respectively. With such investment successes and additional funds flowing in from alumni donors, it is easy to see why schools could begin to consider the loan pledge.

But then came the economic downturn and with it a crushing blow to these investments. First, 2008 saw a three percent average drop in the endowments for all schools. But that drop seemed almost inconsequential when contrasted with 2009 where colleges and universities saw an astonishing average endowment decline of 18.7%.

It was the worst average year for endowments over the nearly 40-year period the data has been tracked. It was also 50% higher than the previous worst year, an 11.4% decline in 1974.

The impact was even worse for those institutions with endowments topping $1 billion. On average the decrease stood at 20.5%, but for the three of the largest, Harvard, Yale, and Stanford, the decrease topped 25%.

Two Schools Reverse Policy

These poor investment results led two colleges that had previously eliminated loans from the financial aid packages of all undergraduate students to restore borrowing to the process: Dartmouth College and Williams College.

Thankfully the changes will be phased in at both institutions. In addition, the no-loan provision threshold remains for the most needy students.

For Dartmouth, it will reintroduce loans in the financial aid packages of students with family income greater than $75,000 commencing with the class entering in fall 2011. Those students already in the program as well as those that will enter this fall will not be affected by the change.

At Williams, the school will be reintroducing “modest loans” for some students receiving financial aid. As with Dartmouth, the change will occur in the fall of 2011 and the school will continue to eliminate loans for lowest income students.

Students Need to Be Alert

While these are the only two schools to date to make changes, the overall impact on college endowments will most likely cause some of the other 70 plus schools to reconsider their policy as well. Those students choosing their school based on the no-loan or limited-loan promise will need to carefully observe what takes place over the next few years.

One of the most significant ways to potentially reduce the cost of college centers upon a non-traditional approach to a degree. Given the difference in tuition and fees between colleges, more and more people are suggesting students consider attending community college for as much as the first two years of school.

The potential savings of taking such a step is enormous. According to the College Board (pdf), the average tuition at two-year community colleges is $2,544, or just a tad more than a third of the average instate-costs at four-year public schools ($7,020). Of course, that rate pales in comparison to the average costs at for-profit institutions ($14,174), out-of-state at four-year public schools ($18,548), or at private four-year institutions ($26,273).

Unfortunately, many see the CC step as one of settling for a lower caliber program. However, a recent summary from the Chronicle of Higher Education gives a clear indication that community colleges do offer quality programs.

Quoting data from the recent Survey of Earned Doctorates, the Chronicle reveals a significant percentage of those earning their doctorates attended community college for a portion of their schooling. First, one in five Americans (19.2%) who earned a doctorate in 2008 attended a community college at some point.

But even more significantly a larger portion of several minority groups used the path.The highest percentage subgroup was the American Indian; two out of five (39%) awarded a Ph.D. earned some of their credits at a community college. Two other groups, multiracial and Hispanic, relied on the option significantly as well with one in four (26% and 23.6% respectively) having attended a CC at some point.

Whites essentially matched the American average (19.6%). The two subgroups using the format least were Blacks (17%) and Asians (12.8%). On the flip side, Asians earned 2,543 research doctorates in 2008, more than members of any other U.S. racial/ethnic minority group.

Time and Money

But even though community colleges are less expensive, the debt students took on did not mirror the ratios mentioned above. For example, the highest percentage of attendees at community college, American Indians, posted the second highest overall accumulative debt for those earning their doctorate ($29,698). In addition, in yet another sign that we need to do more in the way of grant opportunities for minority groups, multiracial had an average debt load of $25,761, Hispanics at $27,553 and Blacks $ 38,586.

And while fewer Asians attended CC, the average overall debt for that subgroup totaled just $13,216. Clearly, these speak to another issue, that when it comes to accumulating debt, it is likely more about attitude and approach than simply taking advantage of the CC system.

At the same time, we can begin to understand these debt totals better by noting that attaining a graduate degree can be a very lengthy process for most students. Half of all those earning a Ph.D took at least 9.4 years to earn their doctorate. Even more significantly, half of those earning a Ph.D. took at least 7.7 years just to complete graduate school.

As a way of reducing the need for borrowing, many students were able to utilize teaching assistantships, research assistantships/traineeships, and fellowships/grants to help them fund their schooling. Three fourths of all graduates reported one of these three categories as their primary source of support during graduate school.

And in the best sign that college is possible without taking on gobs of debt, just over half (53%) of graduates reported having no graduate or undergraduate education-related debt at all. But on a sobering note, one in 12 graduates (8%) reported debt of $70,000+.

What one studies also is critical when it comes to debt management. The greatest average cumulative debt occurred in the social sciences ($27,083), the humanities ($23,033) and education ($22,351). In contrast, the lowest average cumulative debt could be found in the fields of engineering ($10,149) and the physical sciences ($10,516).

