As inflation bites, parents are borrowing more than ever to pay for college

By Beth Pinsker

The annual Sallie Mae report on how America pays for college does not signal good news for next year, either

While the dollar amount that families are spending on college stayed flat for the 2023-24 school year, the percentage that came from parent borrowing jumped to the highest level in the 17 years that student-lending company Sallie Mae has produced its annual How America Pays for College report.

This year's average tuition was $28,409, a figure that combines tuition at public and private schools. Making that payment doesn't happen with a single check for most families, especially if they are on the higher end of the tuition scale, paying for a private school with a list price of $90,000 or more. Those families have to marshal a lot of resources to pay such large amounts.

The bulk of the money to pay tuition costs comes, on average, from parents' savings and income, and this year was no different, with that covering 37% of the total bill. About 27% comes from scholarships and grants, and the rest comes from student income and savings, gifts from relatives and friends, student borrowing and parent borrowing.

The ratios have shifted slightly over the years, but they don't usually see huge jumps. Still, you can observe economic impacts in small changes, like those that occurred during the 2007-09 recession or the early pandemic era. Student borrowing and scholarships and grants accounted for a much higher percentage in the 2010s, but then parent income and savings picked up the slack.

For the 2023-24 academic year, the survey results show some pushback going on with parent income. Parent income and savings dropped by 3% from the previous year, and the gap left by the slightly lower contributions was covered by an increase in parent borrowing this year over last year. For the academic year, 11% of the total cost was covered by parent borrowing, compared with 8% in the previous two years. What could be driving parents to the limit of their ability to pay out of pocket? Inflation, for one thing. The previous highs reached for parent borrowing were 10% for the 2009-10 and 2017-18 academic years.

"We don't like to directly correlate, but we do see some trends that match the bigger economic picture," said Jenny Berg of market-research company Ipsos, who worked with Sallie Mae on the survey. "That's where this tradeoff happens: In harder economic times, they borrow more and look for scholarships. In better times, we see more coming from savings and income."

Another factor is that many people may see less risk in borrowing for college, given that the Biden administration has been forgiving some federal student loans. Some parents may have had their own loans forgiven, freeing them up to borrow more for their kids. The survey found that 48% of students who took out loans expected forgiveness by the time they graduated and met eligibility requirements.

Families need to exercise some caution, though, because there may never be more forgiveness, or any future possible forgiveness could be for student borrowing rather than parent borrowing - although there are other income-driven forgiveness and repayment options available to parents.

"The broader picture here is that if you are going to borrow, you need to do so responsibility, and look for free money first," says Rick Castellano, vice president of corporate communications for Sallie Mae.

He was concerned about another finding - that 43% of families who borrowed said they considered more expensive schools because of access to loans. "That could also be another factor driving up loans," he said.

Preview of next year's report

For this latest report, Sallie Mae asked a new set of questions pertaining to the rollout of the simplified FAFSA for the 2024-25 academic year - a rollout that was still experiencing problems when they conducted the survey in April and May about the school year that was just ending.

The Education Department overhauled its standard financial-aid form, ostensibly to make it easier for families to fill out, and delayed making it available until December, two months later than its typical October release date. There were a number of technological hurdles. "The new FAFSA was anything but simple," Castellano said.

Only 29% of respondents found the new form simpler, while 44% said it caused them stress. Nearly half of all respondents who filled out the new form said they experienced delays, and of those, 83% were negatively affected. The stress made 11% consider leaving school, and 9% reported that they actually stopped attending.

The FAFSA for 2025-26 is supposed to open in two months, but Castellano sees it as a grand presumption that it would open on Oct. 1. One thing he predicts when Sallie Mae fields its next survey is that participation rates for filling out the FAFSA will likely drop, and that will generally mean less access and help for the families that need it most, because the federal aid form is their gateway to free federal college aid like Pell grants and other scholarships. Next year may also show even more impacts of inflation, with fewer families able to pay out of their income and savings.

The FAFSA debacle will no doubt show up in the next set of numbers, measuring the 2024-25 academic year, when Sallie Mae surveys again next April and May. Castellano hopes those results illuminate broader issues that legislators and colleges will act on.

"The system is in need of significant reform, and the greater transparency there is about cost and borrowing, the better we can do," Castellano said. "We need better ways to connect students to scholarships and grants."

More Fix My Portfolio

College tuition is due soon. What to do if you can't write a $45,000 check right now.'Everyone should appeal': The new FAFSA could give you grounds to ask for more financial aidDesperate parents will pay top dollar to lower the price of college

Got a question about investing, how it fits into your overall financial plan and what strategies can help you make the most out of your money? You can write to me at beth.pinsker@marketwatch.com. Please put "Fix My Portfolio" in the subject line. You can also join the Retirement conversation in our Facebook community: Retire Better with MarketWatch.

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-Beth Pinsker

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08-06-24 1541ET

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