I worked on two personal income tax returns yesterday that serve as examples to further underscore the need for education finance reform. As an adviser I see plenty of these examples in working class families, these two just happen to be the latest. I know that my peers in the tax preparation industry will see plenty more examples this season.
#1 – A divorced office worker mom with a salary of about $26,000 takes almost $20,000 out of her modest savings to pay for her son’s first year tuition. The son lives with her her ex takes the dependent deduction as part of the divorce settlement. (This is common in divorce settlements to allow the higher income spouse to take the dependent deduction). Federal tax law says she can’t get the education tax credit under these circumstances even though she paid all the tuition. Furthermore, if the money came from a retirement account then she will owe additional income taxes this year that she is financially unprepared to pay.
#2 – A professional family with 4 kids; 2 at home and 2 in private colleges. Total family income is $200,000 so they qualified for little financial aid. But the private college expenses was over $40,000 for each child, including travel and other related expenses. The father was required by employment contract to live in an expensive area so their housing expense and real estate taxes were also high. In the end, the parents were unable to put money away for their own retirement. They lost out on an employer match to the 401(k) and appear to be financially struggling. When you net out $200K gross income minus taxes, minus housing expense, minus $80K tuition, there is little left to support a family in a middle class lifestyle.
Another accountant said “Why don’t they take an education loan?”. I think the answer is simple. Loans postpone the pain but don’t get rid of it. I see many families. including my own, who prefer to “bite the bullet” during these college expense years just to get past the burden. Even more families pay what they can and still take loans that need to be paid later. When you have 4 kids as in this second situation and the likelihood of advanced education expenses beyond a 4 year basic degree, it quickly becomes apparent that the parents will suffer for at least a decade without vacations or retirement savings just to put the kids through school.
I’m not in a position to comment on the judgments of made by other parents. Certainly I’ve made plenty of financial decisions that fall in the same category. But we do need to consider and deal with the mess that this leaves behind – an erosion of financial security for ordinary hard-working middle class families that, IMO, deserve to be handled with better public policy.
Besides these anecdotal stories, we know that education debt is growing at a shocking pace and that it places a significant drag on our economy. Education debt now exceeds the total of all other consumer debt combined by a wide margin. For all of these reasons I support the most aggressive of education finance reform proposals that are being discussed in the political arena.