But in sum total, the most important data for students consists of the difference between accumulated undergraduate and graduate debt. The three most debt-ridden graduate categories (education, social sciences and the humanities) caused students pursuing a doctorate to quadruple their undergraduate college debt.

The key difference involved the number of research assistantships available in the hard sciences and engineering versus that of the social sciences, education and humanities. In contrast, each of the categories posted similar percentages of teaching assistantships as well as grant/fellowship/scholarship options.

Graduating Debt-Free

Taken collectively, these results make it clear that if a student is truly interested, he or she can earn a graduate degree without taking out college loans. No doubt, one clear method of saving is to attend community college for a portion of that schooling.

But the biggest factor to accumulating minimal debt appears to center as much upon the proper choice of major and the subsequent scholarship/funding that accompanies that specific programming as less conventional routes. Most importantly, whether one utilizes a CC for part of their course of study, it is clear that students with the proper attitude, approach and choice of academic area of study can even earn a Ph.D. without making college debt a part of their future.

Always a poor way to pay for college, private loans are now tougher to consolidate and more difficult to obtain.

When it comes to finding help for college everyone is advised to pursue free funds first. Securing grants and scholarships, money that you are not required to pay back, is always the most appreciated form of help. But somewhere along the line, many students have to turn to a less palatable form of support, loans.

However, every chance we get we caution students regarding borrowing sums of money to pay for school. Accumulating debt is not something to take lightly. That said, if you do have to borrow it is imperative that you understand the one type of loan you should avoid like the plague.

Private or Alternative Loans

In virtually every way imaginable, private bank or alternative loans should be avoided. In fact, students may well want to employ the baseball standard of three strikes and you’re out mentality.

Strike One

First, unlike federal loans, private loans have been less than desirable because both the interest rate and borrowing terms are dependent on credit records and the economic climate. If either you or your family does not have the highest of credit scores, you may be assessed a higher starting interest rate and a point or two surcharge on the face value of the loan. Furthermore, the loans will have a variable interest rate based on the current prime rate plus some buffer. Therefore, your interest rate can change dramatically over the course of the loan.

Strike Two

Second, unlike federal subsidized loans, students are assessed interest from the moment they borrow the money. It is true that you might not have to begin paying on the loan until six months after graduation but your debt will be growing every day you remain in school. And while it is also true the federal unsubsidized loans accrue interest from the time the money is loaned, those federal loans will not have the high variable interest rate or point issues that private loans carry.

Strike Three

Third, if you graduate from school only to have difficulty finding work, or if you are lucky enough to find work initially (no small task in today’s work environment) only to be laid off later with federal loans it can be possible to get an “economic hardship deferment” on your federal loans. Obtaining such a deferment from a private lender has proven to be generally impossible even when you have been granted deferment from the federal government. And most importantly, as is true of all loans for college, federal or private, they cannot be discharged in bankruptcy.

You’re Out!

Fourth, and what has to be the proverbial straw that breaks the camel’s back is yet another issue developing in today’s tougher economic climate. It seems that consolidating individual private loans upon graduation has become almost impossible.

Consolidation is a mainstay of the federal loan process. The process allows for the combining of multiple loans (if a student takes a loan of some amount to help pay each year in school) into a single payment based on one interest rate. Consolidation extends the repayment period and therefore lowers the monthly payment.

Unfortunately, many banks no longer offer consolidation even if they do offer multiple individual loans. And if they do, they will consider consolidation only after running a credit check. If that check provides a picture that you are at risk you can kiss the consolidation option good-bye. You may also be out of luck simply because the sum total of your debt is too large.

Avoiding Private Loans

Unfortunately, for a lengthy period of time students thought very little about the impact of private loans. That has led to some horrific stories of student debt.

Fortunately, the economic downturn has made private loans more difficult to secure. And whereas once upon a time it was easy for students to borrow on their own, today they are unable to secure such a loan without obtaining a cosigner that is also well-qualified.

Ultimately, that is a positive development for students. In fact, we advise students to make it a goal to not only graduate with as little debt as possible, whatever debt they accumulate should be devoid of private or alternative loans.

As students and their respective families enter the 2010 financial aid application time period, those filling out applications should be reminded of a letter sent by Secretary of Education Arne Duncan last spring.

As just one aspect of President Barack Obama’s pledge to increase student participation in higher education, the U.S. Department of Education released what has been dubbed a “Dear Colleague” letter. That communication, dated May 8th, encouraged college financial-aid administrators to take into consideration any special circumstances that students and families have faced during the economic downturn.

The key aspect of the letter involves an effort to make families more aware of a concept referred to as professional judgment. However, while the letter sought to have schools take greater responsibility for making more families aware of their rights, those filling out application forms owe it to themselves to understand the concept and the current circumstances surrounding Duncan’s letter.

The Letter

First, The Chronicle of Higher Education describes the fundamental change that Duncan’s office was seeking. While families have always had the right to ask the financial-aid office to exercise professional judgment, many were unaware of this right. The Duncan letter went so far as to encourage “financial-aid administrators to reach out to students and families who may be in trouble.”

