Poor College Completion Rate Costs the U.S. Billions
The U.S. and state governments lose out on billions in tax revenue because four in 10 college students are unlikely to earn their degree within six years, according to a new report by the American Institute for Research (AIR).
The AIR study, The High Cost of Low Graduation Rates: How Much Does Dropping Out of College Really Cost?, finds that of the 1.1 million full-time students who entered a four-year college in 2002 seeking bachelor degrees, almost 500,000 did not graduate within six years. AIR estimates that in 2010 these students cost the U.S. $3.8 billion in lost income that would have resulted in $566 million more in federal income taxes and $164 million more in lost state income taxes. In all, the 40 percent of freshmen in 2002 who failed to earn their degree costs the country $4.5 billion in 2010, according to the report.
"These findings represent just one year and one graduating class. Therefore, the overall costs of low graduation rates are much higher since these losses accumulate year after year," explained Mark Schneider, a vice president at AIR who co-authored the report with AIR researcher Lu (Michelle) Yin.
In addition to increasing revenues, the Obama administration could make significant strides toward its goal to have the highest concentration of college and university degrees in the world by increasing college completion rates for students who access higher education.
The inability to complete their program also has a negative impact on the individual students.
"Students who start college and don't graduate incur large personal expenses," Schneider said. "They have paid tuition, they have taken out loans, they have changed their lives and they have failed in one of the biggest goals they have ever set for themselves."
In the state-by-state analysis, AIR calculated that 14 states saw income losses from this single group of dropouts exceeding $100 million annually. Those include California, with $386 million in lost income, and New York with close to $360 million, to Louisiana, Massachusetts, North Carolina and New Jersey, all losing between $100 and $107 million in earnings. Losses in federal income tax saw were also substantial.
The report also highlights some of the financial implications for students who complete college compared to those who do not. Young adults between the ages of 25 and 34 with a college degree, working year round, earn around 40 percent more than someone with some college who has not completed a degree and around two-thirds more than someone with just a high school degree, according to the U.S. Bureau of the Census. A college graduate can earn about a half million dollars more over a lifetime than a person without a degree.
"Given these higher earnings, many governors are looking at a more educated population as a way of dealing with the growing fiscal crisis they face," said Schneider. "Most states have state income taxes and they benefit directly from the higher incomes earned by college graduates."
"Low college graduation rates are costly for students, for their families, and for taxpayers in each state and the nation as a whole," the report concludes.
Publication Date: 8/23/2011
Wednesday, August 24, 2011
Monday, August 22, 2011
3 myths continued
(Continued ...).
Until now, families had to do a fair amount of digging to try to figure out what they might actually pay. They had to gather the "sticker price" cost of various schools, get an idea of their "expected family contribution" from calculators such as the one at Kantrowitz's FinAid.org, and then try to get some idea if their student was likely to get merit aid that might reduce the total cost.
Too many don't do this research, with potentially disastrous results.
"It's reckless to apply blindly and hope in the spring you'll get good news," O'Shaughnessy said. "What if you don't and you've missed the deadline for other schools?"
Where to get money for college
Fortunately, starting in October, all colleges that offer financial aid are supposed to post "net price calculators" on their websites, O'Shaughnessy said. These calculators will allow people to input various factors, including income, assets, the student's grades and test scores, to get an estimate of the net cost of the education there.
The calculators aren't perfect. Some don't include merit aid, which schools can use to significantly reduce costs for students they're trying to attract. So families will still need to do some research.
Fox recommended that families use the federal Education Department's College Navigator to figure out which schools are most likely to want their kids. Under the "admissions" tab for each school, you'll find SAT scores for the 25th and 75th percentile of students attending there. If your student's SAT scores match or exceed the 75th percentile number, "that significantly improves the chances they will offer a better financial-aid package," Fox said.
Schools may also try to recruit students for particular majors or who have particular skills (the band may need a trombone player, for example). Ferreting out that information may require a call to the admissions office. Fox attends college fairs, which are often held in large-city convention centers, to talk to admissions officials about what types of students their schools are trying to recruit.
A well-connected high school guidance counselor can be another source of leads, although you're more likely to find those in a private high school than in many public schools, where guidance counseling is frequently subject to budget cuts.
