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The College Financing Crisis
With the growth of student borrowing, policymakers have responded over the years with legislative efforts at the federal and state level to help defray costs, but it only seems to have exacerbated the confusion about paying for college. This is where a CPA adviser can be instrumental.
By Wayne W. Williams, EdD, CFG, EA, and Cory Ng, CPA, DBA, CGMA
At a time when public funds are limited and the country would benefit most from an educated workforce, the vast majority of students and their families no longer have the financial resources to pay for a college education without incurring some form of debt. American workers have seen their wages stagnate or decline over the past few decades, but college tuition costs have soared, well outpacing inflation. The Federal Reserve Bank of New York reported in February 2015 that student loans in the United States totaled about $1.16 trillion, second only to mortgages as a form of household debt. The system, as it currently exists, has led to borrowing for more than 41 million Americans who need a college education to be competitive in the workforce. One of the nation’s leading financial aid experts, Mark Kantrowitz, warns about the lasting impact that the debt levels can have on student’s lives.1 Increasingly, CPAs are being included in client conversations about college financing due to a financial aid system that has constantly changing rules and that has been compared to the complexity of the tax code.
According to the Lumina Foundation’s, “A Stronger Nation through Higher Education,” report,2 over the next five years 65 percent of all U.S. jobs will require some form of postsecondary education, yet only 40 percent of working age Americans (ages 25-64) possessed a two-year or four-year degree as of 2013. The National Center for Education Statistics estimates that undergraduate enrollment is projected to increase from 17.5 million to 19.6 million students between 2013 and 2024, yet there will remain a college attainment gap of 19.8 million students by 2025 to meet employer needs. For working, middle class, and lower-income households, financial aid through the Free Application for Federal Student Aid (FAFSA) remains a primary source for subsidizing tuition costs. Thomas G. Mortensen of the American Council on Education writes that “despite steadily growing student demand for higher education since the mid-1970s, state fiscal investment in higher education has been in retreat in the states since about 1980.”3
With the growth of student borrowing, policymakers have responded over the years with legislative efforts at the federal and state level to help defray costs, but it only seems to have exacerbated the confusion about paying for college. With the exception of the most financially capable, the planning for paying for college often begins after students have explored colleges that meet their interests and before determining their financial wherewithal for attending the preferred choice of institution. This is where a CPA adviser can be instrumental. He or she can provide financial planning and find cost-control strategies. When clients approach their CPAs early on about college expense, CPAs can reinforce that setting aside early for college is a must. At the very least, CPAs can direct clients to The College Scorecard, an online tool developed by the U.S. Department of Higher Education, or the Glossary of Federal Student Aid as a starting point. The College Scorecard, introduced by President Barack Obama in his 2013 State of the Union speech, is an online tool that provides comparative information about colleges and universities in an effort to promote information transparency about the costs associated with the choice of higher education institution.
There are several tax-advantaged plans intended to ease the cost burden, such as Coverdell Savings Accounts and 529 savings plans. A Coverdell Educational Savings Account is for individuals whose modified adjusted gross income (MAGI) is less than $110,000 ($220,000 if filing a joint return). It offers no tax deduction, but allows the interest to accrue tax free to pay the qualified education expenses of a designated beneficiary. A 529 plan has no income restrictions and is solely for higher education expenses. (The funds in a Coverdell could be used for eligible K-12 expenses). Congress also enacted tax subsidies for middle-income students to supplement traditional financial aid programs. These tax credits, namely the Lifetime Learning Credit, and the HOPE Scholarship Credit are nonrefundable tax credits that provide up to $2,000 per year and is phased-out for taxpayers with adjusted gross income in excess of $80,000 ($160,000 for married couples filing jointly). These nonrefundable tax credits provided limited benefit to low-income students whose tax liability is reduced to zero by the credit. To remedy this policy gap, the HOPE Scholarship Credit now allows up to 40 percent ($1,000) of the $2,500 tax credit limit as a refundable credit. Tax breaks, however, appear to be inadequate policy remedies to bridge the gap between college costs and college savings accounts. A 2014 report from Sallie Mae, “How America Saves for College 2014,” states that the average college fund balance is $15,346 in the United States, which would afford about two years of tuition for just one student at a public college. The less saved for college, the more will be borrowed.
