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Getting Ahead?

Believe it or not, as a father currently paying steep college tuition bills, I still believe that a college education is worth its cost. The “pay gap” between jobs which require a degree and those that don't persists. Over the long term, this differential will more than offset its cost to our family and the loans my children may have to take out and repay.

However, just because it pays off in the long term, don’t think that steep increases in the cost of education don’t impact young people’s lives because they do. Repaying larger loans for education means delaying key milestones in life like buying a first home or getting married. Heavily indebted graduates simply need more time to pay off loans before they can begin to save meaningful sums of money. Thinner finances also make it harder to qualify for reasonably priced mortgages.

Last month, officials at the U.S. Consumer Financial Protection Bureau (CFPB) announced that the amount Americans owe on student loans is higher than earlier estimates. If this leads some consumers to postpone buying homes, it could in turn slow the recovery in housing.

Total student debt outstanding surpassed $1 trillion late last year.(1) That was approximately 16% higher than the estimate made earlier this year by the Federal Reserve Bank of New York. Total student debt now surpasses total credit card debt. Wait a minute...total student debt now surpasses total credit card debt?!? Yes it does - and you can’t easily scrape it off in bankruptcy proceedings anymore either.
According to the CFPB, student debt is rising for several reasons. In recent years, a surge of Americans have elected to attend (or remain in) college to escape the weak labor market. Public colleges have increased tuition to offset big cuts in state funding. Both contribute to higher loan balances for students.

Worse still, more graduates are falling behind on their loan payments, which only increases their effective interest costs. New York Federal Reserve data shows that as many as one in four student borrowers who have begun repaying their education debts are now behind on payments. Student debt is a burden not only for recent college graduates but also for many parents, who may co-sign their children's student loans, or who have not yet themselves finished paying off their own student loans.
Despite these challenges, the axiom still stands: the cost of a college education remains a good investment.

How then to pay for a college degree? Simple: find a wealthy relative and ask them to buy one for you. Rich relatives gone into hiding? Start loading up on debt. Injured due to someone else’s negligence? Bingo! Fund future college expenses through a guaranteed, tax-free structured settlement.

Consider the scenario of an injured child. Eight-year-old “Mary” will receive $70,000 after fees and expenses for injuries suffered in a car accident. Her parents could put the settlement proceeds into a CD or a federal insured bank account, but if they do, she would have to pay taxes on the interest earned and potentially at her parents’ higher tax rate (the so-called “kiddie tax”).

If Mary’s parents agreed to a structured settlement, they could guarantee a lump sum on her 23rd birthday to help pay down any student loans she may have incurred. $70,000 will currently provide over $123,000 at that time. Why defer until she is out of school? To preserve Mary’s eligibility for financial aid. Structures themselves do not count as assets which could disqualify her for consideration, but the final question on the FAFSA form (2) asks about “other income”. If we begin delivering funds prior to graduation, her parents would have to declare even her structure income on this form. Better to keep it clean and preserve eligibility but create a guaranteed source of funds to pay them all off once she has graduated.

The other scenario involves an injured parent. Let’s stay with this example and say it was Mary’s father Jack who was hurt. The same issues present here, but from a slightly different perspective. Rather than thinking in a fiduciary way about what is the best thing to do with a child’s money, the need we are addressing here is a parent’s terror about how he is going to provide for his child’s education now that his employability may be in doubt. He could take his recovery in cash and would certainly have a broad array of investments to choose from but college money is generally not “risk money”. If a parent has the opportunity to fully secure college funding for their child in one fell swoop, most will do it. Talk about sleeping better at night…

Please note that the timing issues in this scenario remain the same: parents will want to design their structure with an eye on preserving eligibility for financial aid. Also remember that, since it was the parent who was injured, the future payments will be made to the parent, not the child. If Mary does not actually go to college, the future funds remain with Jack.

Do you have a case involving an injured infant or an injured parent? Want to show them a guaranteed way to get ahead in life and sleep better at night? Call Frank C. Kilcoyne, CSSC at 800-544-5533, I am here to help.

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(1) “Student-Loan Debt Tops $1 Trillion”, The Wall Street Journal, March 22, 2012, Section A5

(2)“Free Application for Federal Student Aid”, offered by the U.S. Department of Education