The Coming Financial Aid Crisis, Part 2 in a Series

In the first part of this discussion on the coming financial aid crisis, we talked about Pell Grant shortfalls and increased demand due to enrollments. Let’s dig into some heavier economic data to see what may lie ahead.

Here’s a chart of underutilized labor from the Bureau of Labor Statistics. Underutilized labor includes the unemployed, discouraged workers (people who are jobless and have stopped looking/stopped filing for unemployment insurance), and underutilized workers (part time employees who want a full time job but can’t get one).

The reason I use labor underutilization rather than employment is because underutilized labor affects financial aid as well - if you’re working only part time, you have that much less income to work with.

What this shows is a sharp and increasing spike in underutilized labor, to 11.8% of the workforce.

Second item: this story in Yahoo Finance shows that day care centers are reporting record drops in enrollments.

What does that mean? The same economic pressures that are driving parents to find alternatives for day care are going to impact public and private university enrollments, as well as the ability for families to pay for higher education. As the labor markets get tougher for job seekers, the raw numbers of people applying for financial aid will jump, as will transfers from private colleges to public colleges, unless private colleges have the endowment and financial means to step up institutional aid.

Summary: not only will more people be applying for financial aid due to demographics, more people will be applying for more financial aid due to the economy.

Given this picture, what should you be doing right now to prepare?

Financial Aid Paperwork

First, be aware that there’s an entirely new section of the FAFSA, including questions about displaced workers, for 2009. The definition of displaced worker encompasses anyone who’s been laid off or let go, unless the termination was for cause or you just up and quit your job. When you go to file your FAFSA for 2009, it’ll be super important to make use of that section if your family has run into hard times.

For the immediate moment, if the wage earner(s) in your family have lost their job(s), you should talk to your financial aid officer right away. One of the things a financial aid officer can do is help adjust your financial aid package to account for significant financial changes at home; in this case, you’d be asking about a professional judgement override on future earnings, which could change how much you pay at least for the spring semester. You’ll need to provide a copy of the termination notice that your family’s wage earner(s) received as documentation of the financial status change.

Student Lending

In terms of student loans, federal student loans like the Stafford and PLUS loans will be okay. You may find yourself changing lenders, or your school may change which federal student loan program it is enrolled in, but Stafford loans and PLUS loans will remain widely available.

Given the latest data on unemployment and the credit markets, it seems unlikely that private student loans will improve their availability before next summer at the earliest. If you need to pay for college above and beyond what you can get in scholarships, grants, and Stafford loans, your best bet is going to be the Parent PLUS loan for the time being.

General Education Finance

Be open to the possibility of changing schools and attending a less expensive institution. Be aware of the possibility that you may have to take some time off if necessary. As much as you can, find ways to reduce the cost of college through things like taking credits at community colleges, online degree programs, and testing for college credits using CLEP exams.

If you’re not aggressively pursuing every scholarship you’re eligible for, you need to get on the wagon as soon as possible. Grab a copy of our free scholarship search eBook and get moving. Once the huge wave of students with increased need comes into the market in early 2009, competition for scholarships will increase drastically. Get in the game now, get all of your groundwork done, and be ahead of the curve. Make sure you’re enrolled in our free scholarships program, Scholarship Points.

General Personal Finance

Despite urging from retailers, spending less, rather than more, is and should be your primary concern right now, whether or not your job is in danger, whether or not your family’s financial health is good. Frugality in uncertain times is one of the best defenses you can use to protect yourself. Cut out everything that can be cut, discretionary spending like dining out, coffee from coffee shops, etc. If you’re thinking about allocating dollars for the holiday season, go light on spending and heavy on face time with family.

Save money. Save, save, save. If you aren’t saving, start. Start an FDIC insured savings account like this one at ING Direct. We’re in a period of deflation, when the amount of money in circulation actually decreases, which means that the dollar you save today may be worth more tomorrow.