A parent of a new college graduate recently lamented good-naturedly that just when the steady stream of tuition bills had finally stopped coming, "now there is going to be free college." While higher education may not become tuitionless anytime soon, the fact that the topic is being seriously discussed is notable. As of this writing, much remains to be seen about the prospects for various reform proposals.
On college campuses everywhere, this past year and a half has been among the most unusual ever. But even before COVID-19, higher education was undergoing significant changes that require individuals and families to rethink how they plan for education expenses. Choices about paying for college can be difficult and stressful, and wise guidance from an adviser can make a world of difference.
Education planning expert Ross Riskin, CPA/PFS, DBA, CCFC, M.S. Tax, in a written Q&A with the JofA, offers thoughts about recent developments affecting education planning and how advisers can best answer certain common client questions. Riskin is an associate professor of taxation at the American College of Financial Services.
With online-only classes, campus shutdowns, and so forth, students and their families have faced many challenges recently. Has the COVID-19 pandemic created many education planning issues?
Riskin: Rethinking gap-year planning, reevaluating distribution planning strategies to maximize tax efficiency, measuring the ROI of attending certain schools or pursuing certain majors — these are a few things that I am thinking about as a result of the pandemic. But from my perspective, the pandemic acted as both an accelerant of changes in higher ed and also brought about unique challenges that affected so many different constituents in an almost uniform manner.
Even before the pandemic happened, addressing the rising costs of college was a popular topic among policymakers, researchers, and, most importantly, families. While most schools universally shifted in some way to an online or hybrid learning environment in 2020, there was no standardization in how revenue models were affected. Some schools offered partial refunds in cases where students were sent home, some schools increased costs to account for expenditures that were incurred to transition to this new learning environment, some schools reduced fees — and many schools made no changes at all.
In response to this shift, we saw a lot of students and parents demanding some form of cost reduction or refund, which is very revealing of something I believe we have all thought about but haven't spent too much time thinking about in quantitative terms. It revealed the fact that at minimum, there are two distinct things being provided yet combined into a single tuition cost from the perspective of students and parents: the education element and the experience element. And given that the average cost of an online three-credit-hour undergraduate course falls between $800 and $1,200, is it any wonder why families are having trouble justifying paying $2,000 to $3,000 for an online undergraduate course in English?
The increased prevalence of families fighting for refunds and discounts is more evidence that many, if not most, value the experience element more than the education piece — at almost two-thirds to one-third, respectively. So, what's the takeaway? As CPA advisers, we need to be more focused on understanding which element our clients value most when engaging in the planning process, instead of making assumptions or relying on our own beliefs. We may encounter clients who say, "I just want my son/daughter to get in and out of school with the skills necessary so they can start working and get a steady job." We have others who say, "I want to pay as little as possible and will just be happy if they graduate with a degree." Then we have those who say, "I want my son/daughter to have the same great experience I had where I met my spouse, made lifelong friends, and expanded my network." Or we may encounter some combination of all three.
The important thing to remember is that our job is not to judge our clients based on their viewpoints on higher education. Instead, we are there to provide guidance, and part of that process is not simply helping our clients save for future goals but to ensure they understand what sort of "return" they can and should expect from this type of investment.
Many borrowers are burdened by enormous student loan debt. Is it generally a wise decision to enroll in a federal repayment plan that adjusts the monthly payment based on the borrower's income?
Riskin: Student loan repayment advising — one of my favorite topics to discuss! Unfortunately, most advisers still know very little about student loans and effective student loan repayment strategies. The relatively small number of advisers who are educated on the topic tend to dive right into the quantitative side of things by going straight to comparing interest rates. And, hey, why not? Isn't that what advisers are trained to do? Strategize to get rid of, consolidate, or refinance high-interest-rate debt and pay it off as quickly as possible.
