skip to main content

Higher Education’s Last-Minute Financing Fiasco

May 22, 2023

Higher Education’s Last-Minute Financing Fiasco

It’s May and millions of prospective students are in the throes of committing to a college for the upcoming academic year. For many it’s a journey that started with an application submitted last fall. For the truly proactive, it’s the culmination of years of preparing and dreaming.

Yet no matter when any of them started, all sit in pretty much the same spot today – finally learning how much next year will actually cost, as well as how to pay for it.

Buying college is an overly cumbersome process that looks nothing like any other consumer purchase people make. It’s bought annually rather than all at once, and in clunky credit-hour increments rather than by the degree. It’s a system where getting a private grant or scholarship can be perversely rewarded by losing a state or institutional grant somewhere else.

Putting the cart before the horse

Lots of things throw families curveballs when buying college, but a big one is the gap between when applications are due and when students finally learn how much those choices will cost.

Considering how unaffordable most perceive college to be today, expecting people to price shop for something they can’t know the actual cost of it seems implausible. Yet in higher education it is actually the norm. Shopping students can guess at the total cost, and some may even use schools’ often unreliable net price calculators, but at the prices colleges charge today even being slightly off could mean thousands more dollars of cost, and likely debt.

It’s a situation that plays out for millions of low- and mid-income families every year. A high school senior gets into their dream school only to eventually find weeks or months later the family still needs to somehow cover anywhere from $5,000 to $25,000 for its “out of pocket” share.

The solution most offered to pay for it? Typically private or federal parent PLUS loans.

Painted into a corner

For any other purchase the first thing someone would do when faced with an overly expensive choice is consider the alternatives, but having to wait until late spring makes that exceptionally difficult. What if the student has no other 4-year school options available? What if there are alternatives that are equally financially unattractive?

Community college first is assumed to be the default fallback – and most affordable scenario – but 2- to 4-year transfer rates are dismal. Never mind that choosing the open-admission option after the fact defeats applying to other places first to begin with.

Wait a year and apply again? That’s a steep price to make a financially naive 18-year-old or adult student looking at college to fix their current circumstances pay.

Families instead typically scramble to find dollars that’ll help close the gap. State grant programs are an obvious stop, but only if you’re lucky enough to live in roughly half the states whose program deadline hasn’t already passed. Private scholarships are a close second, but here again the late search often leads to already closed applications and even if aid is gotten, there’s always the risk it will displace some other state or institutional grant.

While some suggest students have the power to negotiate better aid packages, that’s an ad hoc solution that doesn’t scale well. It also requires a good deal of time and effort without any real guarantee of more aid.

The reality of fruitless, last-minute searches for most however is to cover the unanticipated gap with loans.

Fixing the uncertainty

Buying college today forces an exceptional amount of borrowing uncertainty on families. There are several ways to solve the problem.

One way is to let families and schools manage the risk directly. This could be done by letting either institutions or borrowers themselves buy Loan Repayment Assistance Program (LRAP) or student loan insurance coverage. That would help reduce borrowing risk by covering monthly payments when graduates struggle to find employment that generates enough income to comfortably cover the debt.

Insurance would effectively reduce the concerns students may have with shouldering debt because of unanticipated post-graduation events like economic slowdowns or a longer-than-expected runway into greater career earnings. It would also more fairly allocate repayment risk to schools whose degree programs are required by different job markets.

Another way would be to draw lessons from car dealers, which present the total all-in cost up front, but also all the dealer discounts and government rebates. Starting with the maximum amount that needs to be financed reduces buying stress because every other financing decision – from the amount put down to the loan term chosen to unanticipated windfalls – makes the borrowing commitment both known and affordable in advance.

In the case of college that means selling degrees, not credit-hours and it means giving students a clear sense of government and institutional “rebates” before submitting applications, not months afterwards. Schools would have to pivot away from sophisticated tuition discounting and states may question front-loading grants given their own budget constraints, but it would also put the brakes on over-borrowing by moving the maximum debt load into the shopping decision rather than after the fact.

That, in its own right, is a win for everyone.

Carlo Salerno is an education economist who writes frequently about higher education access, completion and affordability. More from him can be found on Twitter (@EDanalyst) and on LinkedIn.