Myth No. 3: "A public school will be cheaper than a private college."
Reality: You could end up paying less for a private-school education.
"Many private colleges will offer a need-based financial-aid package or a merit-based package that brings the net price either close to or even below the cost of a public school," Fox said. "At public colleges, the financial-aid packages are much more loan-heavy, with a lower percentage of grants and scholarships."
You also need to factor in how much time it will take to graduate. Far fewer students manage to graduate from public schools in four years (29.9%), compared with private schools (51%). If you wind up paying for an additional year or two, that could dramatically increase the overall cost of a public-school education.
Those statistics are for people who started college in 2002, the latest available data from the U.S. Department of Education's National Center for Education Statistics. Since then, the situation at many public schools has gotten worse as strapped state governments have slashed education budgets.
"Students can't get the classes they need, or they're not being offered every semester," Fox said. "Parents should factor in the cost of at least an extra year when they're comparing public schools to private."
Of course, their child may be the exception, Fox said. A kid who knows what he wants to do, who is proactive enough to plan out the courses he needs, and who's first in line at registration has a shot at getting through a public college in four years.
Other kids may flail around, sometimes for years, trying to decide what they want to do. Again, private schools may have the advantage here, since they offer more guidance -- "handholding," Fox called it -- to help students settle on their majors.
•Connect with Liz Weston on Facebook
A commonly recommended strategy is for students to attend a cheaper two-year college first and then transfer to a four-year college. This can work well for motivated students. Less motivated students, though, might attend only part time and never complete a degree at all. Without a degree, all the money paid for education is essentially cash down the drain.
Community college "can be like a sand trap," O'Shaughnessy warned. "You may not get out of it."
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy." Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Click here to find Weston's most recent articles and blog posts.
3 college myths that will cost you
Certain misconceptions about financial aid and the price of higher education are all too frequent. The facts show why they're not to be taken seriously.
Myth No. 1: "Saving for college will hurt my child's chances of getting financial aid."
Reality: If you can save for college, you should.
The federal student-aid formula is much more heavily weighted toward income than assets. Translated: What you manage to save doesn't count against you as much as you might think, particularly if you save it in the right ways.
If you a have a decent income and don't save, however, you could be in a world of hurt. That's because the formula assumes you have been saving money all along, even if you haven't.
Since a lot of financial aid these days consists of loans, rather than scholarships or grants, your savings essentially reduce your (or your child's) future debt.
.
"Despite the slight reduction in aid eligibility, families who save for college are in a much better position than families who do not," said financial-aid expert Mark Kantrowitz, the publisher of Fastweb.com and FinAid.org, and the author of "Secrets to Winning a Scholarship." "Saving for college provides you with more flexibility in your choice of college. Also, every dollar you save is about a dollar less you will have to borrow, helping you to avoid borrowing too much."
And you'll wind up paying less overall if you save rather than borrow. Kantrowitz offered the example of a parent who saves $200 a month for 10 years in an account that earns 6.8% on average. She would accumulate $34,400. Borrowing the same amount at 6.8% (the current fixed rate for federal Stafford student loans), "you'd have to pay $396 a month for 10 years, almost twice as much," he noted.
"The difference is that when you save, you earn the interest, while when you borrow, you pay the interest," Kantrowitz said.
Of course, it matters where you save. Generally speaking, you don't want to save in the child's name -- and beware of advice that tells you to hide money in a grandparent's name. Here is Kantrowitz's advice:
•Saving in a custodial account generally isn't a good idea if you hope to get any financial aid. Savings in UTMA or UGMA accounts, for example, reduce your child's aid eligibility by 20% of the accounts' value.
•If you save in the parents' names, by contrast, the impact is minimal. "Less than 4% of dependent students have any impact on aid eligibility from parent assets, because most parent assets are sheltered," Kantrowitz explained. "Even if the money counts against you, the worst-case impact is a reduction in aid eligibility by at most 5.64% of the asset value. That means every $10,000 in parent assets reduces aid eligibility by at most $564. That still leaves you with $9,436 to spend on your child's education."
•Money in a 529 college savings plan, regardless of whether the student or the parent is the account owner, is treated as though it were a parent asset on the Free Application for Federal Student Aid, or FAFSA. That's good.
