How the Economy Has Changed Financial Aid

For years, Tom and Lori Lapin dutifully prepared for their two sons' college educations. They made regular contributions to 529 accounts, invested in some stocks and mutual funds, and lived as frugally as they could. They figured they'd be able to supplement their savings with some of the income from their business—a small commercial sign shop in Portland, Conn., that they've owned for 30 years. But as their older son, Ben, prepared to enroll at Union College in Schenectady, N.Y., in fall 2008, the economy began to nosedive. So, too, did their company's sales, many of which are tied to the real-estate market. "It was pretty dramatic," says Lori. "It just got worse and worse." After Ben headed off to Union—where tuition, fees, and room and board total roughly $50,000 a year—the Lapins struggled to keep their business afloat and began tapping some of their investments. When Lori sat down to prepare the couple's taxes in January 2009, she quailed at the numbers. "I didn't know how Ben was going to go back to Union the next year," she says.

Running out of options, Lori wrote a letter to the financial-aid office. She explained the family's stark new reality and included a copy of the couple's tax returns and other relevant documents. She also emphasized how much Ben was loving Union. He was making friends, fitting in easily, and thriving academically. Unbeknownst to her, the college had been getting many similar requests—enough that officials finally decided to add a $1 million contingency fund to the 2009–10 financial-aid budget. Soon after writing her letter, Lori received a response. To help meet Ben's new level of need, Union boosted his grant award and offered him a work-study position. "I was absolutely thrilled," says Lori. "They're making it possible for Ben to continue to go to Union. I couldn't be more grateful."

In the throes of the worst economic crisis in decades, families are straining more than ever to pay for college. They're contending with job losses, tumbling home equity, and ravaged investment portfolios. At the institutions they hope to send their kids to, the picture is just as dismal. Endowments have shed billions in value, donations are down, and states have slashed appropriations for higher education. As terrifying as it all seems, though, families shouldn't despair. As the Lapins discovered, schools are trying to ease the burden—beefing up aid budgets, for instance, or stretching out payment plans. And the federal government is lending a hand as well. President Barack Obama's administration and Congress have unveiled a host of measures, from additional grant money to more-generous tax credits. "These are tough times for families and tough times for colleges and universities," says Terry Hartle, senior vice president at the American Council on Education (ACE). But "federal student aid will be readily available, more than has been before."

Few people witness the effects of the downturn more closely than the folks in the financial-aid office. "In the 25 years I've been in aid, I have never seen it this bad," says Pamela Fowler, executive director of the Office of Financial Aid at the University of Michigan. "It seems that every time somebody announces a layoff or plant closing, we get another wave" of appeals. Among the many cases that have come across her desk was the ordeal of one student's father: the man tried to help out his brother (who had fallen on hard times because of bad investments), only to lose his own job and then suffer a heart attack because of the stress. "Some of these stories go on and on and on," says Fowler. "People are just dealing with so much." For 2009–10, the number of students eligible for institutional grants at Michigan increased by 20 percent over the previous year—a huge jump. As a result, the university added millions more to its aid pool.

Institutions are in a tough bind—trying to make themselves affordable to the students they admit, yet struggling to scrounge up the necessary aid dollars from budgets they've had to pare down. Take Vanderbilt. Like many universities in recent years, it decided to replace all need-based loans with grants and scholarships. The university announced the change with fanfare in September 2008—right on the eve of the economic meltdown. Though the program suddenly became much more difficult to fund, Vanderbilt nipped and tucked all across the budget to make it work. "It scares us all," says Douglas Christiansen, vice provost for enrollment and dean of admissions, "but it is the right and moral thing for our institution to do."

Not all schools have suffered equally. Though their endowments have been pummeled, wealthy Ivies still have a financial cushion to fall back on. Small private colleges that rely more on tuition revenue don't have that luxury. They need to convince parents they're still worth the price—not easy when everyone is more cost-conscious. At Union College, the number of applicants declined for 2009–10, says Matt Malatesta, vice president for admissions, financial aid, and enrollment. The institution had to dig deeper into its wait list and still came up 15 students short of its enrollment target of 555. Perhaps the hardest hit, however, are public universities. True, their applications tend to increase during recessions, since they're perceived as more of a bargain. But many face deep funding cuts, as states hack at their budgets to bring them into line.

In California, higher education is confronting a true calamity. With the state's finances in shambles, Gov. Arnold Schwarzenegger proposed draconian cuts in the summer of 2009—nearly $800 million over 14 months for the University of California system alone, a roughly 20 percent decline in its state appropriation. A contraction of that magnitude "will require us to consider extremely painful options," said UC president Mark Yudof in a statement in June. Among those options: reducing freshman admissions, raising fees even more than anticipated, and imposing layoffs, furloughs, and salary reductions for staff. Not only that, but the governor also suggested eliminating the Cal Grant program for low- and middle-income students. That would be painful for people like Tommy Le, a rising senior at UC Santa Cruz. The economic collapse has already overwhelmed his family, forcing his father to close his furniture store in El Monte, Calif., and prompting Le to start sending cash home. If he were to lose the grant money, he says, "either I have to take a leave of absence or pretty much drop out."

