The College Solution: Where Is the $$$?
- Colleges have gotten increasingly good at price discriminating. The list price is set high, and then many customers are offered a discount called “financial aid” based on their ability to pay. Here’s the secret plan: In the future, Harvard will cost $1 billion a year, and only Bill Gates’s children will pay full price. When anyone else walks through the door, the message will be “Special price, just for you.”
- —Greg Mankiw, professor of economics at Harvard University
When you’re visiting colleges, the campus tour guides understand that certain areas are off limits. They aren’t going to have you traipse through the cafeteria kitchen where the discarded pizza crusts mix with soap suds, and you won’t be trolling past the financial aid administrators’ cubicles.
Why disturb a family’s wonderment at the beauty of the campus and perhaps the school’s great perch in the U.S. News & World Report rankings with such prosaic concerns as how much this is going to cost—much less where the money is going to come from?
But before your child heads off to college, you will probably end up getting acquainted with the financial aid staffers who will be bundling together potential financial aid packages for your child. By the time the process is complete, these paper shufflers could know more about your finances than perhaps anyone else on earth, even more than the Internal Revenue Service does.
While colleges are entitled to learn the most intimate details of families’ financial lives, most parents are clearly at a disadvantage in this process. That’s because they typically harbor no clue about how colleges make decisions. And if your strategy is to depend on the kindness of a college administrator, you could very well be disappointed.
Mastering how financial aid is dispensed—or at least knowing enough to benefit your own family—will probably seem about as appealing as reading a digital camera’s instruction manual. But understanding the basics is essential because the costs, especially for private schools, can be staggering. Colleges don’t face the same predicament as McDonald’s or KFC, which must agonize over the potential of losing customers if they boost the price of a Big Mac or bucket of chicken. Even Starbucks, which has so many of us addicted to lattes and frappuccinos, has to be careful about raising its prices too high for fear of turning caffeine lovers into tea drinkers.
Colleges, however, have not been punished for raising their prices far beyond the rate of inflation each year. In fact, as perverse as this may seem, some schools have jacked up their prices to attract affluent families who assume that if the cost isn’t exorbitant, the school must not be any good.
Colleges have been sitting in a supply-and-demand sweet spot. Since the early 1990s, applications from high school seniors continued to rise as the Baby Boomers’ children entered college. The number of high school graduates, however, peaked in 2008 when roughly 3.34 million earned a diploma. More than 60% of those kids will be heading to college. In contrast, the last time there was such a surge in applicants—in the mid 1970s when the Baby Boomers were in their teens and early twenties—less than half of high school graduates even bothered with college.
Even after high school graduation rates have peaked, the number of teenagers heading to college is expected to continue to grow as more of them decide that a college education is essential. The difference in lifetime earning power between a student who stops with a high school education and someone who earns a bachelor’s degree is roughly $1.2 million. The financial advantage between someone who obtains a professional degree, such as a law degree, versus those who are satisfied with a bachelor’s degree is an additional $1.7 million.
Thanks to the high price of a college degree today, two-thirds of all families receive some sort of financial aid. But as you’ll learn, some types of aid are infinitely better than others. Grants, which don’t need to be repaid, are going to be far more welcome than a federally guaranteed loan or work study. Not too long ago, 60% of the typical college’s financial aid award was packaged with free cash. Loans represented the other 40%. But today, those numbers have been reversed. Loans now make up 60% of the average package.
Follow the Money Trail
You will increase your chances of obtaining a financial aid package that is fair or even more than fair if you understand how the process works. The families who get the most financial aid aren’t always the ones who need it the most. Those who educate themselves will increase their chances of walking away with a package they can celebrate. But before you can do that, you’ll need to understand the basics that you’ll find in the next eight chapters.