In addition, Duncan’s letter clarified the changing circumstances for which financial aid administrators should consider utilizing professional judgment.

“A changed circumstance certainly includes the loss of a job or a reduction in work hours or wages,” wrote Duncan, “but it also includes, for example, the income loss associated with a prospective student’s decision to leave the work force or to reduce work hours in order to return to school.”

The letter further indicated that professional judgment should be used on a case-by-case basis and requires colleges document the changed circumstances.

The Use of Professional Judgment

The idea of financial aid officers exercising professional judgment is simple to describe. According to The Chronicle:

Professional judgment allows aid officers “to adjust student aid to reflect a family’s financial circumstances not reflected on the student’s Free Application for Federal Student Aid, or FAFSA.”

In other words, schools are being asked to look beyond the numbers and examine a student’s and/or families’ immediate circumstances. For example, if the student or parent worked most of last year, the FAFSA form might call for a specific expected family contribution based on those earnings.

However, if the student or parent recently became unemployed or has seen a reduction in hours or hourly wage, then their ability to pay has been significantly altered. And for 2010, another adjustment involves families who took a hardship withdrawal from a retirement account to cover a medical bill. Normally such a withdrawal would be counted as income earned in that respective year but will not be for earnings in 2009.

The use of professional judgment was not something schools practiced liberally in the past. In fact, such a step previously held negative ramifications for institutions.

Previously, the Department of Education had used the professional judgment determination in its risk-based model to select schools for program reviews. The higher the percentage of students qualifying for professional judgment, the more likely the school could find itself in the review process.

The Duncan letter informed colleges that for both 2008-09 and 2009-10, the Department would make appropriate adjustments to its risk-based model.

Implication for Students

Students and families who have been impacted by the economic downturn need to understand their right to request that aid officers make adjustments even if such an adjustment is not offered. Such an adjustment could dramatically affect one’s status, creating a new-found eligibility for grants and other need-based student aid that a student may not have previously qualified for. Students might also qualify for additional federal loans and work study options.

The biggest benefactors would be those individuals who have been laid off or had hours/wage reductions yet are interested in returning to school to retrain. Those individuals could conceivably find themselves in a position to be eligible for significant levels of need-based financial aid based on their current employment status.

Previously, independent students who had been laid off had to report their unemployment benefits as income. The Duncan letter directs institutions to set that student’s earned income from work to zero for financial aid purposes.

But other benefactors could be current students who have had one or both parents lose wages. If a student or family has seen a recent paycheck change they should be sure to alert their respective financial aid office and seek adjustments accordingly. For greater clarity on who might be eligible, the Department of Education and the Department of Labor have collaborated on a web site that offers assistance to those recently unemployed.

Adding further optimism for students and families are a number of other positive aid developments. The maximum Pell Grant will be increasing to $5,350 for the 2009-2010 school year and to $5,550 for the 2010-2011 academic year. Those numbers are up from $4,731 a year ago.

In addition, the Hope Credit (now called the American opportunity tax credit) has risen to $2,500 for the 2009 and 2010 tax years (up from $1,800) and can be claimed for the first four years of post-secondary education (previously available for first two years only). The maximum income level for Hope eligibility is $90,000 for single filers and $180,000 for joint filers for 2009 and 2010.

Once upon a time, the price of a year of schooling at elite private colleges matched the price of the average new car – not any more.

The news from The Chronicle of Higher Education certainly was not positive for students and families. After surveying private schools as to the charges for a year of attendance (tuition, fees, room and board), The Chronicle revealed that 58 private colleges had passed the 50K pricing milestone for 2009-2010.

Leading the way was one of the perennial front-runners, Sarah Lawrence College, at $55,788. Rounding out the top five were Landmark College, a school for students with learning disabilities ($53,900), Georgetown University ($52,161), New York University ($51,993), and George Washington University ($51,775).

Not Actually a New Barrier

While news, it is important to note that the $50K threshold had already been broken. It was just that a year ago, the Club had but five members.

And it is the calculus or rate of change for these numbers that is raising eyebrows. Ultimately, the sheer number of schools topping the threshold led The Chronicle to call $50K the new norm.

Amazingly, the $40K threshold once represented a major psychological milestone for many. But that figure has been rendered obsolete in the matter of just six years time.

In 2003, just two colleges set their tuition, fees, room, and board above $40,000. Including the members of the $50K club, 224 schools were above that threshold in 2009.

Unfortunately, reading the folks at The Chronicle, the average citizen may have even more bad news on the horizon. While some are wondering aloud if we are not on the edge of a precipice, others insist college prices are nowhere near a ceiling.

In fact, The Chronicle reports that “the most expensive institutions have seen no drop in demand.” Sadly, of these high costs, one school, Harvey Mudd, offered this assessment: “So long as we’re staying roughly in the same range, we don’t worry about it too much.”

