how much debt is too much debt? kevin fudge, american student assistance kendra lider-johnson, mefa...
TRANSCRIPT
How Much Debt Is Too Much Debt?
Kevin Fudge, American Student AssistanceKendra Lider-Johnson, MEFAJulie Shields-Rutyna, MEFA
November 7, 2012
About MEFA• MEFA (Massachusetts Educational Financing Authority) is a not-
for-profit state authority that works to make higher education more accessible and affordable through community education programs, college savings plans and low-cost financing options.
• MEFA created the U.Fund® and the U.Plan® college savings plans, and has offered affordable fixed interest rate college loans for 30 years.
• MEFA has assisted hundreds of thousands of families in financing a higher education.
About ASA
• Private nonprofit• Public purpose mission = empower students and
alumni to successfully manage and repay their college loan debt
• Provides student loan education• Develops financial competencies through
innovative web-based tools and trusted, neutral advice
• All free of charge to students and alumni .
Of the private, not-for-profit 4 year colleges with the highest tuition costs – 70 percent are in
New England and the Mid-Atlantic area
Of the private, not-for-profit 4 year colleges with the highest net prices – 55 percent are in
New England and the Mid-Atlantic area
Of the 13 states with the highest average student debt, half are the 6 states in New
EnglandSources: US Department of Education, Project on Student Debt, 2012
States with the highest average student debt
Source: Project on Student Debt, 2012
Within the United States, Massachusetts has the highest concentration per capita of colleges and
universities that cost over $40,000 a year
Students are often encouraged to go to their top choice regardless of the cost
This is considered by guidance counselors and college admissions counselors as ‘an investment
in their future’
Source: US Census, 2010
An Investment in Your Future
• College Board’s ‘Education Pays’ report gives many reasons a college education is an investment in a student’s future
• It shows college graduates have:• Better health• Stronger community ties• More security• Greater wealth• Closer Family
Expected Lifetime Earnings Relative to High School Graduates, by Education Level
Sources: The College Board, Education Pays 2010, Figure 1.2; U.S. Census Bureau, 2009; calculations by the authors.
Estimated Cumulative Earnings Net of Loan Repayment for Tuition and Fees, by Education Level
Sources: The College Board, Education Pays 2010, Figure 1.3; U.S. Census Bureau, 2009; The College Board, 2009; calculations by the authors.
• Student is the sole borrower– No co-signer or credit check– No payments due while enrolled– Many repayment choices
• Federal Direct Stafford Loan – Subsidized – Fixed interest rate of 3.4% begins after graduation– Unsubsidized – Fixed interest rate of 6.8% begins immediately
• Federal Perkins Loan– Fixed 5% interest rate begins after graduation– Loan availability varies by college; not all colleges participate
Federal Student Loans
Federal Student Loan Repayment
• Standard– Most cost effective
• Graduated– Useful if you expect a sharp rise in income over time
• Extended– Useful if you need a lower monthly payment
• Income-Based Repayment – Lowest monthly payment
• Consolidation
Case Study: Louis• Family size = 4• 2012 family income = $12,887• Accepted to first choice school:
Private, Catholic liberal arts college
Cost of Attendance $39,650Financial Aid Award $34,150
Gap $5,500
College Stats88% Accepted55% Graduate2% Cohort Default Rate
If you were this student’s financial aid counselor, would you encourage him or her to accept this generous financial aid award?
Financial Aid Package DetailsCost of Attendance $39,650Financial Aid Award $34,150Pell Grant $5,550FSEOG $2,000Mass Grant $1,600College Scholarship $12,000FWSP $2,000Stafford Loan $5,500Perkins Loan $5,500Gap $5,500
Another way of looking at it:•Grants/Scholarships = $21,150•Net Price = $18,500
One way of looking at it:•Grants/Scholarships = $21,150•Self-Help = $13,000•Net Price = $5,500
Look beyond the gap
Type Amount
Stafford 5,500
Perkins 5,500
Stafford* 4,000
Total 15,000
Type Amount
Stafford 7,500
Perkins 5,500
Stafford* 5,000
Total 18,000
First Year
Third Year
Type Amount
Stafford 6,500
Perkins 5,500
Stafford* 4,000
Total 16,000
Type Amount
Stafford 7,500
Perkins 5,500
Stafford* 5,000
Total 18,000
Second Year
Fourth Year
*Parent(s) denied PLUS = additional unsubsidized Stafford Loan
Source: Kantrowitz, n.d.
Even if he manages to fill some of the gap, his federal loan debt may exceed $60,000 by graduation
What Are Results of His Choice?Average Louis
Average federal undergraduate debt $22K
Graduates with $60K in federal loan debt
38% of borrowers who graduated in 2005 were delinquent or in default by 2009
2-year cohort default rate of Louis’s institution is 1%
Median salary of bachelor’s degree recipients ages 25-34: $45K
Currently unemployed
Do you think Louis will successfully repays his loans?
Source: Baum & Ma, 2011; School data from College Navigator
Is this debt manageable?
•College retention and graduation rates•College graduate employment rates•College major•Career choice•Starting salary•Parent support•Living choices
• Over a 10-year standard repayment period:
• He will pay $690/month• $22,858 in interest• Total = $82,858
Considerations Total Cost of Investment
Strategies to minimize debt
• Using Net Price Calculators to identify affordable schools
• Prioritizing saving• Working a summer job (student)• Applying for scholarships• Appealing financial aid decision
Before College
Strategies to minimize debt
• Using payment plan• Graduating in fewer
semesters• Attending a less
expensive college• Choosing a specific
major for its career prospects
• Working while in school• Renting textbooks• Living at home and
commuting
During College
Strategies to minimize debt
• Income-Based Repayment• Loan forgiveness benefit at work• Deferment• Forbearance• Considering income when choosing career• Lifestyle choices
After Graduation
This case reflect current trends• 25% of borrowers in 2008
graduated from 4-year colleges with at least $30,526 in student loan debt
• 10% of borrowers graduated with at least $44,668 in student loan debt
• 1.5% of borrowers graduated with at least $100,000 in student loan debt
• What will the percentages be in 2018?
Source: Project on Student Debt, 2010; Kantrowitz, n.d.; Kantrowitz, 2012
Changing the Trends
• At your institution, who is in a role that can reduce education costs and student borrowing?– Financial Aid Administrators– Financial Aid Deans & Directors– Enrollment Management VPs– Finance & Administration VPs– Faculty– Trustees– President
The Buck Stops Here
You have just been appointed as President of Massachusetts College. The Board of Trustees is very concerned about student borrowing and debt-burdened alumni. They have asked you to propose some strategies to cut the average student debt level from $40,000 to $20,000 within the next five years.
•What would your recommendations be?
Contact Us
• Kevin Fudge – [email protected]
• Kendra Lider-Johnson– [email protected]
• Julie Shields-Rutyna– [email protected]