Moral Issues with Saving for College

[KestrelLowing]

(Sorry, very USian focused thread)

I've been lucky enough to be able to nearly afford college by myself thanks to scholarships, internships and co-ops - as well as the meager savings I had before going to college (babysitting and reffing money). Well, my parents didn't know if this would be the case for me or my three siblings, so they've been saving their entire married lives for our college. They always lived well within their means (often using just my mother's part time paycheck for living expenses, and my dad's salary for savings and the mortgage).

So because they had saved that money and lived within their means, we only got unsubsidized federal loans for financial aid. It seems as if it's almost a punishment for people that do save and do live below their means. It is important to note that there are others in my parents same income range that got more federal financial aid because their parents were not quite as fastidious about saving. IN fact, because they had that savings, even though my dad (main breadwinner) lost his job and was unemployed for my sophomore and junior year, my financial aid did not increase (although that may have been because of my jobs).

So is there any way the US system can fix this?

[Zcorp]

Sure, lots and lots of ways. But what are you looking for exactly?

I mean we, the department of education, should be investing in digital learning tools on a federal level removing scarcity, improving access, motivating individuals to learn and creating vastly superior assessment processes. This would solve most of the problem you are speaking of as high end education would be essentially free to everyone.

But it sounds like you are looking for a change in how loans work?

[Chen]

Well you could make it based on income, but all that would do is make it harder for people to get into college if their parents didn't save money. Presumably the intent of the federally subsidized student loans is to help more people get to university. Presumably if no one saved money the federal subsidies would just be spread that much thinner. At which point even though no one saved, there would be those who couldn't get enough subsidies and wouldn't go to university anyway. So it seems like somewhat of a calculated risk. You save a lot and almost guarantee the funding to go to university (with some unsubsidized loans) or you risk getting subsidized loans, possibly also needing to take out unsubsidized ones and go to university or you don't get the subsidies and have to take out HUGE unsubsidized ones to go. Or just not go at all.

Still seems like a decent enough incentive to save to me. It may seem "unfair" but its the same level as unfairness that a very wealthy person could argue. They can pay directly (no loan required) but if they could take out a no (or low) interest loan, it would still benefit them to invest that spare money and use the subsidized loan for school.

[eSOANEM]

So is there any way the US system can fix this?

I'm going to offer a UKian perspective on this.

First of all though, some caveats. Course fees in the UK are far lower but the cost of living is generally higher (price of accommodation and petrol for instance are both larger on average across the whole country (I'm assuming this is equally true for cost of living in students)) so not only are the ratio of course fee:living costs wildly different, but the total cost is far smaller. As such, the following opinion may not be particularly valid in light of the US situation as I may not have fully appreciated the scale of things.

The UK system recently went through a massive change and, despite being completely messed up because it went through at least a year before it was ready (the first cohort going to uni next year will be on this scheme and have already applied for student finance, the terms of which are still not entirely decided), is a broadly sensible scheme.

First of all, you don't have to pay anything up front. This is good because it means there isn't much of a barrier to entry for poor students. Instead, you can apply for a tuition fees "loan" and some government-y organisation pays for it at the time (I'm not sure which). You can then also apply for a maintenance "loan" to cover your living costs during term time.

The exact amount of your maintenance "loan" depends on your income (so having money saved up wouldn't change the amount you get), it also depends on whether you're studying in London (because the cost of living (in particular, accommodation) is substantially higher than the rest of the country). There's then also the possibility of a maintenance grant if your family has a low enough income. The grant is completely free money and is essentially a national bursary.

There are also of course then various scholarships and bursaries from the unis and various other organisations which all work in different ways.

Your two "loans" (the maintenance and tuition fees "loans") are then aggregated and the nominal debt builds up over the course of your degree (you can change how much you want to "borrow" for each part up to the maximum for your income at the start of each year).

Now, you've probably noticed that I've been using quotes around the word loan. This is because, it's not a loan at all in any conventional sense. For one thing, you don't have to pay any of it off until you're earning above a minimum salary (slightly higher than the median graduate salary IIRC) and, even once you are making payments, those payments depend on your salary and are calculated as if it's an additional income tax. Furthermore, after thirty years, any remaining debt is written off.

Given typical graduate salary-time curves, it's been calculated that almost all of the students in this scheme will not pay the nominal debt off before the thirty years are up and so, the amount you "borrow" is broadly irrelevant.

