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Where College Planning Stands Today

Adam Zoll

Note: This video is part of Morningstar's October 2014 College Planning Report Card special report. 

Adam Zoll: For Morningstar, I'm Adam Zoll. College has become more expensive than ever. But where are costs headed and what can college planners do to prepare? Here with some answers is Mark Kantrowitz, publisher of Edvisors.com, a college planning website. Mark, thanks for being with us today.

Mark Kantrowitz: Thank you for having me.

Zoll: So, the rate of college tuition inflation, which has far outstripped the overall rate of inflation over the past few years, seems to possibly be slowing down, according to recent figures. Are we at a tipping point at which college tuition will not be increasing as fast as it has in the recent past?

Kantrowitz: This is a pattern that we see after every economic downturn, especially public college tuition inflation. It goes through feast-famine cycles, and we're starting to enter into a period when it won't increase as much until we reach the next recession.

Zoll: What about demographics? Do demographics play a role in terms of where college tuition is headed if there's not as much demand, for example, for enrollment?

Kantrowitz: Clearly, the small colleges that are not well known nationally and have under a thousand in enrollment are feeling more and more financial pressure as demand for these colleges moderates. This is, in part, because families are becoming much more price sensitive, they are concerned about the increase in college costs, and they are asking questions about what is the return on this investment.

Zoll: Where are some of the best values right now in terms of getting the most bang for your buck for your tuition dollar?

Kantrowitz: The best colleges in terms of overall quality of education at low price are the in-state public colleges. There are also a few dozen colleges with very generous financial aid policies that eliminate loans from their financial aid package. So, to the extent that you receive financial aid, it's going to be grants and student employment, not loans. Princeton University, the college that started this trend, has an average debt at graduation of just $6,000. That's much lower even than some in-state public colleges. So, those are your best bets for finding a low-cost college that is, nevertheless, very high in educational quality.

Zoll: You mentioned financial aid, and earlier this year, we spoke about some financial aid trends. You said that grants--financial grants in particular--were not keeping pace with tuition inflation. Is this something that you foresee as a continuing trend in the years to come?

Kantrowitz: I think so. Grants from the federal and state governments have been declining on a per student constant dollar basis for decades. And until Congress gets out of its budget-cutting mood, I don't foresee any real changes in this regard. Now, there is one small, bright light, which is private scholarships. The total amount of funding for private scholarships doubled in the last four years, and that was about $6 billion. That's a significant increase over the $2.7 billion to $3 billion that was available in 2007-08, but that's just a drop in the bucket compared to the complete college cost picture. It is part of your plan to paying for college; but for most students, it's not the entire plan.

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Zoll: Another interesting trend that bears watching in higher education is the increasing popularity of online courses. Currently, many schools that offer online courses are charging the same amount of tuition for that as they would for attending courses in person. But do you think that technological innovations like that ultimately will help hold down tuition costs in the long run?

Kantrowitz: The argument behind an online college is that you can teach 10,000 students the same as you can teach a single student, because it's just video and automated testing. The problem is education is difficult; it requires a lot of hand holding. There is a reason why we have the same class sizes today as we did 100 years ago. So, it's not as scalable as they claim. You need to have tutorial sessions, office hours with the faculty, you need recitation sections.

All of this adds to the cost and makes it not as scalable. To have a truly scalable enterprise, you need to be able to have machine intelligence so good that it could substitute for graduate students and faculty. And we are at least 50 to 100 years away from that becoming a practical reality. And you may have effective speech recognition in your telephone system, but to actually diagnose where a student is not understanding the material and to provide targeted remedial education to address that weakness, that requires a sophistication that is not available from current-day technologies.

Zoll: Another issue on many families' minds is the student-debt crisis. Many students now leave school with mounds of student debt--sometimes not with the rosiest of job prospects. And I even hear some people questioning the value of a college education these days. Do you think that this is going to have a long-term impact on college enrollments and tuition?

Kantrowitz: As I stated earlier, the failure of grants to keep pace with the increases in college cost is shifting more of the burden of paying for college from the government to the families. Family incomes are flat, though there's some improvement now at the end of the credit crisis, but that flat income forces the families to make one of two possible decisions: either take on additional student loan debt--which is why average debt at graduation increases by $1,000 to $2,000 a year--or their shifting their enrollment to lower-cost colleges, such as from four-year colleges to two-year colleges.

There is a lot of data that shows that, on average, a college education is worthwhile from a financial perspective. You get a greater lifetime income with a bachelor's degree than with just high school diploma. Even your annual income is going to be about $20,000 higher on average. Those are averages; some students graduate with more debt and pursue occupations that don't pay as well. Those students should be borrowing less. Your debt needs to be in sync with your income, so that your total debt at graduation is less than your annual starting salary. If your debt is in sync with your income, you'll be able to pay back these student loans in 10 years, and you'll have substantially greater income over your lifetime. But if you go into a low-paying field, borrow less.

Zoll: Finally, like me, you probably hear from parents with younger children who sort of throw their hands up in the air and say, "I don't know how I'm possibly going to be able to afford to pay for my child's college, and I can't even imagine how much it's going to cost once they are in college." What advice do you have for these families in terms of saving for college for younger children when it is such a cost unknown at this point and it seems like such a daunting task?

Kantrowitz: Like any life-cycle event, paying for college is going to be spread out over time. A third of your college cost will come from savings, a third from current income, and a third from future income in the form of loans. In addition to this, over any 17-year period, college costs go up by about a factor of three. So, combining the two: Three times each third equals one. This suggests that your college-savings goal should be the full cost of a college education the year the child was born. You might not be able to predict the specific college that the child will enroll in 17 years into the future. It's hard to predict what they'll eat for dinner, let alone what's going to happen in over a decade.

But you can probably predict the type of college. Is it an in-state public college, an out-of-state public college, or a private nonprofit college? Based on this, for a child born this year, the amount you should save per month should be $250 a month for an in-state public college, $400 a month for an out-of-state public college, and $500 a month for a private nonprofit college. If you stick to this, you will accumulate about a third of future college costs.

Now, most people don't save enough. But remember: Every dollar you save is a dollar less you are going to have to burrow. And every dollar you borrow will cost about $2 by the time you repay that debt.

Zoll: Well, thanks Mark. You've provided us with a lot of useful information today. Thank you so much for joining us.

Kantrowitz: You're welcome. Thank you for having me.

Zoll: For Morningstar, I'm Adam Zoll. Thanks for watching.