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.

There are those news stories that really give you pause. And we are not talking about those AOL headliners mind you, the ones like “NASA astronaut insists government covering up evidence of alien visits.”

What we are talking about is the latest news regarding college students and credit cards. According to a study from Sallie Mae, many students are now using credit cards for almost all of their college expenses, including tuition.

Talk about giving one pause – we might have expected students charging books and fees on their card. But we could never imagine anyone in their right mind putting their tuition on one, not with those cards carrying anything from 14.99 to 18.99 percent interest rates.

The Numbers

Today, Sallie Mae notes that more than 84 percent of undergraduates have at least one credit card. Half of all college students carry four or more cards with the current average at 4.6 per student.

An incredible 92 percent of all undergraduates with a credit card charged textbooks, school supplies or other education expenses. College seniors led the way with an average credit card debt of $4,100.

According to the report, “How Undergraduate Students Use Credit Cards: Sallie Mae’s National Study of Usage Rates and Trends, 2009,” students charged an average of $2,200 in direct educational expenses per person, more than double the $942 amount from four years ago. Of those charging educational expenses, roughly 30 percent actually placed tuition on a credit card as well.

Terrible Choice

While many students were using the cards for convenience, the overall findings of the study pointed to college students using credit cards to live beyond their means. In fact, 82 percent of the students incurred finance charges by carrying a monthly balance.

In a clear indication that credit management was a huge problem, roughly 40 percent indicated they had charged items even though they knew they did not have the funds to pay the bill.

Given the going interest rates and monthly charges of as much as $30.00 for transactions beyond credit limits, the idea that students would place their tuition charges on their credit card demonstrates a real lack of knowledge regarding how credit cards work.

There is no doubt that credit cards offer great convenience. No need to fill out the FAFSA forms and no need to complete additional paperwork to apply for a loan. Add in the ease of online payments and the process is indeed extremely easy.

But credit card interest rates of 15 percent are more than double the current rate for Federal Stafford loans (6.8 percent). Even private loans, considered the least advantageous of loan options carry current rates of only 8 percent.

The result is that credit card users are overpaying for college big time. Unless a student pays off his or her card in full, by placing these charges on a credit card he or she is paying far more than the list price for books, fees and tuition.

College, Expensive Enough

There is no doubt that college expenses are extremely taxing – however, students should be aware that using credit cards to cover these costs only makes the costs of college less manageable in the long run.

First and foremost, students need to build a budget ahead of time that tallies the cost of tuition, books, fees and travel. Once the need is determined, students must pursue the most advantageous funding help available.

That means completing the FAFSA, the standard federal form that is the ticket to potential grants, scholarships and federal loans. Filling out the FAFSA form does take time but it is a must for any serious student.

Even if students do not qualify for grants or scholarships, the first credit option everyone should pursue is the Federal loan program. Simply stated, they represent the best borrowing bargain.

Only after completing the federal application process should students pursue the more expensive private loan option. Such loans carry higher interest rates and other processing fees may be assessed depending on a student’s credit standing.

Still, private loans are a bargain compared to the fees and rates associated with credit cards. Unless a student has a wealthy friend or relative paying that credit card bill for them, placing one’s tuition on a credit card is a recipe for disaster.

In fact, it is as preposterous to us as that NASA astronaut claiming our government is hiding evidence of intergalactic visitors.

Editors note: The full study is available in PDF format online.

The recent economic downturn has Americans thinking very differently about the process of borrowing. In what just might be the silver lining of the current crisis, the idea of creating extensive future debt obligations has both students and college trustees rethinking recently-accepted borrowing practices.

Borrowing for College

The first concern centers upon the amount of debt students have been taking on as they pursue a college degree. While most students have always needed some financial assistance to be able to attend college, the level of debt many students have recently been willing to rack up while in school has truly gotten out of hand.

Today, the median debt load for a student earning a bachelor’s degree is about $20,000 while the average now exceeds $21,000. Most alarmingly, roughly one-fourth of all undergrads borrow more than $25,000 and a tenth borrow more than $35,000.

If the choice is made to attend graduate school, then students generally add tens of thousands of dollars to the accrued debt. Depending on the graduate degree program students pursue, the current average debt for graduate degree students ranges from $42,000 to more than $125,000.

However, a student loan for school is often referred to as “good” debt because it is an investment in one’s future The reason is simple, upon earning a college degree, you will have the chance for a better job and far greater earnings than a person without a degree.

But many students are starting to realize that those greater earnings still may not be enough to pay off the debt incurred while securing that degree. All too often, students are finding their debt obligations from school eating up such a large portion of their pay check that purchasing a home or starting a family is beyond their financial means.