The good things about this scheme are:

* everything is income based rather than asset based
* you don't pay anything up front
* the amount you do pay depends how much you earn when you graduate

These are both good things because they mean that there's very little financial barrier to entry (at least in principle; in practice, the maintenance loan would have to be bigger for this to be the case) and because everything is income based, people are not punished for living well within your means or rewarded for living beyond them.

The bad things are:

* No-one knows whether the government can afford this system (because it puts a large financial strain on the government now in exchange for additional income in 4 or more years).

Now, because the costs in the US are far higher, the downside is much bigger however, were these safer economic times, it seems to me that the benefits would far outweigh it.

On a more practical and less radical note, the idea of shifting the means testing for the subsidised loans towards being income-focussed (although, from what little I understand about the US system, some asset-based testing would still be necessary to reduce the number of defaults) would certainly be a good move

[freakish777]

So because they had saved that money and lived within their means, we only got unsubsidized federal loans for financial aid.

I don't think this is a problem. The aid we're talking about are loans. If your parents have savings accounts earmarked for your education (and you're listed as a dependent), presumably you shouldn't need as many loans.

Other family: We spent our money on big screen TVs, nice couches, and vacations. Our priorities are questionable.
Other Child: Well it looks like I'm going massively into debt for school (or am forced to go to a non-expensive school). At least I can get subsidized loans because my parents were idiotic...

Your Family: Money gets saved.
You: Thanks Mom and Dad for saving, and making sure I don't end up with as big of debt after school (assuming you didn't get scholarships, internships, etc).

So, now your parents have a pile of money for your siblings' education instead? Sounds like a win to me.



I don't know, I'm not sure qualifying a loan as a reward is a healthy financial outlook. Yes, almost everyone borrows money at some point, and a good interest rate is better than a bad one, but the point remains, if you hadn't been able to afford school on your own, you wouldn't be as in debt thanks to your parents. The most common US Federal Grants for students I'm aware of are the Pell Grant (low income, if your Dad had lost his job your senior year of high school right before you applied for aid, that would have been better, they basically check once and only once even though you apply for aid each year), FSEOG (also low income), and I think there's another common one for Family's with 2 or more children in college that year (but this might be a loan?).

If you didn't qualify for any Grants, it's very unlikely that a family in the same income level as your parents qualified for any either. If they did, I'd be interested in knowing what Grants they did qualify for.

[gorcee]

Federal loans are based on expected family contribution (EFC).

EFC is computed as the sum of a percentage of net income and a percentage of net assets (minus a fixed offset).

So, a family that saves has higher assets that spends their money on hookers and blow, and therefore has a higher EFC, which may put the family over the cutoff for certain loans, grants, etc.

So, the solution is, spend more money on hookers and blow, and just suck from the government teat.

[freakish777]

Federal loans are based on expected family contribution (EFC).

Right, I was under the impression that EFC applied towards loans, where as income alone (and not assets) were used for Grants. But it appears I'm remembering wrong.

[KestrelLowing]

Federal loans are based on expected family contribution (EFC).

Right, I was under the impression that EFC applied towards loans, where as income alone (and not assets) were used for Grants. But it appears I'm remembering wrong.

As far as I understand, everything's based off the estimated family contribution. Perhaps changing that is one way that you don't end up inadvertently rewarding those who didn't save while marginally punishing those that did.

Of course there are issues with just income based too. Say, for example, that a family's income suddenly changed from $40,000/year for the last 17 years to $80,000. If everything is based off that 80K, that's not really fair as the family didn't have as much opportunity to save for the previous 17 years. Obviously this is extreme, but possible - particularly if a parent who previously did not work (perhaps to take care of younger siblings) re-enters the workforce.

[gorcee]

Federal loans are based on expected family contribution (EFC).

Right, I was under the impression that EFC applied towards loans, where as income alone (and not assets) were used for Grants. But it appears I'm remembering wrong.

As far as I understand, everything's based off the estimated family contribution. Perhaps changing that is one way that you don't end up inadvertently rewarding those who didn't save while marginally punishing those that did.

This is correct, at least for the Pell Grant (I have not looked up the entire scope of federal grant programs, but the Pell grant is certainly the most popular).

http://www2.ed.gov/programs/fpg/index.html

Grant amounts are dependent on: the student's expected family contribution (EFC) (see below); the cost of attendance (as determined by the institution); the student's enrollment status (full-time or part-time); and whether the student attends for a full academic year or less.

