Minimizing Your Student Debt Before And After College

Steve Pomeranz: You may have seen these new numbers that were released by the New York Federal Reserve Consumer Credit panel where it stated that debt among 19 to 29-year old Americans exceeded one trillion dollars at the end of 2018. Now that’s the highest exposure for the youngest adult group since late 2007. What’s the primary cause of this debt? A lot of it is student loans, so to discuss this today, I have invited Richard Polimeni, Chair of the College Savings Foundation, which is a leading nonprofit helping American families save for higher education to discuss this with us. Hey, Richard, welcome to the show.

Richard Polimeni:  Thank you, Steve, a pleasure. Thanks for having me.

Steve Pomeranz: Just a quick plug for you, I understand you’re going to be attending in Jupiter Florida, on March 19th through the 21^st, the National Conference for the College Savings Foundation. So anybody interested in attending that, just look that up. College Savings Foundation National Conference, and it’ll be in Jupiter on March 19th to the 21st. So, Richard, debt levels are playing a role now in how young adults are spending their money and there is proof of reduced spending compared with previous generations. How is that breaking down?

Richard Polimeni: Yes, Steve that’s absolutely correct. As you can imagine, with that level of debt, younger adults coming out of college, they are spending less and they’re delaying life decisions as a result of it. In many cases, in order to help pay off those loans, they are taking second or third jobs, they’re delaying marriages, they’re delaying having children, and often delaying the purchase of a first home. As you can imagine, that level of debt is crushing, especially to somebody starting out.

Steve Pomeranz: So $1 trillion is an awful lot of money, and I think it’s the vast majority of the amount of debt held by these young people, followed only by mortgage debt, right?

Richard Polimeni: That is correct. Yeah, and we’re finding that not only with this group but with debt, in general, student loans are the second highest debt in the country, you know, for all age groups.

Steve Pomeranz: And it’s not only the students that are in debt, but a lot of the parents still are paying off student debt as well.

Richard Polimeni: Absolutely. As we, in many cases, taking on that debt for college is done for a combination of both student loans that the student pays back as well as parental loans that, in most cases, the parents pay back. And we find that parents are motivated to save by this. 45% of parents are still paying off their own student loans. And as a result, we’re seeing, trying to now save for their children’s education, so hopefully their children don’t have to face that same

Steve Pomeranz: So let’s talk about proactive things that families can do because it’s going to be cheaper, in the long run, to save and invest early than it is to borrow the money and then pay the interest on that money until it’s paid off, which could then reach well into your adult life. So when you’re working with the College of the Savings Foundation, what are some of the best proactive things that parents and children can do?

Richard Polimeni: Sure, well as you stated, first of all, saving early and often is really the best strategy. The longer time horizon you have, the better off you’re going to be. And the more you can save, even though many people won’t be able to save the full amount they need for college, every dollar they can save today is going to be a dollar less that they have to borrow down the road. Having said that, we see families using a variety of strategies. So on the savings front, we are seeing that 50% of families, either through the parent or the child, are using the 529 savings account, which is obviously a smart choice given the tax-deferred and tax-free growth on those accounts. So that’s one way. We’re also seeing students take a more active role in expecting to pay for college. We see 85% of high school students plan to work during college, 62% plan on living at home at least for some period of time while in college help reduce the overall expenses, and, believe it or not, 51% have jobs while in college or plan to have jobs while in college. So those are just a few of the strategies that we’re seeing based on some of our surveys.

Steve Pomeranz: I think we’re also seeing from some of the numbers that I looked at that even high school students are working and putting some of that money away for college too.

Richard Polimeni: Absolutely, we do an annual survey of high school students and their parents, and we have been finding over the last few years, the number of high school students that are working with the intent to save money for college has increased steadily. And as of last year, 57% said they were already saving for their own college education.

Steve Pomeranz: I always would state that saving for college or having enough money ready for college was a four-legged stool. The number one would be savings, as we’ve been mentioning. The number two would be student debt. The number three would be kids working summers while they’re in high school and putting away their own money and also working in college.

And the fourth would be money coming out of the parent’s pocket. Real time to help for books and living expenses and the like. But it’s good to see that students are getting some skin in the game themselves and understand that it can’t be a burden totally for their own future of student debt or solely on their parents. Tell me a little bit about these 529 plans. While they’re pretty popular and they’re growing in popularity and their use, I think a lot of people still don’t know about them.

Richard Polimeni: You’re right. There’s an awareness about them but a lot of people still don’t know even some of the basic stuff about them. The easiest way to think about them, they’re a tax-deferred savings account where the money is earmarked for education. So it’s similar to an IRA account; the money is growing tax-deferred and as long as it comes out for education expenses, it comes out completely tax-free. So there’s an enormous tax benefit from that standpoint. In addition, many states also offer a state income tax deduction for contributions for the in-state 529 plan.

So, for example, a client that resides in New York, if they decide to contribute to the New York 529 plan, the first 10,000 as a married couple that they contribute each year to that plan, they will be able to deduct from their New York State income taxes. That will save the average New York family somewhere in the neighborhood of 7 to $800 a year. And there are about 25 to 30 states that offer a state income tax deduction. So substantial benefits there. The other nice things about 529 is one, the parent or the adult keeps control of the assets.

Steve Pomeranz: Yes

Richard Polimeni: They also have flexibility to change the beneficiary, so if one sibling, for example, doesn’t need all the money for school, gets a scholarship, you can transfer it tax-free to a younger beneficiary or even a first cousin that maybe needs the money. So a lot of flexibility.

Steve Pomeranz: It’s a better vehicle than a UTMA or a UGMA account, which you’re really giving ownership of the gift, the money that you’re putting aside to the child. Of course, until they become 18 or 21, there’s kind of a trustee. The parent is still trustee. But fundamentally, the money is the child’s. In the case of a 529, the control is left with the parent, and as you said, you can change the beneficiary. So if one child doesn’t use it, doesn’t go to college, doesn’t need it, the other child can. So it’s far more flexible, plus it has these tax-free aspects to them.

So, what I would advise my listeners, if you are interested in that, just go on to Google and put in 529 Plan. Maybe your state, start with whatever state you are in and start to look around. Each state has its own plan. Some are better than others, so you can do a little bit of shopping, a little bit of looking around on that as well.

Well, we are out of time, but I want to say one quote here. And this was pretty interesting because this was in the material that you gave me. It was from the old Fram Oil commercial of the 70s. I don’t personally remember Fram Oil, but basically, the commercial was this:

This choice was a regular oil filter change or an engine rebuild. And the ad said: You can pay me now or pay me later, but either way, you will still pay me. And I think that is a good way to end this discussion about college savings. You’re going to college; you are going to pay. Better to pay now a little bit at a time, let that money grow into it, as opposed to waiting and avoiding and having to pay later. Richard Polimeni, thank you for joining me today.

Richard Polimeni: Steve, thank you for having me, a pleasure.

Steve Pomeranz: To hear this interview again, if you missed anything or you have a question about what we just discussed, we love to get your questions so go to our website stevepomeranz.com and join the conversation. Conversation and sign up for a weekly update. Every single we put together all the live events that we’re doing and the important topics that we’ve covered that week, straight in to your inbox that stevepomeranz.com.