Laura Rowley Money & Happiness

I recently spoke with a family who lost much of their college savings fund in last year's market meltdown.

The family is planning to send their oldest child, who earns straight A's and excels in sports, to a local junior college for two years, then on to finish at a four-year school. They insist they wouldn't qualify for aid because their household income is too high, so they are not filling out the federal application for student aid (also known as FASFA).

The problem is, bright, talented students who are qualified for four-year institutions but go to community colleges are 36 percent less likely to finish their bachelor's degree, according to William Bowen, president emeritus of Princeton and co-author of "Crossing the Finish Line: Completing College at America's Public Universities."

In the book, Bowen and his co-authors argue that America is losing its competitive edge because of high drop-out rates. Overall, 44 percent of undergraduates leave school before they complete their bachelor's degrees. It's not a first-semester phenomenon either; half of students depart after finishing the second year.

"The share of the population that graduated from college went up steadily for almost 200 years and put the U.S. at the top, and that has flattened out for last 20 to 30 years, while other countries continue to increase their educational attainment," Bowen says. "That's very worrying, when you think about a world dominated by brain power and knowledge."

With $25 billion lost in 529 college savings plans last year, according to a Treasury Department report, many families are altering their aspirations for higher education. "Crossing the Finish Line" is a timely guide to factors that matter most in college graduation rates. The authors assembled and analyzed a large new trove of data, including the characteristics of 200,000 freshmen who entered college in 1999. Five of the key findings:

1. High school academic performance matters more than standardized test scores. "It was striking in our data how important high schools grades are," says Bowen. "They are a powerful predictor of who graduates, because they measure not only cognitive skills but coping skills, self discipline, time-managements skills -- and those have an enormous amount to do with success later on." Studies of Chicago high school students found 58 percent of those who entered college with a "B" average graduated, compared with 47 percent of students with lower GPAs.

2. The size, location and racial mix of a high school did not affect the ability to earn a college degree. "We were surprised how little difference (those factors) made," says Bowen, stressing that while the data are solid, they are unique to North Carolina, and the outcome in other states may differ. But the findings are significant for parents who are considering paying for a smaller private high school to give their children a leg up in college. If the public high school is good, parents may be better off saving that money for higher education (see No. 4).

3. Parents of limited means may be better off renting a home in a wealthy school district than buying one in a poorer school district. "If the high school is in a wealthy neighborhood, it does make a difference," says Bowen, because that wealth is usually a proxy for parental income and education. The authors found a 4 percent matriculation advantage for schools in relatively affluent neighborhoods and modestly higher college graduation rates.

4. Money changes everything. The book looks at equally qualified students who attended the most competitive public universities in the study -- the University of California-Berkeley, the University of Virginia and the University of Michigan. Of that group, 57 percent of students from the highest socio-economic group graduated in four years, compared with 38 percent from the lowest bracket. (For students who graduate within six years, the rates are 83 percent and 68 percent, respectively.) "One of the clear findings is upper-income families have consistently higher completion rates," says Bowen. "Money really matters, and it matters in large part because it allows you to help students get past bumps in the road."

A recent Sallie Mae survey found six in 10 parents are saving for college, with annual savings of $2,600 and total accumulation of $13,800. But that's not enough to pay for a full year at the average public institution, where tuition, room and board currently average $14,333, according to the College Board. Moreover, only 29 percent of parents were likely to meet or exceed their college savings goal if they continued to save at their current rate, the study found.

5. Beware the undermatch. "The single most striking finding was the "undermatch phenomenon" -- how many well-prepared, talented kids from moderate circumstances don't go to the schools for which they're qualified," Bowen explains. "In North Carolina, 40 percent of all students who on a very conservative calculation were eligible to attend one of best universities in the state were lost at the application stage. It's not that they applied and were rejected. They didn't apply because they didn't know how to apply and they didn't think they could afford it. Undermatch rates are twice as high for students from modest backgrounds than kids from more privileged families." 

Comparing equally qualified students, just 44 percent of the undermatched students graduated in four years, compared with 59 percent of students who attended the more selective university. (The numbers were 66 percent and 81 percent for graduation within six years.)  "What produces success is good classmates -- if you are surrounded by smart, hard-driving people, that helps you, and if the expectations are that everybody is going to graduate, that helps you," Bowen says. "Where there is not as strong an expectation, your odds go down."
 
For many parents the dilemma is the mystery surrounding the net cost of education – something most families don't find out until the spring before college enrollment. A recently launched service, StudentAid.com, is focused on helping students get accurate net costs as early as their junior year in high school.

For $49, the company offers a College Cost & Planning Report, which assesses an individual student's out-of-pocket costs at more than 6,500 colleges; eligibility for 8,000 different grant and loan programs, including federal, state, college, private and local offerings, and detailed comparative data on college choices. Parents must provide information on income, assets, GPA, class rank and SAT scores. (For $99 families can get assistance by phone as well. The site is currently offering its service for free to households with income of less than $40,000.)

"We spent two years working on our algorithm based on 25 million test cases and gave feedback to 28,000 families based on their personal circumstances," says David Childress, general manager of StudentAid.com. Childress, a West Point grad, says his involvement was inspired by his own frustration in applying for a master's program after completing his Army service.

"I had to wait until after I applied and received my aid award letter, which arrived a few months before tuition bills were due," he says. "That's how the process works for traditional students entering senior year. It's not until March or April that they get the award package and understand that net cost. We're targeting juniors and seniors trying to answer questions about net costs as early as possible."

Bowen agrees that net college costs must be made more transparent to raise graduation rates. "The biggest takeaway for government is to approve a drastic simplification of financial forms and show the net price charged by public universities," he says. "The sheer complexity and uncertainty of the process really frightens people from applying to college -- never mind being able to continue."

And the takeaway for parents? "Emphasize old-fashioned discipline and character traits -- that's what pays off," Bowen advises. "Focus on that much more than paying for high-priced test preparation class or a traveling soccer team."