Of course there are issues with just income based too. Say, for example, that a family's income suddenly changed from $40,000/year for the last 17 years to $80,000. If everything is based off that 80K, that's not really fair as the family didn't have as much opportunity to save for the previous 17 years. Obviously this is extreme, but possible - particularly if a parent who previously did not work (perhaps to take care of younger siblings) re-enters the workforce.

The simplest way would be to use the last 4 W-2s, and throw out the highest. This way, it considers family income while the student is in high school.



Edit: not sure why I double-posted. Sorry, mods!

[freakish777]

The simplest way would be to use the last 4 W-2s, and throw out the highest. This way, it considers family income while the student is in high school.

It probably be better to just take an inflation adjusted average.

Say you have a family where the main breadwinner lost their job recently (incomes 60k, 62k, 65k, and zero). By discarding the highest one (average 40,667 for 3 years, compared to 46,750 over 4), you now have a family that could very well have savings for college put together (from before the job loss), but look far less well off then they actually are (provided a new job is found before unemployment benefits stop) and discarding the highest for a family that has had a new higher income also look less well off than they are (40, 40, 40, 80 ~> average of 50 over 4 compared to average of 40 over 3, they may not have any savings, but that new jump should allow them to contribute more than they would have before).


@KestrelLowing, I think trying to find a way to "fix the issue" so the system is better isn't going to achieve much (it would require getting congress to pass laws, ich). But going into business suggesting to clients how to legally "launder" money for the purposes of getting the largest amount of financial aid sounds like it could be very profitable (and a rewarding feeling perhaps helping responsible families??).

[gorcee]

If you've had a recent loss of employment, then I should think that perchance there are other more pressing things that the savings might need to go towards.

The reason for throwing out the highest year of income is because higher outlying years are typically farther from the earned income average than lower years.

If you lose a $75k job for a year, you're out $75k. But if you sell a house and take the capital gains, sell some stocks, or something along those lines, then that would typically be $150k+. Of course, this wouldn't show up on the W-2 as earned income, but I mis-spoke. What I should have said originally was your tax return, not just your W-2.

[Bakemaster]

So, I've been trained in this field and I worked for a time as a financial aid administrator. I was a student beforehand and I am a student again, always receiving federal aid and often thinking I should receive more. I know what it's like from both sides of the desk. I don't have time right at the moment for an involved post but I am posting to put this in my egosearch so that I will remember to come back later and comment further.

The federal financial aid system does not exist to reward or to punish. It exists to increase the number of people in this country who can afford to attend college. Its goal is not to make college cheaper for people who can already afford it. The system does not exist to determine who is righteous or lazy or in some way more or less worthy to receive aid. That means when Gallant saves up $60,000 for tution and Goofus buys a Corvette, the system exists to give Goofus money. That's an oversimplification and you'll find many holes in it if you treat it as anything more, so.

The system isn't perfect. It could use some re-working. But before going too far in the direction of criticism and calls for reform it's worth spending some time reading about the Higher Education Act and its various amendments over the years, to get an idea of what exactly is this system designed to do in the first place and how well it's accomplishing that goal.

[KestrelLowing]

I get that they want the most people possible to go to college, and that there's only so much money to go around. Maybe it comes from growing up with 3 siblings, but I have a very active "fair meter" I guess I wish there was a way where it could be more fair - and yet at the same time, it's not cool that someone who wants to go to college but has parents that aren't very forward thinking could possibly not get to go to college because of that (of course, then there's the people whose parents will not help them with college but still get financial aid based on their parent's income, but that's another topic)

[Zcorp]

I get that they want the most people possible to go to college, and that there's only so much money to go around. Maybe it comes from growing up with 3 siblings, but I have a very active "fair meter" I guess I wish there was a way where it could be more fair - and yet at the same time, it's not cool that someone who wants to go to college but has parents that aren't very forward thinking could possibly not get to go to college because of that (of course, then there's the people whose parents will not help them with college but still get financial aid based on their parent's income, but that's another topic)

And hopefully we can make it more fair by reducing the costs required to attend college, removing significant aspects of scarcity within learning. We are working toward creating equality. Udacity claims they will be able to provide master degrees for $100. There are lots of potential problems with such a claim but the goal is to reduce the costs of education thus making it far more fair and accessible for everyone.

