Arrangements between colleges and financial institutions that provide services to students may mirror problems with private student loans and predatory credit card marketing on campuses, U.S. consumer agency says.
Parents: We can’t possibly afford $60,000 per year for our daughter to go to Medallion University.
College representative: But Medallion University provides financial aid based upon your family’s financial need.
Parents: Oh, that is interesting. Someone told me that Medallion University was need-blind, so I just figured you didn’t care if we couldn’t pay that much.
College representative: If your daughter is admitted to Medallion University, we will calculate your expected family contribution.
Parents: Well, we contribute to our church but we have never made a contribution to Medallion University, but someone told me this is expected in order to get in.
Should we laugh or cry about this exchange? While the conversation is written in English, the parents and college recruiter are not speaking the same language. The college representative is speaking the “Language of Financial Aid” while the parents are speaking a language about paying for college.
I call the former “Financial Aid Speak” and the latter “Payment Language.” To explain college pricing to the American public, higher education administrators must translate their rhetoric to Payment Language so families can make informed decisions about whether they can afford the price.
Actually, college administrators speak several languages in addition to Financial Aid Speak. Vice presidents for finance, for example, speak “Cost Language.” They engage in discussions about balance sheets and expenditures for producing a college education
Like Académie française for French, Cost Language has regulating boards that dictate the standards for word usage. The Government Accounting Standards Board (GASB) and the Financial Accounting Standards Board (FASB) regulate the meaning of words, phrases and concepts for finance administrators from the public and private sector, respectively. But administrators correctly hold no expectation that the public would know or even care about the wording of, say, FASB Rules 516 or 517 as a generally accepted accounting principle.
To balance a budget these same vice presidents for finance also estimate the income side of the ledger. Here the language follows not only GASB and FASB rules, but also the more public vernacular of “Tuition, Fees, Room, Board, Transportation, Books, and Other Expenses.” Vice presidents for enrollment management may use additional phrases like the “Cost of Attendance” or a “Comprehensive Fee” to explain the full price of going to college at an institution. They are using Price Language to explain the price of college.
“Ay, there’s the rub,” as the Bard reminds us. Price Language and Cost Language do not explain how much most families, and certainly not low-income families, will actually pay for college. Families must also understand Financial Aid Speak or be left with the impression that everyone pays $60,000 per year. Perhaps many families narrow their choices of where to apply because they are not multilingual, or maybe they speak Price Language and don’t understand Financial Aid Speak.
And why should they? Financial Aid Speak evolved from internal administrative activities at Medallion University -- procedures that now exceed half a century in age. “Expected Family Contribution,” for example, became the shorthand jargon of financial aid officers to explain how much a family would pay after the financial aid distribution to a student.
An “award,” (not to be confused some kind of “prize") has different components, i.e., the “package” is made up of “gift aid” and “self-help.” Ironically, these birthday sounding words reduce the family’s financial obligation, not only by the amount of money available to the family but also according to the admissions priorities of Medallion.
“Scholarships,” or “grants” – the so-called “gift aid” -- reduces the “net price” for a family, while a job or a loan – the so-called “self-help” -- requires labor and repayment. Who is “giving” this gift that requires payment of an unaffordable bill? And is the “help” really for the “self” or a down payment on the school’s operating budget? This language so familiar to the financial aid officers ignores the verbiage that an untrained family uses to consider college affordability.
Add the various proper nouns and one begins to think that Financial Aid Speak is a history exam. Pell, Stafford, Perkins, SEOG, Plus at the federal level, or Lindsay, Herter, Adams, Tsongas at the state level where I live in Massachusetts, are generous programs; but families often must find and recognize eligibility, and complete lengthy forms for these named programs, to receive the intended financial help.
“Net Price,” is the central concept for knowing how much a family pays for a college education. A consumer buying a car or a television or a computer would recognize the concept as the listed price minus any store discounts and rebates. The “Net Price” for a year of college is the price of attendance minus grants and scholarships from any and all sources.