Colleges Borrowing

On the flip side of student’s borrowing, it seems that colleges themselves have also been incurring significant debt in recent years. Now, amidst the current economic downturn, some colleges face financial perils.

According to the folks at The Chronicle of Higher Education, “June 30 could be a day of reckoning” for many colleges. What makes the issue so compelling is this day of reckoning is one that most never saw coming.

Effectively, the competitive rush for top shelf facilities led many schools to borrow tens of billions of dollars over the past ten years. With their borrowing, many schools created extensive debt obligations against the potential for future earnings.

However, the financial downturn has made it tougher for students to attend school and thereby has greatly reduced projected future returns. At the same time, in the process of borrowing funds, colleges used the existing value of their facilities and endowments as asset collateral. Here again, the recent downturn has greatly reduced the value of these assets.

With large liabilities accompanied by shrinking assets, some schools are now finding themselves in violation of specific bond or loan requirements. At the same time, with banks and lenders under pressure, cash-strapped colleges are not as likely to be given forbearance should it be requested.

According to the Chronicle, the result could create a situation where bondholders subsequently “demand immediate repayment on part or all of an institution’s bonds.” In addition, in the cases of a school facing variable-rate debt obligations, those institutions holding a loan could legally hike the interest rate exacerbating the debt repayment challenge.

To repay these loans on the quick, schools must then turn to their endowments for cash, a factor that then further reduces their assets and thus increases their debt to asset ratio.

Beyond the debt obligations themselves, strapped schools could ultimately violate the eligibility standards set by the U.S. Department of Education for federal student aid. Any college so indebted as to lose eligibility to receive federal student aid would soon find its enrollment falling through the floor. That drop in enrollment would further exacerbate the debt repayment issue to the point that the school would have to cease its operations.

Carefully Consider Any Debt Contract

Any incurred debt carries with it an expectation of repayment, plus some additional cost (interest). Debt also generally requires some type of collateral in case the borrower defaults on the repayment expectations.

It is extremely important that students understand that debt is ultimately a claim against future labor and earnings. The borrower essentially gains something immediately but in turn makes a pledge to pay for that something down the road.

The recent economic downturn has hopefully taught many people a great lesson. First, as many have recently found, there is no guarantee that those future earnings will in fact be enough to meet the debt commitment. Second, if you default on that commitment, you will lose your collateral as well as your credit rating.

The number of home foreclosures and businesses filing for Chapter 11 combined with the current issues facing institutions of higher learning serve as a great reminder to us all: entering into debt is not to be taken lightly.

What We Can Learn From Suze Orman

The other night I had television on, just on, background noise. At some point in the evening the Suze Orman Show came on. I paid relatively little attention until one of her guest callers asked her opinion on student loans: Her daughter was in the process of choosing colleges. She was down to a choice between a private, four-year college and a state university. Did Suze think the value of the private college matched the increased expense or should she encourage her daughter to choose the more affordable state university? And would the education at the state university offer comparable value?

Two separate college issues were addressed in that call:

• Value between types of colleges
• Expense of high tuition costs

Lesson One from Suze: The additional cost associated with the four-year college would most likely have to be financed via private student loans. According to her, an absolute no-no.

Lesson Two from Suze: She attended a state university and look where she is right now.

Private Student Loans: The Bottom Line Revealed

Private student loans, or alternative student loans, have generated colossal business for lenders—really the meat and potatoes—in the last few years. The startling statistics (College Board): Since 2001 private student loan borrowing has increased 27 percent annually and is fattened enough to monopolize 20 percent of the student loan market. Just a decade ago, private student loans constituted a mere sliver–7 percent–of the same market. Regionally the behavior may be even worse; one source reports that private student loan borrowing among Maryland students has increased by 600 percent since 2000.

As I speak there are some alarmists extolling the evils of the private student loan market—bloated beyond belief, they say, could cause another market debacle not unlike the recent mortgage fiasco. But how did the alternative student loan market get so heady? The advertising message is: don’t worry if your federal student loans don’t cover the cost of your education; with a private loan you can carry enough credit to cover everything, in some cases even add on auxiliary expenses such as textbooks, transportation, and computers.

No Limits and Interest Rates as High as Your Worst Credit Card

Suze’s message was, of course, right: private student loan interest rates are all over the place and lenders may hike them at will, much like those attached to credit cards. Also, most have no limit. Borrow as much as you’d like—no problem…. Lenders sell them as easy, as quick and simple as opening a checking account. You can be approved and paid overnight, so the perception is that these loans are no big deal. It’s usually thousands and thousands of dollars worth of a deal.

