Paying for College Today is a Drag on Finances

When I was 22, my tuition at Ohio State cost me $1,110 a year. Today, it's $10,038, nearly ten times higher! You want to know how to pay for college once you got that college admissions committee to yes on your application?

Photo: OSU vs. Indiana (1980), resting after halftime, sometime during late-3rd quarter of OSU Football, we were extremely comfortably in the lead, under Head Coach Earle Bruce.

As part of a continuing companion series on LinkedIn Pulse's Education Channel, "Helpful Advice on Getting Acceptance to College," and LinkedIn Pulse's Best Advice Channel, "More Advice on Getting Admitted into College," here's some additional advice on how Mom and Dad can pay for your child to attend that college he/she has been accepted to enroll in the fall.

Today the unemployment rate for a college graduate is less than 4 percent." - U.S. Representative Luke Messer, R-Indiana, 6th District, Republican Freshman Class President, 2014 Ball State University Commencement Address

The Washington Post reports on May 24, 2014 the annual premium in job pay of a college graduate averages $28,000 over a non-college graduate. Paying for college today can indeed be a drag on your finances. But, big rewards require big risks! Here's why and what's possible in one's life?

Photo: My sisters, Brenda (left), Sherry (right) and Me

As a child, we are shaped and molded by the influences around us.

Our parents already know that it is all about investing in one's future very early-on in one's life.

Attending college transforms one's life. I have taken the liberty of sharing family and personal photos of my life that capture major milestones afforded to me as a result of having the privilege to attend college and earn not just one, but four college degrees.

So, let’s discuss how to convert your child’s future four-year process of college degree attainment into real economic value to even have a fighting chance to pay off student loan debt, or perhaps avoid excessively costly student loan debt in the first place.

Stressing Over College Tuition?

As Shree Nanguneri inside my recent article on college admissions pointed out, “Any parent who is planning on sending a child to college in the next ten years is sweating bullets right now. And they are not the only ones. Any adult who has committed to donate money to help a child attend college (like grandparents, rich uncles, and wealthy benefactors) should be very worried about how exactly they are going to pull off such a miracle. Why? Because the most recent college tuition figures for 2012-2013 paint a very scary picture of what tuition rates will look like once that prospective college student graduates high school.”

Photo: Dad, Oliver McGee, Jr. (left), Mom, Jean Wilson (center), Me, and my Aunt, Gloria McGee (far right)

Drawing on data from the College Board and Main Street, for instance, consider these statistics on the accompanying illustrative chart, which depicts “why parents are freaking out about paying for their children’s impending college education and how they are trying to prepare (in vain?)”

According to a 2013 Main Street survey, 70 percent of adults are worried about how they are going to cover the cost of a child’s college education.

Since 1972, college tuition rates have risen by 1100 percent.

To save for college expenses, 53 percent of adults are putting their money in savings accounts, 24 percent in prepaid accounts, 13 percent in life insurance, and 11 percent in Roth Individual Retirement Accounts (IRAs).

What do we want a high school senior, who is in need of funds, to know about the difference between private student loans and federal student loans?

Differences between federal student loans and private student loans are cost, repayment, accessibility, and permitted uses of funds, according to Loans.org. Cost is primarily the main issue for most borrowers.

Private Student Loans. Costs of private student loans are established by variability in credit requirements among banks, credit unions, and online lenders. Applicants with low credit scores can expect to get costly quotes. Borrowers having strongest credit scores draw the lowest private student loan interest rates, mainly because applicants with low credit scores are risky for lenders to loan college funds. Their credit scores indicate a history of missed or delinquent payments. The penalty of such delinquency in payments results in higher interest rates of college financing.

Private student interest rates can vary wildly from 2 percent to 18 percent depending on the lender, the borrower’s credit, and the presence (or lack thereof) of a co-signer.