•But don't put the 529 plan in a grandparent's name, Kantrowitz said. That may initially keep it off the radar screen for financial-aid calculations, but as soon as any money is withdrawn, you'll pay the price. "Although such a plan is not reported as an asset on the FAFSA, since it is owned by neither the student nor the parent, any distributions from the plan count as untaxed income to the beneficiary," Kantrowitz said. That's very bad. Withdrawals from a grandparent-owned 529 can reduce a child's eligibility for aid by as much as 50% of the amount withdrawn.
Myth No. 2: "College costs too much."
Reality: A college education's cost may be a lot less than you think -- and prices are about to become much more transparent.
"The price tag of any college is meaningless," said Lynn O'Shaughnessy, who blogs at The College Solution and is the author of the book "Shrinking the Cost of College." "It's like airline tickets -- everybody pays a different cost."
Some students, particularly those whose parents haven't gone to college, might not realize that or understand how to navigate the financial-aid process, said Deborah Fox, the founder of Fox College Funding, a college planning company.
"The students that would qualify for the most financial aid often don't know they can get it," she said.
The big danger is that some young adults won't go to college -- trapping themselves into lower earnings and higher unemployment risks for life, when for relatively small investments they could significantly improve their financial futures.
Myth No. 1: "Saving for college will hurt my child's chances of getting financial aid."
Reality: If you can save for college, you should.
The federal student-aid formula is much more heavily weighted toward income than assets. Translated: What you manage to save doesn't count against you as much as you might think, particularly if you save it in the right ways.
If you a have a decent income and don't save, however, you could be in a world of hurt. That's because the formula assumes you have been saving money all along, even if you haven't.
Since a lot of financial aid these days consists of loans, rather than scholarships or grants, your savings essentially reduce your (or your child's) future debt.
.
"Despite the slight reduction in aid eligibility, families who save for college are in a much better position than families who do not," said financial-aid expert Mark Kantrowitz, the publisher of Fastweb.com and FinAid.org, and the author of "Secrets to Winning a Scholarship." "Saving for college provides you with more flexibility in your choice of college. Also, every dollar you save is about a dollar less you will have to borrow, helping you to avoid borrowing too much."
And you'll wind up paying less overall if you save rather than borrow. Kantrowitz offered the example of a parent who saves $200 a month for 10 years in an account that earns 6.8% on average. She would accumulate $34,400. Borrowing the same amount at 6.8% (the current fixed rate for federal Stafford student loans), "you'd have to pay $396 a month for 10 years, almost twice as much," he noted.
"The difference is that when you save, you earn the interest, while when you borrow, you pay the interest," Kantrowitz said.
Of course, it matters where you save. Generally speaking, you don't want to save in the child's name -- and beware of advice that tells you to hide money in a grandparent's name. Here is Kantrowitz's advice:
•Saving in a custodial account generally isn't a good idea if you hope to get any financial aid. Savings in UTMA or UGMA accounts, for example, reduce your child's aid eligibility by 20% of the accounts' value.
•If you save in the parents' names, by contrast, the impact is minimal. "Less than 4% of dependent students have any impact on aid eligibility from parent assets, because most parent assets are sheltered," Kantrowitz explained. "Even if the money counts against you, the worst-case impact is a reduction in aid eligibility by at most 5.64% of the asset value. That means every $10,000 in parent assets reduces aid eligibility by at most $564. That still leaves you with $9,436 to spend on your child's education."
•Money in a 529 college savings plan, regardless of whether the student or the parent is the account owner, is treated as though it were a parent asset on the Free Application for Federal Student Aid, or FAFSA. That's good.
•But don't put the 529 plan in a grandparent's name, Kantrowitz said. That may initially keep it off the radar screen for financial-aid calculations, but as soon as any money is withdrawn, you'll pay the price. "Although such a plan is not reported as an asset on the FAFSA, since it is owned by neither the student nor the parent, any distributions from the plan count as untaxed income to the beneficiary," Kantrowitz said. That's very bad. Withdrawals from a grandparent-owned 529 can reduce a child's eligibility for aid by as much as 50% of the amount withdrawn.
Myth No. 2: "College costs too much."
Reality: A college education's cost may be a lot less than you think -- and prices are about to become much more transparent.
