Parents used more of their earnings and savings to pay for college this year, instead of borrowing the money, according to a new study by Sallie Mae.
The student lender surveyed 800 families and found they spent an average of $24,164 on tuition, books, room and board for the 2014-15 academic year, a 16 percent jump from the prior year and the most significant increase since 2010. Parents out-of-pocket contributions accounted for 32 percent of the total funding used to pay for college, surpassing scholarships and grants for the first time in five years, according to the survey.
The findings are striking considering that tuition has risen faster than the rate of inflation and wages have not kept pace with the cost of college. But the resurgence of the job and housing markets have given families more confidence in the economy and their ability to pay for college, said Marie O’Malley, senior director of consumer research at Sallie Mae.
“Parents are less fearful about their own income and the value of their homes declining,” she said. “At the peak of the economic downturn, parents were looking for more ways to reduce costs–more students were living at home, students and parent were working more hours to afford college. That’s starting to change.”
The boost in spending is largely attributed to families with incomes over $100,000, who paid 25 percent more on average to send their children to school this year compared to the prior year. Those families only borrowed 7 percent of the money needed to cover costs, the same as families earning $35,000 to $100,000 a year. Lower-income parents took out even less, with loans accounting for just 4 percent of the money they used to help their children pay for college.
Still, the percentage of families who borrowed to pay for college climbed from 35 percent to 38 percent. While that is well below the peak of 46 percent in 2010, families who took out loans this year spent on average 34 percent more overall than those who did not.
Among families who did take out loans, students shouldered most of the burden signing for nearly three-fourths of the amount borrowed. Students who borrow directly from the government face lower interest rates and better repayment options than their parents.
Federal Stafford loans for undergraduate student carried a 4.66 percent interest rate this year, much lower than the 7.21 percent interest tied to Parent PLUS loans that the government extends to moms and dads. The government also hits parents with a 4.27 percent fee to make these loan, compared to a little over 1 percent to originate Stafford loans. Given the disparities in the loan terms, financial advisers encourage families to have students borrow for school, even if the parents plan to pay back the loan.
On average, upper-income families surveyed by Sallie Mae spent $33,260 on college, while middle-income households paid out $21,375, a few dollars shy of the $21,036 lower-income families spent. Parents reported that spending on four-year private universities went up 20 percent to $41,857, while public college spending increased 10 percent to $23,189.
While many private and public colleges are holding the line on tuition increases in the face of flagging enrollment, there remains concerns that there are few incentives for them to keep costs down. A recent study from the Federal Reserve Bank of New York said the availability of federal student aid is encouraging schools to increase cost.
Researchers at the New York Fed found that private colleges raise their tuition 65 cents for every dollar increase in federal subsidized loans and 55 cents for Pell grants given to low-income students. The loan effect was most evident at expensive, private schools.
Still, continued pressure on enrollment has created enough competition, especially among small private schools, that families may continue to see prices level off, if not come down some. Either way, having a plan to pay for college is critical in avoiding borrowing a lot to cover costs, said O’Malley of Sallie Mae.
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