Help is on the Horizon to Ease Student Debt

The future of college funding
The evolving partnership between 529s, colleges and the government

Student debt: by the numbers

Lately, the headlines on student debt have been nothing short of sensational — both hard for readers to miss and for publishers to pass up:

• Student loan levels in the United States now exceed $1.2 trillion.¹

• Roughly seven out of 10 college graduates in 2012 shouldered student loan debt — at an average loan balance of nearly $30,000 each.² 

• Last year, approximately 7 million borrowers defaulted on Federal or private student loans.³  

Yet, while these statistics are clearly staggering, there is an ongoing debate as to whether they collectively rise to the level of a student debt “crisis”.

Student loans the sole culprit?

Today, many families feel like they are facing the perfect storm. College debt is on the rise and some are questioning the value of a higher degree. A considerable number of young Americans are struggling, but does student debt deserve all the blame?

It is fair to say that graduates are having a harder time landing jobs — or at least ones that pay a sufficient wage, relative to their outstanding debt loads. Between 2005 and 2012, the median annual earnings of young adults age 25-34 declined by several percentage points, while the average student loan balance increased by about 35%.

What’s more, some students are compounding their woes by incurring college debt, but failing to graduate. Between 2003 and 2009 (the most recent time period available), 29 percent of student borrowers had dropped out — up from 23 percent for the period between 1995 and 2001.⁴

“Crisis” a misnomer

Armed with these facts, some contend that labeling student debt a “crisis” is hyperbole — especially when it comes to assertions that student debt is a drag on the U.S. economic recovery. In reality, the monthly payment obligation for student loan borrowers has remained roughly the same over the past twenty years.

Since 1992, student loan payments have consistently consumed three to four percent of monthly income for the median borrower.⁵ the fact remains that most young adults can service the debt load, even though it may mean moving back home.

What’s in a name?

Whether we’ve reached “crisis” levels or not, the consensus is that it may be too late for the current generation. Looking back at the $1 trillion plus in debt that has already been incurred focuses on the wrong issue. 

Both sides also agree that the conversation must change. Instead of denouncing the student loan crisis, the dialogue must shift to the college funding crisis that lies ahead. The current path is unsustainable and the real problem can be reframed as follows:

• How do we ensure that future generations finance college without going deep into debt? 

• How can we encourage early and holistic planning so that debt does not become the failsafe?

• How should the partnership between 529s, colleges and government evolve to effect change?

Don’t wait on Washington

It is tempting to start by looking to Washington for potential relief, but those hopes may be misguided. While many would concede that the current mishmash of federal, state and private funding sources can be confusing and overwhelming, radical improvements are not on the horizon. 

That’s because in the prevailing political climate, there appears to be a lack of consensus regarding the prioritization of higher education on the national to-do list. In addition, many point to two overriding trends — political gridlock and deficit spending — that will make it difficult for Washington to address the college funding crisis going forward.

Competing priorities

Consider that for fiscal year 2014, the Federal government spent approximately $167 billion on higher education student aid, including loans, grants, tax benefits and work study programs.⁶ And, for 2012-2013, nearly 70% of student aid was federally funded — with state, institutional and private and employer grants making up the remaining 30%.⁷

Though these figures may seem substantial, higher education is competing against much larger priorities, such as entitlement spending for an aging population and interest obligations on the deficit. True, the latest revenue and spending trends for the Congressional Budget Office project a 33% increase in revenues from 2013 to 2024. However, that increase is more than offset by mandatory spending and debt servicing. Both are siphoning off money that could be used elsewhere — such as for financing higher education. 

States are following suit

If families cannot rely on the federal government for future college financing, will states step in? Unfortunately, similar budgetary pressures are taking hold at the state levels, too. For instance, between 2000 and 2012, state spending on Medicaid rose from 12 percent to 16 percent of states’ own-generated funds.⁹

Conversely, in the wake of the great recession, state higher education executive officers reported a real decline in state spending per student. From 2008-2012, 49 out of 50 states cut per-student funding in order to narrow substantial budget gaps. On average, these cuts have reduced funding by $2,394 per student, or roughly 30 percent, nationwide.¹⁰ in effect, we are witnessing a shift in public higher education from a public good — something that everyone is invested in — to a private good that is increasingly shouldered by the individual.

Colleges and universities respond

It seems apparent that state and federal governments are unlikely to play a leading role in solving the future college funding crisis. What level of support can families expect to receive from colleges and universities? The good news is that, generally speaking, these institutions appear to be sustaining student investment levels — as well as introducing innovative initiatives, too.

For starters, tuition freezes (or at least minimizing tuition increases), seem to be the norm among many public and private institutions. That may seem surprising to some, given the headlines about tuition rising faster than the rate of inflation. However, this disconnect can largely be explained by the difference between posted and net tuition prices. For example, posted tuition, which excludes living costs and financial aid, has increased considerably over the past 15 years.¹¹ Net tuition, on the other hand, reflects the amount families actually pay after grants and tax benefits. That figure has not risen nearly as steeply — especially at four-year, public institutions.

Other initiatives that colleges and universities have introduced include no loan aid and financial literacy programs.  The former offers aid packages where loans are not expected while the latter helps ensure that families who do borrow understand the loans’ terms. Despite these innovations, colleges and universities are unable to completely fill the void left by government. In effect, colleges and universities are making the same investment in students, while other support mechanisms are going down, leaving families to bridge the gap.

529 plans

It appears that families are destined to carry a disproportionate share of the college expense load going forward. However, they are not completely alone. Financial advisors and the 529 industry stand ready to help guide the way.

The 529 industry in particular has come a long way — and may be entering a new phase.  Initially introduced in 1986, 529 plans have evolved from pre-paid tuition programs to multi-manager plans with a wide range of investment options and competitive fees.  Yet, studies show that $150 billion was spent in 2013 on tuition alone — and only a fraction flowed through 529 plans. With just 15% of families using 529 college savings plans, investors may be missing out on important tax advantages and more can be done to get the word out.

Tomorrow’s college conversation

529 plans remain the single most effective way to set aside money today to fund future college costs and form the foundation of a complete college funding strategy. Financial advisors can help promote increasing adoption by:

• Encouraging families to get started early. Financial advisors can facilitate a focused family conversation as early as middle school, covering the amount that clients can afford to invest, then get clients started saving in a 529 plan as soon as possible. For more information, consider Scholars Choice’s “How to Pay for College” brochure.

• Providing families with comprehensive tools to educate and engage on financial aid. Explaining how much your client may be expected to contribute, admissions probability and net tuition can help quantify the goal and make it more achievable. 

• Positioning colleges and universities as partners. Clients need to move away from the idea that colleges and universities are like other consumer organizations with whom they interact. Colleges are not automobile dealerships out to get the best deal.

Why Scholars Choice®

At Scholars Choice — the robust 529 college savings plan from Legg Mason and CollegeInvest — we are dedicated to making it easier for our clients to pay for college.

One of the largest advisor-sold 529 plans nationwide, Scholars Choice offers significant tax benefits and a broad range of investment options. Competitive fees and an active, multi-manager approach make Scholars Choice a solid foundation on which to build a comprehensive college funding strategy.

With the “Bank of Mom and Dad” stretched thin these days, saving for college is becoming a wider family affair. Make 529s your preferred choice for a grandchild’s education and help lighten your family’s load. To learn more, please visit scholars-choice.com.

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