Inside Iowa State

Jan. 30, 2009

Why our students have so much school debt

by Anne Krapfl

Affording an Iowa State education
	1997-98	2006-07	Change (%)
Undergraduate tuition (resident)	$2,766	$6,060	+119
Cost of attendance*	$9,617	$16,466	+71
Iowa median income	$44,022	$48,075	+9
Need-based awards (average size)
Federal Pell grant	$1,575	$2,516	+60
Federal Supplemental
Educational Opportunity grant	$1,040	$619	-40
Iowa Grant	$861	$752	-13
Federal work-study	$1,278	$1,304	+2
State work-study	$670	$806	+20
No. of state work-study awards	1,089	56	-95
No. of federal work-study awards	1,413	1,587	+12
ISU students with private loans	5	5,739	+114,680
Average size of private loan	$5,240	$7,833	+49
Average debt at graduation	$18,605	$29,352	+58
*Includes tuition, room and board, books, transportation and other costs

Perhaps you think you work at a university that provides a solid education at a good value, relative to the price tag at private colleges or public universities in some neighboring states. But "affordable" may not be an accurate Iowa State descriptor to many Iowa families.

A decade of shrinking state appropriations to Iowa State, leading to tuition levels that have more than doubled; stagnant to declining student financial aid from state and federal governments; and an Iowa median family income that has increased just $4,000 in 10 years put the squeeze on families to pay for college. Students who don't qualify for -- or fail to apply for -- need-based or merit-based grants rely more on loans to pay for school. And that has led to high student debt by graduation day, nearly $30,000 on average for ISU students with debt.

Why so high?

Other factors contribute to the escalating cost of an Iowa State education. Consider:

• Work-study funds -- something many of us relied on to get through college -- aren't as available these days. State work-study funds to Iowa State, at just over $0.5 million in 1997-98, had crashed to about $26,000 by 2006-07. That decade included four years of no state work-study funds.
• Iowa's private colleges have successfully lobbied legislative leaders to support private schools with state aid. In Iowa in 2006-07, 85 percent of the state's $3.4 million of need-based grants supported students enrolled in private, not-for-profit colleges. By contrast, 6 percent supported students enrolled in public colleges and universities. The ratio of state need-based aid awarded to public university students is considerably higher in the states of ISU's peer universities, including Indiana (76 percent), Minnesota (61 percent), Arizona (97 percent), California (67 percent) and Michigan (32 percent).
• Even when funding for programs grows, their purchasing power may be in decline. For example, the maximum federal Pell grant grew by 50 percent from 1997-98 to 2006-07. Its ability to cover the cost of attendance fell from 27 percent to 25 percent.

Aid with flexibility

A bright spot in Iowa's student financial aid has been a state Board of Regents commitment to tuition set-aside, what director of student financial aid Roberta Johnson refers to as financial aid "with the most flexibility and the fewest strings attached." Her staff awards it to students with financial need. They also use it as an incentive to bring academically bright students to Iowa State. This strategy positively impacts things like average ACT score and graduation rates, she noted.

Board policy requires the regent universities to set aside at least 15 percent of tuition and fee revenues for student financial aid. Iowa State opts to exceed that requirement, in recent years by 7 to 8 percentage points. In 2006-07, Johnson and her staff awarded $28.3 million in tuition set-aside aid.

Johnson said a common misperception is that student financial aid is one or the other: need-based or merit-based. "My experience is that merit and need are not exclusive of each other," she said.

A critical loan decision

[In the decade studied for this report] "Our loan indebtedness exploded," said Johnson, who has led the office since 2005. "We saw a huge growth in the need, and we tried to give our students options."

One of those options was a private student loan, marketed by the quasi-government entity Iowa Student Loan Liquidity Corp., that required neither a parent cosigner nor a completed FAFSA (Free Application for Federal Student Aid), the document on which most financial aid decisions are based. The appeal to students of these loans, Johnson said, was that they were relatively easy to get -- and they could get them without the inconvenience of lining up a cosigner. The downside was that they had origination fees of 0 to 9 percent that detracted from their buying power, as well as variable interest rates that started low but could change every quarter.

"During the time that we offered these loans, interest rates were less than 4 percent, so they were far more attractive to families than the federal PLUS (Parent Loan for Undergraduate Students), which was carrying a variable interest rate with a 9 percent cap," Johnson said. "We thought it was a good option at the time, but hindsight showed us otherwise," Johnson said.

The PLUS loan was popular elsewhere, but tapped less frequently in Iowa. These loan amounts never show up in student debt comparisons because the loans are made to parents, not directly to students.

Total PLUS loan volume to ISU parents grew167 percent (from $5.9 million to $15.9 million) between 1995-96 and 2006-07. Nationally, PLUS loan volume jumped 394 percent. In neighboring states, PLUS loan volume increases included 744 percent (Illinois), 586 percent (Minnesota), 901 percent (Missouri) and 226 percent (South Dakota).

Johnson said that since 2005, the annual financial aid award letters her office sends to ISU students lists only the PLUS as a loan option if all other public and private aid options have been considered.

PLUS loan volume among ISU families is up slightly (about $4 million) and private loans among ISU students are down considerably this year (about $30 million). Students also are opting for an extra $2,000 available this year on a federal Stafford loan with a fixed interest rate.

"I don't expect any huge changes in our student indebtedness this year," Johnson said.

Some solutions

In their report to the regents, director of student financial aid Roberta Johnson and her colleagues noted that lowering student debt could involve some fairly obvious, practical strategies, such as:

• Encourage all students to fill out their FAFSA, every year and by the March 1 priority deadline
• Lobby state and federal leaders for more need-based student aid
• Encourage more students to participate in the four-year graduation plan

Johnson said ISU promotes its 12-month payment plan harder now. While this option doesn't alter the cost of school, it does help students and families distribute the payments over a longer time.

Communication and financial literacy have important roles as well, she noted. Her staff increased its one-on-one counseling hours to incoming students and their families during summer orientation. The office's web site provides information and relevant links. ISU's personal finance course, HDFS 283, now is available in both classroom and web options.

Johnson keeps track of Government of the Student Body efforts to garner campus support for a half-credit or one-credit course in financial literacy, perhaps even making it mandatory for students.

She sees the need every day for more education.

"We wish we had more staff to offer productive one-on-one counseling to students -- and a little less triage," she said. "Our counselors spend a lot of their time with students in crisis."

Editor's note: Director of student financial aid Roberta Johnson was part of a regent-system team asked to summarize university affordability and student debt for the state Board of Regents this fall. This article is derived from that summary. Their study covered the decade from 1997-98 to 2006-07. More information is available on the regents' web site (agenda item 20 from the Sept. 17-18 meeting and agenda item 13 from the Dec. 10-11 meeting).