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For the millennial generation, student debt is becoming an anchor weighing down their pursuit of the American Dream. The Bureau of Labor Statistics reports that college graduates face lower levels of unemployment and higher lifetime earnings than those with a high school diploma or less. So, as more students seek these benefits and become consumers in the college marketplace, they are entering into the complex system of college financing. Student attitudes about the need to borrow varies from outrage, to expectation, to surprise. The need for financial literacy has grown.
Unfortunately, financial literacy rates are inadequate across generations. The Organization for Economic Cooperation and Development's Programme for International Assessment 2012 ranked U.S. 15-year-olds as eighth in the world among 18 nations surveyed. Another study found that only 20 percent of adults could earn a passing score when quizzed about retirement.4 Those who have historically looked at housing, credit cards, and retirement as indicators for the need for better financial education can add financing college to the list. The accounting profession plays an active, essential role in supporting the country’s need for a college-educated workforce.
In 2004, the American Institute of Certified Public Accountants (AICPA) partnered with state CPA societies and launched a financial education program called 360 Degrees of Financial Literacy. The purpose of this nationwide effort was to leverage the knowledge and skillset of CPAs to educate Americans on a range of financial topics, including student debt management. According to the AICPA, all 50 state CPA societies have implemented more than 250 educational programs customized based on community needs.5 Further, the AICPA has developed an award-winning financial literacy website, www.360financialliteracy.org, which provides extensive free resources to help Americans make prudent financial decisions along with a monthly e-newsletter. Pennsylvania CPAs augment the national effort by disseminating information about college planning tools, student debt trends, and the importance of developing a plan for saving early. In addition, CPAs are volunteering to present financial literacy seminars, leveraging resources developed by the PICPA on a variety of topics, including financial tips for college, good debt vs. bad debt, and budgeting and establishing priorities. The target audiences for these financial literacy seminars would include college bound students and their parents, and the presentations take place at high schools, public libraries, community centers, and professional work environments.
The process of applying for financial aid and developing funding strategies can be daunting for many families. CPAs that provide individual tax preparation are well positioned to assist their clients with FAFSA preparation services to maximize the financial assistance received. In addition, CPAs that provide financial planning services can integrate a college funding plan into their client’s overall financial plan. CPAs who do not provide financial planning services can partner with the financial advising community by referring clients to advisors that specialize in college financial planning.
As the percentage of U.S. jobs requiring some form of post-secondary education continues to grow, keeping the cost of higher education affordable and student debt loads manageable have become increasingly important. The college financing crisis represents a significant challenge for many families today and for the foreseeable future. Fortunately, CPAs can serve a valuable role in educating the public about student debt and helping clients plan for college education expenses and apply for financial assistance.
1 http://time.com/money/4168510/why-student-loan-crisis-is-worse-than-people-think/
2 http://strongernation.luminafoundation.org/report/
4 The American College of Financial Services conducted the Retirement Income Literacy Survey last year and found that 80 percent of the respondents received scores of 60 or lower on financial questions about retirement. Just 20 percent received what amounted to a passing grade.
5 http://www.aicpa.org/FORTHEPUBLIC/FINLITERACY/Pages/360DegreesofFinancialLiteracyOverview.aspx
Wayne W. Williams, EdD, CFG, EA, is the education services director for the Goldman Sachs 10,000 Small Business Initiative at the Community College of Philadelphia. He can be reached at wwilliams@ccp.edu.
Cory Ng, CPA, DBA, CGMA, is an assistant professor of accounting at the Fox School of Business of Temple University in Philadelphia and a member of the Pennsylvania CPA Journal Editorial Board. He can be reached at cory.ng@temple.edu.