"The price tag of any college is meaningless," said Lynn O'Shaughnessy, who blogs at The College Solution and is the author of the book "Shrinking the Cost of College." "It's like airline tickets -- everybody pays a different cost."
Some students, particularly those whose parents haven't gone to college, might not realize that or understand how to navigate the financial-aid process, said Deborah Fox, the founder of Fox College Funding, a college planning company.
"The students that would qualify for the most financial aid often don't know they can get it," she said.
The big danger is that some young adults won't go to college -- trapping themselves into lower earnings and higher unemployment risks for life, when for relatively small investments they could significantly improve their financial futures.
Wednesday, August 3, 2011
Debt Ceiling Law Provides $17 Billion for Pell and Ends Grad Student Loan Interest Subsidy
After months of intense deficit reduction negotiations, both chambers of Congress passed and President Obama signed into law the Budget Control Act of 2011 just hours before the U.S. defaulted on its debt. The House passed the bill Monday with a 269-to-161 vote, and the Senate voted 74-26 Tuesday to pass the $2.4 trillion debt-ceiling bill. President Obama signed the bill shortly after the Senate vote. The package contains three main provisions related to student aid:
Additional mandatory funding for the Pell Grant program for fiscal years (FY) 2012 and 2013
Elimination of the in-school loan interest subsidy for graduate and professional students
Elimination of Direct Loan repayment incentives
The package represents a bipartisan compromise between congressional leaders, and will reduce the nation's debt through a two-stage process, while simultaneously raising the debt limit so that the U.S. does not default on its current obligations.
Stage One: Nearly $1 Trillion in Deficit Reduction; $900 Billion Debt Ceiling Increase
The first stage of the plan includes approximately $1 trillion in deficit reduction through the establishment of ten-year spending caps. In addition, the plan gives the President the authority to immediately raise the debt ceiling by $400 billion, which the Treasury Department estimates will last through September 2011. Another $500 billion debt limit increase would be subject to resolutions of disapproval votes in both the House and Senate. The disapproval measure would be subject to Presidential Veto. A vote of disapproval would still permit the president to raise the debt limit but also allow members of Congress to go on record as disapproving the measure.
Stage Two: Joint Committee Tasked With Legislating $1.5 Trillion in Deficit Reduction, Paired With Additional Debt Ceiling Increase
A joint, bipartisan committee, made up of 12 members (6 from both the House and the Senate, equally divided between Democrats and Republicans) will be tasked with developing legislation to achieve at least $1.5 trillion in future deficit reduction by Thanksgiving. The committee's legislation, which can include entitlements and revenues, must be voted upon by December 23 .
If the Committee's recommendations achieve at least $1.5 trillion in savings and are enacted by Congress, the debt ceiling will be raised by $1.5 trillion. If the committee's bill is enacted and produces between $1.2 trillion and $1.5 trillion, the debt limit will be raised dollar-for-dollar. Regardless of the amount of the debt limit increase, it would be subject to a disapproval vote which would, in turn, be subject to a Presidential Veto.
The bill puts enforcement measures in place if the committee fails to produce a bill or Congress fails to enact it, or if it produces less than $1.2 trillion in deficit reduction.
1.The debt limit will increase by $1.2 trillion, subject to a disapproval vote which would, in turn, be subject to a Presidential Veto.
2.Second, there would be across-the-board spending cuts to make up the differential between the deficit reduction achieved by the joint committee and $1.2 trillion, with 50% coming from defense spending, and the remaining 50% coming from non-defense spending, which would include education spending. The spending cuts would apply to FYs 2013-2021, and apply to both discretionary and mandatory spending programs. Only a handful of program - including the Pell Grant program - would be exempt from these cuts.
As part of the compromise, both the House and Senate agree to vote on a balanced budget constitutional amendment before the end of the year. The plan does not tie future debt limit increases on the outcome of that vote.
Impact on Student Aid Funding
Pell Grants: While many programs faced cuts in this bill, the Pell Grant program was provided with additional mandatory funding for both FY 2012 and 2013. Specifically, the package provides an additional $10 billion in mandatory funds for Pell in FY 2012 and $7 billion for FY 2013, amounts that should come close to preserving a $5,550 maximum award. When the President released his budget in February, Pell faced a projected $20 billion shortfall for FY 2012. The elimination of the Year-Round Pell Grant in the final FY 2011 budget bill reduced this shortfall to $11 billion. Even with the additional mandatory funding provided in the debt reduction package, Pell will still face a $1.3 billion dollar shortfall for FY 2012.
