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Correction to This Article
This article misstated the time frame of a 7.6 percent decline in the value of 529 college savings plans. The drop came since the second quarter, according to preliminary third-quarter figures.
The Strain to Pay for College
Loans Are Drying Up and Savings Are Down

By Nancy Trejos
Washington Post Staff Writer
Sunday, October 19, 2008

With a 3.3 grade point average and a 1700 SAT score, Danielle Price has done better than many of her classmates. Getting into college won't be a problem. Paying for it will.

"When I originally started to plan out the schools I wanted to go to, I didn't take into account money," she said. "Until the economy got bad, and then I started to look at what I could handle and what my family could handle."

She has ruled out Johns Hopkins University in Baltimore as well as Emory University in Atlanta. Too expensive. She is still holding out hope for Auburn University, a state school in Alabama, if she can get a scholarship. But she is also now looking inside her home state of Virginia. The University of Virginia and Norfolk State University are good, cheaper options, she said.

From now until the end of the year, she'll be feverishly applying for scholarships. "I'm really hoping I can get some financial aid," the Lorton resident said. "I really don't want to have to put off school for a year to get money. That would be the last resort."

As members of the high school class of 2009 fill out their college applications this fall, many are thinking more about affordability than academics. With household debt on the rise, parents have less money for their children's educations. While families' savings are down, tuitions are up. At the same time, several private lenders, squeezed by the credit crunch, have left the student loan business, taking away what had become a popular alternative to federal financial aid and scholarships. Those that remain have tightened their standards to the point where few students can get loans without co-signers, advisers and college financial aid directors said.

"The problem with parents getting ready to pay for college is three-fold," said Peter Mazareas, vice chairman of the College Savings Foundation, a nonprofit organization in the District. "Their home equities have decreased, the cost of college continues to rise, and to top it all off, there's difficulties getting college loans. So you've got almost a triple perfect storm that makes it very difficult for many families going forward to come up with the savings as well as the loans."

Some of the most vulnerable families are those with state-sponsored 529 college savings plans, which operate like 401(k)s and are thus subject to market volatility. Parents contribute money to a fund, which is divided up into stocks, bonds and other investments. Preliminary figures from Financial Research, a Boston consulting firm, found that the value of 529s had declined 7.6 percent as of the second quarter. Total assets in 529s at the end of the second quarter were $110 billion.

"Families are looking at their overall financial situation, and they're finding that the money they thought would be there for college might not be," said Chris Long, president of MeritAid.com.

A survey of 2,500 prospective college students nationwide by MeritAid.com, which tracks merit scholarships, found that 48 percent were more concerned than ever about being able to afford college. Fifty-seven percent were considering less prestigious schools as a result, while 16 percent said they were putting off college altogether because their families couldn't pay for it. Other students said they were choosing schools close to home to save on fuel and housing costs or going to two-year rather than four-year colleges, the survey found.

Stephanie Thomas, 17, of Baltimore really wants to go to college outside Maryland just like her brother, who is at Pennsylvania State University. Drexel and Clarion universities, both in Pennsylvania, were high on her list. But if she doesn't get enough financial aid and scholarships, she will probably end up at the University of Maryland at College Park. "To stay in Maryland would be devastating to me," she said.

Her parents, a teacher and a pastor, want her to go to the school of her dreams, but they said they could only do so much. "I had the opportunity to go to college, and I want my children to be able to have that same opportunity, but the way things are looking, we're just prayerful that they have that opportunity," said her mother, Natalie Thomas.

Some public university officials said they anticipate a rise in applications this fall as students forgo the hefty price tags of private schools. Sarah J. Bauder, director of financial aid at the University of Maryland at College Park, where annual tuition and fees add up to $8,005 for state residents, said applications were up 4 or 5 percent already. "Any in-state or public in-state institution becomes more attractive financially, and it's definitely going to influence behaviors in terms of where students apply in the future," she said.

It's no wonder. According to the College Board, the average cost of a private, four-year college in 2007-08 was $32,307 a year, including tuition, room and board, and fees. That was up 5.9 percent from the previous year. The average full-time student attending a private college received about $9,300 in grants and tax benefits.

To fill the gap, many students had been turning to private loans.

In the 1996-97 school year, 93 percent of the $38 billion in loans to undergraduate and graduate students came from the federal government. A decade later, 76 percent of the $77 billion in education loans came from the federal government, and 24 percent came from private and state sources.

But many of those lenders relied on the same asset-backed securities that mortgage lenders did. They packaged the student loans and sold them to hedge funds and insurance funds. When those investors got nailed by the subprime mortgage debacle, the spigot for student loans was also shut off. According to FinAid.org, which tracks the student loan industry, 36 lenders have suspended private student loans.

Even financial institutions that made federally guaranteed loans have scaled back because of the credit crunch. FinAid.org found that 137 of those lenders have pulled out.

Across the nation, universities are bracing for what could be a difficult school year.

Recently, the U.S. Department of Education reported that the number of students submitting the Free Application for Federal Student Aid, or FAFSA, for the 2008-09 school year jumped to 9 million from 7.7 million last year.

Not only will prospective students probably require more financial aid, but current students might also find that their fortunes change if they or their parents lose their jobs.

Tracy Schario, director of media relations for George Washington University, among the most expensive schools in the country with a $50,357 price tag for tuition, room and board this year, said the school eliminated its application deadline for aid so current students can ask for more money if their situations have changed. The school is also considering increasing the amount of money it sets aside for financial aid -- no easy feat as endowments across the country are decreasing because fewer people have disposable income to contribute.

At George Mason University, where tuition is $7,512, more students have filed financial aid appeals because of job losses or the higher cost of living, said Jevita DeFreitas, director of the financial aid office.

At the University of Maryland at College Park, some parents who were on a monthly tuition payment plan are having trouble keeping up, Bauder said. "They're falling behind, and it's only October," she said. "They want to be committed, but they don't have the resources to do it. It's certainly a phenomenon we haven't seen in 10 years."

Many parents are starting to turn to relatives for help. Several Web sites have sprung up that function as gift registries for prospective college students. Freshman Fund, for example, allows parents to designate the gifts towards a 529 savings plan. Started in August, the Web site has added users daily, said co-founder Jason Olim.

"Because of this economic downturn, we're seeing more community-related savings," said Larry Glazer, founder and managing partner of Mayflower Advisors in Boston. "Use the friends and family route. Earmark some of those birthday gifts towards college, instead of toys."

Price, the Lorton resident, is relying on the kindness of her relatives to help her get to college. Her parents, now divorced, started a savings plan for her when she was a child, but it is not enough, her mother Florene Price said.

Recently, Florene Price, a social worker making $47,000 a year, asked her parents and three siblings to contribute to a savings account she opened for her daughter. "The economy was looking bleak, so I enlisted my family," she said.

It's been discouraging so far. One school, Hampton University in Hampton, Va., only offered $2,000 worth of aid. Tuition, room and board are almost $24,000.

"That's when it became apparent to me that it's going to be pricey," Florene Price said. "Financial aid is not what it used to be. I went to school on financial aid. The amount they're giving them now is basically nothing compared to tuition."

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