August Client Letter: A College Education Minus the Debt
Fully funding a college education without debt is no simple task. It’s no secret that the cost of a four-year degree has soared. But do you realize how much it has risen?
According to Education Data Initiative, the average cost of college tuition and fees at four-year public schools has risen 179% over the last 20 years. It’s an average annual increase of 9.0%.
The average cost of tuition and fees at private four-year schools has risen 124% over the same period for an average annual increase of 6.2%.
That is an increase from an annual cost of $3,349 to $9,349 for a public university and $14,616 to $32,769 for a private school.
The statistics are sobering, and students are piling up unmanageable debts to secure a degree.
But there are ways to reduce out-of-pocket expenses, and avoid or at least minimize the need to take on debt.
Be savvy about financial aid
First, let’s review financial aid. This can be an important way to reduce costs, depending on the school.
- Complete the Free Application for Federal Student Aid now. The FAFSA application period for the 2022-23 school year began on October 1, 2021. The FAFSA deadline for this school year is June 30, 2023.
Yes, it seems counterintuitive, but the deadline is next year. Nonetheless, get the form in as soon as you can. Grants are awarded on a first-come first-served basis, and there isn’t an unlimited pot of money available.
If your child is a senior in high school this year and their first year in college begins next year, try to submit when the starting gate opens on October 1, 2022.
One other thing to keep in mind: Many colleges have individual deadlines. As with the federal deadline, earlier is better.
- Apply for scholarships and consider focusing onlocal scholarships, as there is usually less competition than for national scholarships.
“The absolute first place to visit for local scholarships is your school counselor’s office or the school’s website,” says Jan Smith, a financial literacy expert at Educational Credit Management Corporation (ECMC), a nonprofit organization that aids student loan borrowers. “Many businesses want to help out students and will approach the school counselor for getting the word out about scholarships” available in their hometown.
Other places where your kids may uncover funds include community organizations, local businesses, your employer or union, city, county and state governments, and churches and religious organizations.
- A family’s financial situation can change. Since FAFSA uses last year’s tax returns, you can request an appeal if your situation has greatly shifted. Speak with the financial aid office and ask them to ‘reconsider’ based on your unique situation.
- Don’t rule out so-called ‘no-loan’ schools. A university that is a no-loan school aids students in a way that they can avoid student loans through scholarships, grants and work-study programs. Some colleges may assist all students, others look at family income and needs, or focus on in-state students. One or more schools on your child’s preferred list may be a no-loan college. Inquire about the type of support they offer. What you don’t know can and will hurt you, financially.
Saving for college
As with all saving, the sooner you start saving for your children’s college, the better off you’ll be. And there are several advantaged ways to save for education purposes. This isn’t an all-encompassing list, but we’ll touch on the high points.
- 529 plans are popular and offer tax benefits when funds are used for qualified education expenses. Earnings and withdrawals are tax-free when you use the money for college.
Be aware that withdrawals from accounts owned by someone other than the student or their parent must be added back to the student’s income on the following year’s FAFSA and can reduce aid eligibility by as much as 50% of the amount of the distribution.
- The Coverdell ESA allows for tax-free earnings and withdrawals for qualified educational expenses; however, only married couples earning less than $220,000 or individuals earning less than $110,000 can contribute.
The maximum limit to contribute is $2,000 per year. The value of a Coverdell is counted as a parent asset on the FAFSA. Assets of parents are assessed at a lower rate than student’s assets, so the reduction in financial aid is reduced.
- Custodial accounts (UGMA/UTMA) are another option. Funds deposited into these accounts are not limited to college and become the property of the child when he or she reaches 18 or 21 (most states), depending on the state. Will your child have the maturity to manage a windfall at a young age?
There are additional drawbacks, including the potential for tax liabilities on earnings and capital gains. Also, custodial accounts are counted as student assets on the FAFSA, which may reduce a student’s aid package.
We know that college saving can seem daunting. But develop a plan. Break it into smaller steps. Tackle each step and stay disciplined. If you have any questions or want assistance with resources, we’re here to help.
The Fed’s medicine for inflation
The Federal Reserve has been grappling with the worst inflation in over 40 years. Of course, it’s not just the Fed. Equity investors, bondholders, consumers, and workers are feeling the sting of higher prices.
High inflation has forced the Fed to react by ratcheting up interest rates at the fastest pace since the early 1980s, according to St. Louis Federal Reserve data.
Higher rates have pressured stocks. Rising yields have also pressured bonds. The price of bonds moves in the opposite direction of yields.
