May will once again adorn us with flowers, weddings and graduations. One could make a compelling case in either direction whether marriage or higher education were more expensive!
In sticking to the education topic, however, we thought we’d share a few facts and considerations if you or someone in your life is in the midst or will be investing in higher education. Throughout our experience teaching Finance 101 classes to various youth groups, our Jeopardy statement “This is the best investment you can make at this time in your life” is usually met with our desired answer: “What is education?” Among the answers that got the buzzer over the last few years have been “a new Dodge Viper”, “a year off from school to travel Europe”, and “stock in company ABC.” One truly sweet girl, who had budgeted for one speeding ticket per month in the cash flow exercise, decided her best investment would be to NOT get her driver’s license. We concurred.
On a more serious note, few decisions in our lives will have more lasting impacts than the investment we make in higher education from a financial and opportunity cost standpoint. Our medical professional community is among the most familiar with these costs.
We’ll start with a few facts in the “What’s New” category of higher education, and follow with some considerations that may influence your decision making when it comes to how much or how to pay for college.
• Total average costs for the 2015/2016 school year increased about 3% from the previous year: $24,061 for public colleges (in-state), $38,855 for public colleges (out-of-state), and $47,831 for private colleges. Total average costs include direct billed costs for tuition, fees, room, and board; and indirect costs for books, transportation, and personal expenses. Together, these items are officially referred to as the "total cost of attendance." Note that the cost figure for private colleges cited by the College Board is an average; many private colleges cost substantially more--over $60,000 per year.
• You’ve undoubtedly heard the headlines about soaring student loan debt. Seven in 10 college seniors who graduated in 2014 (the most recent year for which figures are available) had student loan debt, and the average amount was $28,950 per borrower. It is likely that this amount will be higher for the classes of 2015 and 2016. Student loan debt is the only type of consumer debt that has grown since the peak of consumer debt in 2008; balances have eclipsed both auto loans and credit cards, making student loan debt the largest category of consumer debt after mortgages. As of September 2015, total outstanding student loan debt was over $1.2 trillion.
• A reduced asset protection allowance has stealthily been changing, with the result being a much higher expected family contribution than in years past. The asset protection allowance shields a certain amount of parents’ non-retirement assets from the federal aid formula, but this number has been steadily declining for years. For the 2012/2013 year, the asset protection allowance for a 47-year-old married parent was $43,400. Today, for the 2016/2017 year, that same asset protection allowance is $18,300--a drop of $25,100. The result is a $1,415 decrease in a student's aid eligibility ($25,100 x 5.64%, the federal contribution percentage required from parent assets).
• A new FAFSA timeline is in play: financial aid application, the FAFSA, as early as October 1, 2016, rather than having to wait until after January 1, 2017. The intent behind the change is to better align the financial aid and college admission timelines and to provide families with information about aid eligibility earlier in the process. One result of the earlier timeline is that your 2015 federal income tax return will do double duty as a reference point for your child's federal aid eligibility--it will be the basis for the FAFSA for both the 2016/2017 and 2017/2018 years.
• The American Opportunity Tax Credit is now permanent. The American Opportunity Tax Credit was made permanent by the Protecting Americans from Tax Hikes Act of 2015. It is a partially refundable tax credit (meaning you may be able to get some of the credit even if you don't owe any tax) worth up to $2,500 per year for qualified tuition and related expenses paid during your child's first four years of college. To qualify for the full credit, single filers must have a modified adjusted gross income (MAGI) of $80,000 or less, and joint filers must have a MAGI of $160,000 or less. A partial credit is available for single filers with a MAGI over $80,000 but less than $90,000, and for joint filers with a MAGI over $160,000 but less than $180,000.
• The Pay As You Earn (PAYE) program has now been expanded. The pool of borrowers eligible for the government's Pay As You Earn (PAYE) plan for student loans has been expanded as of December 2015. The new plan, called REPAYE (Revised Pay As You Earn), is available to all borrowers with federal Direct Loans, regardless of when the loans were obtained (the original PAYE plan is available only to borrowers who took out loans after 2007). Under REPAYE, monthly student loan payments are capped at 10% of a borrower's discretionary income, with any remaining debt forgiven after 20 years of on-time payments for undergraduate loans and 25 years of on-time payments for graduate loans. To learn more about REPAYE or income-driven repayment options in general, visit the federal student aid website at studentaid.gov.
While there are no right or wrong answers when choosing where to study, what to study, and how to pay for it, there are better answers. Here are a few considerations that are worthy of a second thought or discussion with your young adult:
• When choosing a career, being happy matters. But also think through the anticipated education cost (financial and opportunity), salary range, burn-out rate and lifestyle your chosen career will likely offer.
• It is likely easier to be “poor” when you are young, than “poor” when you are old. Many of your fellow students will be “poor” when they are young too. There is great camaraderie in moving through different life stages with peers in similar circumstances.
• There are many ways to finance or pay for college. There are almost no ways to finance retirement.
• While you want to consolidate loans at the lowest possible rate, be careful not to consolidate federal loans (Stafford and Direct Plus) as they will lose any eligibility characteristics for future loan forgiveness.
• Consider alternate ways to pay: scholarships, the military, the National Health Service Corps, possibly private loans from family
• Consider less expensive schools. Students, if you don’t want your parents living with you when they are older because they neglected to save for their retirement in lieu of paying for your education, a less expensive school may be the right option for you.
At Pauley Financial, two of our partners currently have young adult children attending college, and among our staff, we have not less than at least 10 queueing up to go through the ranks. As you know, three of our staff members are West Point graduates. Collectively, we have experienced the gamut of ways to attend and pay for college, and are doing it again with our children. We are happy to help navigate the options along with you. Please do not hesitate to reach out with questions and comments.
Posted on Tue, April 19, 2016
by Kimberly Pauley filed under