By David Cho
Washington Post Staff Writer
Monday, December 28, 2009
When Daniel Ottalini entered the University of Maryland in 2004, his family had an array of choices to cover the cost -- cheap student loans, a second mortgage at low rates, credit cards with high limits and their own soaring investments.
By the time his younger brother, Russell, started at the University of Pittsburgh this fall, the financial crisis had left the family with fewer options. Russell has had to juggle several jobs in school, and the money he could borrow came with a much higher interest rate that could climb even further over time.
The upheaval in financial markets did not just eliminate generous lending for home buyers; it also ended an era of easy credit for students and their families facing the soaring cost of a college degree.
To pay for higher education, most Americans had come to rely on a range of financial products born of the Wall Street boom. Nearly all of these shrank or disappeared in the storm that engulfed the stock and debt markets.
Lenders have raised rates and tightened standards, dramatically limiting the availability of home-equity loans and private student loans. College savings accounts, known as 529 plans, had acute losses in the downturn. And a new law, set to take effect Feb. 22, will bar students younger than 21 from getting credit cards on their own.
Loans offered with federal backing were the lone form of student debt to expand, but only because the government stepped in last year to prevent this business from collapsing under the pressure of the credit crunch. Still, the most common type of federally backed loan has a limit of $5,500 a year, not enough to pay for most four-year programs.
Even as the financing options have narrowed for families, college expenses are rising faster than ever as schools suffer from endowment losses and cuts in state funding because of the financial crisis and the recession that followed.
Last month, California's public universities announced that tuition fees would rise by 32 percent, sparking student demonstrations across the state. University of Virginia officials said a 15 percent cut in state funding for higher education will also force them to significantly raise tuition.
Some educators are concerned that the new price tags will discourage poor students from applying and will price out middle-class families that make too much to obtain financial aid, but not enough to easily afford college.
"It's not only the credit model that has changed; the basic financial model of higher education has also become challenged," said Anthony Marx, president of Amherst College in Massachusetts. "We were already concerned that middle-class students were getting squeezed by racking up debt that could constrain their career choices after they graduate. All of that comes under more strain in these new circumstances."
Other educators worry that students will be forced to compromise on their education.
Russell Ottalini said he choose the University of Pittsburgh because he judged that it would be best for his Japanese-language studies. He relied on his parents to borrow money for his education. But he acknowledged that economic times are tough and said he is willing to transfer to a cheaper school if one parent gets laid off, even if it means attending a lesser program.
"My dad told me I should go to college where I wanted to go," said Russell, 19, whose family lives in Silver Spring. "But not only do my parents have to co-sign for most of my loans, they have to watch one of their sons take on immense amount of debt."
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While public universities had little to do with causing the financial crisis, they are suffering its consequences.
To help close a record $60 billion gap in the state budget triggered by the real estate downturn, for instance, California announced $800 million in cuts to the University of California system of 10 schools. In the past two years, a fifth of the system's state funding has vanished. An additional $1.3 billion in reductions is expected next year.
In response, the system's board of regents announced in November the 32 percent increase in tuition, taking effect next year.
After the decision was made, armed police in riot gear had to protect officials from protesters. Students took over classroom buildings at Berkeley, Los Angeles and Santa Cruz, barricading themselves inside. Dozens of students have been arrested. Then, earlier this month, about 70 students and activists surrounded the home of Berkeley's chancellor while he and his family were sleeping, smashing light fixtures and windows and throwing torches at the house.
In Virginia, meanwhile, state funding for four-year colleges has decreased 15 percent. That has meant $19 million less this year at the University of Virginia, which has a total annual budget of more than $1.2 billion. Larger reductions are expected by university officials for the 2010-11 school year.
Exacerbating the deficit are losses in the school's endowment, which declined from $5.1 billion on June 30, 2008, to $3.9 billion six months later as its investments in the market tumbled. The endowment has since recovered by more than $300 million, but officials are lowering their projections of what the fund will return over the next few years.
Administrators say the University of Virginia remains committed to offering financial aid to anyone who needs it, and so far they have avoided layoffs by eliminating vacant positions. But school officials said they have been forced to raise the price of admission significantly. No figure has been set yet for the coming school year.
Tuition costs at U-Va. had already been growing rapidly. A decade ago, the price, excluding room and board, was just over $4,000 for in-state students and nearly $17,000 for out-of-state students per year. Now it's nearly $10,000 and $32,000, respectively.
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Even before the financial crisis intensified the upward pressure on college costs, the price of a degree was soaring. Since 1980, the average cost of tuition and room and board has grown by a staggering 121 percent while median household income has risen a mere 18 percent, according to federal data. But the credit boom earlier this decade provided some relief for families.
Wall Street financiers packaged student loans into securities and sold them off to investors, who could trade them just like stocks. That, in turn, provided more money for lending, helping to make student loans cheaper and more available. Even people with poor credit histories could easily get a loan.
But during the last academic year, private student loan volume fell by half as financial firms became wary of lending to students, who generally do not have long credit histories. Officials from Sallie Mae, the industry leader in student lending, said they expect another significant decline this year.
Nor have families been able to keep borrowing against the value of their homes, which seemed for years to appreciate with no end in sight. Second mortgages have been shrinking along with real estate values. Money made available by banks to homeowners through home-equity lines of credit has fallen by 25 percent, to $538 billion, since the end of 2007, according to federal data.
About a decade ago, financial planners began to tout the benefits of 529 plans, which invest families' savings in the stock and bond markets with the aim of keeping pace with the growth in college expenses. Even before the crisis, these plans couldn't keep up. Then, in 2008, the average 529 plan lost 20 percent of its value.
And no longer can students count on the credit cards once available so freely, often by salespeople who lined campus walkways, offering free T-shirts and coffee mugs with their plastic. Many students used the cards to pay for books, meals and more.
Lawmakers passed a bill in May that dramatically curtails the issuance of credit cards to anyone younger than 21. Most consumer groups support the measure, saying credit card lenders have been taking advantage of naive youths, charging them hidden fees and exorbitant rates. Currently, about 84 percent of college students have credit cards, carrying balances of more than $3,000 on average, according to a study by Sallie Mae.
But some students said the law will cut off a critical source of credit for everyday expenses.
After Shauna Stuart, a senior at the University of Maryland, was denied student housing, she had to drive to campus and counted on her credit card to pay for gas and other costs of maintaining her car. She also used the card to buy food and cover unexpected expenses. One semester, when money was especially tight, Stuart bought her books with the card.
"It would be really difficult to not have it," she said.
Financial planners say parents will now have to carry more of the financial weight for their children. Students on their own can obtain federally backed Stafford loans, but they have limits of about $5,500 a year. The other major type of federally backed student loan, known as Parent PLUS, has no limit. But it requires Mom and Dad to co-sign, making them ultimately responsible for repayment, and the interest rates for these loans have nearly doubled in the past five years.
"If you are the average family and you've got two car payments and a mortgage, sadly, you are probably living paycheck to paycheck these days," said Gary Carpenter, executive director of the National College Advocacy Group. "And you've got a big problem -- how are you going to afford a state institution at $20,000 a year, not to mention a private one for than $40,000?"
Some educators worry that college programs will sacrifice quality to contain costs or become limited to those who can afford it.
"The big macro question is: Will we have to sacrifice the quality of education, or the access, based on talent rather than the ability to pay?" said Marx, the Amherst president. "Either of those make America less competitive for the next generation."
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