[Bakemaster]

I would agree that rapidly escalating costs are a much more important and immediate issue to deal with than limitations of Federal financial aid. The "high-cost, high-aid" format that has become so popular makes costs seem less meaningful and as a result makes it much harder to have conversations about either the cost or the value of a college degree.

[curtis95112]

You could have practically free education and higher income taxes to make up for it.

[cjmcjmcjmcjm]

I find that university pricing in the US is much like our medical pricing. Namely, that there is so much subsidy and pooled costs that one might as well make up the numbers. For example, my university brags about how 90% of students are on some scholarship or aid (the other 10% are probably the over-wealthy foreign students), meaning that the sticker price is really irrelevant, not to mention the tuition being separate from the fees. I understand tuition, book costs, and housing/food should all be separate, but some of the fees are mandatory for everyone, so include them in tuition; others are only for those living on campus, so include them in housing, &c.

I think I'll stop here before I get too ranty.

[PatrickRsGhost]

The biggest problem with any kind of loan or grant program in the U.S. is that they're all income-based. The less you make, the more likely you'll qualify. If you have good credit, that is.

The biggest hitch to this? They look at your parents' income rather than your own, at least until you're 25. Most loan and grant programs assume that a person in their early 20s is still living at home with mom and dad, works a part-time job making minimum wage, so let's look at mom and dad's salaries, assets, investments, and other sources of income. Whoops. They have too much. Loan/grant DENIED.

This happened to me when I considered going back to school back in early 1999. I was living at home with my parents, worked a part-time job at K-Mart, and considered going to school and getting a degree in computer repair, mainly get the A+ certification. My mom was the only one working at the time; my dad stayed home and tended to the horses and rest of the farmland. When I applied for the Pell Grant, which is given to low-income families, I was denied because while my mom's salary was enough, they had too much due to having sold timber on the property last year. Grant and loan organizations look at last year's salary, and the timber sale put us right over the max.

Look into a 529 College Savings Plan. Michigan seems to offer two or three versions. Your parents (or another relative) can set up the account, and determine who is allowed access to the account. You could contribute to it, and if you have enough saved up, go to college. I'm not sure, but I think your parents could keep it open, and continue depositing money into it while you're in college. Here's how I see it happening:

First of all, let's say you have enough saved up for two years. You could attend for two years, get an Associate's Degree, and meanwhile your parents could keep depositing money into the account. Also, if they allow you to, you could deposit money into the account, if you decide to keep working part-time, granted you'll have enough to also live off of.

If you decide to pursue a Bachelor's, hopefully you'll have enough money to pay for the next two years. Go for another two years, and get your Bachelor's.

Repeat if you plan to continue on for a Master's, and Doctorate or PhD.

[KestrelLowing]

[...]

This happened to me when I considered going back to school back in early 1999. I was living at home with my parents, worked a part-time job at K-Mart, and considered going to school and getting a degree in computer repair, mainly get the A+ certification. My mom was the only one working at the time; my dad stayed home and tended to the horses and rest of the farmland. When I applied for the Pell Grant, which is given to low-income families, I was denied because while my mom's salary was enough, they had too much due to having sold timber on the property last year. Grant and loan organizations look at last year's salary, and the timber sale put us right over the max. [...]

This happened to my mom - almost exactly, although it was her senior year in college and they sold timber.

And while I personally am not having any major problems with paying for school, it just seems like so many others who haven't been as lucky as I have with scholarships and internships are getting shortchanged.

[SU3SU2U1]

Its best to think of this in terms of the goal- maximize college graduates. If thats what you are trying to do, does it make more sense to offer subsidized loans to people with college savings accounts, or people without?

The problem is that you are looking at the loans as "reward" and the lack of loans as "punishment"- thats the wrong lens. Its not a reward- scholarships are rewards. Government subsidized loans are a policy tool- they don't exist to encourage college savings accounts, they exist to encourage college attendance. The very title of your thread is problematic- should government only give loans to those with morals/to the virtuous? By whose idea of virtue? You can imagine a world where those who tithe the most to certain churches get the most scholarships- does that world make any kind of sense?

[PatrickRsGhost]

The problem is that you are looking at the loans as "reward" and the lack of loans as "punishment"- thats the wrong lens. Its not a reward- scholarships are rewards. Government subsidized loans are a policy tool- they don't exist to encourage college savings accounts, they exist to encourage college attendance. The very title of your thread is problematic- should government only give loans to those with morals/to the virtuous? By whose idea of virtue? You can imagine a world where those who tithe the most to certain churches get the most scholarships- does that world make any kind of sense?

