Cost of College Money Going Up

For most families, a house is likely the largest single investment they’ll make in a lifetime. But the cost of a college education is gaining rapidly. Rising faster than inflation and, more importantly, rising faster than the median income for families likely to have college-aged children, college costs require an increasing number of students to seek financial aid. And the price tag on a key component in financial aid is about to take a big jump.

Simply put, financial aid comes in two forms – first is so-called free money, grants, scholarships and other aid that does not have to be repaid. The second form of aid – loans – must be repaid. Students are becoming increasingly dependent on loans to make up the difference between free money grants and scholarship awards and the skyrocketing cost of higher education.


Katy, a sophomore at Ohio State University who prefers we not use her last name, says everyone has debts, and they get through it. Like many students, Katy chooses not to worry right now about how she’ll repay student loans.

Ohio State University Economics Professor Lucia Dunn says the loans seem a distant concern while students are still in school, but reality strikes about six months after graduation when many loans require payments to begin. “Student debt is factored into a credit score for all kins of things, mortgages, buying a car to get to work, medical expenses, starting a family. And they’re going to have a huge repayment,” says Dunn.

Tabitha Hickman is a freshman at Ohio State majoring in International Relations and Chinese. She’s from Lynnfield, Massachusetts, pays out-of-state tuition and faces a projected debt load at graduation of 120-thousand dollars. Even during her first year in college, she has an idea of what Professor Dunn is talking about. “I would have loved to join the Peace Corps, but I know thinking about it now that I don’t think there is any way I can do that. They don’t pay you enough to pay off your loans.”

According to the College Board publication, “Trends in Student Aid 2004,” over the past decade, aid in the form of grants – free money – given on a per student basis rose 64 percent while loans which have to be repaid rose 111 percent. Tally Hart,director of financial aid at Ohio State University, says “It’s a combination of factors. College costs, not just here but everywhere, have grown faster than family incomes.”

Hart says 65 percent or more of OSU undergraduates receive some form of financing and, while it could be a scholarship, often it’s a student loan which Hart says is the fastest growing part of the financial aid portfolio at Ohio State.

Martha Holler of Sallie Mae, the largest provider of student loans in the U-S, says, “When you’re talking about paying for college, for most students, a loan is going to be part of the equation.”

Holler says federal loans should be the first choice of those seeking loans to pay for college for two reasons. First, interest rates on federal education loans are below market levels. Second, the loans are guaranteed by the federal government. Currently, the interest rate on Stafford loans, available only to students, is 2.77 percent.

The interest rate on federal PLUS loans, Parent Loan for Undergraduate Students, is 4.17 percent. And while these rates sound attractive, there’s a catch. Two catches, actually.

Catch number one: You only have until June 30th. Holler says, “We’re expecting when the rates are set, they’ll be about two percentage points higher than they were a year ago.”

The new rates will be determined at the end of this month and go into effect July 1st.

Catch number two: There are limits on the amount of money available to students through Stafford Loans, the one with the lowest rate. The limits are different for each year in college, but for incoming freshmen, the maximum loan amount is about $2600.

On the other hand, there’s no limit on the parents’ PLUS loan. You can finance your child’s entire college education. But the interest starts to accrue immediately, and the first payment is expected shortly thereafter.

But why are loans and other financial aid necessary? Why don’t parents just start saving early for college? Tally Hart calls it “savings paralysis,” “For most families, it just seems too daunting a task. Rather than save a little more, the human experience seems to be,I just can’t do anything because I can’t reach that target.”

To help pay the bills, more students are working while they attend college some even work full time and go to school full time. that’s risky says Hart.

More on that in Part Two of this report.