Well, when it comes to student loans, the same debt management principles may not apply. Before diving into loan balances, loan types, and interest rates, I find it beneficial to take a step back to better understand a few things. First, what are the borrower's thoughts and feelings about debt? Second, what other personal and financial goals is the borrower looking to accomplish? Third, what profession is the borrower in and for how long do they plan on being in that profession? Fourth, how easily are we able to predict income fluctuations, given the borrower's chosen/desired profession? Obtaining answers to these questions helps me as an adviser create a deeper connection with the client, develop a client profile for use in analyzing which strategies will work best, and understand how the strategies I propose should take into account the impact on planning for other financial goals as well.
For federal education loan borrowers, it is always best to consider enrolling in an income-driven repayment (IDR) plan, such as Pay as You Earn (PAYE), Revised Pay as You Earn (REPAYE), Income-Based Repayment (IBR), or Income-Contingent Repayment (ICR). But this doesn't necessarily mean that borrowers should plan to make payments over the preset 20- or 25-year period.
While IDR plans are by no means perfect, in theory they represent a logical way to approach the repayment of debt that is connected to an investment in human capital, as opposed to structuring repayment terms like a mortgage-style loan. Generally speaking, the borrower's monthly repayment responsibility is tied to their "ability to pay," which in the U.S. is primarily associated with the borrower's income.
In addition to providing flexibility should a borrower experience a drastic change in work circumstances or reduction in salary, these plans provide the opportunity for future loan forgiveness should any balance be remaining at the end of either the 20- or 25-year repayment term, depending on the repayment plan chosen (and assuming we are ignoring the ability to qualify for forgiveness under the Public Service Loan Forgiveness program).
Some form of IDR plan is used as the default loan repayment system in most other countries and is part of several newly proposed student loan reform policies. Advisers should encourage clients who have federal loans, regardless of whether they plan on pursuing loan forgiveness in the future or not, to consider enrolling in one of these plans. IDR plans provide benefits that borrowers could have still utilized even if the Department of Education had never enacted the temporary pandemic-related interest waiver and payment suspension provisions back in March of 2020.
How should borrowers choose among the available income-driven repayment plans? What are some factors to consider in making the decision?
Riskin: When it comes to evaluating the different repayment program options, this is where we start to go down the rabbit hole. We could easily spend a few hours on this topic, but the primary factors that should be considered are: Which plans is the borrower eligible to enroll in? What are the repayment terms? How is the monthly repayment amount calculated? And how does tax-filing status impact the monthly payment calculation?
Since there are so many factors to consider, taking a comprehensive approach at the beginning can help us narrow down which repayment plans will work best for our clients and their needs. Additionally, things can get even more complicated depending on who we are working with — younger clients who only have undergraduate loans, clients who have large PLUS loans that were taken out to finance graduate studies, or parents who borrowed via the PLUS loan system.
My takeaways are that CPA advisers should focus on becoming more educated on the ins and outs of the different repayment options available or partner with another adviser who specializes in this area. It is likely that future legislation will introduce additional repayment plan options or revamp the existing plans on a prospective basis, which will just add to the complexity of things, especially if you plan on advising existing borrowers with older loans, existing borrowers with newer loans, and prospective borrowers in the future.
[For more information about IDR plans, visit studentaid.gov.]
Is now a good time to refinance student loans, given the low interest rates? Should borrowers avoid refinancing if they are hoping to eventually obtain loan forgiveness?
Riskin: When it comes to determining if it makes sense to refinance, especially given the environment we are currently in, we need to first segment out our client types and determine the obvious candidates who should or shouldn't refinance. Generally speaking, existing borrowers with high-interest private loans are the prime candidates to consider refinancing, so as to reduce the overall interest paid over the life of the loans, which is how we would traditionally approach debt management. On the other hand, existing borrowers with federal loans who are on track to receive forgiveness under the Public Service Loan Forgiveness program should not consider refinancing, as they would lose out on the ability to receive the golden goose: tax-free loan forgiveness after 10 years of qualifying payments.
