From tuition increases to higher borrowing costs for student loans, inflation is making college even more expensive – CNBC | Vette Leader

Recent years of economic turmoil have not only highlighted the overwhelming burden of student loans, but also highlighted the sky-high cost of college.

“Sometimes students feel, ‘My parents are going to make it work,'” said Jennifer Finetti, director of student government at ScholarshipOwl. “I think a lot of students don’t see the financial reality: a lot of them can’t.”

In fact, college has never been as expensive as it is today. That’s largely due to a convergence of factors, including the sudden impact of inflation on tuition, rising interest rates on student loans, and the impact of the market downturn on investments that families rely on to pay for college bills.

Inflation drives up tuition fees

Tuition and fee increases have remained broadly stable throughout the pandemic, according to a College Board report, which tracks trends in college pricing and student aid.

For the 2021-22 academic year, average tuition and fees for students in two-year schools increased just 1.3% to $3,800; 1.6% for domestic students in four-year public colleges who reach $10,740; and 2.1% for students at four-year private institutions to $38,070.

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Now some colleges are raising tuition by as much as 5%, citing inflation and other pressures.

“We have increased undergraduate tuition by 4.25% for the upcoming academic year, our largest increase in 14 years,” Boston University President Robert Brown said in a recent letter to the community.

“We are caught in an inflationary vise between institutional pressures and the impact on our students and their families,” he wrote.

Rising interest rates make borrowing more expensive

Many students have to borrow to cover the cost of higher education, and borrowing is becoming more expensive.

The interest rate on federal student loans taken for the 2022-23 academic year rose to 4.99%, up from 3.73% the previous year and 2.75% in 2020-21.

Private student loans can have a fixed rate or an adjustable rate tied to the Libor, Prime, or T-Bill interest rate — and that means those borrowers will also pay more interest if the Federal Reserve raises rates. How much more, however, will vary by benchmark.

Stock market losses eat up college savings

Meanwhile, mounting concerns about inflation and a possible recession have taken a toll on most people’s investments, including all college funds tied up in the markets.

Major stock indexes have fallen by double digits in 2022, meaning 529 college savings plan balances may now be smaller than expected.

“All of a sudden, they have less money than they thought,” Finetti said.

The average value of 529 accounts in March was $28,954, up from $30,652 in December, according to the College Savings Plans Network.

If plagued by the recent market declines, colleges are likely to be receptive to requests for financial aid, according to Kalman Chany, a financial aid consultant and author of The Princeton Review’s “Paying for College.” However, he added: “You generally can’t adjust to assets” that are already less significant in determining your eligibility for aid.

A better strategy is to make your portfolio allocation more conservative as college approaches, he advised.

In general, 529 plans offer age-based portfolios that begin with more equity exposure early in a child’s life and then automatically adjust so that the portfolio is weighted toward more conservative investments, such as bonds, as college approaches.

Fears of affordability deter some students

Between Rising college costs and skyrocketing student loan balances, nearly half, or 44%, of currently enrolled students on federal or private loans have considered dropping out of school due to the financial strain, according to a BestColleges.com survey.

Fewer students are also choosing to go to college at all, according to a separate report from the National Student Clearinghouse Research Center based on data from colleges.

While the U.S. Department of Education has yet to confirm whether there will be a sweeping student loan forgiveness for federal borrowers, the Biden administration announced that it is setting new interest accrual limits, among other changes to make college more affordable.

“We are committed to fixing a broken system,” US Secretary of Education Miguel Cardona said in a recent statement.

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