Schooling America
Choice in education is changing and so are the ways to fund it.
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The hullabaloo surrounding student loan debt is not without its merits. There’s $1.6T in student loan debt outstanding, averaging $28,950 per borrower, many of whom didn’t even finish their degrees. Like putting a memory foam mattress back in its original packaging, it’s a problem without an easy solution.
Former students with maimed balance sheets have taken to the internet to broadcast cries of pain. Their plight is not lost on those that hear them. Sadly, there’s little that can be done short of sweeping student loan reforms that will inevitably shift the burden of responsibility to another party.
Congressional gridlock does not necessarily translate to inaction, however. The observant up and comers, interpreting these cries as warnings, have modified their courses to avoid similar financial landmines. But through the minefield they must go if a college degree is the goal. At least they’ll be able to see the paths littered with casualties and avoid them.
According to the Chronical of Higher Education, only 62% of students who start college finish within six years. This sobering statistic has been relatively consistent over the past three school years. I suspect that it will improve over time as economic realities begin to dominate higher education decisions.
Most have taken aggressive college tuition inflation as a given assumption. It’s not uncommon to see financial planners assume a fixed 5% inflation rate within their college funding plans. I have always felt this assumption too aggressive, and the past few years have proven my hunch to be correct.
College tuition has leveled off and even come down in some cases since 2020! This is good news for students. The forces driving this price trend are largely due, although not exclusively, to:
High school graduates are taking more care to consider the economics of their future career choices.
Skilled trades can offer equal or higher pay without the sunk cost of time and money associated with higher education.
Online degrees have become a popular alternative for many looking for more affordable credentialing.
Rest assured that the prospects of career success improve with a well-thought-out education. The snowball of problems seems to start when a student aimlessly, and often reluctantly, enrolls in a university without a clear understanding of why they are there. The number one rule for successful college planning is to avoid ambiguity.
This is the purview of a mentor which is often, but not always, a parent. Identifying a mentor shouldn’t be like a pre-arranged marriage. Children should demonstrate some agency here, asking themselves questions like:
What do I like to do?
What careers/jobs match these interests?
Which one of these would I be good at?
Parents and guardians can then apply an economics overlay to eliminate the impractical. Not everyone can be a YouTuber, unfortunately.
The topic of higher education is nuanced, and we’re only scratching the surface here. There are many ways to pursue meaningful and rewarding careers outside of the traditional roadmap.
The bottom line for students is to know, at least to some degree, what you’re doing. If you don’t, find a mentor who does. Overcommitting future income on some ambiguous journey can result in a financial hangover lasting years, if not decades.
Funding education is nearly as complex as figuring out how education should be focused. Fortunately, advancements in education specific savings plans, such as 529 plans, make funding this goal much less intimidating. Many state-sponsored 529 plans offer unique incentives worth investigating.
A small amount can make a big difference. $100 per month saved from birth to age 18 with a modest 7% average return would result in a plan balance of $43,072! Not bad. Tired of throwing away cheap plastic toys? Request friends and family make contributions to the 529 plan instead. Anyone can contribute.
Better yet, have the grandparents set up the 529 plan themselves. This can help when it comes to the FAFSA (Free Application for Federal Student Aid) application that determines your Expected Family Contribution (EFC).
Recent updates made to section 529 Plans as part of the Secure 2.0 Act reduce the risks of overfunding these plans. Graduates can now roll over up to $35,000 into Roth IRAs from their 529 plans! There are specific guidelines that need to be considered, such as the requirement for earned income and annual rollover amounts being subject to contribution limits. Still, a nice feature to have.
Putting it all together, save diligently and plan wisely. Starting early is best but starting anytime is better than shooting from the hip. Either way, planning will reduce the risk that your education funding strategy will negatively impact your retirement or your student’s.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.
Securities offered through LPL Financial LLC. Member FINRA/SIPC. Advisory Services offered by National Wealth Management Group LLC, an SEC Registered Investment Advisory and separate entity from LPL Financial LLC.