‘Higher Education Bubble May Explode in Taxpayers’ Faces’

“61 percent of folks with a student loan are not paying,” notes Andrew Gillen, Ph.D., of the Center for College Affordability and Productivity. Many of the non-payers are still in school, but many others have long since graduated, but are failing to make payments on their student loans. “To give you sense of how unhealthy this is, consider that after the worst housing price crash in our history, 28% of mortgages were underwater.” In short, it looks like there is a huge higher education bubble about to explode in taxpayers’ faces.

Oh, goody.

Related:  46% of people under 30 have outstanding student loans averaging $23,000

The ‘problem’ of extra money in your 529 plan

If you’re lucky enough to have left-over money in your 529 plan, there are ways to handle that problem.  Besides paying for traditional two- or four-year colleges, other options exist for 529 funds.

1. Vocational education - money in a 529 plan can be used to pay for postsecondary vocational or technical training at schools eligible for financial-aid programs administered by the U.S. Department of Education. This includes schools that teach a variety of trades, such as automotive and aerospace maintenance, hairstyling and computer skills. 
2. Graduate school – 529 funds can be used for postgraduate education
3. Change the beneficiary to another family member – siblings, first cousins, parents, or grandchildren
4. Leave the money in to grow tax-free – as long as there is a living beneficiary
5. Charity – donating the proceeds to charity allows you to take a tax deduction if you itemize deductions

Tax penalties waived if a scholarship covers college costs

Say there is money left over in a 529 account because your child got a big scholarship that reduced his or her college costs. In that case, money withdrawn would be subject to tax on the earnings but the 10% penalty would be waived, as long as the withdrawal doesn’t exceed the amount of the scholarship. The penalty on withdrawals also would be waived if the beneficiary dies or becomes disabled.

Related articles

• Recent developments among 529 plan providers (costofcollege.wordpress.com)

Financial aid department’s job is ‘to supply the college with as many paying freshmen as possible’

Heed this warning when your dream college offers abundant financial “awards” that will enable you to attend their exalted institution.

There are other siren songs out there. A school’s financial aid adviser isn’t always a freshman’s best friend. While seldom openly stated, their job is to supply the college with as many paying freshmen as possible. Budgets even at schools like Brown and Duke will only balance if over half of their students foot the full bill. Few colleges offer actual cash assistance – at best, like car dealers, they dangle discounts – so they steer less affluent students to loans. So-called aid officers do this for one reason: the money you borrow goes into the college’s coffers. Paying it later will be your problem.

Reminds me of this one.  When is an ‘award’ really a loan?

The Debt Crisis at American Colleges – The Atlantic

‘Fears of a bubble in educational spending are not without merit’ – Moody’s

Mike Riggs at Reason writes about Moody’s recent report on student lending.  The situation is looking very similar to other recent industry bubbles.

“These subsidies are kind of like propping up the auto industry with cash for clunkers, or the housing industry with cash for first-time buyers . . . We have this financial aid system that is keeping the system alive.”  –  Howard Horton, President of the New England College of Business and Finance

The future for today’s colleges and their students?

To his credit, Kantrowitz anticipated a future in which would-be students shy away from expensive higher educations, due to the double-whammy of high debt and and gloomy job prospects. But he puts that future at least 20 to 30 years away, when today’s college graduates are likely to still be paying back student loans and thus reluctant to extravagantly finance their own children’s educations as well. Moody’s sees that problem coming to a head possibly within the next decade, and anticipates that the aftershock of declining demand for higher education will hurt both college towns and big cities, which rely on students (and their borrowed money) to keep businesses afloat during down times.

My grandchildren’s* college experience may be completely different from the one their parents have.

* Not that I’m assuming grandchildren in my future!

Family income matters for ‘merit’ awards at the University of Rochester

Are a family’s financial circumstances considered when the University of Rochester awards merit scholarships?  Let’s look at the facts.

From the University of Rochester website:

Merit-based scholarships range in amount from $2,000 per year to full-tuition. They are awarded to students who demonstrate outstanding academic achievement and potential, regardless of financial circumstances.…

We distribute merit-based aid regardless of a family’s demonstrated financial need.

But here’s what Jonathan Burdick, Rochester Dean of Admissions and Financial Aid, writes in a candid blog post about “12 steps that mattered for earning merit scholarships”.

We had a “progressive tax” in our merit. On average, each four dollars less in family income increased merit awards one cent. Not much impact per student, but noticeable overall.

According to this, a family’s “financial circumstances” are a factor in the distribution of so-called merit awards.  I see a contradiction, even if unintended.  Is this curious correlation a simple coincidence?  What should families believe?

Here’s what Daniel de Vise of the Washington Post writes.

“Need-based” aid is fairly easy to predict; many colleges spell out their formulas so plainly that a student can calculate a likely aid award based on her or his household income. “Merit” aid is comparatively opaque, meted out in rough proportion to the applicant’s academic credentials.

Opaque, indeed.  In reviewing college merit aid policies I have seen many instances of “hybrid” aid, where schools make it clear that both financial need and merit are considered.   However, I have not been alone in wondering if some colleges also take financial need into account when dispensing what they label as merit aid while never disclosing this significant fact to families.  It seems that the University of Rochester may have given us an example of this covert and confusing practice.