A quick review of the table of returns below highlights the weakness in stocks and bonds since the beginning of the year.
Table 1: Key Index Returns
Dow Jones Industrial Average
S&P 500 Index
Russell 2000 Index
MSCI World ex-USA*
MSCI Emerging Markets*
Bloomberg US Agg TR Value Unhedged USD
Source: Wall Street Journal, MSCI.com, MarketWatch, Bloomberg
MTD returns: June 30, 2022—July 29, 2022
YTD returns: December 31, 2021—July 29, 2022
*In US dollars
Government data demonstrate that wages aren’t keeping pace with inflation. And you and I are well aware of the higher prices we are paying for a range of goods and services.
Here is a question that sometimes comes up: “Why is the Fed raising interest rates to tackle inflation?”
It’s a fair question that doesn’t require a complex answer. I once heard that economics is simply commonsense made difficult. Let’s go step by step and try to remove the ‘difficult’ as we explain what the Fed is hoping to accomplish.
Inflation raged in the 1970s. It became embedded into the DNA of the economy. No one liked rising prices, but it was the fabric of everyday life.
That is until Paul Volcker was appointed chairman of the Federal Reserve in 1979. Without diving too deep into economic theory, the Federal Reserve, under his leadership, drove interest rates into the stratosphere.
In early 1981, the Fed briefly pushed the fed funds rate over 20% (St. Louis Federal Reserve). Six months prior to that, the key rate sat near 10%. When rates soar to seemingly unfathomable levels, economic activity grinds to a halt amid the soaring cost of money.
The jobless rate jumped, production fell, and excess capacity in the economy rose. It’s the opposite of today’s supply chain woes. Put another way, supply of goods and services exceeded the demand for goods and services.
Furthermore, because businesses didn’t require as many workers, there was less pressure to bid up wages. This is also the opposite of today’s environment.
Input costs came down, which removed the pressure to raise prices. And, with falling demand brought on by a steep recession, most businesses lost the ability to quickly raise prices.
Long story short, the rate of inflation came down. But it took a very painful recession to squeeze a vicious inflationary cycle out of the economy.
This isn’t the 1970s, but the concept is similar. Raise interest rates, which raises the cost of money and—the Fed hopes—slows demand.
Slower demand would likely reduce sky-high job openings (in turn, reducing upward pressure on wages). Slower demand makes it more difficult to raise prices, which would bring down the rate of inflation—at least that is the theory behind the Fed’s reasoning.
Well, Gross Domestic Product (GDP), which is the broadest measure of goods and services in the economy, fell in the first and second quarters (U.S. BEA). Demand is down, right? Why isn’t inflation down? Aren’t we in a recession as some folks say?
If we’re in a recession, it’s one unusual recession. Job growth is strong, and quirks in how GDP is calculated are playing a role in the weak numbers.
While job openings are still high, they are coming down, according to the latest U.S. BLS data.
Instead of a recession, today’s environment is more akin to ‘stagflation,’ or stagnate economic growth and high inflation. Bringing inflation down isn’t an overnight process.
In order to succeed, the Fed is eyeing additional rate hikes, as it hopes to bring demand back in line with supply.
“There’s a path for us to be able to bring inflation down while sustaining a strong labor market. …We know that the path has clearly narrowed, really based on events that are outside of our control. And it may narrow further,” Fed Chief Jerome Powell said at the end of July.
Powell recognizes that it may take a recession to help get inflation back to the Fed’s 2% target, or an incredible amount of luck to engineer an economic soft landing, i.e., slower economic growth that brings inflation down without a significant rise in the jobless rate.
Powell was asked how deep a recession the Fed might tolerate in its quest to squash inflation. He wisely side-stepped the question.
We say ‘wisely’ because telling the public the Fed would blink if the medicine is too tough—or saying ‘Yes, we’ll drive the jobless rate as high as needed’ are hypotheticals that could lead to unintended short-term consequences in the market.
I trust you’ve found this review to be educational and insightful. If you have any questions or would like to discuss any matters, please feel free to give me or any of my team members a call.
As always, thank you for the trust, confidence, and the opportunity to serve as your financial advisor.
Niles P. Geary, II, MBA, CRPC, AIF™
Co-Founder & CEO
Niles P. Geary, II is Registered Representative offering Securities and Advisory Services through UNITED PLANNERS FINANCIAL SERVICES, A Limited Partnership Member: FINRA, SIPC Voyage Partners Financial Strategies, LLC and United Planners are not affiliated.
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