Some Good News Exists

One positive in the midst of this data is that grants and other forms of financial aid help many students pay far less than the sticker price. Even more importantly, it seems that colleges have actually increased their financial aid at a faster rate than they have increased tuition and fees.

As one might expect, a large number of students receive need-based grants or merit-based scholarships with a significant amount of those funds come from the colleges themselves. The Chronicle was able to dissect data for 42 of the 58 colleges whose list price was more than $50,000 for 2009-10.

For 2008-2009, the average grant per full-time student was just over $13,000 – that meant that the “average bill last year for tuition, fees, room, and board, after grants, was about $36,000.”

However, the best news might be that some of these elite private schools are beginning to become concerned. Leadership at one of the schools that has become a member of the $50K club, Bryn Mawr, revealed they were “concerned because we fear the loss of access for students who deserve this education but might be priced out of it.” It should be noted that Bryn Mawr appears serious on both ends having offered an average grant package of about $30,000 last year.

$50K Too Pricey

But such figures also mask the real issue, that the costs of college are soaring at a rate that is unsustainable for the average student. And the clearest sign that $50K should flat out be considered too much is to return to the once relatively firm, age-old equivalent for private schools.

A year of college at the elite private institutions, the total costs including tuition, fees, room and board, should match the sticker price of a new Chevrolet.

And that might well be the most telling fact as to where things stand today. As at least one interviewee told The Chronicle:

“You don’t have to pay $50,000 for a new Chevy these days.”

The recent enactment of H.R.3221 The Student Aid and Fiscal Responsibility Act of 2009 by Congress has many students wondering what impact the new changes will have on them and their student loans.

According to the Seattle Times, “Congress’ overhaul of the college student-loan system offers welcome relief to students at risk of drowning in debt.”

But, while many are applauding the proposed changes, others are taking a more skeptical view. Today we offer readers a Q & A with Tara Payne of the New Hampshire Higher Education Assistance Foundation. Ms. Payne currently serves as the Vice President of Corporate Communications for the NHHEAF Network Organizations.

The New Hampshire Higher Education Assistance Foundation (NHHEAF) was established in 1962 to guarantee student loans. Since 1965, it has been the designated guarantor for the Federal Family Education Loan Program (FFELP) in New Hampshire.

As one major function, NHHEAF is responsible for the initial application, disbursement of funds, default prevention, default collections, and oversight of the federal loan programs. For fiscal year 2008, NHHEAF guaranteed over $213 million in federal loans and the agency continues to rank among guarantors recording the nation’s lowest default rates.

Yet under the proposed legislation, NHHEAF, one of those so-called ‘middlemen’ in the loan process, might no longer exist. Such a scenario led us to the agency to try and gather additional perspective on the legislation.

We were fortunate to have the opportunity to pose a number of very specific questions to a person with more than a decade of experience at the organization. Ms. Payne offers a wealth of perspective having helped construct the organization’s Center for College Planning department. Today, that department reaches almost 30,000 New Hampshire students and parents each year, offering free college planning, financial literacy and financial aid expertise via presentations, materials and websites.

Can you explain in brief terms exactly what Congress is debating and the rationale for the debate? What is meant by the phrase, the new loan process will “cut out the middle man?”

The President’s budget proposal includes the elimination of the Federal Family Education Loan Program (FFELP). As a FFELP provider, the NHHEAF Network Organizations (NHHEAF) is involved in funding, originating, disbursing and servicing student loans for New Hampshire students from our New Hampshire office. The Presidents budget eliminates the local role in the student loan process. The government’s language about “middlemen” implies that agencies like ours are a “cog in the wheel”, not a major source of community support for families, schools and citizens of our state.

New Hampshire’s program is managed by a nonprofit FFELP provider. This means that proceeds from the loan program are reinvested in our community. We reinvest into strong financial literacy programs, early college awareness and financial aid preparation for students and their families at K-12 schools.

We employ 200 New Hampshire residents who are truly dedicated to supporting student loan borrowers. Our success is evident in NHHEAF having among the lowest default rates in the nation. When these local services go away, students suffer.

Our focus is on increasing aspirations, providing funding and best-in-class service. No government program can replace this local resource. As a school counselor who utilizes our programs shared recently, “NHHEAF is the best thing to happen to higher education since I started teaching in 1974.”

In what ways would students and parents be positively impacted by this legislation? Are there any potential negatives?

The legislation includes several positive aspects including increased Pell Grant funding for the lowest income students and increased funding and support for community colleges. Supporting New Hampshire’s low income students is essential to our mission. We fully support any effort to provide additional funding to the neediest students.

However, under current legislation, FFELP would be eliminated and yet Pell would still not be an entitlement. “Eliminating subsidies to lenders” is a politically-charged cry for support. The public hears this and reacts with unbridled support … assuming that those subsidies will go into making the program less expensive for them.