Private Loan Gluttons

Some in the education industry have commented that the gluttony in private loans is due in large part to the leaner Pell Grants. Hmmmm. Pell Grants certainly fail to cover the same costs they did when they were first established, but the statistics I’ve seen suggest that it may not be the Pell Grant crowd gobbling up the private loans—it’s middle to upper income students! A sample of student loan data (ECMC Group) from 1992-3 and then again in 1999-2000, reveals absolutely no increase in the number of low-income students borrowing with student loans. BUT—here’s the dope: middle income borrowing increased “from 32 to 45 percent” and upper income borrowing “from 15 to 31 percent.”¹

Where’s the Steering Wheel for this Fancy Sports Car?

Stories emerge that illustrate how ignorant college borrowers really are when choosing private loans. The sad reality is that for many college grads there is little latitude following graduation for traditional rites of passage, such as hiking across Europe or volunteering with the Peace Corps. Those times are gone. Better find a damn good job because loan repayment is knocking on your door and it’s a pretty big payment for a pretty long time–and it doesn’t come with a high performance engine or a steering wheel.

Cultural Barriers to Incurring Debt, ECMC Group Foundation, March 2003, accessed September 6, 2007, http://www.ecmcfoundation.org/documents/CulturalBarriersExecSummary.pdf.

Barriers to Higher Education are Alive and Well

The Higher Education Act of 1965 launched some of the first financial programs aimed at the support of low-income and disadvantaged students. Since then, dozens of federal and state scholarship and grant programs have been developed to assist the same. A popular theory remains: more and more free money will put more disadvantaged and minority students into college and solve the problem of low college attendance rates among high poverty students. Regardless of the money higher education continues to throw at low-income students, the numbers actually attending college and staying in college remain low. If money is not the solution, then what’s the problem?

The Problem

There are significant numbers of public funds already available for low-income students. Add to this the increasing trend among elite and reputable colleges and universities to spring for full tuition scholarships for academically eligible disadvantaged students and a more relevant question becomes: “With the money available already for low-income and minority students, why do so many fail to earn a college degree?” What circumstances beyond the financial, continue to impede the educational roadway of the disadvantaged student, and why does higher education, at large, repeat the same ineffective gestures in its quest for the solution?

Dream of College Access for All Americans

President Lyndon B. Johnson dreamed of building our country into one in which “a high school senior [could] apply to any college or any university in any of the 50 States and not be turned away because his family is poor…” He further declared, “Education in this day and age is a necessity.”¹ He made these statements on the same day he signed the Higher Education Act of 1965 into legislation. If higher education was deemed a necessity in 1965, then it has become critical by today’s standards.

For the most part President Johnson’s dream has become a reality, but outside of the financial, some of the same barriers to higher education remain:

• Schools that fail to adequately prepare students for college.
• Outside influences and expectations, especially those of parents/family and educators.
• Psychological factors.

Secondary Schools Fail to Prepare Students for College

Regardless of the money available to low-income students, in many cases students fail to even qualify for college admission. Perhaps, as some critics of the current system argue, where career and guidance counselors proactive in “talking up” college as soon as middle school, kids particularly from disadvantaged backgrounds would incorporate college goals into their futures much more naturally than when career and education goals are thought inconsequential.

Educators, including teachers, counselors, and principals, simply have low expectations of disadvantaged students, say some proponents of education reform. An overall neglect of college preparation routinely takes place at most minority and high poverty high schools. The perception that disadvantaged students will either not make it into college, have little interest in higher education, or be unworthy of the time spent to get them prepared, are all subversive and deeply damaging perceptions. At best this disregard is a primitive throwback to the same circumstances President Johnson sought to bury.

The Non-Existent College Prep Curricula

Average, college bound high school seniors are alarmingly unprepared for the rigors of college academics, but an even more disturbing population of low-income and minority students seem to avoid college altogether or possess test scores and academic records that have put many in higher education on alert. In fact, the circumstances renew debate over the quality of public school systems: “Nine in ten high school graduates from families earning more than $80,000 attend college by the time they are 24, compared to only six in ten from families earning less than $33,000.”²

Research proves that many of the so-called high school assessment tests “bear little resemblance to the work [students] are expected to do in college.” Despite the best hopes of those students that do possess college degree expectations, preparation for such is sorely lacking—students again and again clearly “lack crucial information on applying to college and on succeeding academically once they get there.”³ College administrators report that most students only think they are academically prepared; the sobering reality is that the so-called college prep curriculum they slogged through in high school was not college level work, after all.

Ironically, this lack of preparedness is the ailment of many average high school grads, and not exclusive to low-income students. But evidence shows that “a greater percentage of low-income students are marginally qualified or unqualified for admission at four-year institutions.”⁴

And college prep includes providing students the appropriate information with which to pursue college, including college search, financial aid and scholarships, and admissions processes. But in many disadvantaged schools the information is not disseminated, not included as a natural progression in education.