Photo: Sherry & Me, Chicago Booth Graduation Day 2004

Private loans are available to college-bound high school seniors from the now privatized Sallie Mae and numerous private banks. Such private lending, aimed at covering college student costs, is designed as supplement packages once college-bound high school seniors have fully exhausted all available federal student aid options.

Unlike federal student loans, private loans are not sponsored or guaranteed by government agencies and do not require completion of a federal government form to qualify. Private loan creditworthiness requirements, and specific terms of interest rates, as well as other considerations vary depending upon which private lender is chosen.

Private loans mainly depend upon the creditworthiness and soundness of the parental borrower supporting a college-bound high school senior. Submitting a private lender loan application with a parental co-signer may help college-bound high school seniors gain favorably lower interest rates.

Photo: Outside John D. Rockefeller Church, University of Chicago Booth School of Business Graduation Day, March 2004

Several private lenders, including Sallie Mae, offer private student loans supporting up to 100 percent of the cost of college minus other financial aid received. The college or university financial aid office must certify the total cost of attendance, as part of the Sallie Mae loan approval process for borrowers. Upon final approval, the Sallie Mae funds are then transferred directly to the institution.

Generally speaking, several specialized private student loans are sometimes offered to supplement and complete a college-bound high school senior's financial aid package covering their college costs.

For instance, Sallie Mae’s Smart Option Student Loan encourages students to repay such loans in smaller incremental monthly payments. Or, repay only their Smart Option loan interest charges, while enrolled in college. This specialized private student loan program reduces the total debt owed by college students upon graduation, including lowering the overall cost of borrowing a private student loan. Securing a creditworthy co-signer may help prospective college-bound high school seniors to either qualify for a specialized private student loan package or reduce their overall borrowing costs.

Photo: Mom & Me celebrating being honored with the William Oxley Thompson Award for Meritorious Excellence by Young Alumni Under Age 36, The Ohio State University Alumni Association, October 1991

“Larger lenders, such as the Direct Loans or Sallie Mae, will often have better training for their representatives,” said Miller. “They may also be easier to get a hold of. Others may not, and be of little help if you do get them on the phone.”

Federal Student Loans. Costs of federal student loans, in contrast, are fixed. The interest rates on federal student loans are not dependent on a borrower’s credit score or perceived risk. Rather, the government sets interest rates for federal student loans and borrowers have to take them at that price.

Eligibility for federal loan aid is generally determined through completion and submission of standardized government FAFSA forms available online at https://www.fafsa.ed.gov/.

The FAFSA is used by financial aid offices inside colleges and universities to ascertain a high school senior's family income picture to determine what kinds of federally-sponsored aid a prospective enrolled student qualifies for, including federal loans with a fixed or variable interest repayment package.

Photo: Me, The "Bruin Twin Towers", forward Travis Wear (#24), forward David Wear (#12) (center), UCLA Chancellor Gene Block (right), UCLA Office of the Chancellor, Murphy Hall, March 2013

In addition, the FAFSA is used to offer private financing options for high school seniors attending college, including merit-based and need-based scholarships, philanthropy gifts, and private student loan packages.

Jan Miller, President and Founder of Miller Student Loan Consulting, said that the repayment rules for federal student loans are also fixed.

“In other words, the lender has very little discretionary control over how to manage policy on the loans,” she said. “For example, the loan agreement (promissory note) and interest rate are both governed by the federal government. As a result, borrowers are subject to the same handling of the loans, no matter who their lender or [financial] service [provider] is, in regards to the repayment options.”

Delinquency of Payments or Loan Default. Even if a borrower falls in delinquency of payments past the 'point of no-return' and into default, student loans can still be costly, even if no payments have been made for months or years. This is because student loans, both federal and private, are almost impossible to get discharged via bankruptcy.

Photo Credit: University of California Berkeley

“For defaulted private student loan borrowers, many lending institutions will send the loan directly to a standard collection agency immediately after default,” said Miller. “The standard rate of default with most private student loan lenders is at 120 days of delinquency.”