As Bill Spiers, the Financial Aid Director of Tallahassee Community College described, “While the media has focused on the profitability in the FFELP program, little has been said about the fact that the federal government must fund Federal Pell Grant Program increases off the backs of student borrowers.

The government borrows money at very low rates, much lower than those available to lenders, yet the government would continue to charge the same interest rates as FFEL lenders. Under the current proposal the “federal government isn’t providing any breaks to the students and is actually making more off the program than lenders ever could”

While most student borrowers pay a fixed 6.8% interest rate on federal student loans and parent borrowers 8.5%, lenders in the FFELP are required to pay back the difference between what borrowers pay and today’s lower market yield to the federal government.

The difference between the cost of funds and the borrower rate of interest is even greater in the Direct Loan program, so much that the proposed record increase in Pell Grants would be largely funded from the interest rate spread the Department of Education will enjoy from student and parent borrowers paying a far higher rate of interest on their federal education loans than the federal government is paying on its borrowing costs. Enacted legislation required that loans made on or after July 1, 2006 carry a higher fixed rate for students and parents that is not market driven. Had interest rates remained variable, Stafford loans today would have been an extremely favorable 1.88% (in school and grace) interest rate (2.48% repayment rate), and PLUS loans would be at 3.28% in the current low interest rate environment.

Will these changes have any impact on the FAFSA application process?

The CEO of our agency, Mr. Rene Drouin, actually sits on the Federal Advisory Committee for Financial Assistance and has been an advocate for these changes which simplify the financial aid process for students. By reducing the number of questions and simplifying the FAFSA form, families may not be as intimidated. Still, while shortening the form may help for those already committed to going to college, it will not increase college aspirations.

When our staff visits schools in communities like Colebrook and Nashua and Portsmouth and Keene, we offer consistent support which encourages education beyond high school and personalized assistance filing the forms and understanding the award letters for free. Ninety-three percent of New Hampshire high schools invite our full-time college counselors to their schools to educate their students and families throughout the academic year.

Which types of loans will be impacted: Stafford, Plus Loans, Consolidated Loans?

All federal student loans.

How will the legislation impact colleges and universities?

It is important to note that the Direct Loan program has been around since the Clinton administration. To offer some perspective on the use of Direct Loans in New Hampshire, consider that in fiscal year 2008, FFELP loan volume was at $409 million for 89,000 borrowers. Federal Direct Loan volume was only $13 million for fewer than 3,000 borrowers.

Nationally, 70% of post-secondary schools chose to work with FFELP because of the strong technological, programmatic and financial literacy programs it offers. Now, they will have no choice. And, they will have no local support.

Right now, NHHEAF has a full-time staff which provides a hotline, technical support and regular visits to schools for financial literacy activities for their students. NHHEAF also has a strong Compliance Department which ensures that schools have local support for any regulatory or student-eligibility questions that might arise. Both departments also provide in person training and webinars on a range of professional topics.

Supporting the financial aid professionals goes hand-in-hand with supporting the student borrowers on their campuses. Further, the proposal assumes that the government can effectively and efficiently run a program this large. It is estimated that 4,400 schools will be forced to convert from FFELP, their program of choice, to the Direct Loan program on July 1, 2010.

The U.S. Department of Education will be tasked with converting an average of nearly 500 schools a month over the course of a nine month period. Since the Direct Loan program’s inception in 1993, roughly 1,600 schools have been converted over a 16 year timeframe. For schools currently in the FFEL program, this would mean investing staff, time and money to change systems and processes at a time where budgets have been cut to the core. It’s realistic to imagine that those costs may have to be absorbed through increased tuition and student fees.

Will anyone theoretically be hurt by these changes? If private banks lose this source of revenue, what negative impact might it have on their role as lending institutions within the community?

Minimally, 40,000 jobs are at stake across the nation. For agencies like ours, student loans are the only source of revenue. It would be devastating. And, the impact on the local economies would be brutal. Consider that in NH alone, NHHEAF spent $6.8 million on local vendors and contributed $5.1 million in charitable spending. Multiply that by all of the agencies like ours across the country and it is severe. And, again, at the end of the day, will most college-bound families experience any significant savings? It is unlikely.

The amount that could be saved by the Federal Government is projected to be in the billions of dollars – based on the current legislation as proposed what is the plan for this money? Will it be used to attack the current federal deficit or will the funds be rolled into further funding support for students?

The Office of Management and Budget (OMB) indicates that, under the President’s budget proposals, which include the switch to 100-percent Direct Lending, debt held in the Government’s various Direct Loan accounts is expected to rise from $632 billion in FY 2009 to $1.58 Trillion in FY 2019, an increase of more than $900 billion. Nationalizing the education loan programs will add substantially to the national debt over the next decade and the beneficiaries of student loans will have to pay interest twice: first, the interest they’ll owe on their loan as a student borrower and second on the interest they’ll owe as a taxpayer via the national debt.