For students interested in pursuing college the process becomes a bit like fumbling in the dark: “many low-income college students need aid and do not know how to apply for federal or state assistance.”⁵ Low-income students often opt for a community college—open access and remedial coursework, and schedule flexibility that allows students to work part time and carry on normal family responsibilities.

High Scores vs. Student Success and the “Push-Out” Phenomenon

High schools across the country have new standards by which to adhere. Accountability in secondary education may play a significant part in the collegiate success or failure of certain students. Since the inception of No Child Left Behind the reliance on test-based schools has split students down the middle—in some areas. Students are either an asset or a deficit to a school.⁶

In New York City, test scores served to define a dispensable archipelago of students most likely to fail. Students at disadvantaged schools throughout the region were so overlooked that rogue administrators and educators systematically amputated from the system whole populations of underachievers for the “betterment” of the whole. The plan was simple: “push out” students with poor grades and low test scores and test score averages would look a lot better.⁷

The Teacher Factor

Does a high quality teacher make a difference to a low-income and/or disadvantaged student, and if so, why? A growing body of evidence shows that teachers do matter. But studies have begun to prove an alarming trend: “The very children who most need strong teachers are assigned, on average, to teachers with less experience, less education, and less skill than those who teach other children.”⁸

A study that surveyed three Midwest revealed consistent data proving that in most low income schools teachers were much more likely to be “inexperienced, out-of-field, and uncertified.” Furthermore, as school enrollment of low-income students increased, the population of teachers hired grew increasingly inexperienced.⁹ Most studies declare five years of teaching experience as the dividing line between experienced and inexperienced.

The less experienced the teacher the less likely he or she is to be qualified or motivated to guide disadvantaged students in wise career and education choices. Surprisingly, teacher surveys have also proven that on the whole they, too, tend to have an unsure grasp on the college preparatory process.¹⁰

The qualities most valued and effective in high-quality teachers include:

• Over five years experience teaching within their specialty.
• Teachers able to modify methods on-the-fly and in direct response to student abilities.
• Teachers with degrees from reputable institutions.

Contemporary findings such as these provide more leverage for school systems, and lawmakers when it comes time to plan teacher distribution models designed to serve future generations of students.

Can Experienced Teachers Get Disadvantaged Students to College?

Data has been culled from a crew of challenged high schools, turned-high-performing, in various regions of the U.S. that proves high quality teachers can make a significant difference with at-risk youth. In every high performing school surveyed almost half the student bodies were from high minority-high poverty backgrounds. And in every case the population of college bound students had increased above the national average.

What factors set high performing high schools with diverse student bodies well above others in nurturing college ready graduates?

• High quality and experienced teachers able to adjust methods to suit students.
• A very relevant and challenging college preparatory curriculum that surpasses state requirements.
• Unlimited access to academic tutors and career advisors.¹¹

Part of the goal of the Higher Education Act of 1965 was to promote improvement in high minority/high poverty schools, including attracting more experienced teachers. Contrary to some, both these factors—schools and teachers—continue to figure prominently in the educational futures of students.

College Admission Requirements Detrimental to Disadvantaged Students

Whether high school or college, the fact is that reputation, high marks, selectivity ratings, and even cost of tuition, all constitute factors that conspire to create an institution’s reputation. Ratings and credentials have become a beacon for student business, a means to market and advertise a college to expanding populations of prospective students.

The annual U.S. News and World Report: America’s Best Colleges has become a much-anticipated publication.

New criticism, though, from college administrators aims to downplay the relevancy of some of the ratings, which many say have nothing to do with a good college education. Why so much fuss over ratings? The report has been widely dubbed the college “beauty contest,” and the higher colleges and universities have driven ratings the better their business. But in the process, some pieces of the academic puzzle have been forsaken, like some populations of students.

Ratings Drive Business, Which In Turn Drives Up Admission Reqs

Colleges and universities that rank well in the U.S. News report seek to be considered “selective.” This kind of marketing seems to make business more brisk, but it also makes it challenging to attract a large minority or low-income student population. In order to make a college accessible for the majority of low-income and disadvantaged students, admission requirements must be relaxed.

The traditional metrics of admission include SAT scores and GPA, precisely the type of measurements most low-income students suffer by. As we explored above, it’s not their responsibility—educators have been loath to provide the proper guidance and nurture—and, besides, SAT and GPA are rarely accurate indications of academic worthiness. This then is why a growing stable of college administrators is taking aim at the notoriously exclusive annual ratings race.¹²

Compared to the relatively small number of college administrators backing away from the ratings game, there are plenty that believe in its promise. For instance, a strong cadre of schools believes the marketing theory that overpriced products and services attract buyers and consumers because high price implies high quality. This then is why tuitions are hiked and SAT and GPA requirements inflated. Yet again, disadvantaged students are unable to reach certain institutions where, ironically, money is likely to exist for their education.

