Students Assume Greater Share of College Costs

CUs and college students are in desperate need of each other.

August 24, 2012

College students and their parents agree that higher education is an investment in the future. Increasingly, that investment is falling on students’ shoulders.

Drawing from savings, income, and loans, students paid 30% of the total cost of college attendance during the last academic year, up from 24% four years earlier, according to “How America Pays,” a national study from Sallie Mae and Ipsos Public Affairs.

Parents covered 37% of college costs, down from 45% four years earlier.

The percentage of families who eliminated college choices because of cost rose to the highest level (69%) in the five years since the study began, and virtually all families exercised cost-savings measures.

The most common cost-savings strategies included living at home (51%), adding a roommate (55%), and reducing spending by parents (50%) and students (66%).

In 2012, families continued the shift toward lower-cost community college, which accounted for 29% of enrollment compared to 23% two years prior. Overall, families spent 5% less for college compared to one year ago.

“We see that families recognize the value of a college education and that they are taking steps to keep college costs in line with their financial resources,” says, Albert Lord, Sallie Mae’s vice chairman/CEO. “Data confirms again and again that the investment carefully made significantly enhances the lives and livelihoods of those who complete their education.”

Grants and scholarships financed the largest portion of college bills (29%), but student borrowing funded a larger percentage of costs (18% vs. 15% in 2010). Federal student loans accounted for 13%, private student loans, 4%, and other loans, 1%.

Thirty-five percent of students took out education loans to pay for college: 25% took out federal loans only, 9% used a mix of federal and private loans, and 1% tapped private loans only.

Credit card ownership by college students has dropped two years in a row. Overall, 35% of undergrads carried a credit card, down from 42% in 2010, with the sharpest drop among sophomores and juniors.

Of those with a card, the average balance was $755. One-third (33%) reported carrying no balance on their credit card.

Private student loans

American consumers owe more than $150 billion in outstanding private student loan debt.

While this amount is significantly lower than the amount outstanding on federal student loans, private student loans are an important component of higher education finance—and one the public doesn’t fully understand, according to the Consumer Financial Protection Bureau (CFPB).

A report by the CFPB and the U.S. Department of Education outlines some key attributes of the private student loan marketplace and related consumer protection issues:

Private student loan originations grew rapidly over the past decade—and then declined just as quickly.

Fueled by investor appetite for asset-backed securities, the private student loan market grew from less than $5 billion in 2001 to more than $20 billion in 2008 before contracting to less than $6 billion in 2011.

Underwriting standards loosened. From 2005 to 2007, lenders increasingly marketed and disbursed loans directly to students, reducing the involvement of schools in the process. As a result, many students borrowed more than they needed to finance their education.

Also during this period, lenders were more likely to originate loans to borrowers with lower credit scores.

Lenders have changed their underwriting and marketing practices. After 2008, lenders rapidly increased the share of loans with a co-signer, from 67% in 2008 to more than 85% in 2009. In 2011, more than 90% of private student loans were co-signed.

In 2011, 90% of private student loans to undergraduates required schools to certify the student’s need for financing. Lenders also tightened credit standards and reduced lending to nonprime borrowers.

Many borrowers don’t understand the differences between federal and private student loans.

Many private student loan borrowers didn’t exhaust their federal Stafford Loan limits before turning to private loans. Some borrowers reported they didn’t know they had fewer options when repaying private student loans than with their federal student loans.

Many borrowers are struggling to repay their private student loans. In 2009, the unemployment rate for private student loan borrowers who started school in the 2003-2004 academic year was 16%.

Ten percent of recent graduates of four-year colleges have monthly payments for all education loans in excess of 25% of their income. Default rates have spiked significantly since the financial crisis of 2008.

Cumulative defaults on private student loans exceed $8 billion, and represent more than 850,000 loans.

“I think a lot of the problems you see right now are a result of degree-to-debt mismatch or career-to-debt mismatch,” says Ken O’Connor, director of student advocacy at Fynanz Inc., a CUNA Strategic Services alliance provider.

He suggests advising students and their families that the best way to manage loan repayment is to take on a reasonable amount of debt based on the student’s major and career path. Deciding on a major late in the game can add years to students’ college education.

CUs, students share mutual need

Credit unions and college students are in desperate need of each other. Today, only 9% of credit union members are ages 18 to 24, and a disturbing 70% of nonmembers in that age group are “not at all familiar” with credit unions, according to CUNA’s 2011-2012 Survey of Potential Members.

“Credit unions must not sleep on generation Y,” says Shawn Gilfedder, president/CEO of McGraw-Hill Federal Credit Union, East Windsor, N.J. The $280 million asset credit union began its student lending program in July 2010. “If credit unions don’t pick up the student lending ball, banks and larger financial institutions will.”

Students’ lack of financial knowledge can be an obstacle to understanding the details of their loans, making a credit union partner even more important. McGraw-Hill Federal implemented educational programs to teach students, parents, and grandparents how to finance college economically so they can limit student loan debt.

The credit union uses educational blogs, personal consultations, and family focused seminars to provide extensive student loan information. Its Financial Literacy Series also presents an accredited program and real-life examples from financial professionals.

“Our goal is to offer more than a loan product—we offer guidance to help optimize success,” Gilfedder says. “We not only sell student loan financing, but we educate students and their families on the entire process, while making sure education expenses match postgraduate income potential.”