Corporations exist to earn and distribute business earnings to shareholders, while nonprofit agencies like NHHEAF exist to provide programs and services that are of public benefit. Often these programs and services are not otherwise provided by local, state, or federal entities. Particularly in a state with low levels of state aid, high public tuition costs and high debt burdens, promotion of college opportunities, financial aid and affordability is even more critical in order to get students to think realistically about higher education.

Can you briefly explain why the legislation is seen so differently by Republicans (opposed to these changes) and Democrats (support for the changes)?

I couldn’t speculate on this except to offer that many legislators want to support the President’s budget proposal for its supposed savings while many others doubt the savings purported will materialize. Originally, the Congressional Budget Office (CBO) estimated that savings from the President’s proposal would total $94 billion.

In June, the costs savings were estimated at $87 billion. Senator Judd Gregg urged CBO to recalculate its projection to incorporate market risk cost. The CBO then revealed that the proposal to replace new guaranteed loans with direct loans would lead to estimated savings of about $47 billion over the 2010–2019 period. Most recently, the OMB predicted that the savings from the proposed transition to 100-percent Direct Lending will be $41.4 billion over the same time period. And, many legislators question the role of government in taking over a public-private program that has supported students and schools successfully for decades.

Still, it is important to note that some do see that there is a role for nonprofits in the student loan process. In fact, Representative Carol Shea-Porter (D-NH) worked tirelessly to ensure that nonprofit student loan servicers would not be shut out of future Government contracts. Note that Under the Sense of Congress from the FY10 Concurrent Budget Resolution, sec. 605, it reads, “any reform of the federal student loan programs to ensure that students have reliable and efficient access to federal loans should include some future role for the currently involved private and non-profit entities, including state non-profits with 100% FFEL lending in the State, and capitalize on the current infrastructure provided by private and non-profit entities, in order both to provide employment to many Americans during this time of economic distress and to maintain valuable services that make post-secondary education more accessible and attainable for many Americans; and therefore, pursuant to any changes to the student loan programs, loan processing, administration, and servicing should continue to be performed, as needed, by for-profit and non-profit entities.”

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As borrowing rates soar and debt accumulation spirals upward, the national student loan default rate hits a nine year high.

A recently released report from the U.S. Department of Education revealed yet another alarming trend regarding college graduates and student loans. According to the report, the 2007 national default rate hit 6.7 percent, an increase of nearly 30% over 2006.

It was also the highest percentage in nine years.

As a percentage, the 6.7% represents about one student in fifteen, but that overall statistic is extremely misleading. According to the criteria used to define non-payment, those reported to be in default are those students who were scheduled to begin loan repayment by September 2007 but failed to make payments by September of 2008. That means that one in fifteen graduates had defaulted by the end of the first year of the scheduled repayment period! There is little doubt, that if the data were to include a two year period or a three year period, the percentage would grow significantly.

Too Much Borrowing

While most folks point to the economic downturn as the key factor, some college financial experts see the issue a tad differently. Tom Schmidt, Office of Student Finance associate director at the University of Minnesota, provided Mackenzie Martin of the The Minnesota Daily an entirely different take on the matter.

“Students need to be aware of their student loan debt at all times,” Schmidt told Martin. The associate director went on to explain that while the economy might be considered a contributing factor, the issue was exacerbated by students taking out larger and larger sums of money to cover increasing tuition and living expenses.

At the same time, Schmidt suggested students might be borrowing more than they really needed, that perhaps students may be “living better than they probably need to live.”

In other words, too many students are not thinking properly about the debt they are accruing.

We have discussed many times our concern with student debt rates. According to the CollegeBoard’s 2008 Trends in Student Aid report, roughly 60 percent of bachelor’s degree recipients borrowed some amount to fund their education. As of 2007, the average debt of graduating seniors was nearly $23,000.

The percentage of borrowers is too high and the average debt is simply too large. Simply stated, the downturn in the economy provides a strong reminder that debt is not something to enter into carelessly. While some may think a debt load of $23,000 should prove very manageable, that amount is far too much for those struggling to find viable employment (the status of the majority of college graduates the past two years).

It is imperative that you graduate with as small a debt-load as possible: a reasonable goal is to keep it under five figures (<$10,000 maximum) though an even better goal is zero. And the best way to keep that debt to a manageable level is to reduce your expenses.

That process begins with selecting a school that is in your price range and ends by limiting unneeded expenditures. Yet both of those elements remind us of a clear message – think twice about taking on significant amounts of debt.

That college degree could actually do you more harm than good if you begin your post graduate life defaulting on loans and destroying your credit score before you have had the chance to build one.

According to Anne Marie Chaker at the Wall Street Journal, “New numbers from the U.S. Education Department show that federal student-loan disbursements—the total amount borrowed by students and received by schools—in the 2008-09 academic year grew about 25% over the previous year, to $75.1 billion.”