Interest Subsidy for Graduate Students: The Budget Control Act also eliminates the in-school interest subsidy for graduate and professional students beginning July 1, 2012, a provision that would save $18.1 billion from FY 2012-21, $8.2 billion of which is from FY 2012-16, according to the Congressional Budget Office (CBO). The legislative language clarifies that the subsidy elimination does not apply to students taking preparatory coursework and those in programs leading to teacher certification where the credential is awarded by the state instead of the institution.
Direct Loan Repayment Incentives: Repayment incentives were also eliminated in the final package. The incentive for using automatic debit repayment provided borrowers with a 0.25 interest rate reduction and the up-front interest rebate incentive was equal to 0.5 percent of the loan amount and applied toward the 1 percent loan origination fee. For PLUS loans, the up-front interest rebate was 1.5 percent applied toward the 4 percent origination fee. Borrowers were able to keep the rebate if they made their first 12 payments on time. The language prohibits the Department of Education from authorizing or providing repayment incentives on new loans disbursed on or after July 1, 2012, except that an interest rate reduction may be provided to a borrower who agrees to automatically debited electronic payments. The CBO projects the elimination of the origination fee rebates would yield $3.6 billion from FY 2012-21.
Together, the elimination of the graduate and professional in-school interest subsidy and direct loan repayment incentives yield a savings of $21.6 billion. In total, $17 billion of that is being redirected into the Pell Grant program, with the remaining $4.6 going toward deficit reduction.
Contextually speaking, with the exception of the graduate student interest subsidies, student aid funding was largely shielded from cuts during this process. However, funding for student aid could be targeted for cuts once again during the second phase of this process when the joint congressional committee must come up with an additional $1.5 trillion in savings.
Media Coverage
Debt Ceiling Deal To Add Thousands To Grad Student Loan Bills - The Huffington Post
Students, Seniors May Feel Impact of Debt Deal - USA Today
Debt Deal May Offer Only Temporary Reprieve for Student-Aid Programs - Chronicle of Higher Education
Short-Term Stability, But ... - Inside Higher Ed
Obama, Congressional Leaders Reach Debt Deal - Roll Call
Students to Feel Pinch in Debt Deal - CNN
Debt Deal Cuts Graduate Loans to Boost Pell Grants - USA Today
Debt Deal Boosts Pell Grant Funding, Cuts Student Loans - The Huffington Post
Publication Date: 8/3/2011
Additional mandatory funding for the Pell Grant program for fiscal years (FY) 2012 and 2013
Elimination of the in-school loan interest subsidy for graduate and professional students
Elimination of Direct Loan repayment incentives
The package represents a bipartisan compromise between congressional leaders, and will reduce the nation's debt through a two-stage process, while simultaneously raising the debt limit so that the U.S. does not default on its current obligations.
Stage One: Nearly $1 Trillion in Deficit Reduction; $900 Billion Debt Ceiling Increase
The first stage of the plan includes approximately $1 trillion in deficit reduction through the establishment of ten-year spending caps. In addition, the plan gives the President the authority to immediately raise the debt ceiling by $400 billion, which the Treasury Department estimates will last through September 2011. Another $500 billion debt limit increase would be subject to resolutions of disapproval votes in both the House and Senate. The disapproval measure would be subject to Presidential Veto. A vote of disapproval would still permit the president to raise the debt limit but also allow members of Congress to go on record as disapproving the measure.
Stage Two: Joint Committee Tasked With Legislating $1.5 Trillion in Deficit Reduction, Paired With Additional Debt Ceiling Increase
A joint, bipartisan committee, made up of 12 members (6 from both the House and the Senate, equally divided between Democrats and Republicans) will be tasked with developing legislation to achieve at least $1.5 trillion in future deficit reduction by Thanksgiving. The committee's legislation, which can include entitlements and revenues, must be voted upon by December 23 .