When Admission Hikes Purposely Dismiss Disadvantaged Students

Another strategy behind ramped up admission requirements seeks to purposely define the splinter group of underachievers and those students with low test scores and make it impossible for them to essentially clog the way of those students without academic challenges. Low income and minority students with low SAT scores and low GPAs “will be steered” to the state’s community colleges.

Simultaneously more college prep programs are being built into the state’s public school system. Students will now have a system in place able to alert them should their academics fall below realistic first year college goals.¹³

Outside Influences Offer Most Resistance to College Life

Besides money and academic challenge, many low-income and disadvantaged students face challenges much more murky to middle and upper income, white Americans. In some cases the influence of parents and family are more profound than more mainstream issues.¹⁴

Parental Influence

Consider the idea that many minority and low-income students come from first generation families, meaning no one else has yet gone to college. For many average American students, the dream of a college degree is fueled over the years by parents. When that drive is not there, other priorities may take precedence, such as job, finance and family.

It’s not that parents of first gen college students have no desire to see their children succeed, even go to college, but most are unable to provide the type of support necessary to bolster a fresh and, perhaps, disenfranchised college newbie.

Cultural Perceptions of Debt

Financial aid experts may also have discovered another roadblock—“cultural aversion to debt.” Over the years the financial aid needs of middle and upper income students have risen, but statistics have shown little or no increase in the student loan debt among low-income and ethnic minority student groups, which “calls into question the effectiveness of student loans in aiding low-income populations.” Studies strongly suggest that minorities are “more sensitive to price and less willing to use educational loans to pay for college when making their college decisions.”¹⁵

Tuition sticker shock may be a similar deterrent. Even though academically talented low-income students may qualify to enroll in elite universities where the ability to prove a certain level of disadvantage buys them a free ride, only a fraction of those actually eligible partake of the opportunity. The scholarships from institutions like Harvard and Princeton are not just in place for altruistic purposes. These “white-bread” institutions want to diversify and offering money for disadvantaged students seems a good idea. Surprisingly, a much larger wellspring of academically qualified low-income students is out there. SAT scores prove the numbers,¹⁶ but where are they?

Educator Expectation Matters, Too

The nation’s low-income students, including those with academic fortitude and those dubbed low-achievers, may share common bonds: many face familial and cultural obstacles, but do they also face low educator expectations? Studies have already measured the effect of educator expectation on the college outcomes of low-income, minority students and found alarming numbers of low-quality teachers and counselors with little hope for students in lower income brackets.

Teachers and advisors acting out of their personal beliefs and stereotypes may be unable to provide the unbiased guidance underserved students require to get them to the doorstep of a college campus, whether it be a community college or one of the elite universities.¹⁷

What Then if Not Money?

Considering the obstacles discussed above, are there further psychological impacts? If I am a student from a low-income household in which neither of my parents attended college, isn’t it likely that a college degree will not be a main priority in my life? And if I am academically talented, would I not feel out of place and disenfranchised on a Harvard campus even if my education were fully funded?

If I overheard teachers in my high school complaining about their jobs and saying that many of the students will be lucky to make it to graduation, much less college, would I not doubt my teachability, my worth as a student?

Harvard can roll out its red carpet and dangle full scholarships ‘til the cows come home, but what really eats away at the collegiate futures of low-income, minority students—talented or not—has little to do with money.

