According to the 2013 survey by Sallie Mae and Ipsos, 85% of parents believe that a college education is a smart investment for their children. They’re right – college grads earn more than 80% more than students who only finished high school, on average. Of course, college is no penny stock. A public in-state college education cost $23,000 annually last year; private schools cost $45,000. Most folks don’t have that kind of cash sitting around and borrow to finance their students’ education. Students usually look to federal student loans first because they carry lower interest rates and are easier to get. However, federal student loans may not be enough to some students’ education costs. If that’s the case, private student loans can fill the gap. The largest student loan originator in the country is Sallie Mae.
The SLM Corporation, “Sallie Mae” for short, started in 1972 as a government-sponsored enterprise. Over the intervening decades, it has privatized operations and is now a completely private, publicly traded company. Federal student loans used to come both directly from the federal government and from private lenders insured by the federal government. In 2010, the Student Aid and Fiscal Responsibility Act cut private lenders out of the federal student loan loop due to a belief that private companies were profiting from the arrangement without providing cost savings to students. Because of that legislation, Sallie Mae laid off more than 2,500 employees and has reorganized and consolidated its operations.
What does Sallie Mae Do?
Sallie Mae originates student loans, meaning it screens and approves (or denies) loan applicants and then provides them with cash. It also services the loans, which involves tracking payments and handling delinquent accounts. Sallie Mae still holds and manages about 40% of the outstanding federally insured debt from before the Student Aid and Fiscal Responsibility Act, more than any other private sector entity. Sallie Mae offers debt management services for debtors of all types and sells business and technical products to educational institutions.
How Students Pay for College
Every year, Sallie Mae conducts a study on how students are paying for college. In 2013, students paid for about 30% of their costs with grants and another 30% with their parents’ money. Student borrowing accounts for about 20% of the costs with parent borrowing, student income, and gifts from friends and relatives covering the remainder. This study shows some interesting trends over the years, especially in the wake of the 2008 Financial Crisis and the ensuing recession.
Families are Paying Less for College
With the cash crunch that hit most American families in 2008, people can’t afford to pay as much for a college education. Families have to be more cost-conscious about which schools their students choose and about their students’ lifestyles while in school. For the 2009-2010 school year, the average family paid more than $24,000 for college costs. For 2012-2013, that number dropped to just over $21,000. To achieve those savings, families are eliminating more schools from consideration based on cost; in 2012, 67% of families said they did just that. More than half of students lived at home to cut down on living expenses; dorms and apartments are expensive and often unnecessary. Almost a third of students chose to accelerate their coursework, meaning they would only have to pay for three or three and a half years instead of the full four.
Families are Borrowing Less to Pay for College
The financial crisis brought the sky-high debt levels of Americans into the spotlight and families responded by borrowing less. Among those students and families who borrow to pay for a college education, the amount borrowed has remained steady in recent years. However, 70% of families did not borrow at all. Where do they get the money? First, more students are getting scholarships and grants. Almost one third of college funding comes from scholarships and grants – more than any other source. For more information on how Americans pay for college, read here.
Families and Students are Working More
While scholarships and grants can cover a big chunk of an education, they rarely pay for everything. To make ends meet, families are spending less and working more. Since 2009-2010, half of parents and 60% of students reduced their spending on food, clothes, and other items to help cover the costs of college. One in five parents and half of students worked more.
Parents Can Pay Less Out of Pocket
Parents are contributing less to the college education of their children. In fact, parental contributions have dropped by more than a third in the last three years.
Parents are contributing less to their children’s education in part because of the increase in funding from other sources like grants and scholarships. Families are choosing more cost-effective schools and lifestyles. All in all, the out-of-pocket cost for parents decreased from about $9,000 in 2009-2010 to less than $6,000 in 2012-2013. The cost of a college education is dropping – which is good news for both parents and students.
How Can I Lower my Education Costs?
Even though the price is dropping, college is an expensive proposition. Long before you even start to consider which schools you might want to attend, make yourself a good candidate for scholarships. Study hard and get good grades and don’t forget the extracurricular activities. You don’t have to be the best at what you do, but choose a sport, a musical instrument, and/or other activities and stick with them.
When you start to think about college, the first step is to choose a field of study. That can really help to narrow down your list of schools. Not all schools have a pre-med program, for example. If you don’t know what you want to study, that can narrow the field, too. Choose schools that offer a wide range of programs.
Next, look at the schools on your list. Check the tuition costs, but also consider the cost of living where the school is (whether in dorms or in an apartment). The same amount of food costs more in Manhattan than in Albuquerque, so consider those costs, too. Will you need a car? What will books cost? Work out an estimate for the whole price tag, not just tuition costs. Consider all of these factors when looking at your list. You don’t necessarily have to rule out a school because it’s above your price range, but you should keep the costs in mind.
Apply to the schools you want – look for good programs in the field of study in which you’re interested. Start early, so you have plenty of time to complete the applications. Then, apply for every scholarship you can find. Almost all colleges offer scholarships to students based on a variety of criteria, from your need to your outstanding academic ability to your athletic skill to your leadership in community service. You can also apply for outside scholarships. There are plenty of options and you can apply for them all. There are scholarships for redheads, scholarships for left-handed people, scholarships for people who live in a certain town, and scholarships for people who want to pursue particular fields of study. Put in some time on Google and figure out which scholarships are available to you. Some are small and some are large, but apply to all of the ones you think you may be able to get. You can probably take a big chunk out of your college costs this way.
Finally, determine what you and your family are comfortable paying for an education. Consider what you want to study. If you’re interested in a career in engineering, you can reasonably borrow more than if you want to study ancient languages – there are simply more and better-paid job opportunities for the former than the latter, meaning you’ll be able to pay off your loans with no trouble. Did you get scholarships? That will help defray some of the costs. Will you be working while you’re in school? Figure out a budget for your four-year education and choose a school that fits it.
If you decide to borrow to finance your education, look at federal student loans first. Their interest rate is generally lower than private loans and they’re easy to get. If you don’t qualify for enough of a federal student loan to cover your costs, look at private loans from respected organizations like Sallie Mae. Shop around to make sure you’re getting the best deal.
The Bottom Line
College is extremely important in today’s high-tech, service-oriented workplace, but it doesn’t have to break the bank. Choose your school carefully and get all the scholarships you can. You can get a college education without a mountain of student debt.
M. Erik Clark is the Managing Partner of Borowitz & Clark, LLP, a leading consumer bankruptcy law firm with offices located throughout Southern California. Mr. Clark is Board Certified in Consumer Bankruptcy by the American Board of Certification and a member of the State Bar in California, New York, and Connecticut. View his full profile here.