But there’s one place in which private student loan borrowers are afforded more protection than their federal counterparts: ease of wage garnishment. The federal government has the power to use debt collectors to garnish wages without filing judgment in court. As one can imagine, garnished wages can prove extremely costly to a federal student loan borrower.

Photo: 2013 Executive Leadership Academy (ELA) Fellowship Class, Center for Studies in Higher Education (CSHE), University of California Berkeley

“This is why over 80 percent of all debt on defaulted federal student loans is recouped by the government,” said Miller. “Private student lenders do not have this luxury. They must file judgment on the borrower and take them to court, like with any other type of debt, before they can force the borrower to pay back the loan.”

Private or Federal – Which Loans are Best? Clearly, both types of student loans are different. But different does not necessarily mean one is better than the other.

Private student loans tend to be more expensive than federal student loans, but this is not the case for everyone since people with excellent credit scores are likely to get generous terms on their private financing.

Photo Credit: UCLA Royce Hall, Launch Site of "Let There Be" 2019 Centennial Campaign

Federal student loans are more readily available than their private counterparts, but they can be difficult to repay, as the Student Debt Crisis shows.

Still, private student loans lack the many benefits of federal student loans, such as easier and longer deferments, forbearance, and consolidation options. Even though these may be unimportant to a recent graduate who thinks they will land a dream job, they can be very important if a borrower falls on hard times.

Photo: Oliver G. McGee III (Left), The Late Oliver G. McGee, Jr. (Center), The Late Oliver G. McGee, Sr (right)

“Federal student loans should always be the first option for students and their families,” said Patrick Kandianis, Co-Founder and EVP of SimpleTuition. “They generally have lower, fixed interest rates and are sometimes subsidized so they don’t accrue interest while the student is enrolled.”

With federal student loans out of the way as a first option, only then should borrowers and their families look into private student loans. While private student loans can mean the difference between being able to and being unable to attend college, they should still be approached with a measure of caution and awareness.

Photo: Berkeley provides a few lifetime parking spaces

“College is expensive, and with tuition rates rising faster than the rate of inflation, it is only going to continue to get more expensive,” said Kandianis. “For students and parents who are planning how to pay for college, that means that making smart borrowing decisions is more important than ever.”

By being smart about college financing and understanding upfront how much money they will need to borrow, students can calculate and plan for their years of repayment. Having awareness about the different types of student loans lets borrowers avoid being overwhelmed by debt in their long lives after college.

Are there any upcoming or new changes to private student loan lending or federal student loan lending that borrowers should be aware of?

JPMorgan Chase and Co., the largest bank in the United States, is exiting the private student loan industry.

It has scheduled to cease accepting applications on October 12, 2013 and will make its final private student loan disbursements before March 15, 2014.

Photo: A Really Smart Absentee Teacher whispers to Me inside UC Berkeley's Main Library, July 2013

JPMorgan is just making a wise business decision.

The bank cannot afford another probable domestic-based student loan bubble bursting after the devastating impact the sub-prime mortgage crisis had on JPMorgan’s balance sheet.

Commenting to Loans.org, I suspect that the student loan bubble is beginning to burst right now and that JPMorgan’s exit is suggesting that the market for private student loans will contract, as the bank effectively closes a section of its cash flow.

“Sounds a lot like the sub-prime loan department shutdowns in the large banking sector that sent similar shock waves onto Main Street back in 2007,” I said to Loans.org. “Similar spin machines of sudden sub-prime loan unit shutdowns occurred much the same way.”

I also recounted to Loans.org that JPMorgan is actually the second major private student loan lender to leave the industry, since 2012 when US Bancorp did the same. That leaves only a handful of other household names as the remaining private college loan lenders, namely Wells Fargo, Discover Financial Services, PNC Financial Services Group and Sun Trust Banks.

