Rising college costs prompt student loan reform

States struggle to contain fees at public universities while the federal government rolls out affordability measures to help counter the rising costs of higher education.

As 19 million college students descend on campuses this fall, many families are asking: Can we afford this?

People are often willing to stretch already-tight budgets to reach their college goals. But when costs get out of reach, a national goal is at stake, too: By 2020, President Obama has said, the United States should lead the world in the rate of college degrees earned. Both he and members of Congress are at work to boost financial support for college students.

Many factors determine whether college is "affordable" – everything from students' income, to state and federal policies, to a school's price. Here's a look at some of the current issues and long-term trends that play into the affordability equation.

What's happening with state financial aid and tuition at public schools?

Last year, average tuition and fees at public four-year institutions came to $6,590, but the net price (what's paid after receiving various grants) was $2,850. Students also paid $7,750 for room and board, the College Board reports.

Prices, and the degree to which they're going up this year, vary considerably from state to state. Because of revenue declines, at least 32 states have made cuts to higher-education funding recently, and more may follow. California students can expect to see cost increases of up to 20 percent, while those in Washington State, Florida, and New York will see a spike of about 15 percent, says Terry Hartle, a senior vice president at the American Council on Education in Washington.

A number of states, including Indiana, Ohio, and Illinois, have had to cut back on need-based student grants. But pockets of good news exist: Missouri's schools will not raise tuition this year. The state held funding steady by tapping into federal stimulus dollars. Maryland has a tuition freeze in place for the fall, but recent state budget shortfalls have cast doubt on whether that can continue in the spring.

What's happening with tuition and aid at private schools?

Last year, average tuition and fees at private four-year institutions came to $25,140; the net price was $14,930. Students also paid $8,900 for room and board.

Tuition and fees for this year are up about 4.3 percent at 350 private, nonprofit schools surveyed by the National Association of Independent Colleges and Universities in Washington. That's the lowest increase since the 1972-73 academic year, although it's still higher than overall inflation, the group notes.

Despite drops in endowments and charitable giving, many private schools have anticipated rising demand for financial assistance from families. The schools in the survey increased their aid budgets by an average of 9 percent for this year.

Some have gone even further to compete for enrollment, freezing tuition or offering to match the price of nearby public institutions.

What is the federal government doing to increase affordability?

For one, it's giving a major boost to Pell Grants for low-income students. The stimulus package raised the maximum grant amount for this year to $5,350, from $4,731 – the largest increase since the program started in the early 1970s. Next July 1, it will rise again, to $5,550.

The Student Aid and Fiscal Responsibility Act would continue to raise the maximum Pell Grant annually for the next decade to match cost-of-living increases, based on the Consumer Price Index plus 1 percent. The bill has recently been approved by the House and is now awaiting a vote in the Senate.

"A $40 billion investment in the Pell Grant scholarship [would be] historic," says Rachel Racusen, spokeswoman for the House Education and Labor Committee. "Over the past 30 years, the purchasing power of the Pell Grant has significantly declined, so ... these investments are going to ... make sure that Pell Grants can once again cover an effective share of a student's tuition cost." (See chart at near left, on facing page.)

One controversial element in the bill is a restructuring of federal loans. It would eliminate a part of the system that has paid subsidies to private lenders to give them incentive to make college loans. All new loans would originate through the government's Direct Loan Program.

The Obama administration's reasoning on this: Since the government already guarantees student loans, it should reap the interest payments rather than private lenders that haven't taken on the risk. But the private sector would still be contracted to service and collect the loans, so borrowers should notice little change.

The Congressional Budget Office estimates this shift would save $87 billion over 10 years, which could pay for the Pell Grant increase and other education initiatives. Some lawmakers oppose this idea, saying they doubt it would really save that much and that it may lead to job losses in the lending community. But the change appears to have enough support to be approved in Congress this fall.

Other provisions in the bill include funding for community colleges and incentives to improve college graduation rates. The stimulus package, meanwhile, has expanded college tax credits for low- and middle-income families.