It’s hard to watch the news and not see at least one story about student loans, especially in the wake of the Supreme Court decision in June rejecting President Biden’s plan for a massive loan forgiveness program for student loan borrowers.
In addition to news about student loan debt, we are hearing about rising costs across the board and stagnant salaries. One of the most prominent rising costs catching the eye of young adults is the cost of college. Tuition and other related costs just keep going up and up making it harder and harder for families to afford to send their kids to college.
If you look at the math, you see that it’s true, the numbers just don’t add up.
Need-Based Aid to Help Pay for College
Clearly there’s financial need for the average American household to get some assistance to help pay for college. Need-based aid typically looks at students’ ability to pay and attempts to subsidize that need with grants and scholarships. One of the most popular grants for need-based students is the Pell Grant awarded by the Federal government based upon demonstrated need evidenced on the FAFSA (Free Application for Federal Student Aid).
To receive the max Pell Grant from the U.S. Department of Education ($7,395) prior to the 2024-2025 award year, in general, your family would have to have a household income of less than $27,000/year. If your family makes than $27,000 you could receive some Pell grant money but not likely the maximum amount, and families who make enough money each year that their EFC (Expected Family Contribution – now renamed Student Aid Index) is above 6656 may not qualify for any federal Pell grant money at all.
| Average Cost of College | Average Household Income |
|---|---|
| Average Cost of Attendance - $36,000 | Average Household Income - $75,000 |
| Average Federal & State Aid for 1st Year Students - $12,000 | Estimated Income Taxes - $9,000 |
| Balance After Gift Aid - $24,000 | Estimated Take Home - $66,000 |
| Federal Loan Limit for 1st Year Undergraduates - $5,500 | College Tuition to Cover After Federal & State Aid - $18,500 |
| Balance After Gift Aid and Federal Loan - $18, 500 | Leftover for Family to Live on For the Year - $47,500 |
Most families cannot afford college, even after exhausting federal and state aid.
According to the U.S. Census Bureau, the median household income in the United States in 2022 was roughly $75,000. Running a simulation for EFC (based on national averages) with a household income of $75K, a median household savings of $5k, a median household net worth of 97K and an average 529 savings balance of 27K, generates an EFC of 10K, well over the max EFC to qualify for a Pell Grant. So, one could conclude that the average household in the U.S. makes too much to quality for a Pell Grant, but what about other state funded scholarships.
This is where the FAFSA comes into play again. State schools use 2 pieces of information from the FAFSA to determine who gets need-based aid – the date you submitted your FAFSA (when you effectively got in line for the money) and your EFC (now Student Aid Index). Schools use this information to determine who will receive whatever financial aid they have to award. This is why it’s critical to submit your FAFSA as soon as you can, so you can get some of that money before it runs out.
Based on national averages in the United States, it appears the odds are against the majority of households to be able to cover the costs of college, especially given the risings costs of tuition.
Gift Aid: How Realistic are Scholarships?
The most common action students take to help reduce tuition costs is to apply for scholarships. On average students spend an hour a week searching for and applying to scholarships. Yet 80% of students admit to not having won a nickel in scholarship money. With all that hard work and dedication, why is this? Are scholarships really that hard to win?
Seemingly scholarships are easy to win. The internet is ripe with stories of students winning thousands, if not millions in scholarship money. What are these kids doing that most are not and how are they achieving free college when so many are drowning in student loan debt?
To be fair, these kids we read about online or watch on TikTok bragging about winning thousands upon thousands of dollars only represent about 0.2% of students. With about 2.3M incoming freshman in the 2023 academic year, this accounts for only 46,000 students. While that seems like a lot of people winning lots of money, that’s only about half of all incoming freshmen into the California UC system alone. Keep in mind that there are 4,000 plus other colleges in the United States.
There are roughly 1.7 Million scholarships awarded to students each year, with the U.S. Department of Education awarding an estimated $46 billion in scholarships alone, yet only 1 in 8 students will receive any money and most, 97% of those who win anything, will receive less than $2,500 on average. So, this brings us back to the main question why is it so hard to win a scholarship?
Only 22% of scholarships are awarded based on merit, i.e., grades, athletic ability, special skill etc. The vast majority of scholarships are need-based, meaning your family must be in a position that they simply can’t afford to pay for school for you. With college being so expensive that seems like an easy enough hurdle to overcome but it’s not (see above).
Student Loans to Bridge the Gap
This leaves student loans. Students are hesitant to take on debt, and rightfully so, when salaries are not growing as fast as we’d like or need. Unfortunately, loans become the means to the end, with students hoping that a college education will provide greater returns than the costs to obtain it.
Data does confirm that college educated people have greater earning potential than those with only a high school diploma. So ultimately it comes down to making informed decisions. Some advice when it comes to taking out loans to even up the math and be able to pay for college:
- Never borrow a penny more than you absolutely need.
- Always be mindful of how much you’ve already borrowed before taking on more debt.
- Before borrowing money, consider your future earning potential to ensure you will have the opportunity and the means to repay the loan(s) with ease.
- If you are able, make payments on your loans during college. Whatever you can do to reduce your principal upon graduation will only serve to benefit you. Even interest only payments on unsubsidized or private student loans will make a big difference at graduation.
- Research in advance which repayment plan makes the most sense for you and your ability to make on-time and in-full payments each month.
If you go into college making informed decisions about the costs of colleges and what you can expect on the other side of graduation in terms of earning potential and student loan debt, you can position yourself for success. While the math doesn’t initially add it, you can make it work out in the end.