…the rising levels of borrowing may ironically be contributing to the accelerating cost of college, say some college-finance experts. Loans can give colleges an artificial sense of a family’s ability to pay tuition. To some extent, that false sense of security gets built into the assumptions schools make when setting prices, say experts. The idea is that as prices rise, families borrow more and more, spurring prices to rise further, which in turn requires more borrowing. Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers, says this phenomenon is playing a role in why tuition grows at about twice the rate of inflation. “Instead of imposing tougher choices” on college costs, he says, it’s “easier to raise prices…because this additional loan amount is made available.”

It’s like anything, the seller always wants to know how much money the buyer has available to make the purchase rather than focus on the price of the product or service. If colleges know that maximum loan amounts and the availability of loans are on the increase, they are free to raise their prices.

I would love to see colleges and universities publishing their budgets for all the world to see. Put everything out there. Every salary paid out to professors and coaches. Every expense. Every source of income. Throw it all out there so we can see WHY prices are rising so quickly. Are the laws of supply and demand driving prices? How can we know if we can’t see the numbers?

There’s a lot about this stuff that I just don’t understand but I want to learn.

Should we forgive student loans as a way to stimulate the economy?

I say NO. Actually I say HELL NO!

Lots of college students bought cars too. Should we forgive those loans too? I’m joking of course, but how far are we supposed to take this loan forgiveness stuff? It’s silly if you ask me.

Thoughts?

Thanks for the link, Stacey.

RELATED: Smart Spending: Should Feds Forgive Student Loan Debt? – the comments are along the same lines as AFM’s readers.

The Best

Illinois Bright Start College Savings Program – OppenheimerFunds Inc.

Maryland College Inv Plan – T. Rowe Price

Virginia CollegeAmerica* – Virginia (American Funds)

Virginia Education Savings Trust – Virginia

Colorado Scholars Choice College Savings Program* – Legg Mason, Inc.

The Worst

Ohio Putnam CollegeAdvantage* – Putnam Investment Management

Mississippi Affordable College Savings Program – TIAA-CREF

Mississippi Affordable College Savings Program* – TIAA-CREF

New York 529 College Savings Program – Upromise

Nebraska AIM College Savings Plan* – Union Bank (AIM)

* denotes advisor-sold plans.

You’ll have to read Marta Norton’s Morningstar piece to find out why these plans were on the best and worst list. I will say that fund performance, expenses, and investment choice were the main deciding factors.

As a side note, while putting his post together I decided to check out Saving for College’s 5-Cap ratings for each of these plans. One thing that troubles me is NEARLY EVERY PLAN has an above average 5-Cap rating (the ratings are lower for out-of-state residents). I realize that rating these plans is somewhat subjective. However, it seems as though Saving for College may be a little too generous with their ratings, which almost makes them worthless. I would only use Saving for College as a starting point for 529 plan research.

JLP,

I love reading your blog, and you answered my rollover IRA question so well, I thought I’d ask you another question.

Some background first: I’m 27 and hope to do applications this fall for grad school starting next fall (probably about $500 between all the fees). I have a bit under $6000 on one credit card with an interest rate of 2.99% (special rate, which when it expires, I’ll call to ask it be extended). I have $24,393 in Stafford loans at 4.25% locked in. These loans are in deferment for hardship right now, as last year I quit my job before I found a new one. I have a new job now, at a much lower salary, but sending me in the direction I want to be. I can pay all my bills and have enough left over to feed me, the cat, and have a touch of savings.

My question: This fall when my hardship deferment comes up for renewal, I’m not sure what to do. My goal is to get my credit card down as much as possible before I go back to school, but I’m not sure this is the wisest idea with my student loan debt. Do I keep my loans in deferral and keep hitting away at my credit card? Or do I take them out of deferment and send less to my credit card company? I’d also like to start saving a bit more than I have been for all those application fees. The thought of doing all three of these things feels financially overwhelming, though I know I could fit them all in my budget, albeit, at lower amounts than I would really want to.

Now that I’ve typed all this out, it feels like a stupid question, but it is still one that worries me. I’m asking you, and your readers, because two heads are better than one and I want to make sure I don’t miss something obvious.

Thanks, and thanks for all the stuff you write, I’ve learned a lot from you!

A. (a faithful reader)

Wow! A faithful reader! I like that.

Okay, here are my thoughts:

If you have to choose between one or the other, I would say to pay off the credit card first. Credit cards are quite risky because the rates can go through the ceiling if you make one mistake. With you going back to school and finances being tight, I would say getting rid of the credit card debt would be a smart move.

If your finances are tight and you are going back to school, I would also defer the student loans as long as you can but remember how much you owe and how much your payments will be once you graduate and have to start paying the loan back. Knowing this information will hopefully inspire you NOT to borrow more money or charge up credit card debt.

It’s been so long since I was in college that I’m really not up to speed on student borrowing. However, I did find some information about deferrals on the StaffordLoan website:

Loan deferment refers to a temporary period when a borrower is not required to make payments for an eligible reason. For Subsidized Stafford Loans, the interest that accrues on the loan during the deferment is paid by the federal government. For Unsubsidized Stafford Loans, the interest that accrues during a deferment must be paid by the borrower during or after the deferment period.