“Watch for some of these large private banking institutions, now facing growing risks and exposures to student loan defaults, to begin to signal they’re heading for the exit doors of the student loan gaming racket,” I stated to Loans.org. “This will leave the largest player holding the student loan bubble, the federal government’s Sallie Mae, now privatized since 2004.”

Photo: Keynote Speaker, AIESEC United States, Summer National Conference, Atlanta, GA, August 2013

Far from accepting the belief that the recession is over, I point to rising costs across housing, food, durable goods and services and other sectors of the economy that show the nation is still in a vice-grip of troubling economic times. Another financial bubble bursting will be far from a positive sign that the nation is “recovering.”

With Janet Yellen's senate confirmation and installation as Federal Reserve Chair, look for a continuance of the tens of billions of dollars of "very easy money" flooding monthly into the financial markets for many more months through 2014, and even well into 2017!

So, for the next four years of a prospective student's undergraduate or graduate college education, interest rates for federal and private student loan borrowers should be quite favorably low, and "wonderfully reasonable" for federal and private student loan consumers.

With the current administration shifting from just the previous top two priorities of healthcare and energy, and onto a third priority of reducing higher education costs for consumers, borrowers can look for a flood of fiscal policies easing federal student loan availability that will be aided by Yellen's monetary policy gifts of "easy money" and more "stored liquidity" inside private finance and lending markets.

What should graduate students know about the difference between federal student loans and private student loans?

Federal PLUS Loans, open to parents and graduate students, who are U.S. citizens enrolled at least 50 percent time in eligible graduate education institutions, may borrow up to the full cost of graduate school, excluding other sources of financial aid received. Cost to borrowers is primarily interest set by reasonably low rates established under federal mandates. Federal Plus sets loans limited by whether graduate students are classified as dependent on their parents or supporting themselves independently on their own.

Photo: Script Ohio, OSU vs. Michigan (1980) Pregame, ABC-TV

Graduate students may also qualify to receive subsidized Stafford Loans, depending on their demonstrated financial need, as mandated under a federally-established formula.

No interest accrues while the graduate student is enrolled in graduate school, as well as during the subsidized Stafford Loan grace period, or requested deferments.

“Unsubsidized” Stafford Loans are available regardless of financial need. Graduate students are solely responsible to pay interest that accrues on unsubsidized Stafford Loans, including during the period while they are enrolled in graduate school.

College Captures What's Possible in Life

In 1988, I was 1 of only 9 African Americans awarded a doctorate in engineering in the U.S. out of over 4,500 Ph.D. degrees awarded in engineering in the U.S., and over 34,000 Ph.D. degrees awarded across all disciplines in the U.S., according to Doctorate Recipients from United States Universities: Summary Report 2004, Source: NSF, NIH, DOE, USDA, NASA, National Endowment for the Humanities

Photo: Brenda (at 2 years), Me (at 3 years), Sherry wasn't born yet.

Needless to say, government grants and student loans factored heavily into my ability to attend and pay for college. But, in the end, it is worth it.

Our place in society is determined by the life experiences we have had and the lessons we have learned along the way. No one should ever be either denied an education in this country, or be denied the opportunity to achieve one's potential due to lack of funding and finances to pay for college one is admitted to attend. But, as stated in this article, this has become an increasingly difficult and painful process for college students and their families. So, the critical questions of access and affordability remain in higher education in the age of demography shift and heightened outreach, engagement, diversity enhancement, and U.S. workforce development need.

Please do join in and engage a discussion about this article.

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Oliver McGee is professor of mechanical engineering at Howard University. He is an aerospace, mechanical, and civil engineer, and author of six books on Amazon. He is former United States deputy assistant secretary of transportation for technology policy (1999-2001) in the Clinton Administration, and former senior policy adviser in the Clinton White House Office of Science and Technology Policy (1997-1999).

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Photo: Script Ohio, OSU vs. Indiana (1980) Halftime, Ohio Stadium, Columbus, Ohio