This last posting discusses a challenge that many students will encounter—managing and servicing loans for education. Student loan debt in the United States in 2020 totals about $1.56 trillion and it is owed by 45 million people. In January 2019, the Federal Reserve stated that aggregate student loan debt has more than doubled in the last decade. The Fed also reports that 69% of students from the Class of 2019 had taken student loans with an average debt balance of $29,900. Six percent of borrowers owe more than $100,000 with this same six percent owing about one-third of the total outstanding debt. Clearly, this is not a situation to take lightly!
Our most recent posting discussed the menagerie of potential tax deductions and credits that have been introduced to help American taxpayers fund college. Unfortunately, our legislators have approached this on a piecemeal basis, so there is very little consistency in the income limits, amounts and other qualifications needed to claim the tax breaks. One area of the education funding mix which seems to be universal, however, is the need to complete a FAFSA* form. The Free Application for Federal Student Aid or FAFSA is a form which must be completed by current and prospective college students (undergraduate and graduate). It is a pre-requisite in the United States for determining eligibility for need-based student financial aid. For parents and college age students it has become an annual fall ritual (for at least four years) as October 1 is the first day the FAFSA can be submitted for the upcoming school year. Because funding for various grants and aid is limited, wise students complete their FAFSA’s as early as possible to avoid missing out on the “first-come, first-served” allocation of these dollars. The FAFSA process allows the results to be transmitted to up to ten schools and a U.S. Department of Education policy introduced for the 2016-17 academic year prevents each school from learning which other schools are listed on a particular application.
Our most recent posting discussed several tax-advantaged accounts that were introduced by Congress to assist in the savings process for funding education. There may also be opportunities for tax savings when qualified education expenses are incurred, even if the aforementioned savings accounts are not utilized. Today’s posting will review these tax breaks which are claimed when filing your tax return. It must be noted that in general, the IRS code does not permit “double-dipping”, that is, using the same education expense to claim two different tax breaks. Occasionally, an education expense may qualify for more than one tax break and a decision must be made as to which is most advantageous. Once again, a qualified financial planner and/or CPA can provide guidance in this area.
Our next series will address topics related to the challenges associated with funding a post-secondary education. These could include four year college, junior/community colleges and trade schools. In addition, most of the concepts could also be applied to a graduate school education as well. Today we will look at some strategies for accumulating funds to pay for education. Congress has provided several tools that reduce or eliminate the “income tax drag” associated with growing these balances. For most of our country’s existence, there were no specialized accounts and no tax breaks available to help parents and students accumulate funds. Generally, education costs were paid from savings and investment accounts that were not necessarily earmarked for schooling.
The Covid-19 pandemic has certainly wreaked havoc on peoples’ lives the world over. Students have suffered a huge experiential loss as graduations, proms and sports competitions have been cancelled or severely curtailed. There is one area, however, where some students may reap a benefit from the coronavirus.
For many years beginning in the 1950s, it was axiomatic that obtaining a college degree was a sure-fire ticket to a higher paying job. High school guidance counselors steered millions in that direction and for many years, it was good advice. Businesses were rapidly expanding and the evidence of a completed college degree became a “seal of approval”. If anything, the degree indicated that a job candidate could “follow something through to completion.” Many employers took the approach that nearly any degree was a good sign since they would be training the new employees regardless of background.