The overall news may not be shocking to most people, after all the amount of money students borrow for school has been rising steadily in recent years. But the key number here is the size of the increase.

To put the 25% increase in perspective, we turn back to the WSJ.

“…last year far surpassed past increases, which ranged from as low as 1.7% in the 1998-99 school year to almost 17% in 1994-95.”

In addition to the increase in borrowed funds, the percentage of students taking out loans to pay for school is also on the increase. Today, nearly 70 percent of college students are borrowing funds to help pay for school. Just 12 years ago, the percentage of borrowers totaled 58%.

To get a sense of this distressing trend and its impact on students, the Journal offers a number of frightening examples. First, they discuss the plight of “Kordi Solo, a senior majoring in journalism at Central Michigan University,” who “expects to owe about $60,000 in student loans by the time she graduates in the spring.” Later they tell the tale of “Zack Leshetz, a 30-year-old lawyer in Fort Lauderdale, Fla.,” who “has $175,000 in student loans from his seven years in college and law school.”

Even with a law degree, Leshetz lives paycheck to paycheck. And while Leshetz is struggling, Solo might be in an even worse position at one-third the debt level. Given the extent to which the journalism field has been hammered by the recession and an evolving media model, her accumulated debt could well be insurmountable.

Losing Investment?

The impact of this borrowing on students and their future opportunities is significant. Chaker notes:

“The ripple effects for today’s heavily indebted young people are becoming palpable. A growing body of research suggests that tough loan payments are affecting major life decisions by recent graduates, forcing them to put off traditional milestones—from buying a first home to even marriage and having children.”

While most everyone continues to tout the college degree as a must for future job options, Chaker notes that borrowing such sums to obtain that coveted sheepskin put students into a tough spot when they first enter the world of work.

These numbers and the impact on major life decisions have Karl Denninger of Market-Ticker uttering some almost unthinkable words:

“Students are literally coming out of college with more debt than they can ever reasonably hope to amortize over their working lives, making their education a negative net equity position – that is, a guaranteed losing investment.”

In other words, the debt load accrued by the majority of students is so large that even with the greater pay associated with a job based on earning a degree, that pay is not enough to cover both the costs associated with taking care of oneself and the debt payments that must be made.

Borrowing Begets Higher Costs and an Additional Need for Loans

As but another sign the system is not working, it seems that all the borrowing ultimately is triggering an even greater need to pursue loans.

“The rising levels of borrowing,” writes Chaker, “may ironically be contributing to the accelerating cost of college, say some college-finance experts. Loans can give colleges an artificial sense of a family’s ability to pay tuition.

“To some extent, that false sense of security gets built into the assumptions schools make when setting prices, say experts.

“The idea is that as prices rise, families borrow more and more, spurring prices to rise further, which in turn requires more borrowing.”

The untenable position students are finding themselves in has Seth Godin insisting that higher education may well be at the crossroads.

Godin suggests that higher education is going to have to make basic decisions in three distinct areas moving forward.

• Should higher education be scarce or abundant?
• Should higher education be free or expensive?
• Should higher education be about school or about learning?

Currently, Godin suggests that college tends to be focused on scarce, expensive schooling. The result could be categorized as a monopolistic format.

Students can only obtain a college degree by spending gobs of money to gain access to specific curricula at institutions that have ascertained accreditation. Yet once in an institution, there is little emphasis on what a student has actually learned. Instead, credits are paid for and collected and when enough money is spent and enough credits accumulated the degree is awarded.

Godin instead imagines what higher education might be like if a school were to be built around inexpensive, abundant learning. A place where an unlimited number of materials were made available for a modest fee and the emphasis was not on charging per course or per credit, but for access, with a degree awarded based not on the courses or credits or fees, but on demonstrated knowledge.

One Option Exists

While most students continue along the traditional path, one that is taking too many down a road of false promises of future prosperity, it is interesting to see that one company today is challenging the status quo.

A new educational entity called StraighterLine is delivering Godin’s suggested option, offering online courses in subjects like accounting, statistics, and math for a flat rate of $99 a month. Instead of a per course or per credit fee, the rate is $99 for the month. In addition, instead of a semester or yearly or four year degree schedule, there are no semesters or defined calendars.

You as a student decide how many courses you want to take at a time and for how long you want to take them. Instead of heading off to some distant location or stopping your schedule to meet that of higher education, you work online, from home.

Students can “access course materials, read text, watch videos, listen to podcasts, work through problem sets, and take exams” all over the internet. In addition, to make the program more consistent with one critical aspect for learning (the need for a sense of community) StraighterLine also features online study groups where students can collaborate with one another via a “listserv and instant messaging.”

Most importantly, tutors are available to help students when they need additional support. These support personnel are available any time, day or night, and there is no extra costs for accessing such services.