Where things become more unclear is when we are dealing with federal loan borrowers with higher-interest-rate loans who may or may not be on track for forgiveness under one of the previously described IDR plans sometime in the next 20—25 years. This is why it is so important to really understand who your client is and what their ultimate goals are, as solely relying on the numbers may not always provide the best strategy for a client.
For example, while private lenders are focused on attracting borrowers by "framing the conversation" to be solely about lower interest rates, they often can't compete with how the federal government can respond to an economic crisis and provide relief in a widespread fashion — the pandemic was the perfect example of this. As a result of the pandemic and interest rates' racing to the bottom, many borrowers refinanced federal loans to lock in the low rates in the private market, while the government responded to the pandemic by temporarily instituting a full interest rate waiver and payment suspension that has been extended several times since its original enactment in March 2020 for federal loan borrowers.
Even if someone were to argue, "Well, those benefits are temporary and the taxpayer will still benefit by refinancing to a low-interest-rate private loan and will save interest over time," the passage of the American Rescue Plan Act [P.L. 117-2] introduced another game-changing provision — the exclusion of federal and private loan discharges from taxable income. While this technically applies to all types of student loans, this signals something I have been expecting for some time that will primarily benefit federal loan borrowers: tax-free loan forgiveness for those on IDR plans. Even though this provision is set to expire at the end of 2025, I expect this to be made permanent, or at least extended, since most borrowers pursuing forgiveness under an IDR plan won't be eligible until after 2025. Factoring in the nuances of these other benefits that may be available is just another reason why interest rates can't be the only thing to consider when developing strategies for both existing and prospective borrowers.
Should parents consider modifying how they save for their children's education, given the changes that are underway or expected to happen in higher education in the next five or 10 years?
Riskin: Yes and no. I could probably best sum it up by providing my thoughts on what should and shouldn't change. What shouldn't change is the idea to keep saving for college! With proposals and talk of college becoming "free" in the future, some may be thinking, "Well, if it's going to be free, then I don't need to save anymore, right?" I am in the camp of people who like to have options. Implementing a savings plan early allows your money to work for you and can ultimately provide the financial resources necessary to have options in the future.
What should change is how parents decide where to save for college. As much as I love 529 plans — and it is clear from recently passed legislation (the Tax Cuts and Jobs Act, the SECURE Act, the CARES Act) that this savings vehicle is becoming more flexible in its uses — I am not a fan of only considering 529 plans. I am not an advocate of a "one size fits all" approach, which harkens back to my previous point once again — I like having options! I am a big fan of using a multiple savings vehicle approach. So, I would consider utilizing a combination of 529 plans, taxable accounts, and Roth IRAs when developing a comprehensive education savings strategy for ultimate flexibility from operational, investment, tax, and financial aid perspectives.
Related to this is the idea that parents need to make sure they are doing a proper assessment of what their target savings goals are, as I have found that, in practice, many parents anchor their savings targets to benchmarks or IRS limits. One example would be a taxpayer saving $4,000 annually in a 529 plan because that is the maximum amount of state income tax deduction they can receive, when they should be saving $10,000 to be in a position to realistically meet their goal.
So, at the end of the day, the higher education landscape is changing at an accelerated pace, and it is necessary for CPAs to get "creative" in how they work with clients to develop and provide comprehensive education planning services. As famously said by Liam Neeson in the film Schindler's List, "My father was fond of saying you need three things in life: a good doctor, a forgiving priest, and a clever accountant. The first two, I've never had much use for. But the third ... "
About the author
Dave Strausfeld, J.D., is a JofA senior editor. To comment on this article or to suggest an idea for another article, contact him at David.Strausfeld@aicpa-cima.com.
- "The Impact of Filing Status on Student Loan Repayment Plans," The Tax Adviser, Jan. 2021
- "Student Loan Debt: Tax and Other Considerations," The Tax Adviser, Dec. 2020
- Tax and Financial Planning Tips: Education Costs (free access for AICPA members)
CPE SELF-STUDY: Examines personal financial planning for college, a critical consideration affecting areas from cash flow planning to income taxation.
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