Midwestern Forum Session 45 Defining a Reasonable Threshold for Borrowing by Students and Families

1. Midwestern Forum Session 45Defining a Reasonable Threshold forBorrowing by Students and Families Presented by Clint Gasaway Director of Financial Aid Wabash College February 27, 2007

2. Borrowing Overview • Parents and students have varying expectations regarding borrowing for education • Their beliefs about borrowing are generally influenced by the parental experience with borrowing • Student and parental borrowing is increasing because the cost of education has risen faster than both the typical family’s ability to pay and the availability of need-based grants and scholarships

3. What percentage of students graduating from four-year institutions graduate with some debt? • One third • Half • Two thirds • Three quarters Debt Burden: A Comparison of 1992-93 and 1999-2000 Bachelor’s Degree Recipients a Year After Graduating; National Center for Education Statistics, U.S. Department of Education, March 2005

4. Midwestern Student Debt Levels for Graduates of Four-Year Institutions for the Class of 2005

5. Unrealistic Views • I cannot/will not borrow anything as a student • Any debt is bad • I should not borrow to pay for education • I am better off not pursuing higher education if I have to borrow in order to do so

6. Unrealistic Views • I can/will borrow everything as a student • I can borrow as much as I want • Wants vs. needs • I do not need to pay attention to how much I am borrowing to pay for education • No idea of how much I have borrowed • My parents are taking care of how much I borrow

7. Realistic Expectations for Student Borrowing • I will benefit from my education and I can borrow what I need in order to cover a reasonable portion of my educational expenses • I will borrow only what is necessary • I will earn as much as I can through summer and school year employment to minimize what I need to borrow

8. Realistic Limits for Student Borrowing Traditional view (8% RULE) For many years, the financial aid community has generally accepted the idea that students should not devote more than 8 percent of their gross income to repayment of student loans.

9. Repayment Expectations as a Percentage of Income • Source is The Project on Student Loan Debt: • WHITE PAPER: Addressing Student Loan Repayment Burdens FEBRUARY 2006

10. Realistic Limits for Student Borrowing Progressive view (varies depending on income level) • Source is research by: • Sandy Baum The College Board and Skidmore College • Saul Schwartz Carleton University • How Much Debt is Too Much? Defining Benchmarks for Manageable Student Debt

11. Midwestern 2004 Median Earnings of College vs. High School Graduates,Age 25 Years and Over, by State

12. The spread of 2004 Earnings by Education Level • Source is The Project on Student Loan Debt: • WHITE PAPER: Addressing Student Loan Repayment Burdens • FEBRUARY 2006

13. Realistic Expectations for Borrowing • Parental borrowing influencers • Current income and debt levels • Other extended family obligations • Educational and other financial needs of their other children • Number of years to retirement • Adequate retirement funding

14. Student Case Study - 1 • Student’s parents are opposed to any kind of debt • Student is high-need and there is only a small parental contribution expected • Student has the choice of going to a less expensive school and borrowing less or going to their first choice school and borrowing $30,000 over four years • What should the student do?

15. Student Case Study - 2 • Student’s parents believe the student should pay for their education just like they paid for their own education when they went to college • Student is low need and there is a significant parental contribution expected even after the student receives a $15,000 merit-based scholarship • Student has the choice of going to a less expensive school and borrowing less or going to their first choice school and borrowing $50,000 over four years • What should they do?

16. Parental Case Study - 1 • Parent has significant health issues and is now working part-time • Uncertain how much longer they will be able to work • They have significant debt because of ongoing medical expenses and several periods when they were unable to work • What should they do?

17. Parental Case Study - 2 • Parents have been in debt and now that they have worked their way out of debt they are strongly opposed to taking on new debt • Because of their experience with debt, they are unwilling to allow their child to borrow in order to pay for education • What should they do?

18. Parental Case Study - 3 • Parents value education and they are willing to borrow a portion of what they will need to contribute to their child’s educational expenses • They have two younger children that will be going to school in two more years • What should they do?

19. Resources • Four-year picture • Help families anticipate borrowing needs • Help students and parents understand their options • Help students and parents understand their long term obligations based on borrowing projections • Borrowing resources • Loan Calculators http://www.collegeanswer.com/financing/lt_financial_planning/ltfp_monthrep.jsp • Simple Tuition http://www.simpletuition.com/home

20. Loan Calculators http://www.collegeanswer.com/financing/lt_financial_planning/ltfp_monthrep.jsp

21. Simple Tuition http://www.simpletuition.com/home

22. Informational Resources • Project on Student Loan Debt http://projectonstudentdebt.org/index.php • How Much Debt is Too Much? Defining Benchmarks for Manageable Student Debt http://www.collegeboard.com/research/pdf/06-0869.DebtPpr060420.pdf • White Paper: Addressing Student Loan Repayment Burdens http://projectonstudentdebt.org/files/pub/WHITE_PAPER_FINAL_PDF.pdf