While college is notoriously expensive, a new study shows that higher education is unaffordable for most Americans.
Recently, the Institute for Higher Education Policy (IHEP) found that 70 percent of colleges are unaffordable for lower-income and middle-income students who are unwilling or unable to take out student loans.
Find out what this study means for college affordability and what you can do to reduce your education costs.
The issue with college affordability
The “Limited Means, Limited Options” study from IHEP uses a benchmark created by the Lumina Foundation, a nonprofit organization dedicated to making college affordable for all. The Lumina Foundation also funded the report.
In the study, IHEP looks at the cost of attendance at more than 2,000 schools nationwide. They use 10 different student profiles to compare grants, scholarships, and loan offers.
With the Lumina Foundation’s “rule of 10” benchmark, IHEP deems a school affordable if students could pay the total cost of attendance by working 10 hours a week, after deducting scholarships and grants. IHEP also assumes the family put aside 10 percent of their discretionary income for 10 years.
The study finds that the vast majority of U.S. schools are unaffordable for typical Americans.
The study also shows that the idea that low-income students get more financial aid is a myth. In fact, only two percent of schools in the country offer enough financial assistance for a student who has a household income under $36,000 to attend.
Even those who are high-earners may struggle to send their children to school without taking out burdensome student loans. State and public schools, traditionally considered a lower-cost option, can be out of reach as well.
Zakiya Smith is the strategy director for finance and policy at the Lumina Foundation. Smith also formerly served the Obama administration as a senior advisor in the U.S. Department of Education. According to Smith, IHEP’s study highlights a growing issue in the nation.
“This study makes clear that low-income students face the brunt of the challenge in paying for college,” said Smith. “Middle-income students are also largely unable to afford most institutions covered in the study. All but the most wealthy families are struggling to pay for college.”
The changing cost of college
The concept of working through school has changed. In past decades, people could pay for their education by working part-time while studying. However, that’s no longer possible.
“You can no longer afford to go to an average college by only working part time,” Smith stated. “This report lays that fact bare.”
That’s because the price of attending a university has increased dramatically, affecting college affordability.
In the past 10 years, college prices rose by 45 percent, according to the Lumina Foundation. Yet during the same period, incomes have decreased by seven percent. This disparity highlights a growing problem as students try to get a degree.
“Today’s students are more likely to be older, working, and have children of their own, making the ‘typical’ archetype of a college student different than what we may imagine,” explained Smith. “Still, this analysis suggests that for most students and families, many colleges are unaffordable by a reasonable standard.”
And increasing college costs can force students and families to rely on student loans to fill the gap, adding another financial burden.
“They have to take on more debt than in the past, which can be intimidating and create further stratification,” said Smith.
How to make college more affordable
Despite the rising costs, Smith stresses the importance of getting a degree to ensure higher lifetime earnings.
“Students and families should keep striving, though, and not give up on trying to obtain some type of postsecondary credential (even if it is not the idyllic residential four-year experience),” Smith added.
To make college affordability a reality, families can look into alternative options. One way to reduce the cost of college is to attend community college for the first two years, then transfer to a four-year school. In a recent Student Loan Hero study, we found that students can save more than $11,000 with this approach.
And taking advantage of savings plans such as 529 accounts can help families earmark money for college.
“Families can plan ahead, to the extent that they have the capacity to save,” said Smith. “And, they can use tools like net price calculators and the College Scorecard to determine which colleges may be more affordable to reduce their reliance on debt.
What’s more, Smith said families should not only consider the cost of college, but also the outcomes. For instance, the idea that not all debt is “bad” if the college provides a quality education.
Finally, students and families should calculate the value of the degree and the school’s return on investment before choosing a university.
“High school seniors should consider the graduation rates and employment outcomes for colleges they are considering before making a final decision,” Smith explains. “You want to make sure that the institution has a good track record of success and a plan to help you succeed.”
Planning for college
Despite a decrease in college affordability and stagnant household incomes, a college degree remains an invaluable asset when it comes to your earning potential.
While IHEP’s study emphasizes the rising costs of college, getting a degree is still an important tool for accessing better job opportunities.
For more information about reducing your college expenses, check out this article on four common pitfalls to avoid in college.
Interested in refinancing student loans?Here are the top 6 lenders of 2019!
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.97% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on ourstudent loan refinance product.
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2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.
Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.28% effective October 10, 2018.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.57% – 6.97%1||Undergrad & Graduate|
|2.47% – 6.99%3||Undergrad & Graduate|
|2.68% – 8.77%4||Undergrad & Graduate|
|3.24% – 6.66%2||Undergrad & Graduate|
|2.61% – 7.35%5||Undergrad & Graduate|
|3.01% – 9.75%6||Undergrad & Graduate|