Footnotes

1. LBJ for Kids, accessed September 3, 2007, http://www.lbjlib.utexas.edu/johnson/lbjforkids/edu_whca370-text.shtm.
2. “Harvard Announces New Initiative to Aimed at Economic Barriers to College,” Harvard University Gazette, February 28, 2004, accessed September 5, 2007, http://www.hno.harvard.edu/gazette/daily/0402/28-finaid.html.
3. Rooney, Megan, “High Schools Fail to Prepare Many Students for College, Stanford Study Says,” March 3, 2003, accessed September 4, 2007, http://ed.stanford.edu/suse/news-bureau/displayRecord.php?tablename=susenews&id=25.
4. Andrea Venezia, Michael Kirst, Anthony Antonio, Betraying the College Dream: How Disconnected K-12 Schools and Postsecondary Education Systems Undermine Student Aspirations, 2003, accessed September 4, 2007, http://www.stanford.edu/group/bridgeproject/betrayingthecollegedream.pdf.
5. Kirst, Michael, “Betraying the College Dream in America,” The College Puzzle, August 21, 2007, accessed September 4, 2007, http://thecollegepuzzle.blogspot.com/2007/08/betraying-college-dream-in-america.html.
6. Beveridge, Andrew, “Counting Drop Outs,” Gotham Gazette, August 2003, accessed September 4, 2007, http://www.gothamgazette.com/article/demographics/20030814/5/492.
7. Beveridge, Andrew, Gotham Gazette.
8. Heather Peske, Kati Haycock, Teaching Inequality: How Poor and Minority Students are Shortchanged on Teacher Quality, The Education Trust, June 2006, accessed September 2, 2007, http://www2.edtrust.org/NR/rdonlyres/010DBD9F-CED8-4D2B-9E0D-91B446746ED3/0/TQReportJune2006.pdf.
9. Peski, Haycock, The Education Trust.
10. Venezia, Kirst, Antonio, Betraying the College Dream
11. “Preparing All High School Students for College and Work: What High-Performing Schools are Teaching,” ACT, February 23, 2005, accessed August 30, 2007, http://www.act.org/news/releases/2005/2-23-05.html.
12. “U.S. News College Rankings Debated,” The Online News Hour (transcript), PBS, August 20, 2007, accessed September 5, 2007, http://www.pbs.org/newshour/bb/education/july-dec07/rankings_08-20.html.
13. Tresaugue, Matthew, “UT Campuses Will Raise Admission Standards,” University of Houston, May 10, 2007, accessed September 5, 2007, http://www.uh.edu/ednews/2007/hc/200705/20070510admission.html.
14. Szelenyi, Katalin, “Minority Student Retention and Academic Achievement in Community Colleges,” 2004, accessed August 29, 2007, http://www.ericdigests.org/2001-4/minority.html.
15. Cultural Barriers to Incurring Debt, ECMC Group Foundation, 2003, accessed September 3, 2007, http://www.ecmcfoundation.org/documents/CulturalBarriersExecSummary.pdf.
16. “Large Numbers of Highly Qualified, Low-Income Students Are Not Applying to Harvard and Other Highly Selective Schools,” Journal of Blacks in Higher Education, 2006, accessed August 26, 2007, http://www.jbhe.com/news_views/52_low-income-students.html.
17. Patricia George and Rosa Aronson, How Do Educators’ Cultural Belief Systems Affect Underserved Students’ Pursuit of Postsecondary Education?” Pathways to College Network, 2003, accessed September 3, 2007, http://www.pathwaystocollege.net/pdf/EducatorsCulturalBeliefs.pdf.

College costs have outdistance inflation by nearly 40% over the past 5 years. While government has been subsidizing education, many of these subsidies have been going to loan corporations like Sallie Mae, not students.

A new bill that was approved in the House of Representitives and is headed for the Senate may slash government subsidies to lenders by as much as $18.3 billion. To offset this drop they are also increasing Pell grants for students by over $500 over the next for years. The NYT reports on the changes

As well as cutting lender subsidies, the bill reduces the share the government would guarantee in the event of student default. It halves the interest rate on federally backed loans gradually over the next five years, to 3.4 percent from 6.8 percent, and would limit monthly payments to 15 percent of the borrower’s discretionary income.

The bill raises the maximum Pell grants by $500 over the next four years, to a total of $5,200 by 2011. It also grants $5,000 in loan forgiveness for police, firefighters, prosecutors and other public servants, and a complete release from student loans for public servants after 10 years. It would also provide for complete forgiveness of federal student loans after 20 years for economic hardship.

In that article they also said that the smaller student loan providers are likely to be hardest hit. That is not for the least of reasons because they can’t compete with equal marketing budget, and at as many as 800 US colleges the top loan provider offered over 70% of the student loans. Andrew Cuomo has been investigating some of those backdoor deals at Sallie Mae, Nelnet Inc., Education Finance Partners Inc., EduCap Inc., the College Board, and CIT Group Inc. for many months.

According to Cuomo, investigators found:

• Lenders pay kickbacks to schools based on a percentage of the loans directed to the lenders.
• Lenders foot the bills for all-expense-paid trips for financial aid officers to posh resorts and exotic locations. They also provide schools with other benefits like computer systems and put representatives from schools on their advisory boards to curry favor.
• Loan companies set up funds and credit lines for schools to use in exchange for putting the lenders on their preferred lender lists and offer large payments to schools to drop out of the direct federal loan program so that the lenders get more business.

This past spring the big-time world of student loans was rocked to its foundations when it was discovered that several financial aid officials were in the back pockets of some student loan lenders. The heyday of “you scratch my back and I’ll scratch yours” is over as far as preferred lender lists at colleges go. One bad apple…. But are lenders the real enemy?

Sunshine Act—Push for More Federal Loans That Just Aren’t There

Now colleges and universities that favored a single lender will be expected to offer students optional lenders, no more playing favorites. The Student Loan Sunshine Act was spearheaded by Senator Ted Kennedy as a way to show the government’s support for students battling with college finances. And the Sunshine Act is also an attempt to undercut the need to resort to private or alternative student loans.

