What's New With Paying for College? (July 2019)
Who pays for college?
Discover Student Loans, a division of Discover Financial Services, surveyed 1500 parents of college-bound students about who would be footing the bill. Whether the numbers are accurate or not is less of a story than the movement in just one year. 38% of parents expect students will be covering at least half of the cost, up from 31% last year, and 28% of parents say they will cover the entire cost, down from 34% last year. What’s more, fewer parents (41% versus 51% last year) are willing to use their savings or loans (38% versus 43%) and risk hurting their financial well-being and retirement.
Again, one statistics demonstrates how irrational parents can be: in light of the lower support, 70% will not constrain their child’s college choice based on price. I guess scholarships will have to fill the gap. (Yahoo)
A great analogy for 529 plans: they are like Roth IRAs for education. But 529 savings plans are apparently less popular. Little wonder, as they are pretty confusing. It doesn’t help that each state has its own rules.
Morningstar (you have to join to read their articles, but membership is free) has an article that explains the history of these tax-advantaged plans. Did you know they came into being as a result of Michigan’s prepaid tuition plan? This, apparently, is why the states are involved—to handle each state’s prepaid tuition equivalent. Each state then proceeded to develop plans for straight up college savings (versus prepaid tuition), putting states in the business of managing investment funds. And each state went their own way in determining state tax benefits for these savings plans.
How do you decide which plan to invest in? (Do lots of research!) Do you have to use the plan in the state in which you reside? (Apparently not, but you may not get the state tax benefit if you use and out-of-state 529 plan.) Bottom line, don’t assume the marginal tax benefit will always outweigh a sub-par savings plan.
For more on 529 plans and some perhaps less complicated alternative vehicles (Savings accounts, Universal Gift to Minors, Coverdell Education Savings Accounts) check out this CNBC article, which includes short videos explaining each one.
Once a student decides to take out a Federal Student Loan, she must complete “Entrance Counseling” before any funds are disbursed. On the back end, she must complete “Exit Counseling.” Yet few students seem to be aware of how much they are borrowing, what the interest rate is and how interest will accumulate (or not, for subsidized loans), and what their repayments will look like. Somehow, this system is not effective. Is it too much information crammed into 20-30 minutes for a Freshman concerned with a million other things? Would if be more effective to deliver the information across all four years? US News takes a look at efforts to improve the outcomes.
Paying off student loans
We are quite familiar with the student loan statistics and anecdotes about how this debt is burdening several generations. Sometimes the averages tell an adequate story—sometimes you need to get into the details.
JP Morgan Chase looked at a sample of over four million of their active checking customers who pay student loans in this study. Here are the key findings which were included in this press release (BusinessWire):
- One in four families, across all ages and incomes, spends more than 11 percent of their take-home income on student loans in months with positive payments, and families are spending more on student loans than they are on key categories of basic necessities, like out-of-pocket healthcare expenses and fuel.
- Younger and lower-income account holders are especially burdened by student loan payments.
- Of families actively paying multiple loans, the proportion making consistent payments is lower for student loans than auto loans (10 percentage point difference) and mortgages (6 percentage point difference)
Among the most powerful graphs summarizing the findings is the one below (Finding Two), showing the greater impact of student loan repayment on younger and lower income folks. (To orient you, the lines represent the middle 50% of a box-whisker plot.)
“In particular, student loan payments are sensitive to large income changes, and may lack sufficient mechanisms to adjust payments to accommodate income fluctuations….Overall, there may be better ways to structure or implement student loan repayment plans that would ensure that families are not over-burdened and are able make consistent payments.”
Another related issue in paying off student loans is the number of complaints about loan servicers. The trend in the current administration (Department of Education) is to back away from regulating the loan servicing industry and the ombudsman at the CFPB who was dealing with these issues resigned. While the Department of Education claims states can’t be involved in oversight of Federal loans, many state legislatures are trying to do just that. The article cites California’s efforts, following the lead of both Connecticut and Illinois. Inside Higher Ed3
(By the way, it is probably the loan servicers that could be more proactive in making flexible payment plans more accessible, as addressed in the JPMorgan survey.)
Cost of Attendance
A survey by the National Association of College Stores shows that spending on textbook and classroom materials has dropped 41% over the last decade, and 14% just in the last year. Some of this drop can be attributed to textbook rentals becoming more popular, and students sourcing their materials elsewhere. Textbook manufacturers are also dropping their prices. (Inside Higher Ed)
Likely as a result of this trend, one of the largest textbook publishers is trying to move to 100% digital textbooks. (How about for high school too? Lighten up those backpacks!) (Inside Higher Ed2)
Moving on to housing, Inside Higher Ed interviewed the authors of a book, Addressing Homelessness and Housing Insecurity in Higher Education. They quote some pretty eye-opening statistics:
“About 10 to 15 percent of college students experience homelessness with an additional 20 to 30 percent having experienced housing insecurity while attending college.”
Food insecurity is even more prevalent, with studies showing as many and 36% of college students experience food insecurity (skipping or cutting down on meals) in any given 30-day period. (afforablecollegesonline.org)
Everything comes with a cost, but there are nine schools in the US with zero tuition. Of course, there are other requirements, not to mention how difficult they are to get into. Here is the complete list, with requirements/limitations. (CNBC)
If you happen to live in Louisville, KY and are a night owl, you can work the third shift at the UPS facility there and UPS will pay your tuition at one of a few local colleges and university. Fill your savings account while you fill your brain! (courier-journal.com)
Cost of Higher Education
Leave it to The Economist to bring a global perspective and some economics into the current debate in the US (it is election time, after all) about the cost of higher education. Most of the developed world actually does offer higher education free of charge, apart from books and living expenses.
Check out the two most recent Teacher Tip videos by NGPF Fellow Amanda Volz on Paying for College
About the Author
Beth Tallman entered the working world armed with an M.B.A. in finance and thoroughly enjoyed her first career working in manufacturing and telecommunications, including a stint overseas. She took advantage of an involuntary separation to try teaching high school math, something she had always dreamed of doing. When fate stepped in once again, Beth jumped on the opportunity to combine her passion for numbers, money, and education to develop curriculum and teach personal finance at Oberlin College. Beth now spends her time writing on personal finance and financial education, conducting student workshops, and developing finance curricula and educational content. She is also the Treasurer of Ohio Jump$tart Coalition for Personal Financial Literacy.
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