You've pretty much nailed it. That's the general consensus dealing with college scholarships and loans. Many young people today are of the "entitlement" mindset, believing that they have the right to anything and everything they want, need, or require in order to make it through life.

While, yes, Virginia, a college education can get you a higher-paying job, there's no guarantee in that it actually will. My mom has a Bachelor's in Science, with a major in Microbiology, but the last time she put that education to use in order to earn some income was back in 1993 or 1994. After that, when she was laid off, the only job she'd been able to get had been working with computers, doing tech support and finally IT.

I've only got a high school education, but due to my self-taught experiences with computers, and on-the-job learning, I now work for a major civil engineering firm, making over $15 an hour, as an administrative assistant. I've worked for the same company for 10 years. If I were to find a job elsewhere, even if they required a college education, I believe they'd pick me over any other applicant, because I've got 10 years of experience, versus a college grad with only one year.

Kids and their parents believe that everyone is entitled to a free college education, and expect to get it, so they don't bother saving. A lot of state governments help fuel this belief, in creating and funding college scholarships that reward supposedly easy good behavior. Here in Georgia, for example, we have the Hope Scholarship. Hope was first established in the early to mid-90s, and the concept was simple: Get a minimum 3.0 GPA (A/B student, or all A's) throughout all of high school, total family income be less than so much yearly, and you're all set. Hope pays for tuition, books, room and board (if staying in campus residence), and a couple other things. Hope, along with other education-based funding, was paid for with taxes and profits collected from the state lottery. Every time someone bought a ticket, or won a taxable amount (over $599), that money was used to fund the Hope, and other education programs.

Lately there had been talk that the Hope was in trouble. Some speculated not enough money collected from the lottery. It's very simple: too many students qualified, so they need (don't know if they ever did) to tighten up on the rules.

With student loans, you just have to pull in so much per year, have acceptable credit, and you'd be approved. A student loan works like any other loan, such as a car or mortgage on a house: a promissory note indicating that a borrower is loaned a specified amount of money, with the intentions of reimbursing the lender said amount of money, and in addition, an agreed-upon interest that is a percentage of the loaned amount. In other words, the borrower reimburses more than they borrowed.

What a lot of people lack is discipline. If they'd save their own money, they'll find it more rewarding than receiving a scholarship or loan. Besides, scholarships and loans aren't guaranteed. A scholarship can be just as easily taken away as it was given to you, sometimes for legit reasons (expelled from the school), or for what many would perceive as stupid reasons (low attendance in class; failing grades; not performing well in the sport or extra-curricular activity that was the basis of the scholarship).

With the 529 plans I linked to above, you and your family, even extended family, can deposit what they can, and it'll never expire. It can be used for almost anything school-related: tuition, books, supplies, housing, food, etc. Some will pay interest, and all are tax-deductible.

[gorcee]

Its best to think of this in terms of the goal- maximize college graduates. If thats what you are trying to do, does it make more sense to offer subsidized loans to people with college savings accounts, or people without?

The problem is that you are looking at the loans as "reward" and the lack of loans as "punishment"- thats the wrong lens. Its not a reward- scholarships are rewards. Government subsidized loans are a policy tool- they don't exist to encourage college savings accounts, they exist to encourage college attendance. The very title of your thread is problematic- should government only give loans to those with morals/to the virtuous? By whose idea of virtue? You can imagine a world where those who tithe the most to certain churches get the most scholarships- does that world make any kind of sense?

So, we could just rephrase the title to "Moral issues with encouraging college attendance by shifting craploads of toxic debt onto individuals who either grew up in environments where fiscal responsibility was never taught or who cannot realistically leverage the debt towards future prosperity"

[Bakemaster]

With the 529 plans I linked to above, you and your family, even extended family, can deposit what they can, and it'll never expire. It can be used for almost anything school-related: tuition, books, supplies, housing, food, etc. Some will pay interest, and all are tax-deductible.

There's a wrinkle though in that when a student is the beneficiary of a 529 plan, those savings are treated as student assets even if every contribution to the plan has come from the parents. Student assets are subject to a higher conversion rate in the EFC formula and are not protected, which means that saving under your child's name for college will ultimately result in a higher EFC than just paying for your kids' college from your own assets and income.

Depending on your frame of reference, whether you're looking at need-based aid as "deserved" or simply pragmatic, this can seem pretty fucked up.