Savings (past resources), wages (present resources), and loans (future resources) – both of student and parents -- describe the assets that a family will use to pay for all of these academic goods and services over time. This is the vocabulary of Payment Language; it is simple, direct, understandable and essential for general understanding of college prices. The public speaks Payment Language every day.
Recent research has shown that over half of the high-achieving students from low-income families never consider selective public and private colleges even though the price of attendance could actually be lower than the college they select.
Entitled “Boston’s Faces of Excellence,” the Boston Globe published the photographs and future plans for the valedictorian from each of the city’s 44 public high schools. The student destinations included selective private universities (Harvard, Boston University, Boston College, Northeastern), flagship state universities (the University of Massachusetts, the University of New Hampshire), state public colleges and universities (Westfield State and Bridgewater State), local colleges (Simmons, Mount Ida), community colleges (Bunker Hill), and undecided.
How many of these students made their choice of college knowing the financial options that were available from all sectors of higher education? Their preferred college could have depended on the best fit for each student, but one suspects that at least some of these students had a conversation that sounded like the one at the beginning of this essay. And for the valedictorians whose surnames are Lopez and Garcia, and who were born outside of the United States, one wonders how Financial Aid Speak translates into the parents’ native tongue.
Financial Aid Speak is a precise language; the verbiage describes what enrollment managers do when they decide about price discounts and eligibility for jobs and loans. Becoming articulate requires years of experience and training. When spoken well, it allows financial aid officers to compare pricing among a large number of college applicants from a variety of financial and academic backgrounds. It also produces an illusion of fairness by using standardized criteria applied equally and professionally to all applicants.
Financial Aid Speak, Cost Language, and Price Language, however, do not use words and phrases that provide adequate explanation to those that need pricing information the most – middle and high school students with low-income parents. Many education experiments indicate that simple, straightforward explanation about college pricing increases the college-going rate and available college options to low income families. Meaningful communication is a necessary condition for informed choice.
Payment Language uses words and concepts directed toward that objective. It can enlighten those who may have limited their college choice because they did not understand the available information about paying for college. Colleges must use words with universal meaning for financial transactions that explain the choices about what college to attend and how to pay the bill. We should adopt Payment Language, and follow these principles::
Payment Language adopts only words that are used in common financial transactions that are familiar to the public.
Payment Language produces comparable concepts about college pricing in all institutions from any sector of higher education, for all types of financial aid programs, and for all amounts of discounting and payment.
Payment Language uses “net price” – the amount of money that the family pays for one year of college -- calculated as the price of attendance minus grants and scholarships from all sources.
Payment Language separates financial obligation among the institution, student and parents.
Payment Language identifies the federal, state, institutional, and other programs and their associated eligibility requirements as a source of funding.
Payment Language identifies the expected timing for payment into past (savings), present (wages), and future (loan) financial obligations.
Payment Language includes the responsibilities for education loan repayment, including the interest rate, effect of compound interest, the total interest, monthly repayment, the possibilities for reduction and forgiveness as well as the incidence and consequences of default and bankruptcy.
Payment Language is as easily understood in Spanish as English and can be translated directly to other foreign languages.
These principles require testing. Conjecture about how people talk, the words they use, and what they understand is not enough to evaluate the benefits and the costs of a college education. Years of good intentions notwithstanding, our communications with the public about paying for college are confusing and often misunderstood outside of the academy.
C. Anthony Broh is the founder and principal of Broh Consulting Services and co-author of Paying for College. He has been constructing a universal “Language of Financial Aid” with financial aid officers for more than a decade.
The annual amount families spent on college leveled off at about $21,000 after several years of decline, according to Sallie Mae survey, which finds families -- particularly high-income ones -- taking steps to limit their expenditures.
As total student debt passed $1 trillion last year, more than 35 percent of repaying borrowers under age 30 were at least 90 days late on their payments. The first three months of 2013 were the worst on record for student loan defaults. A college education still pays, but rising tuition, low graduation rates and burgeoning debt levels are pushing postsecondary credentials out of reach for too many students. Meanwhile, the government is expecting to earn a $34 billion dollar profit on federal loans next year.
