Piggy bank for College?

The New York Times ran an op-ed column by Andrea Levere on October 7, 2014 (yesterday as of this writing) on Children’s Savings Account (CSA). Ms. Levere is attempting to address the issue of sending lower income children to college by starting CSA’s for disadvantaged children in kindergarten or even at birth as a government program. The idea is worthy but the presentation has a terrible flaw – saving money even from birth does not pay for college any more.

My good friend was so proud of his first born and had great dreams for her. He put $100 in a 529 College Savings Plan every month through her first 18 years. At the end of her 12th grade year, her account had $40,000. For a capital investment of $21,600 with compounding interest, the child had a great start so it seemed.

Except that $40,000 did not cover completely her first year of college. She was an excellent student who excelled and secured a slot an fine university that was not Ivy League. If her father had put away $500 a month for 18 years, then the power of compounding interest would have paid for her undergraduate career. That is $6000 compared to the $1200 that my friend socked away each year. For middle class families in the United States, putting away for each child $6000 a year for college is not a possibility. Putting away 8% of the household income per child when the average income for a two adult, two child middle class household at $75,000 a year is a fantasy.

Adding insult to injury is the manner in which the government calculates estimated family contribution (EFC) for government sponsored loans and grants for college. The higher the EFC number, the more the family has to pay out of its own pocket. If the money is still in the 529 College Savings plan, the government calculates 100% of the money for college, which raises EFC by hundreds or thousands of dollars. If the college money is not in the 529 plan but under the parents’ name in any sort of investment fund, then the government calculates a percentage of the money based on the 1040 tax return, which will be less than 100% including the parents paying income tax on the college money the previous year! The money is the same amount but the EFC will be lower. The system is disconnected by college savings under one agency and college loans under another agency and thus broken.

The real kicker is that if the family has not put aside any money for college, the EFC will be lower and the student and the family will qualify for more subsidized loans and/or grants.

College tuition along with room and board has risen much faster than inflation in the United States and real wages have been stagnant for at least twenty years. Also, the middle-class paying jobs of the foreseeable future require a Bachelor’s Degree. Without government intervention into this non-market driven segment of our economy, more and more of the population will be disenfranchised from achieving or even maintaining a middle class livelihood. This is more than bad economics, this is a recipe for the decline of a nation.

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