A student completing a traditional college semester of 15 weeks and 15 credit hours in the traditional time frame would spend a total of just $400. Compare the cost of one full year under such a format with the numbers bandied about today for America’s elite colleges, as much as $40 and $50 thousand per year if a student chooses to live on campus.

StraighterLine is actually the idea of a man named Burck Smith. The entrepreneur has created an educational model that seems to fit Godin’s inexpensive, abundant learning concept by getting some other established (i.e., accredited) colleges to allow the transfer of credit from Straighter Line to the traditional learning model.

This is ultimately the biggest hurdle as it allows learners to earn that coveted diploma from an accredited institution. In other words, at the end of the line they have that all-important degree.

StraighterLine is indeed a new model, one where students are not tied to some college campus or program. Instead, students can assemble a degree from various course providers from their own computer.

More importantly, they can do so at a cost that is reasonable, a step that protects their long term fiscal future. Perhaps most importantly, it is a step WashingtonMonthly.com sees as a proper one for higher education.

It may be some time before the “Internet bomb explodes in its basement,” writes Kevin Carey. “The fuse was only a couple of years long for the music and travel industries; for newspapers it was ten.

“Colleges may have another decade or two, particularly given their regulatory protections. Imagine if Honda, in order to compete in the American market, had been required by federal law to adopt the preestablished labor practices, management structure, dealer network, and vehicle portfolio of General Motors. Imagine further that Honda could only sell cars through GM dealers. Those are essentially the terms that accreditation forces on potential disruptive innovators in higher education today.”

Time for a Change

We would like to think the fuse has been lit, that the current accumulating debt loads being assumed by college students would be cause for society to demand a new model for higher education.

Yet, because it is so early in the process, StraighterLine is likely to seem a bit too much cutting edge, a little too groundbreaking and novel for a public that tends to prefer tradition. It is also, dare we say it, a little too inexpensive to be considered a viable alternative by a populace that equates higher cost with higher quality.

But with accruing debts making the current model a net negative for students at precisely the same time that society is placing greater emphasis on earning a college degree, more cost-effective methods must be created.

That would indicate that we are at the crossroads as Godin postures, a time when higher education does move from its current scarce, expensive schooling format to one that features a more abundant, cost-effective learning model.

There is little doubt that the conventional financial wisdom is changing amid the current economic uncertainty. Dave Copeland of the Boston Globe recently highlighted a number of thoughts that today’s families will find noteworthy.

Quoting Larry Glazer, managing partner of Boston-based Mayflower Advisors, and Adam Bold, author of “The Bold Truth about Investing,” Copeland raised a number of issues, two of which pertain directly to parents and college students.

Good Debt, Bad Debt

Glazer, presenting to 100 public school teachers in New Hampshire, insisted it was time to rethink a number of longstanding financial practices. Those educators all taught personal finance classes in the state.

Glazer informed his audience that he took exception to the longstanding notion that there was such a thing as good debt, particularly the idea that “mortgage debt is good debt.”

The financial advisor noted that many experts still touted mortgage debt as being good. This is in large part due to two current factors.

First, the interest on mortgage debt is tax deductible. Second, current interest rates on home mortgages are at historic lows. Ultimately, those experts insist investment returns over time should outpace those mortgage rates of four percent plus.

Glazer thinks differently, pushing his clients to retire mortgage debt as soon as possible, suggesting they double up on payments whenever possible. In addition, Glazer frowns on another traditional aspect of home mortgages, taking the biggest loan that one can qualify for.

“Over the past two decades, ‘good debt’ became a buzzword, and if you could get debt, you took it,” Glazer told Copeland. “That is part of what got us into trouble. Maybe no debt in retirement is the new standard for good debt. ”

Saving for College

While another conventional practice has been to insist that families begin funding a 529 college savings plan as soon as possible, Bold insists that saving for college should come only after a number of other savings options has been addressed. The author notes that many families have followed that advice and made the placement of money in a college fund their number one priority.

Bold indicates the number one priority for parents should instead be their 401(k) and IRA plans. The author insists the first priority should be to maximize retirement contributions.

Only after they have met that commitment should they consider setting money aside for college. The rationale for that recommendation comes from one simple fact.

Bond correctly notes that there are multiple options for paying for college including scholarships and grants. In contrast, there are no scholarships or grants for retirement.

Bond also notes that students can take out loans for college or families can opt for a pay as you go philosophy during the college years using the funds that might otherwise be set aside for retirement.

Current Crisis Offers Some Lessons

While Bond advocates that families make their retirement contributions the first priority, he by no means is advocating that students turn to indiscriminate borrowing for their education. The continuing theme from the current downturn is to rethink some longstanding financial strategies, especially the notion that there is such a thing as “good debt.”

Debt represents a claim on future earnings. If the current economic downturn has taught us anything, it is that borrowing represents a risky financial strategy.

Whether it is to borrow for a house or a college education, such debt should be minimized and paid off as soon as is possible.