In response to all the hardship, the federal government stepped in aggressively. In 2008, as the credit markets seized up, Congress passed a law that raised the limit on how much students could borrow in federal Stafford loans and deferred repayment of federal PLUS loans (available to parents) until six months after graduation. It also empowered the secretary of education to buy student loans from banks, thereby ensuring that lenders have enough capital to meet borrowing demands. Moreover, certain provisions of a separate law enacted in 2007 have been gradually taking effect in the years since. They include a reduction in the interest rates on subsidized federal loans (now down to 5.6 percent), tuition assistance of $4,000 per year for students who commit to teaching high-need subjects in underserved areas, and loan forgiveness after 10 years for graduates who enter public-service careers.

One of the more touted elements of the 2007 law went into effect in July 2009. Known as the Income-Based Repayment program, it caps the monthly payments on federal loans at 15 percent of a graduate's discretionary income. What does that mean for the bottom line? Say you're a recent graduate with $30,000 in federal loans and a starting salary of $25,000 a year. Previously, your monthly payments would have totaled about $345; now they'll be around $110, according to The Institute for College Access and Success (TICAS), a nonprofit focused on affordability issues.

The Obama administration delivered another basket of goods. As part of its stimulus package approved by Congress, the maximum Pell Grant award jumped from $4,731 to $5,350 in July 2009. In addition, many families can now take advantage of a temporary tax credit of up to $2,500 per student for tuition and books. "These two changes will make about $32 billion available to students and families over the next two years," says ACE's Hartle. Looking ahead, Obama put forward additional suggestions in his proposed 2010 budget. He wants to lock in Pell Grant increases and index them to inflation, make the temporary $2,500 tax credit permanent, and expand the Perkins loan program for needy students (if Congress were to approve these measures, they likely wouldn't take effect before 2010-11).

Obama's proposed budget also includes an initiative that has created a stir. To provide the necessary funds for the Pell Grant increases, he recommended changing the way the government disburses federal student loans. Currently, the government lends only about one quarter of that money directly to undergrads. The remainder is lent by financial institutions, though the government still guarantees those loans and pays banks a subsidy to make them. Basically, Obama wants to cut out the middlemen and have the government do all the lending directly. That would save an estimated $94 billion over 10 years—money he'd then funnel into the Pell Grant program. The idea has met resistance from banks and the lawmakers representing districts where they operate. The proposal's fate remains uncertain.

Despite the availability of federal money, many students rely on private loans from banks. According to TICAS's Project on Student Debt, the proportion of undergrads who took out such loans jumped from 5 percent in 2003–04 to 14 percent in 2007–08. That trend has likely abated given the squeeze in the credit markets. But it's still prevalent enough to worry many financial-aid professionals, since private loans are usually more expensive than federal ones and have higher interest rates. "Make sure you know your federal-loan options before you turn to other sorts of financing," counsels Lauren Asher, TICAS's acting president. If you've maxed out your Stafford loans, she says, consider asking your parents to take out a federal PLUS loan, which carries a fixed rate of roughly 8 percent. In the event your parents are denied because of credit problems, says Asher, your school's financial-aid office can nearly double your eligibility for Stafford loans.

She and others add a note of caution—just because loans are easy to get doesn't mean you should pursue them indiscriminately. Among graduates who borrowed to fund their educations, the average debt rose, in inflation-adjusted dollars, from $19,300 in 2000–01 to $22,700 in 2006–07—an 18 percent increase—according to the College Board's 2008 Trends in Student Aid report. Kids may not pay much mind to their debt loads while in school, but then find they are overwhelmed when it's time to start paying them off.

Financial issues weighed heavily on Richael Young's mind in recent years. After graduating from high school in 2006, she enrolled at the two-year College of San Mateo in California, planning eventually to transfer to a four-year school. As she began classes at CSM, however, her parents—both mortgage brokers—started feeling the effects of the real-estate downturn. By the time the market collapsed outright two years later, their combined income had plummeted from the mid-six figures to $12,000.

So Young took matters into her own hands. Besides applying for aid at four-year schools, she pursued the Jack Kent Cooke Foundation's Undergraduate Transfer Scholarship. The largest private award for community-college students in the country, it provides up to $30,000 per year for the final two to three years necessary to obtain a bachelor's degree. In May 2009, Young learned she'd won one, allowing her to attend her dream school—the University of Illinois at Urbana-Champaign—in fall 2009. "This scholarship is going to make a huge difference in my life," says Young, who advocated for disadvantaged kids as president of the Student Senate for California Community Colleges. "Now I don't have the financial barriers that other students have in their lives." With the right mix of aid, however, plenty of them might follow in her footsteps.

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