A Q&A with financial-aid expert Mark Kantrowitz
By Mara Grbenick
Last Update: 12:01 AM ET May 29, 2012
WASHINGTON (MarketWatch)President Barack Obama opposes a push by Congress to double the 3.4% interest rate on federal Stafford student loans, but Mark Kantrowitz, publisher of Fastweb.com and Finaid.org, has a different message: Let the rate expire in July as currently mandated and increase funding for Pell Grants, which help make college attainable for the neediest students in America.
The U.S. is in a brains race, Kantrowitz says, and, to stay competitive, should devote substantially more resources to smart people who cant afford college.
In a recent conversation, Kantrowitz offered his take on federal education loan policy and his best advice for students and parents.
Question: What frustrates you most about how the college-aid process works?
Answer: The financial-aid system, which includes the financial-aid application, the methods for evaluating financial need and the types of aid available, is too complicated. Neither the Free Application for Federal Student Aid (FAFSA) nor the College Boards CSS/Financial Aid Profile form take into consideration consumer debt held by the student or parents. Student-loan debt is also not treated as offsetting to assets or income and consequently the need analysis overstates ability to pay.
There are three college-savings plans: 529 college savings plans, prepaid tuition plans and Coverdell education savings accounts. There are three education tax benefits: Hope Scholarship tax credit (also known as the American Opportunity tax credit), lifetime learning tax credit and tuition and fees deduction. There are also too many student-aid programs: For example, there are five different federal loan programs Perkins, subsidized and unsubsidized Stafford, Parent Plus loans, consolidation loans and they all have different interest rates. Its too much choice for most people and makes the true cost of college hard to know.
Q: What should students look for in their college-aid award letters?
A: In financial-aid award letters, colleges often describe loans as reducing college costs, which is, of course, misleading, because loans do just the oppositethey increase your costs. Also, theres an important distinction between the net cost, the term used in award letters, and the true cost of college. The net cost of college is the total cost of attendance minus the financial-aid package, which may include a variety of student loans.
I routinely hear from students who believe they are getting a free ride because the net cost is zero. The net cost is usually the same or similar to the expected family contribution, which may be zero for low-income students. When I look at their financial-aid award letters I see thousands of dollars of student loans and tens of thousands of dollars of Parent Plus loans. That isnt a free ride.
Q: What should the goals be, on a national level, to improve financial-aid policy?
A: In the United States, we are not adequately investing in our greatest resourcestudents. Public policy can be based on a variety of goals, such as increasing the number of college-capable low-income students who can enroll in and graduate from college, or keeping the U.S. strong in fields that are going to be strategically important (e.g., science, technology, engineering and math) by rewarding academic merit in those fields. Finally, encouraging college graduates to become teachers in those areas will help educate the next generation so public-service loan forgiveness should be a part of the policy.
More money for loans means less money for grants. Cutting direct investment in education will ultimately hurt us as a nation. The benefits of this investment are not private. Not only do college graduates earn incomes that are 70% to 80% higher than high-school graduates, but bachelors degree recipients also pay more than double the federal income tax.
Q: Why have the interest rates on some federal student loans remained high even though interest rates for other things like cars are quite low? The Direct Plus loan for parents is 7.9% plus a 4% origination fee. The government makes money on it.
A: The rates are overall a pretty good deal. When you buy a car, the loan is secured with the car. When you buy a house, the mortgage is secured by the home. If you default on a federal student loan, the government cannot repossess your education. Federal student loans are also higher risk, since they are not credit underwritten. Federal student loans have fixed rates, while most other forms of consumer debt have variable rates, rates that have nowhere to go but up. This is why, if you fail to pay your student loans, your wages or even Social Security checks could be garnished up to 15%.
The interest rate doesnt matter while youre in school. It only affects the cost of college after you graduate. Remember that interest rates are unusually low right now because the Federal Reserve is suppressing increases in interest rates through 2014. If interest rates follow past patterns, they will eventually begin to rise by about the same amount they dropped at the start of the credit crisis. Federal student loans have fixed rates, which over time will cost less.
Q: Its an election year so theres more talk about education policies that appeal to voters in the short-term, but what do you think the U.S. needs to do in the long-term?
A: We are no longer in an arms race, but in a brains race. We need a national priority of investing in people. The U.S. doesnt have a monopoly on talent. Weve invested in our native ingenuity [in the past], but we cant slack off. The U.S. has the best system, but its only a matter of time before other countries start catching up.
Student-aid policy over the past several decades has focused mainly on maintaining the status quo. While the total dollar amount of funding has increased, the average amount of funding per student has declined on a constant dollar basis. There hasn't been any bold new investment in postsecondary education. What would happen if we were to increase investment in the Pell Grant program from $30 billion a year to $100 billion? This would dramatically increase the number of college graduates, switching us from a downward spiral to a new renaissance of business and technological leadership. Even people who dont have kids going to college would benefit because higher federal income tax revenue from the college graduates would allow Congress to maintain or expand current programs without any tax increases. There are 3 million jobs unfilled because we dont have enough college graduates with the right skills to fill them.
Question: Whats your best advice to students and parents who are trying to make a good decision for college?
- Start saving as soon as possible for college. The earlier you start, the better off youll be and the more flexibility youll have in making your decision. The greatest asset is time. If you start saving from birth, about a third of the college savings goal will be achieved from earnings rather than from contributions to savings. If you start saving when the child enters high school, only about 10% will come from earnings. Also start searching for scholarships early. Every dollar you save or win is about a dollar less youll have to borrow to pay for school. The more you can save or receive in grants, the more freedom you have to choose your ideal school.
- Minimize your debt. Before you incur debt, figure out how you will repay it. The total student-loan debt you will take on should be less than your expected annual starting salary. Federal loans provide alternate repayment plans like extended repayment and income-based repayment, but those have consequences like more interest. The longer you are in debt, the more difficulty you will face in meeting other financial goals.
- Compare college costs based on net price. This is the truer measure of cost and affordability. The net price is the cost of attendance minus just grants and scholarships. The remaining amount is how much money you need to pay from savings, income or loans.
- Also consider graduation rates and other measures of college quality. Is your chosen field of study offered at the university and how strong is the program? Those students that are driven to do well will do well no matter where they go, but talented and driven students tend to matriculate in schools where the graduation rate is high. (It is unclear whether this is due to the value added by the elite colleges or whether the elite colleges merely aggregate the most talented students.) Given the trade-offs between college affordability and college quality, it is often worthwhile to enroll at a lower-cost college, such as an in-state public college.
- Know how much debt you are really going to end up with and calculate the monthly loan payment. There are online tools for this. Think about the life goals you have and how those payments will affect your ability to meet those goals. Will you need a car? Do you want to save for a house or your childrens education? When evaluating college costs, make the cost of your loans tangible and specific.
Mara Grbenick is a reporter for Medill News Service.