There has been a lot of chatter in the social media about student loans of late. The first is the common belief that there is an impending student loan bubble. The second is from students receiving financial aid award letters which are tending tow
ard more loans and fewer grants and scholarships. I am not sure I am ready to opine about the former. There are a few reasons why it seems like student loans are becoming the choice for financing a college education.
Students attending state colleges and universities are seeing the result of the significant cutbacks in state funding of higher education. All one has to do is look at the trends at the major state universities in most states to see that funding cuts are leading to smaller grant awards which leads to a need to fill the gap with loans. In Texas, where I live, the University of Texas at Austin used to be one of the most generous state universities in the country meeting close to 96% of financial need for its students about five years ago. With cuts in education spending the university is only meeting about 80% of the financial need of its student body. This requires students and parents alike to scramble to cover the gap. This not only means more loans but also more loans that are not subsidized by the government.
As a second reason is that colleges are finding that more and more students are unprepared to take on a college curriculum. These colleges reserve their grant money for the brightest students. The students who may be admitted but barely meet the admissions criteria are lucky if the qualify for a Pell Grant. Otherwise most of the aid they will be receiving will be in the form of loans.
The third, and perhaps the most important reason, is that families are not developing a financial aid plan before their student applies to college. They blindly apply to institutions based on the perceived cost when the actual cost is something completely different once you factor in the cost of loans. A financial aid plan is necessary to prevent the mistake of, especially a talented student, applying to the wrong schools based on a lack of financial aid information.
With the average student taking on around $22,000 in student loans to pay for their education there is a serious problem out there. State funding cuts are a large factor in the process. The lack of planning, however, is inexcusable. By the time the student receives their financial aid award letter it is a little bit too late to try to change course. Parents and students are committed to a college education so they willingly take on unrealistic amounts of debt to pay for that education.