STATE OF MIND – ‘The Cost of Education’
‘The Cost of Education’ is a web-based discussion focused on how households can most effectively save for higher education. A recent study conducted by theDepartment of Agriculture revealed that the cost to raise a child for an average American household can be up to $245,000 over eighteen years. According to the study, it can cost the same family twice as much to send their child to a four-year college.
This raises a key question: how can families save for college and what methods are most efficient to enable their children to attend and graduate from college with as little debt as possible?
Reyna Gobel, Debra Chromy, and Joseph Brusuelas accompany Krishna C. Nadella for the conversation. Ms. Gobel is a Forbes Contributor who writes about selecting and financing higher education. Ms. Chromy is the President of theEducation Finance Council, a national organization that represents student loan organizations and other nonprofits. Finally, Mr. Brusuelas is the Chief Economist at McGladrey.
In Part 1: Saving For College, Chromy highlights that families, especially those from low-income households, should start the savings process for their children’s college as early as possible. Many parents do not begin to save for their children’s education until their kids are well into their teens. This late start leaves many families with too little time to take full advantage of the available recourses to maximize the full value of financial aid, e.g., through federal loans and 529 savings plans. Families must understand the higher education “market” to more fully comprehend the costs associated with specific avenues within it and also learn about the fates of savings portfolios when they meet unexpected events like the 2008 financial downturn.
Many parents are prone to panic in the years leading up to their children’s college education. Channeling money from friends and family that a child receives for birthdays, holidays and other functions such as high school graduation can help in alleviating the cost of attending higher education. Putting this money in an interest bearing savings account is a great way to house these funds over time. Once this money adds up it can provide significant relief when families send their kids to college. Gobel discusses how relatively small $25 contributions from 20 people over an eighteen year time span can add up to as much as $9000.
Brusuelas reinforces the importance of taking advantage of the 529 savings plans, named after section 529 of the Internal Revenue Code, Title 26. These are educational savings plans operated by individual states. The plans are designed to help families set-aside funds for future costs associated with their children’s higher education. They carry tax benefits specific to each state. Brusuelas stresses how important it is for students to obtain the requisite skill-sets required for success in college so that the money that their families have saved over so many years is put to wise use.
The demographics in the United States twenty years from now will be much different from today. As those aged between 20-45 years and Baby Boomers become older, the demand for senior and retirement services will increase. This will squeeze available capital that could otherwise be expensed toward financial aid and scholarships. A potential implication for Millennials will be that student loans could be offered at higher rates than in the past, making access to higher education more difficult, particularly for low-income households.
These arguments lead us to Part 2: Borrowing for College. In 2013, President Obama nearly doubled the funding for the Pell Grant, a U.S. federal government program that provides students in need with funds to pursue higher education. While this grant provides access, a hypothesis states that it is responsible for a surplus of college graduates. Since their numbers exceed available jobs, Pell Grants are blamed for higher unemployment among college graduates. This begs the questions of whether or not there is a student loan bubble, if it will burst and what this means for current and future college students.
Chromy discusses several categories of student financing through debt equity available for families to use. The Federal Student Loan Program, funded by theUS Department of Education provides direct loans to families in need and is one of the most important instruments used to finance higher education. The Perkins Loan provides a ten-year financing plan at a constant 5% interest rate. There are many other state-level programs.
Since the housing bubble burst, student loan debt has doubled to $1.3 trillion. As college debt will continue to follow young people for a large part of their lives, this is changing consumer behavior among Millennials.
Four years of an undergraduate education is no longer the norm since many students spend up to 6 years in college to complete their degree programs. The current underemployment rate of 12% also speaks volumes about a potential higher-education bubble. These trends have changed the savings and borrowing strategies employed by households to prepare for children’s college expenses. Young people are being forced to take on debt outside their budget, yet they face an uncertain post-graduate employment future.
Part 3: Paying for College, discusses how students can pay off student loans while still in college and after they graduate. The default rate on loans is close to 14%. Of that percentage only 1% of loan recipients have finished their bachelor’s degree. There should therefore be an enhanced effort to ensure that students graduate successfully and then stay true to their payment plan to not prolong their debt. Students should be in constant contact with career services and future employers to gain the skills required to be competitive in the post-graduate job market.
Gobel emphasizes the most effective strategy for students to pay off debt is to first fully understand what they are borrowing on a monthly basis and then the amount that they need. Once students are in college they should identify and apply for scholarships. A common misnomer among students is that scholarship money is only available for rising freshmen when this is not the case. Many scholarships are allocated for college sophomores and juniors.
Paying for college is one of the most important expenses that face us, which can be intimidating. By tapping into the advantages that student loans have to offer, coupled with scholarships, other forms of loans and hard work, this fiscal responsibility can become less daunting.
Students should understand that they should only borrow what they will be able to pay off, based on their choice of major and anticipated career options.
View all three episodes below!
Stay tuned for further discussions on the economic and political challenges young people face today. Until then, “What is your STATE OF MIND?”
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Writer: Krishan Puri
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