As a borrower under the federal loan program, you are entitled to a certain number of deferments of your monthly payment provided you meet the criteria and complete the appropriate documentation. One such example is if you became unemployed. You are entitled to unemployment deferments for a specific period of time. Another would be if you entered repayment and then went back to school at least half time in an eligible program, you would be eligible for an “In school” deferment.

For more information on deferral of federal student loans, click here.

Good luck with your school this fall and thanks for being a faithful reader! Just be sure and tell all your new college friends about AllFinancialMatters.com!

1. Financial aid comes only in the form of grants and scholrships.

Don’t forget about federal loans that carry favorable interest rates and are available regardless of financial need.

2. The value of my retirement funds and my home will prevent me from getting need-based aid.

First off, retirement plans are completely excluded. Also, according to the article, home equity on the home you live in is excluded from the federal calculation. However, some private colleges may cap it at 2 or 3 times your annual income. Parents also get something called an asset protection allowance, which is an amount of personal assets that are excluded from the aid calculation based on the age of the parents.

3. I should choose a lender from the list of “preferred” lending copanies recommended by my college financial-aid office.

Shop around but be careful. Lots of private lenders will offer specials (or disounts) but be sure that those specials can’t be easily lost (in other words, READ THE FINE PRINT). Also, you might want to check out FinAid.org’s Calculators. The Loan Discount Analyzer will even let you compare discounts from different lenders.

4. I’m doomed: I’ll have two kids in college at the same time.

Again according to the article, you are more likely to qualify for more aid when you have multiple children in college at once. Hmmm… Maybe they have buy-one-get-one-free offers!

5. The federal aid process is bound by a strict formula, and it’s virtually impossible to eke any special consideration out of college administrators.

Although the questions on the Fafsa are the same for everyone, it still may pay to write a letter along with supporting documentation to the financial-aid consultant explaining your personal situation if you have something that is out of the ordinary. Things like a death in the family, a health issue, job loss, and big changes in family income might qualify you for special consideration.

6. Not to worry. Our brilliant/talented/athletic child will get plenty of privately funded scholarships, maybe even a free ride.

LOL! What parent hasn’t thought this? I know my wife and I have. According to the article, some 87% of parents are counting on scholarships or grant money while 92% of financial-aid officers think that parents overestimate the amount of scholarship and grant money their children will receive!

7. The 529 college-savings plan offered by my state is bound to be the best for me.

Although it pays to check out your state’s plan, it may not always be the best. You have to weigh any tax benefits offered by the state against sales charges, fees, and the underlying mutual funds within the 529 plan. In some cases, it may make perfect sense to go with another state’s 529 plan.

Those were the seven myths according to the article. Overall I thought it was an interesting read. I’m far from an expert on financial aid, so if I missed something please let me know.

There was an article in today’s Wall Street Journal about how colleges are trying to make themselves more affordable ($). Some colleges are doing stuff like:

• freezing tuition for certain students
• offering more grants instead of loans
• adjusting financial aid formulas to reduce the amount families are expected to contribute, which will aid more affluent households

This is all fine and good but why can’t colleges just rein in their expenses? We all know college expenses are rising a lot faster than the consumer price index. According to the WSJ article above, college tuition and fees are expected to rise another 5.5% to 5.8% this year.

Why is that?

Is it a self-fulfilling prophecy that gives colleges the automatic right to raise tuition and fees simply because it’s expected? Are any of you familiar with the economics of running a college or university? If so, please share your insight with us.

The Best…

Colorado Schoars Choice* – Legg Mason
Maryland College Inv Plan – T. Rowe Price
Nebraska College Savings – Union Bank & Trust
Utah Educational Savings – Utah (Vanguard)
Virginia CollegeAmerica* – Virginia (American Funds)

The Worst…

Alabama Higher Education 529** – Van Kampen
Alaska John Hancock Freedom 529* – John Hancock
Missouri MOST 529 Advisor* – Upromise
Nebraska AIM College Saving* – AIM
West Virginia Conerstone SMART529* – Hartford
West Virginia Leaders SMART529* – Hartford

The reason most of these plans are in the worst category is due to their fees. One reason for that is the fact that they are broker-sold funds, which adds to their expenses since the broker has to get paid for their services.

That’s the list. It might be a good starting-point in helping you find a plan that’s best for you. I promise to do more college planning articles in the future.

A survey by San Francisco college savings company Little Grad has suggested that parents prefer friends and relatives give college money as gifts.

The survey found that 61 percent of responding parents preferred their children to receive college funds on holidays rather than toys, with 13 percent dissenting.

As I stated before, I think this will always be a problem because it simply isn’t fun for relatives (and even parents) to give money as gifts. It seems impersonal and most kids hate getting money because they can’t grasp the significance of the gift. That’s why I’m an advocate of moderation. Why not spend half of the gift budget on a toy and give the other half to mom and dad to put in the college fund? Of course, this idea has a shortfall because it could be embarrassing for those who don’t normally spend a lot of money on gift-giving.

There’s no easy answer. I think each family has to approach (or not approach) this topic in a way that they see fit. But, based on the above survey, parents are at least thinking about college funding. This is a good thing!