Rising College Costs Force Families to Deplete Savings
Life + Money

Rising College Costs Force Families to Deplete Savings

Faced with rising college costs and a struggling economy, families are paying for college by digging deeper, borrowing more and tightening their belts, according to a new study released Tuesday. “How America Pays for College,” a Gallup survey conducted under the aegis of student lender Sallie Mae, shows that fast-rising college costs are becoming an increasingly important factor in students’ college selection decisions.  

Based on interviews with more than 1,600 students and parents this spring, the survey shows a 17 percent increase in the cost of attendance in 2009-2010 compared to the previous year, and a 28 percent increase over the last two years. Those with the biggest increase: families in the $100,000-$150,000 annual income group, which reported a 30 percent increase over the previous year. 

No wonder families, students and even the government are beginning to ask: Is higher education worth the cost?  Not necessarily, according to a small but provocative band of skeptics, and several new books, including  Higher Education?: How Colleges Are Wasting Our Money and Failing Our Kids—and What We Can Do About It, by political scientist Andrew Hacker and journalist Claudia Dreifus.

Most Americans, however, have not lost faith in the power of higher education to boost future earnings, according to the study. “What is most striking to us is how strongly committed families are to making the investment in a college degree,” says Patricia Nash Christel, a Sallie Mae spokesperson. 

Figuring out the likely return on a college investment is tricky, to say the least. There is no reliable data linking degrees to future income, though a Department of Educations' recent proposal to regulate some post-secondary vocational training based on graduates’ ability to pay back loans is a step in the right direction. Broadening that research to cover most degrees and professions would give families a much-needed tool to help them make better college choices. 

Creative Financing
In the meantime, parents are getting creative about college finance. To pay the rising bill, families increased their reliance on all available funding sources and took a variety of steps to cut costs, according to the study. For example, 43 percent of families reported that their student lived at home in order to save money. Additionally, the new survey showed that virtually all families instituted belt-tightening measures and nearly half increased work hours or boosted income in other ways.  

Parents continue to absorb the largest share of college funding, picking up 47 percent of the tab through savings, income and borrowing.  Grants and scholarships remain an important source of funding, covering 23 percent of college costs. Student borrowing is 14 percent of the bill, while student income and savings funded another 9 percent. About 7 percent of costs were covered by friends and relatives. 

  • 28 percent: increase in college costs over the last two years
  • 43 percent:  college students living at home 
  • 63 percent: students limiting college choices because of costs 

Borrowing rose, with the number of families taking on debt increasing to 46 percent from 42 percent. That borrowed money was used to cover nearly half the cost of college. Among those that borrowed, the typical combined student and parent borrowing hit $12,549, a figure that includes home equity loans, credit card debt and loans from retirement accounts as well as traditional education loans. That compares to $10,779 in the previous survey.

Narrowing Choices
Also rising was the number of students choosing to eliminate specific colleges for financial reasons, increasing to 63 percent, up from 56 percent the previous year. Some students made the decision before applying while others waited until after receiving notification of their financial aid packages. 

The survey is one of the first to reflect educational decision-making in the wake of the economic slide that began in 2008. Not surprisingly, the survey says more parents described themselves as concerned about future tuition hikes, increases in loan rates and the possibility that a job loss would reduce income. 

Unshaken Beliefs 
In spite of the costs, some 83 percent strongly agree that college is an investment in the future, with nearly three-quarters of respondents saying they strongly believe a college degree is even more important now than it used to be. 

Sallie Mae notes that the survey findings raise important questions about the future of college funding and the impact on families. “At what point do accumulating parental economic concerns translate into shifts in the types of schools that students attend?” it asks. Another question raised by the survey: Does the increased use of savings to pay for college reflect greater savings by families, maturation of college savings plans or simply the depletion of family assets? 

The full text of the survey is available at www.salliemae.com/howamericapays.