Home>Video>Keep Up With Your College-Savings Homework

Keep Up With Your College-Savings Homework

Tue, 26 Mar 2013

Families of future and current college students should be mindful of the effects of sequestration, a university's 'Scorecard,' their own savings projections, and their future debt loads.

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Video Transcript

Christine Benz: Hi. I'm Christine Benz for Morningstar.com. One of the less discussed aspects of sequestration is its impact on the college-funding landscape. Here to discuss that and other news items in the world of college funding is Adam Zoll. He is assistant site editor for Morningstar.com. Adam, thank you so much for being here.

Adam Zoll: Happy to be here.

Benz: So, let's discuss at the outset what is going on with sequestration, and how does it affect people who are paying for college currently?

Zoll: Well, the sequestration, as you'll recall, is the $85 billion in federal spending cuts that went into effect earlier this month, part of a larger plan to cut Federal spending over the next decade. The near-term impacts of sequestration on higher education funding, and financial aid in particular, are not that great for the current school year. In fact, they're not affected at all.

But in the coming school year, the primary effects will be felt in the area of Work Study, and also for the Federal Supplemental Educational Opportunity Grant, which is a grant that benefits undergraduate students from low-income families. There is about $86 million worth of cuts to those two programs in particular.

Benz: It doesn't sound large. I mean, it's a big number, but it doesn't sound huge.

Zoll: It doesn't sound huge, but Secretary of Education Arne Duncan has estimated this could affect as many as 70,000 students who are reliant on these programs. It's not a real broad effect when you look at the overall student population, but it's still going to have a meaningful impact on some people who rely on financial aid.

Pell Grants, which are a much larger program, are unaffected in the coming school year. However, they could be affected by sequestration cuts the following year. So for the 2014-15 academic year, Pell Grants could also fall under sequestration.

Benz: So, stay plugged in if you are a parent or someone else paying, or if you're student paying for school using one of these means, you need to stay plugged in to how that could affect your overall package.

Zoll: Exactly. Financially, if this is a significant portion of your college-funding plans either in the near future or even down the road, you definitely want to pay attention to what's happening with these sequestration cuts.

Another area that's going to be affected, though it's a rather minimal effect, is that there is going to be a modest increase in origination fees for student loans. So, if you think that that's part of your plan as well, you could be paying a few dollars more for those origination fees.

Benz: So, that would be for the federally subsidized student loans?

Zoll: That's for all student loans.

Benz: All student loans.

Zoll: Those are student loans and also the Parent PLUS loans; so that affects them all.

Benz: So, not related to sequestration, Adam, is this College Scorecard. The White House has rolled out a new tool for people to do comparison shopping among colleges. Let's talk about what's available there.

Zoll: Well, you may have remember that President Obama in his State of the Union address mentioned the need for more transparency in terms of college pricing and giving people information that will allow them to make a good estimate of how much bang for the buck they're getting for what they're paying for college.

Shortly thereafter the White House introduced something called the College Scorecard, which is a website that you can access at whitehouse.gov, that provides a database of information about college costs for schools all over the country. It breaks it down by lots of different factors, but for each college, it provides first of all the average cost of attendance, which is different than the sticker price--which is what you might call the published tuition cost--in that this is after scholarships and grants what the typical student of these schools would pay.

So, this is good information, because it's more of a real-world look at what people are paying. However, you have to approach it with some caution; just because the typical student is paying these expenses doesn't mean that that's what your sticker price is going to be. For example, if you come from a higher-income home and are not going to qualify for as many grants and scholarships, you may end up paying more than these numbers.

Benz: You may pay that sticker price.

Zoll: You may end up paying the full price.

Benz: OK.

Zoll: Other information that's provided there are graduation rates, the loan default rates, and the median borrowing, so, how much the average loan payment for students who take out loans is for that school. All this information combined can help consumers make a more educated decision in terms of what the actual real-world cost is going to be for them, especially if student loans are a part of their expectations in their planning.

Benz: So, one thing we've talked about wanting to get our arms around is what is the return on investment for various schools? Are they there yet? Will people be able to do any of that sort of analysis, or is that maybe down the line?

Zoll: Well, unfortunately, the College Scorecard website, though it has a placeholder for employment information and salary data, it's not available yet. What the site says will be available, ultimately, is information on average salaries for people who have taken out student loans, which also is not going to necessarily represent the full student body. But it's definitely a good idea, and you may be able to obtain from an individual school information on what its graduates are making once they leave school. And that's really part of the broader return on investment picture that you want to come up with as you make your decisions.

Benz: Right. We've long said that parents should really be thinking about that ROI. Of course, it's not the only thing that goes into making college worthwhile, but you want to think about whether you are getting that bang for your buck.

Zoll: Right.

Benz: Another thing that you wanted to talk about, Adam, was a recent Sallie Mae study that actually looked at fewer families saving for college. Let's talk about what that study showed and what you think is going on there.

Zoll: This is an interesting study that came out just a few weeks ago put out by Sallie Mae. They do a survey each year of families with children below age 18 who they expect to go to college one day and what [the families'] college-savings habits have been. And what they found is that in the most recent survey, which was done last August, only about half of families had started saving for college, which was actually down from 60% two years earlier. So, that in itself was kind of a little bit alarming in that fewer people seem to be saving.

Among the nonsaving families, the biggest reason for not doing so, about half of those families said they just simply didn't have enough family income to start on those college-savings plans. The other reasons cited were the need to fund their emergency accounts, just to pay off everyday bills, and things like that. So, this may be an outgrowth of our continuing unemployment problem in the country and other economic factors, but certainly we don't want to see people moving backward in terms of thinking about college saving.

Benz: One statistic was that 44% of families said they had discussed paying for college with their kids. I guess that's sort of encouraging, but it doesn't seem like enough. It seems like every family with college on the mind should be having that discussion with their kids, how are we going to pay for this?

Zoll: Right. That struck me as a little bit higher than I would have anticipated also, but another number that really leaped out at me here was, when they asked people how much do you expect to save by the time your child enters college, the average response was about $39,000. But when Sallie Mae went ahead and projected how much families actually would be saving, given their current rate of saving, it was only about half that amount. It was less than $20,000. So, there is little bit of a disconnect there in terms of what people expect to have available in terms of resources once their child is ready to go to school versus the track they are on right now.

Benz: Another study in the news, Adam, recently looked at levels of debt in younger households. This is a somewhat more encouraging picture, right?

Zoll: That's true. This was a Pew Research Center study that found that 78% of younger households--those are households headed by someone aged 35 or younger--had debt of any kind, and it was the lowest since these numbers were first tracked in 1983. So, that is encouraging that fewer younger households have these debt loads. However, while there were decreases in debts for housing, we know generally people are holding off more on buying houses and taking out mortgages, for example.

Benz: Right. Or they're spooked by what they've seen their parents go through probably.

Zoll: Probably, and fewer are taking out auto loans, for example. College loans were one area that did increase since 2007. So, the percentage of these households that had college debt increased from 34% to 40%. I think this study is somewhat complementary with the one we just talked about, the Sallie Mae study, where families maybe are not saving as much as they had planned for college. Then here we see the other end of the spectrum, once people graduate, they may actually be graduating with debt when they maybe had not planned to or really had hoped not to.

Benz: Right. Well, Adam, thank you so much for providing this roundup of the latest news in college funding. It's really interesting to talk to you.

Zoll: My pleasure.

Benz: Thanks for watching. I'm Christian Benz for Morningstar.com.

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