Education: A Financial Curse?

I want to begin by sharing an excerpt with you from an article published by Reuters News on January 17^th, 2012 entitled “Insight: Recovery at risk as Americans raid savings” written by Jilian Mincer and Jonathan Spicer. 

“The amount of money Americans put aside for their children's college fees is taking a hit too. Assets in the popular state-managed college savings funds known as 529s dipped more than 10 percent in the third quarter of 2011. Estimated outflows were $354 million between July and September contrasted with inflows of $927 million in the same period of 2010, according to Financial Research Corp.

Indicative of the trend, contributions to the 529 plans managed by investment management firm Vanguard dropped 1.0 percent in 2011 after climbing 17 percent from 2009 to 2010. Parents of younger children are continuing to save, according to Vanguard, "but they may be concerned about the economy and market conditions and have cut back a little."

At the same time, college students are borrowing twice as much as they did a decade ago when adjusted for inflation, according to the College Board, and Americans now owe more on student loans than on credit cards.”

My business partner and I are often baffled by the responses we receive when we ask parents of college bound teenagers or young adults eyeing graduate degrees, ‘how are you saving for your future educational expenses’? The answers generally sound like the chorus of “Living on a Prayer” by Bon Jovi, coincidentally an American college-party classic. What we have found is that very few people are adequately saving for their educational expenses. There is also a smaller group of people that believe the less money they report via FAFSA, the more financial aid they will receive. What they fail to realize is that the financial “aid” will likely come in the form of loans.

According to the College Board, tuition and fees have increased over 130% over the last twenty years at public universities (a similar percentage increase is estimated for private institutions, respectively). Students have increasingly been forced to finance these degrees (read: expensive pieces of paper) through loans, both government and private.  In 2011, student loan debt surpassed credit card debt for the first time ever (what a scary thought)!  Many are beginning to wonder if the student loan debt market is experiencing bubble like conditions. A New York Times article reported recently that there has been a surge in personal bankruptcy filings due to student loan obligations that persons have the inability to repay. Although the job market continues to slowly recover, high unemployment rates have left many people jobless and lacking income to repay their student loans.  The cost of a bachelors and masters degree combined can leave some people in $100,000+ of debt! Yikes!

Of course, scholarships and grants are what all future students hope to receive to assist with the expenses. However, with increasing numbers of students enrolling in bachelors and advanced degree programs the competition for these coveted funds is very steep. As a result, there will be some disappointment and back up plans need to be considered. As tuition expenses continue to soar to astronomical heights, families and individuals need to have defined strategies and adequate savings to pay for these expenses or they face the possibility of large and burdensome student loan debt.

Commandment #5 of Financial Empowerment: Adequately save for educational and retirement expenses via tax preferential accounts

We recently unveiled the 10 Commandments of Financial Empowerment, the fifth commandment states, “adequately save for educational and retirement expenses via tax preferential accounts”. You may be wondering how you can get you get started, well look no further. Over the last few years, state governments have increased the marketing efforts behind 529 Savings plans to hopefully encourage and spur increased usage of these savings vehicles for educational expenses. We at D.R.E.A.M. believe that being financially prepared is the best way to approach future education expenses. Take matters into your own hands and open up a 529 Savings account today! 529 Savings Plans are low maintenance and allow you to invest in mutual funds or similar investments, consistent with a 401(K) or IRA. Beware, there is some risk involved with these types of investments, but you can select your investments from a list based on your risk tolerance. Our advice, the shorter the amount of time you are aiming to save for i.e. 1-3 years in the future, the more risk adverse you should be.

The benefit of these savings plans are the tax benefits. The investments grow tax deferred and the distributions used to pay for educational expenses are tax free (Federal)! If you invest in a 529 plan for your state there could also be additional tax benefits. Analyze your current budget and asses how much you can afford to allocate to this savings plan. Instead of asking friends, loved ones, and significant others for gifts on your birthday and holidays, ask them to make an investment in your future and contribute to your 529 Savings Plan!

In the words of Drake, “Thank me later.”  

About the Author:  Femi Faoye is the Co-Founder and Chief Executive Officer of D.R.E.A.M. He’s a staunch and passionate financial literacy education advocate.  

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