Complexity and Financial Aid: A Barrier to College Completion

Behavioral factors often play a bigger role in decision-making than financial or economic factors. For example, all of us tend to discount current losses compared to future gains. This factor, known as “hyperbolic discounting,” is true for all of us. We are unlikely to risk 50 cents today for $1.00 next year despite the return on investment.  Consequently, more than 80% of all Americans have a negative personal savings rate.  This tendency becomes magnified for low income families where earnings are barely able to keep up with daily life expenses.

All of us are loss averse. Potential losses loom larger than gains. We overvalue what we already have and discount what we may get in the future.  Research on loss aversion indicates that we require gains equal to double of that of the current loss. That factor is magnified again when the loss is potentially ruinous or your lifestyle is threatened.[1]   Let’s say your income is $45,000 a year, are you willing to lose $35,000 right now in exchange for $15,000 in additional income over the next ten years?  That is the risk many low-income students face.

We also tend to base our decisions on our experiences rather than theoretical projections offered by other people.  Lower-income families have little experience with college and thus the gains seem far more uncertain.  The combination of risk aversion and complexity not only leads to an aversion to borrowing but an aversion to seeking and receiving financial aid.

When confronted with a high risk decisions like investing in college, small barriers can become huge barriers. This starts with the process of seeking financial aid. According to the Advisory Committee on Student Financial Assistance, “Millions of students and adult learners who aspire to college are overwhelmed by the complexity of student aid. Uncertainty and confusion rob them of its significant benefits. Rather than promote access, studies show that aid often creates a series of barriers - a gauntlet that the poorest students must run to get to college.” [2] 

[1] Hahnemann, (2011) Thinking Fast and Slow  Farrar, Strauss and Giroux

[2] Advisory Committee on Student Financial Assistance. (2005). “The Student Aid Gauntlet: Making Access to College Simple and Certain.” Final Report of the Special Study of Simplification Of Need Analysis and Application for Title IV Aid. Washington, D.C.: Department of

Education.

The Cost of College

The most important indicator of regional economic success is the number of residents who have completed a college degree or certificate.  The problem is that the economic payoff from college occurs after completion of the program, so the costs precede the benefit.  And the costs are substantial. Tuition and fees at Washington Community and Technical Colleges have risen by 50% over the past five years.[1] The average cost of tuition, books, fees and the cost of living[2] for community and technical college students in Washington State is $17,044.[3] Even low income independent students actually receiving Pell Grants and the State Need Grants face an average unmet need of $6,400 per year.[4] This imposes an unsustainable burden on low-income and low middle income students. 

Perhaps most importantly, eligibility for Pell Grants, low interest Stafford Loans and the Washington State Need Grant is limited to families with incomes of under roughly $40,000. For example, a grocery clerk with a child earning $45,000 per year would be ineligible for aid.  Lost earnings for attending college as well as other college costs would take up over 40% of the family’s income. 

The obvious solution would be to expand traditional financial aid programs, which have failed to keep up with the soaring cost of college. The proportion of college costs covered by Pell Grants has fallen dramatically over the past 30 years, and now cover the lowest portion of costs in history.  In the state of Washington, budget cuts to the State Need Grant have left 32,000 students, or 30% of the eligible students, without aid.  And as a result of federal budget cuts in 2011, Federal Pell Grants no longer cover summer programs. [5]

Unfortunately, both state and federal budgets are shrinking and Washington voters show little interest in making college more affordable. 

There needs to be a creative way out of this box. Some kind of creative loan package might work. However, many working adults have little history or understanding of personal finance and borrowing.  Students fear indebtedness in a time of high unemployment and mortgage foreclosures. Many colleges have not offered federal students loans because of penalties related to the high default rate.  Private loans are only offered at very high interests, if at all, for lower income working adults.  

 

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[1] Washington Higher Education Coordinating Board, 2012, Key Facts About Higher Education in Washington.

[2] The cost of living is included in this figure since students who work more than half time are unlikely to complete programs. Program completion requires students to forgo earnings to attend college.

[3]  Scott Copeland, State Board for Community and Technical Colleges, July 9, 2012; Higher Education Coordinating Board, January 2004,  Key facts about higher education in Washington (adjusted for inflation)

[4] Washington State Higher Education Loan Program Work Group, December 2012, Higher Education Loan Program Legislative Report

[5] Washington State Higher Education Coordinating Board, January 2012, Access, Affordability, Achievement: Annual Report on State Financial Aid Programs 

Working Adults are Today’s Community College Students

The profile of college students in the minds of policy-makers today is an eighteen year old who lives at home and is going to school full time. 

Nothing could be further from the truth. Community college students (and university students as well) are older, often with dependents, and going to school part time while they are working. Unfortunately, policy-makers have designed tuition and financial aid around the needs of single, recent high school graduates. 

The median age of Seattle Community Colleges students is almost 30.  Almost a fifth are immigrants, over 30% have dependents, a quarter are working full time and well over half are working part time or more.  A majority are students of color. For the entire post-secondary system in Washington State, almost 40% of the students are over the age of 30. Two-thirds of the students who entered college at age 25 or older are low income.[1] In Seattle, only 5% of community college students have entered directly from high school. 

Demographics	Seattle Central	Seattle North	Seattle South	Seattle Vocational Institute	Washington State Community Colleges
Immigrants or refugees	18.5%	8.6%	9.3%	17.5%	8.4%
Single with Children	7.0%	7.0%	11%	27%	11%
Couples with Children	12%	23%	23%	9%	19%
Work Full time	18%	29%	29%	7%	17%
Work Part Time	26%	26%	20%	13%	26%
Median age	27	29	29	29	26
Over age 30					37%
Students of Color	55%	39%	52%	83%	36.3%
Source: Washington State Board for Community and Technical Colleges, Data Warehouse, 2011

However,  college programs and financial aid are not designed to meet the needs of today's students.   Adult friendly evening and weekend schedules exist at many colleges but are significantly less common than traditional school schedules. Child care is rarely provided on campus and financial aid programs are geared towards traditional college registration schedules. 

Most importantly,  these workers will still be a majority of the workforce for the next quarter century yet many lack the skills to compete. [2]  If our goal is to succeed in global competition over the next decade, we need to begin thinking about how to retool our college system to meet the needs of the workforce. 

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[1] Prince and Jenkins, April 2005, Building Pathways to Success for Low-Skill Adult students, CCRC Brief,

[2] Thanks to Robert Baker, Economist, Division of Forecasting, and Washington Office of Financial Management for help in calculating labor participation and population data...