Earlier this month, Congress passed a bill meant to lower the cost of college tuition while simultaneously providing greater access to college. This bill, which is awaiting President Bush’s signature, would slash interest rates on student debt—and that sounds nice. But in reality, it will do little to curb rampant tuition inflation, which increases, on average, about 6 to 7 percent annually—despite the fact that each year the U.S. Department of Education provides around $67 billion to “reduce” costs, and make college more “accessible.”
Simple economic reasoning says that if you pump more money at a particular good or service, the cost of that good or service will rise—because more cheap loans increase demand (think of the housing market over the last several years). And colleges have capacity constraints; and can’t exactly increase their student populations easily. In short, it’s akin to trying to stop inflation by pumping more money into the economy.
Indeed, the financial burden of going to college only grows, despite politicians’ best intentions. According to the non-profit College Savings Foundation’s annual survey titled, “The State of College Savings,” the debt level of graduating seniors has gone from $9,250 in 1997 to $19,200 in 2007—a 58 percent increase after accounting for inflation. (At this rate, clients’ kids might start thinking of their college debt as a first mortgage.)
The good news (if that’s the right way to put it) is that the bill increases your usefulness to clients. In short, your clients need you to help them plan properly so that they can borrow money at the lowest rate possible. And it can be more complicated than, say, just dropping money into a 529 or UGMA account. (Many colleges still regard 529s as the student’s asset when determining who deserves needs-based loans and grants.)
The College Cost Reduction and Access Act—the title itself seems Soviet-like in its impossibility—was cleared for the president to sign the bill into law on September 7, and features “savings” such as reducing government subsidies to private student loan providers. But, at the same time, the bill would cut interest rates that the government collects (for Stafford loans) in half (from 6.8 percent to 3.4 percent over five years); and, the bill increases the maximum Pell Grant by 2012 from $4,310 to $5,400.
“It is a little bit more hoopla than it is actual money,” says Bradley Pace, president of Pace Capital Management, a private wealth management firm specializing in financial and college planning for high-net-worth clients. For example, Pace says the bill increases the Pell Grant each year by $500. However, he says right now it costs about $25,000 a year to go to an average private college, so the bill is really only going to take off about 2 percent of college costs. The grants have greater impact for those who attend public or state schools, where tuition runs around $10,000 to $15,000 a year, he says. The more significant initiative is the halving of the interest rates. Pace reckons that borrowers with $13,000 of need-based debt will save, on average, about $4,400 in interest.
Besides messing up the pricing mechanism of college, federal largesse could also be giving parents a false sense of security. “I say the one bad thing about this College Cost Reduction Act coming out is that it’s going to give a false sense of socialism out there that the government is just going to take care of us,” Pace says. “But really, all that’s going to do is cover the cost of your books for a couple of years.”
Joseph Hurley, a CPA and founder of the Website savingforcollege.com, says clients who put assets into an account in their child’s name to save on income tax is a practice that can come back to hurt them from a financial aid standpoint. They’re better off putting kids’ assets into 529 plans, or Coverdell Education Savings Accounts. (Remember: some schools factor in such assets when doling out aid.) Hurley also says clients should look to spend assets in a student’s name before they file for financial aid. So, if your client’s kid needs a car for college, make sure they buy it out of their kid’s assets before they file the application.
Says Pace, “What I usually advise my clients and friends to do is start off assuming no one is going to help you. [A federal loan] is a last resort. The thing you’re supposed to do is put aside money the day they’re born.” So now, more than ever, it is important for wealth managers to help their clients figure out the best way for them to save for college. It may not always be the most obvious.