Kennedy is not alone in his concern that there is an alarming trend toward private loans, possibly impelled by overly aggressive marketing tactics. He would prefer to see borrowers really exhaust all their federal loan options first. Of course, private student loan lenders are selling a product; that some actually need.

Their message: you CAN qualify for additional loans and completely cover the cost of your tuition, and maybe even get approved for money to cover those extra sundry expenses you were concerned about, too. If not my bank, then who?

The Hand That Feeds

College tuition costs have not stopped rising. One could argue that a college education is one big commoditized package that colleges, banks, and the federal government all want in on. But messages are mixed. As much as we want to browbeat lenders, plenty of them sell their warm and soft side—the helpful account managers that make the annual rounds of high school campuses offering one-on-one assistance for a confused herd of parents and students with half-completed FAFSA applications.

We are not conditioned to think that people who help us are bad. Are private lenders bad to try and make college possible? Are colleges and universities out of control with their costs? Why is everyone else making so much money and Americans being strapped so beyond their financial limits? From what other sources could a large quantity of money come, some nationwide bake sale?

How the Confused Can Go Wrong

In an article in USA Today a college graduate reportedly said that his foray into student loans was one big ignorant blunder. He argues that some student borrowers and uninformed parents are so confused by the student loan milieu that it’s easy to be sold on costly private loans well before you’ve really plumbed the depths of the ridiculously convoluted federal loan system.

Desirable Colleges Simply Cost a Fortune

Alternatively plenty of arguments are made for more affordable college options, such as state schools and community colleges. This is all well and good for students with no prejudice for a particular program, but for some students certain private colleges and universities provide a desirable field of study, a necessary reputation that costs money and lots of it. In cases like these, with the exception of the very wealthy, it’s likely that students will not qualify for nearly enough federal aid to cover the cost and will resort to private loans. Here are the real stories of alarming student loan debt.

So in the end, who’s really to blame? Is there a student loan life cycle here that at some point will naturally correct itself?

A recent government inquiry into the “relationships” forged between college financial aid offices and student loan lenders has raised the question, “Is there a correlation between soaring college tuitions and fat-cat lenders?”

The recent New York Times article (“Greater Scrutiny on Colleges and Ties to Lenders,” Glazer) draws attention to the initial inquest, which originated with the New York Attorney General’s Office. As we speak, the Attorney General is sniffing out a slew of college practices to see exactly what stinks.

See, colleges and universities prefer to work exclusively with a particular set of lenders, that’s no secret. And the qualifying criteria for such a relationship? That’s what a growing number of lawmakers want to know.

Back Office Handshakes or Just Good Business?

It’s a matter of course that “lenders use various tactics to curry favor with colleges and universities.” But until now the practice has gone without issue. Unchecked tuition rates in conflict with government efforts to curtail student loan rates, now makes this professional partnership a rug to be looked under. Senator Ted Kennedy (Mass.) has likewise waxed skeptical over the harmlessness of the “preferred lender lists” that many colleges maintain:

“Mr. Kennedy is pushing a bill that would require the disclosure of such arrangements; ban gifts and services worth more than $10 to college employees; and require lenders to tell students that they might be eligible for low-interest federal loans.” (NY Times)

Currently the de rigueur business agreement between lenders and colleges looks a bit like this:

“The kinds of arrangements loan companies may have with colleges vary. One type is the kind that Education Finance Partners has — paying a college increasing sums of money based on loan activity. Other lenders, including Sallie Mae, make money available to an institution for loans to students with poor credit, also based in part on private loan volume.”

Private loans might be the operative term here. Most lenders of course provide the whole menu of federal loans, but they also make a bigger business with their private, or alternative student loans. According to the NYT, private student loans now account for 20 percent of all student loans put together, and they “have grown at an average rate of 27 percent annually since 2001.”

Potential Plot Twists

Players on all sides of the fence have predictions for bettors. Student loans could become a guerrilla marketing mess if lenders are left to appeal directly to college students, or colleges are unable to recommend lenders; student loans could go up, especially for students with bad credit and/or low income levels; or the relationship could be guaranteed fair and just—preferred lenders but based not on back office kickbacks relative to volumes of customers served, but instead on the best rates and service, buoyed up by the college’s forthright reputation.

While the whole brouhaha over cuts in student loan interest rates may seem attractive, even helpful thanks to the political rhetoric, students actually in college or prepping for college will have to look elsewhere for financial relief.

What the Interest Rate Cuts DID NOT Do

A couple of weeks ago the House of Reps voted to cut the interest rates accorded to big student loan lenders. The move, dubbed the College Student Relief Act, was hailed by many as a smart response to the skyrocketing costs of a college education that just don’t stop. Others, like the White House, argued the measure was inconsistent with the real meat of the matter—college costs.