Congress is about to make things worse. Last spring, students fought and won a battle to prevent interest rates on subsidized Stafford loans, loans with lower interest rates on which the government pays the interest while students are enrolled, from doubling. Yet Congress only fixed the problem for a year. If our leaders in Washington fail to act again, over 7 million students would see their interest rates jump from 3.4 percent to 6.8 percent on July 1. That adds $1,000 to repayment per year of school for someone who borrows the maximum amount each year – an extra $4,000 for a student who graduates in 4 years. Students are fed up with manufactured crises and Band-Aid policies. We need a comprehensive solution that permanently fixes how the federal government sets interest rates for student loans. But the current long-term proposals fall far short.
Proposals Fail to Solve the Problem
One leading reform idea, embraced by both Senate Republicans and President Obama, would replace the current system, fixed interest rates set by Congress, with rates that vary with market conditions but are fixed over the life of the loan – like a mortgage. Students would pay less when overall interest rates are low, and more when overall interest rates are high. The rate would change over time, with no need for Congress to get involved. Allowing for some flexibility would be fairer to borrowers and provide the kind of comprehensive long-term fix that students need. Overall interest rates are currently at historic lows: the federal government can borrow for less than 2 percent on a 10-year Treasury note, but federal loans to students are set at rates ranging from 3.4 percent all the way up to 7.9 percent.
With a market-based rate, though, comes the risk that interest rates will shoot upward. If Treasury rates were to rise to say, 10 percent -- which happened in the 1980s -- not only would this substantially increase costs for students, but it could deter students from going to college at all. A market-based rate with no cap is simply wrong for students.
Which is why the devil is in the details. Senate Republicans, who want to use student borrowers to pay off the deficit, start with a rate set at the 10-year Treasury bill plus 3 percent, a rate that will inevitably rise further with the market. They would also allow interest to grow while students are in school, fueling more student debt, and using the money to reduce the deficit. Previous rounds of deficit reduction followed by sequestration have already slashed the federal education budget. Students need reform that makes college more affordable, not less.
The president’s budget proposal is also disappointing. It changes rates to a market-based rate, but provides no cap on how those rates could go. This approach keeps rates low now but pays for it by letting rates rise later. It also subjects those rates to the whims of the market – who could have predicted today’s low rates?
A better approach would combine a market-based rate with a strong cap and have borrowers pay back loans based on their income. Under this model, interest rates would track market conditions when issued, but would be fixed over the life of the loan.
The fixed rates and a strong cap would balance flexibility with the need to provide certainty to students. Borrowers would know their expected monthly payment as soon as they took out their loans. A dramatic interest rate spike would never seriously threaten educational investment. Finally, the annual adjustment of a market-based fixed rate removes Congress from the rate setting process -- something everyone can appreciate.
A change to interest rates alone, though, will not curtail rising defaults in a tough economy. That is why we need broader reform to the student loan system. We need better counseling, better loan servicing, and importantly, a simple system that puts students into income-based repayment (IBR). By having students pay back their loans based on what they earn, we would ensure that students graduating in tough economic times would not pay more than they could afford. IBR does not replace an interest rate cap because it does not limit total debt owed or the time required to pay it back. Rather, it limits monthly payment amounts, an essential tool for stemming the default tide that ruins credit ratings and livelihoods.
Finally, we need comprehensive federal and state reforms that will truly address the underlying driver of student debt -- the rapidly rising cost of college.
Last year Congress worked together to avoid a self-inflicted crisis only to face another one 12 months later. We need to address rising college costs and increase school accountability, but we also face a looming deadline to take action on student loans and ensure an affordable, stable system for years to come. And if comprehensive student loan reform proves politically impossible, we must at least come to a short-term agreement that keeps rates low for students and leads us on the path toward that long-term solution.
As we approach the July 1 deadline, one thing is clear: students can’t afford for Congress to default on its responsibilities.
Aaron Smith is co-founder and executive director of Young Invincibles, a nonprofit, nonpartisan youth advocacy organization.