How Much Debt Is Too Much Debt? Kevin Fudge, American Student Assistance Kendra Lider-Johnson, MEFA Julie 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 England Sources: 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 The calculations in this figure are based on earnings of individuals working full-time year-round. Because the proportion of adults working full-time year-round increases with education level (for example, 67% of college graduates and 55% of high school graduates between the ages of 45 and 54 worked full-time in 2008), the lifetime earnings differentials would be larger if all adults — or all adult workers — were included in these calculations. Higher earnings correspond to higher tax payments. If after-tax earnings were used in this calculation, the ratio of lifetime earnings for individuals with more than a high school diploma to lifetime earnings for high school graduates would decline slightly. 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 Earnings Premium Relative to Price of Education For the typical student who borrows to cover tuition and fees at a community college and earns an associate degree two years after high school graduation, total earnings net of loan repayment exceed the total earnings of high school graduates by age 33, after 13 years of work. Many students take longer than two years to earn an associate degree or longer than four years to earn a bachelor’s degree. More time out of the labor force increases the amount of time required to compensate for lost earnings. If the earnings of all adults at each level of education are considered — instead of only those working full-time year-round — the typical four-year college graduate makes up for time out of the labor force and for paying tuition by age 30. In 2008, 43% of full-time students at four-year colleges and 53% of full-time students at two-year colleges were employed (NCES, 2010). Earnings during college reduce the amount of time required to compensate for lost earnings. Sources: The College Board, Education Pays 2010, Figure 1.3; U.S. Census Bureau, 2009; The College Board, 2009; calculations by the authors.

Federal Student Loans 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 MESSAGE: Federal loan options should ALWAYS be considered before private options Go over loan details and limits: Stafford: $5500 FR, $6500 SO, $7500 JR & SR Perkins: $5500 max/yr. Student will need to sign promissory notes for both loan programs and complete entrance counseling for Stafford Loans Stafford – all U.S. citizens/permanent residents are eligible Many repayment options are available for borrowers, including one that can be tailored to the student’s budget. Forgiveness provisions for certain professions. See www.studentloans.gov for details What is reasonable student loan debt? College seniors who graduated in 2010 carried an average of $25,250 in student loan debt, MA Avg.= $25,541. *Project on Student Debt. Avg debt for class of 2011: $27,200 (Finaid.org)

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 College Stats 88% Accepted 55% Graduate 2% Cohort Default Rate Cost of Attendance $39,650 Financial Aid Award $34,150 Gap $5,500 Yes means go to slide 13; No means go to slide 16 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 Details Cost of Attendance $39,650 Financial Aid Award $34,150 Pell Grant $5,550 FSEOG $2,000 Mass Grant $1,600 College Scholarship $12,000 FWSP Stafford Loan $5,500 Perkins Loan Gap One way of looking at it: Grants/Scholarships = $21,150 Self-Help = $13,000 Net Price = $5,500 Another way of looking at it: Grants/Scholarships = $21,150 Net Price = $18,500

Look beyond the gap First Year Second Year Type Amount Stafford 5,500 Perkins Stafford* 4,000 Total 15,000 Type Amount Stafford 6,500 Perkins 5,500 Stafford* 4,000 Total 16,000 Even if he manages to fill some of the gap, his federal loan debt may exceed $60,000 by graduation Third Year Fourth Year Type Amount Stafford 7,500 Perkins 5,500 Stafford* 5,000 Total 18,000 Type Amount Stafford 7,500 Perkins 5,500 Stafford* 5,000 Total 18,000 *Parent(s) denied PLUS = additional unsubsidized Stafford Loan Source: Kantrowitz, n.d.

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 Private loan debt? Do you think Louis will successfully repays his loans? Source: Baum & Ma, 2011; School data from College Navigator

Is this debt manageable? Considerations Total Cost of Investment 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

Strategies to minimize debt Before College Using Net Price Calculators to identify affordable schools Prioritizing saving Working a summer job (student) Applying for scholarships Appealing financial aid decision

Strategies to minimize debt During College Working while in school Renting textbooks Living at home and commuting Using payment plan Graduating in fewer semesters Attending a less expensive college Choosing a specific major for its career prospects

Strategies to minimize debt After Graduation Income-Based Repayment Loan forgiveness benefit at work Deferment Forbearance Considering income when choosing career Lifestyle choices

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 What would your recommendations be? 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 Kendra Lider-Johnson Julie Shields-Rutyna kfudge@asa.org Kendra Lider-Johnson klider-johnson@mefa.org Julie Shields-Rutyna Jshields-rutyna@mefa.org