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By Adam Zoll | 03-04-2014 04:00 PM

College Aid Trends Worth Watching

College affordability is becoming more problematic, which is why most families should seek scholarships or other financial aid ASAP, says college-planning expert Mark Kantrowitz.

Adam Zoll: From Morningstar, I'm Adam Zoll. Rising college costs have more families crossing their fingers when it comes to financial aid. Here to talk about trends in financial aid is Mark Kantrowitz. He is publisher of Edvisors.com, a college-planning website.

Mark thanks for joining us today.

Mark Kantrowitz: Thank you for having me.

Zoll: Let's talk about the financial aid landscape. How is it changing? What are we seeing in terms of who is getting financial aid and how maybe that differs from the way it was five or even 10 years ago?

Kantrowitz: There is long-term trend toward declining buying power of grants. The grants are not keeping pace with increases in college costs. State funding of higher education has been declining on a per-student constant-dollar basis. Even money from the federal government has been anemic in its growth. Over a 10-year period, The Federal Pell Grant is increasing at less than the consumer price index.

It's not only not keeping up with tuition inflation, it's not keeping up even with regular inflation. And so this is causing the affordability of college to go downhill and increasingly is pressing low-income students out of college education. Students are being forced to make up the difference with their own resources, but since family incomes have been flat, they are increasingly turning to student loans. Student loan debt at graduation increases every single year. That's causing more problems with college affordability.

I'm predicting that interest rates on new student loans will increase July 1 because they're based on the 10-year Treasury and that rate has been going up. So even the debt's going to become less affordable.

Zoll: Let's talk a little about merit-based aid versus need-based. Need-based aid of course is tied to the student's and the family's financial picture, whereas merit-based aid is a little bit more ephemeral in terms of what the criteria are. How are schools using merit-based versus need-based aid these days?

Kantrowitz: The long-term trend of the grants that colleges give, more and more of it is shifting from need-based aid to merit-based aid, or non-need-based aid. Colleges use these grants as a form of leverage to try to achieve recruiting goals. Sometimes this is trying to recruit academically talented students, but more and more often it is trying to attract wealthier students because even with that grant to that wealthy student, that student is paying more net to the college than a low-income student might.

It helps the college's financial picture, but it also is pricing low-income and moderate-income students out of a college education.

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