See the interest rate cuts really benefit college grads. They are the party who may see adjustments in their student loan repayment, but for those in the thick of college or looking for financial aid relief now, the whole political handshaking scene is worthless:

“So the College Student Relief Act is really the College Graduate Relief Act - the expansion of a regressive wealth-transfer program benefiting a demographic group earning $1 million more per capita than the hardworking American taxpayers without college degrees who will have to pay for it.” (Baltimore Sun, Carbone)

If Not This, Then What?

The student loan business is really not poised to change very much. State and federal programs are not budging; no, you’re not going to get more money for your Stafford Loans. So if not student loans, then where should college-bound kids look for more cash, because what they have now, ain’t working?

Right now it seems that the biggest break students can get is a two-fold process: scholarships and the savvy to know they can qualify if they work at it.

In Kentucky, plans to create scholarships and grants that would benefit hundreds of college kids and their families are already underway. Eastern Kentucky U., Western Kentucky U., and Morehead Universities are all patting themselves on the back for their contribution to the college cost problem. And we’re not talking a little $200 scholarship for a couple of students. The KY institutions are taking the problem seriously and going after it in a proactive kind of way:

“In the face of persistent evidence that a college education is becoming less affordable, three more public universities in Kentucky have announced financial-aid initiatives to help students.” (Lexington Herald-Leader, Jester)

BEACON Scholarship Program at EKU comprises a set of scholarships, including the Math/Science Scholars program that awards a current 22 students with over $11,000 each; the Regional Scholars program that recognizes the academic fortitude of low-income students with $2,600 scholarships; Scholastic Opportunity Grants will focus on students who are already Pell Grant recipients; and the Transfer Scholarships will assist those students who wish to transfer in from one of the state’s communities colleges.

Western Kentucky U. is launching its “Top it Off” program. The aid measure awards financial aid grants equal to the disparity between a WKU tuition and the federal and state financial aid awarded to low-income students. Future plans are to cover the tuition disparities of over 500 students.

Morehead U.’s Eagle Access Program is also a “cover the difference” program.

Second Part of the Problem—A New Mantra

Still, according to financial aid experts, too many families and students are selling themselves short. Fill out the FAFSA, is the mantra. Whether you think you qualify for aid or not the form is important. Many colleges and universities want the FAFSA for other types of aid. Miss the deadline and you miss out entirely. And typically those who think they don’t qualify are dead wrong.

The biggest news in “Education” yesterday made headlines in the New York Times (“House Cuts Interest Rate for Some Student Loans,” Schemo), the Chronicle of Higher Education, and every other mainstream rag online and off with their ear to the rail. Seems like the Senate has gone ahead and passed a bill that might cut both ways but not without much ado about it. Essentially the new regulations intend to incrementally slug away at guaranteed student loan interest rates charged by the big corporations, such as the ubiquitous Sallie Mae and Citibank, among a rank of others. The plan slashes interest rates in half over the course of the next five years. The purpose, say scores of bipartisan Senators, is to make college more affordable for the middle class.

“According to the U.S. Public Interest Research Group, the bill would save the average student who starts college next year about $2,300 in interest payments over the life of a 15-year loan.” (NYT)

This is good news for the middle class, right? Or does the political rhetoric serve as smokescreen for the real issue(s)?

Cost of Affordability

Ironically enough, at the same time such legal and political measures are promulgated as beneficial to the constituency, you have to wonder if the ramifications loudly argued by Big Lenders are now set in motion to counter any positive actions—kind of a typical lesson in Newton’s Third: for every action there is an equal and opposite reaction.

The bill, of course, costs the government a reported 6 billion dollars. According to the Chronicle, though, the largely Democrat-driven plan delegates a share of the cost to the biggest lenders, whose “profit-margins” will be chopped in the federal loan program:

“’This program, which has been highly reliable and serves students attending 80 percent of all U.S. colleges and universities, cannot sustain annual deep budget cuts without the quality of services to borrowers being hurt,’ the bankers’ group said.” (Chronicle)

Semantics of the Problem

The issue at hand could open a huge Pandora’s box of conjecture on a range of issues. Not only do the new measures seem to pit the college public against the good of big banking, but it also pits small lenders against large and challenges politicians across the board who will not risk alienating their “middle class voters” (NYT). In fact the real issue might be out of this particular ballpark, altogether—the college and universities themselves whose costs rise faster than the middle class paycheck to cover cost of living and inflation.

The only party, surprisingly, that pointed to this neglected player was the White House, which summarily opposes the new measures:

“The White House statement…said access to higher education should be improved by containing costs. The responsibility for helping families, the statement said, ‘must be shared with colleges, which also have a central role in making higher education affordable.’” (NYT)