In his recent New York Times article: “The Student Debt Problem Is Worse Than We Imagined,” author and senior director for post-secondary education at the Center for American Progress, Ben Miller stated that one of America’s best investments in socioeconomic mobility — college — has become a debt trap for far too many. While I wholeheartedly agree with Miller, in my experience, it’s not just the students who are getting caught in this trap, it’s their parents as well.
Let’s examine the state of student debt. A May 2018 Harris Poll found that 45 percent of recent undergraduates have student loan debt, and 39 percent of those with debt don’t think it’s likely they’ll be able to pay it off within 10 years — the most common repayment period for federal student loans. The study also pointed out that the student debt problem has played an integral role pushing the average age for first-time homeownership among Millennials to age 36. Why? Despite record low unemployment, roughly 40% of college graduates remain underemployed. That leaves many Millennials with a less than desirable debt-to-income ratio, making qualifying for a mortgage nearly impossible.
The restraints on Millennials to successfully launch financially has also created a conundrum for parents: to what degree should parents be responsible for helping their children pay for college or pay off student loan debt? The financial planning community has long advised parents against raiding their retirement savings to pay for children’s educations costs, citing you can’t borrow money to support yourself in retirement. Doing so could also result in a disservice to your children down the road if your retirement savings run out during your lifetime, placing the burden of support on your adult children. Borrowing from your home can be an equally dangerous strategy for those in or nearing retirement as we saw when the housing bubble burst in 2007, which resulted in a loss of trillions in home equity value.
Nonetheless, it can be difficult for parents to watch from the sidelines as their newly-minted college graduates struggle to balance the competing financial burdens of paying for housing, food, and other essentials, saving for their own retirement needs, and paying down student debt. The problem doesn’t appear to be going away anytime soon.
In its most recent survey of college pricing, the College Board reports the “all-in” costs for an in-state public college for the 2017–2018 academic year averaged $25,290, while private colleges averaged $50,900 for tuition, room and board, books and materials, transportation and related expenses. While the average cost of higher education continues to rise year-over-year, a handful of institutions have made strides toward cutting or freezing costs, according to data reported by The James G. Martin Center for Academic Renewal. The North Carolina-based nonprofit dedicated to improving higher education reported in 2016 that Philadelphia’s Temple University was among the first to eliminate varsity sports programs to save money. Ohio State University saved $95 million by switching to common vendors for office supplies and creating a common expense report – and at the University of Cincinnati, which is part of Ohio’s university system, the president turned down a salary increase and bonus pay, and the school sold its presidential residence. This year, the University of Maryland eliminated the use of textbooks, making all materials available to students online.
While these one-off, cost-cutting measures are commendable, it’s not likely that parents or their college-aged students will see real relief in the form of tuition breaks anytime soon. Even online education, which many had hoped would bring down overall costs, has actually increased in many cases due to high production costs. According to the WCET Distance Education Price and Cost study, 54.2% of respondents reported that commuting students pay more than on-campus students when tuition and fees are added.
While 529 Education Savings Plans and Coverdell Education Savings Accounts (ESA) remain among the most popular vehicles for college savings, due to their tax-advantaged status, on their own, they don’t solve the problem many families face (competing priorities for their discretionary income). So, what steps can parents take to help themselves and their children avoid getting caught in the college debt trap?
- Create a budget to track all money coming in and going out of your household. Make savings a prominent and permanent part of it.
- Begin saving for college costs as early as possible through tax-advantaged savings vehicles such as 529 and Coverdell education savings plans.
- Apply for scholarships and grants.
- Consider work-study programs to help offset tuition costs.
- Earn college credits while in high school to help reduce the number of college credits needed to complete a degree program.
- Empower yourself through a holistic approach to life planning.
The last step is the most important of all. No matter what stage of life you find yourself in today, adopt a balanced approach to pursuing important life goals. Yes, the cost of higher education comes at a premium, but it should never put you in a position to jeopardize your financial future. Teach your children how to navigate student loans. Help them understand the benefits of adopting good saving habits early in their career. Help in ways you are financially able if it aligns with your values and financial goals. And always know the options available to you.
Before investing, the investor should consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state’s 529 Plan.