Sallie Mae study shows poor college financing
Sallie Mae study shows poor college financing

By Paula Burkes Comments 0
Published: August 24, 2008

College students and their parents aren't very smart when it comes to saving and paying for their education, according to a study released this week by Sallie Mae.

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Planning ahead

•Do the math. Go to www.SallieMae.com/plan to estimate the total cost of college (including books, housing and food), make a payment plan, and estimate the salary you‘ll need to manageably pay back loans.

•Apply for scholarships and grants. A good resource is www.FastWeb.com

•Complete the Free Application for Federal Student Aid (FAFSA) form www.fafsa.ed.gov). Depending on factors such as the number of college undergraduates in the household, families with annual incomes of $100,000 or more may qualify for aid.

•Exhaust federal loan options, before considering private or home equity loans. Federal loans have lower interest rates and better terms.

•Don't overborrow. Though it's tempting to cushion loans, you'll regret it when it‘s time to repay.

•If you need private loans, shop hard for those with the lowest interest rates. A one-point difference is significant. For example, you'll pay $5,700 less on a $10,000 loan with a 8.69 percent interest rate than one at 9.69 percent. Compare rates at banks, credit unions and on the Internet. A parent or other co-signer with strong credit may help you get a lower rate.

•Consider immediate repayment of loans. If you can start paying back while you're in school versus deferring the loan until after graduation, you can save thousands of dollars.

•Take a hard, unemotional look at the job and salary prospects for your major. Be sure your field of study will support what it will cost to pay student loans. It might be worth starting off at a two-year or less expensive school, or thinking about career alternatives.

Sources: www.MyRichUncle.com, Sallie Mae, Oklahoma Guaranteed Student Loan Program.

The study found too few families are focused on total costs or have college savings plans like tax-advantage 529 plans. Meanwhile, too many students fail to complete forms for low-cost student loans, and are borrowing without thinking about whether their future income is enough to repay loans. Conducted by Gallup, the study was based on telephone interviews in May with 720 parents and 684 undergraduates enrolled in the 2007-08 academic year.

College a ‘lifetime' cost

"Paying for college is becoming one of the major costs across a lifetime,” said Tom Joyce, senior vice president of Sallie Mae, on a conference call for media Wednesday. According to the study, the average cost of college for last year alone was $14,628, ranging from $27,679 for four-year private institutions to $5,263 for two-year public schools.

"We need to get families away from a semester-by-semester fire drill in terms of how they pay,” Joyce said.

Rather than 529 plans, which only 9 percent of families used, parents' current income was the leading payment source last school year, with 38 percent of all families spending an average of $5,815. Upon graduation, Oklahoma students on average owe $17,250, according to the latest data available. Families, Joyce said, cannot expect to pay for college solely with scholarship and grant money, which covered only 15 percent of costs, the study found. "Particularly with today's economy, they must make well-informed decisions, including exhausting lower-cost federal loans, before considering private loans and other sources.”

Families don't file for aid

Joyce said he was shocked to learn nearly one-fourth of middle-income families, or those earning $50,000 to $100,000 annually, failed to complete the Free Application for Federal Student Aid (FAFSA) form, which is the basis for awarding all federal grants and lower-cost federal loans. Meanwhile, the study showed middle-income families tend to borrow more to afford higher-cost institutions, and of all families, 70 percent were borrowing without considering post-graduate income.

Parents on average paid nearly half of college costs and students, one-third. Of what they contributed, parents borrowed 16 percent and students, 23 percent. Students were the sole borrowers in two-thirds of the 47 percent of families who borrowed.

Among other things, students should limit borrowing and be leery of higher-interest private loans, said Rick Edington, director for school/lender services for the Oklahoma Guaranteed Student Loan Program.

Schools that accept students will state the maximum financial aid available in their award letters, Edington said. But students don't have to borrow the full amount, he said. Meanwhile, Edington advises students to avoid higher-interest private loans, though late-night TV commercials for them boast no FAFSA applications and 48-hour decisions.

Even Chase, a lender of private loans, urges students first to exhaust free or lower-cost resources, spokesman Tom Kelly said.

"Because of the credit crunch, we — like a lot of lenders — have higher standards,” Kelly said.