College Savers: Keep Your Foot on the Gas

Christine Benz: Hi, I'm Christine Benz for Morningstar.com, and welcome to College Radar. 2013 has been an eventful year in the realm of college funding. Joining me to discuss some of the recent changes 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, Christine.

Benz: Adam, one piece of happy news that we got in 2013 was that we finally saw some easing on college tuitions. Let’s talk about some of the pullbacks that we've seen in terms of the rate of increase in college costs?

Zoll: The latest figures show that for a four-year, in-state school, the rate of college-tuition inflation was just under 3%. This comes on the heels of 4.5% the year before and 8% the year before that. So there is some optimism that finally this kind of runaway tuition inflation we've seen in recent years may finally be leveling off.

Benz: Are we seeing this mainly at the undergrad level, or does it affect people in graduate programs, as well?

Zoll: This affects both. The undergraduate change is due to a couple of factors. One is demographic. There are fewer high school graduates to fill those incoming freshmen enrollments at lots of schools. So, that's obviously easing some of the demand for enrollment. And then also lots of people who maybe left the workforce to return to school during the recession and the high employment we've seen since then are now finding jobs and maybe finishing up school and going back to work.

Again, there is less demand for enrollment at the undergraduate level, but that's also happening at the graduate level, as well. In fact, just this week a new study found that applications to law schools were the lowest since the 1970s. This upward pressure pushing tuition at a rate much faster than the broader rate of inflation may finally be easing.

Benz: I know in the past that some of those runaway inflation rates were really scaring parents to death, and that maybe persuaded them to get serious about saving. But you say that it's still worthwhile to really focus on saving the money that you need for college?

Zoll: These are such uncertain times for college savers because if you've got a student who is in school right now or maybe in next few years, you probably have some decent idea of how much it's going to cost. But if you're saving for a child who is not going to be in school for 10 years or more, there are so many unknowns. Will the rate of tuition inflation continue roughly at what we've seen to be much faster than the overall inflation rate? Or will things change?

The entire financial model of going to college is undergoing some transitions. People are finding alternative routes to getting their college education. They're maybe going to community college and then transferring to a four-year school or finding different certificate programs to get an accreditation. These massive open online courses, or MOOCs as they're called, are a way that people can take courses over the Internet and get a college credit.

There are lots of different variables, but my advice to people who are saving for a college for a student who is not going to enroll until way down the line is this: Don't let up and don't take your foot off the gas because you don't know what it's going to cost. Odds are college is still going to be very expensive. It's hard to know exactly how much, but you don't want to be caught short when it is time.

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Benz: Another positive headline in the realm of college savings is we're starting to get greater transparency about college costs and maybe get a little closer to what the return on investment is for college. Let's talk about the advances there.

Zoll: I think college consumers, in general, are becoming more cost-conscious obviously with these sky-high tuition rates, and there is a movement toward greater transparency. In fact, the White House has introduced something on their website called the college scorecard that includes lots of information about graduation rates, debt loads for graduating students, and other factors that can help people, who are researching a specific school, see what the typical student who has taken out federal financial aid, is leaving school with in terms of a debt load. Eventually the White House hopes to have salary information [on the website].

This is the kind of information that was not previously available in the sort of opaque world of college finance, and I think this is a real positive development because it does allow consumers to make more informed choices.

Benz: If I am trying to calculate the return on investment for a given college, can I do that, or are there still missing pieces?

Zoll: It's still tough. Obviously, every situation is different. Is the student going to graduate in four years or five? That's going to make the cost difference. Is the student going to need to go to graduate school? What field is the student going into? There are lots of different moving parts there. But at least there are more tools now to try to make that educated ballpark estimate in terms of getting that return on your investment.

Benz: We also saw some changes in the federal student loan market in 2013. Let's talk about those and how in a lot of ways they are becoming more similar to the private-loan market?

Zoll: Right. Previously federal student loans were fixed rates, and the big change that occurred this year is that Congress and the White House agreed to tie them to market rates. The rate will now float each year, rise or fall based on market rates. The good news in the short term is that the rates go down. They're going to be lower for the vast majority of students than they were in previous years, but there is the danger that they could rise in the long term.

For people who are taking out loans in the next few years or even beyond, you want to pay attention year-to-year because the rate that you are paying this year may not be the rate that you're paying next year.

Benz: I was struck too, Adam, by the percentage of students taking out some sort of student loan. It's pretty staggering actually.

Zoll: Right. About one third of undergraduates take out some form of a federal loan. This is up from 10 years ago. I believe it was in the mid-20% range at that time. This is a reflection of the rising cost of college. There's a reduction. Lots of states have pulled back on the money that they give to their state universities, though some of that now is starting to flow back to universities.

But overall, a lot of these costs have been shifted onto the backs of students and their families, which is why we've seen student debt become a huge issue in this country, estimated at a over $1 trillion altogether. It's something that you really want to keep your eye on when planning your own college financial picture down the road because leaving school with a huge pile of debt is a real headwind for someone starting their financial adulthood.

Benz: I guess the fact that we had a recession in there probably complicated finances for a lot of families, too?

Zoll: Absolutely.

Benz: Adam, thank you so much for being here.

Zoll: My pleasure.

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