For Immediate Release
February 8, 2010
Contact: Marjorie Malpiede, 617-548-6808
Amid rising tuition costs and heavy debt burdens,
college marketplace lacks consumer focus
Facing complex choices with inadequate information, families make costly mistakes
BOSTON-Rising college costs have Americans making greater sacrifices to get their degrees. In 2008, families took on more than $86 billion in college loans and the average undergraduate finished school with more than $23,000 in debt. Higher education is now one of the most important investment decisions middle class Americans make. But far too often they’re lured to colleges with the most energetic tour guide, the biggest reputation for partying, or the highest ranking in the popular press.
These temptations win out because the choices are complicated and families aren’t getting the information they needed to make truly informed decisions. Beyond choosing a school, families trying to find the best savings plan or the least expensive loan also face complicated choices with insufficient information.
“When you look at the tuition prices that middle class families are facing, together with the debt burdens graduates are taking on, it is astounding that there is such little transparency in the higher education marketplace,” said Greg Torres, President of MassINC and Publisher of CommonWealth magazine. “By laying out a framework for how parents and students navigate this system, we hope to shed some light on what we can do to give more support to families making one of the biggest investments of their lives.”
The new report, by C. Anthony Broh and Dana Ansel, is part of MassINC’s Family Financial Skills initiative, which explores new pathways to help families navigate the complex financial decisions increasingly tied to major milestones of American life.
Nearly two-thirds of students from private four-year college graduate with debt. This makes loan choices particularly critical. But evidence shows that families can make the wrong choice when picking a loan product.
“Interest payments on loans add to the overall price of an education. Families need information about the least expensive place to borrow, the terms and conditions of borrowing, and the total price of borrowing before making a decision about when and where to apply for college,” said author Tony Broh.
In the report, the authors describe the branches of a college-bound decision tree to examine the major decision-points for families as they 1) save for college, 2) choose their college, 3) pay for college, and 4) repay their college loans. Each of these branches is fraught with complexity and limited transparency. For example:
- Currently, there are 118 different 529 savings plans from which to choose. Each managed by different states with different brokerage houses, investment strategies, fees, and records of performance.
- Consumers have limited understanding of the price they will actually pay when comparing colleges. While the average 2009 published tuition at a private four-year college was $35,640, the net price after financial aid for the average student was $21,240. Families have little information for predicting how much they would pay based on their own individual circumstances.
- Families choosing schools do not have access to indicators of value such as price relative to student-teacher ratios, direct education spending, and graduation rates. The report shows considerable variation among schools on these important measures.
- Colleges and lending institutions do not routinely explain the total price of a loan or the probable monthly payments after graduation. While recent legislation will bring borrowers greater transparency in this area, lenders still have no obligation to describe repayment options for various scenarios that may occur after students complete their coursework, such as loan forgiveness or forbearance.
Helping families access the information they need to become savvy consumers in the higher education marketplace could help them get more from their college investment. More importantly, consumers equipped with better information might make choices in ways that would fundamentally alter the way institutions compete, creating a more efficient higher education marketplace.
This new research was made possible with generous support from the Highland Street Foundation, the State Street Foundation, and the Cabot Family Charitable Trust.