If the Committee's recommendations achieve at least $1.5 trillion in savings and are enacted by Congress, the debt ceiling will be raised by $1.5 trillion. If the committee's bill is enacted and produces between $1.2 trillion and $1.5 trillion, the debt limit will be raised dollar-for-dollar. Regardless of the amount of the debt limit increase, it would be subject to a disapproval vote which would, in turn, be subject to a Presidential Veto.
The bill puts enforcement measures in place if the committee fails to produce a bill or Congress fails to enact it, or if it produces less than $1.2 trillion in deficit reduction.
1.The debt limit will increase by $1.2 trillion, subject to a disapproval vote which would, in turn, be subject to a Presidential Veto.
2.Second, there would be across-the-board spending cuts to make up the differential between the deficit reduction achieved by the joint committee and $1.2 trillion, with 50% coming from defense spending, and the remaining 50% coming from non-defense spending, which would include education spending. The spending cuts would apply to FYs 2013-2021, and apply to both discretionary and mandatory spending programs. Only a handful of program - including the Pell Grant program - would be exempt from these cuts.
As part of the compromise, both the House and Senate agree to vote on a balanced budget constitutional amendment before the end of the year. The plan does not tie future debt limit increases on the outcome of that vote.
Impact on Student Aid Funding
Pell Grants: While many programs faced cuts in this bill, the Pell Grant program was provided with additional mandatory funding for both FY 2012 and 2013. Specifically, the package provides an additional $10 billion in mandatory funds for Pell in FY 2012 and $7 billion for FY 2013, amounts that should come close to preserving a $5,550 maximum award. When the President released his budget in February, Pell faced a projected $20 billion shortfall for FY 2012. The elimination of the Year-Round Pell Grant in the final FY 2011 budget bill reduced this shortfall to $11 billion. Even with the additional mandatory funding provided in the debt reduction package, Pell will still face a $1.3 billion dollar shortfall for FY 2012.
Interest Subsidy for Graduate Students: The Budget Control Act also eliminates the in-school interest subsidy for graduate and professional students beginning July 1, 2012, a provision that would save $18.1 billion from FY 2012-21, $8.2 billion of which is from FY 2012-16, according to the Congressional Budget Office (CBO). The legislative language clarifies that the subsidy elimination does not apply to students taking preparatory coursework and those in programs leading to teacher certification where the credential is awarded by the state instead of the institution.
Direct Loan Repayment Incentives: Repayment incentives were also eliminated in the final package. The incentive for using automatic debit repayment provided borrowers with a 0.25 interest rate reduction and the up-front interest rebate incentive was equal to 0.5 percent of the loan amount and applied toward the 1 percent loan origination fee. For PLUS loans, the up-front interest rebate was 1.5 percent applied toward the 4 percent origination fee. Borrowers were able to keep the rebate if they made their first 12 payments on time. The language prohibits the Department of Education from authorizing or providing repayment incentives on new loans disbursed on or after July 1, 2012, except that an interest rate reduction may be provided to a borrower who agrees to automatically debited electronic payments. The CBO projects the elimination of the origination fee rebates would yield $3.6 billion from FY 2012-21.
Together, the elimination of the graduate and professional in-school interest subsidy and direct loan repayment incentives yield a savings of $21.6 billion. In total, $17 billion of that is being redirected into the Pell Grant program, with the remaining $4.6 going toward deficit reduction.
Contextually speaking, with the exception of the graduate student interest subsidies, student aid funding was largely shielded from cuts during this process. However, funding for student aid could be targeted for cuts once again during the second phase of this process when the joint congressional committee must come up with an additional $1.5 trillion in savings.
Media Coverage
Debt Ceiling Deal To Add Thousands To Grad Student Loan Bills - The Huffington Post
Students, Seniors May Feel Impact of Debt Deal - USA Today
Debt Deal May Offer Only Temporary Reprieve for Student-Aid Programs - Chronicle of Higher Education
Short-Term Stability, But ... - Inside Higher Ed
Obama, Congressional Leaders Reach Debt Deal - Roll Call
Students to Feel Pinch in Debt Deal - CNN
Debt Deal Cuts Graduate Loans to Boost Pell Grants - USA Today
Debt Deal Boosts Pell Grant Funding, Cuts Student Loans - The Huffington Post
Publication Date: 8/3/2011
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