Goodbye 529s; Hello Free College

Why college savings should take a backseat in financial planning for many clients

Ric Edelman: It's Monday, February 5th. On today's show. Do you really need to save for college? Let's begin today's show by taking a look at Birmingham-Southern College. It's a private liberal arts college in Alabama. The school was founded 167 years ago. Been around a long time, and the school is also $30 million in debt. They recently asked the state of Alabama for a loan, and the state treasurer refused, saying the loan is not in the best interests of the state's taxpayers. The state, after all, already funds plenty of public colleges and universities and doesn't need to spend money to support private ones. But if the college doesn't get the loan, it's going to have to close. Banks and investors have already refused to provide funding because all it takes is a look at the school's revenue. You know, the tuition and fees and compare the money they collect to the money they spend. You quickly see that this school does not have a sustainable business model.  

So if you're a student at Birmingham-Southern College, what do you do? Do you transfer to another college? If you do, the new school won't take some of your credits. That means you've got to take classes all over again. That's more cost and more time to get your degree. If you stay and hope that the school stays open long enough for you to graduate, well, you run the risk that the school won't make it and that they'll close on you while you're still there. You'll not only have lost another semester or two, you'll be stuck with having to transfer anyway. And the more students who transfer, the less the school collects in tuition and fees, the faster it's going to run out of money and close. The school only has 700 students left. They're paying about 21 grand a year.  

I think we can agree that applying as a high school senior to attend this college is a bad idea, and the problem is that a lot of these students at this particular college are first generation students. They are low-income students. They're dependent on Pell Grants. Well, that's a bit of a challenge because back in the 70s, Pell Grants covered about 80% of the cost of college, but today they only pay about a quarter of it. So the economic burden has now shifted to the student. And by its nature, these Pell grants go to lower income students, the ones least able to afford college since they're not getting the money they need from Pell Grants, they are forced to get the money from student loans, and they are in the worst situation or ability to be able to pay those loans back. And it's really a bit of a crisis. They owe repayment on their loans whether or not they graduate.  

Nationally, a third of college freshmen drop out. Less than half graduate in six years. And yet the average student amasses $30,000 in student loan debts. Students who drop out after the first year or two, they don't owe 30 grand, but they do owe 14. And even though they only owe half, they actually have a higher default rate than students who graduate with $30,000 of debt. That's because the dropouts don't have the career success that graduates have. So even though the graduates have twice the debt, they also have twice or three times the income so they can afford their debt payments more easily than the college dropouts can.  

And today's high school students see all of this, and they're beginning to realize that applying to any college is a bad idea, not just avoiding Birmingham-Southern College. Avoid them all. You see, today's college students see the impact of student loans on their parents. There are 9 million people over the age of 50 who still have outstanding student loans. We're talking about a third of the population over the age of 50. The high school dropouts also see their older brothers and sisters who might have dropped out, or who didn't get great jobs after they graduated, or who now can't afford to buy a house or a car, or can't afford to get married or have kids simply because of the size of their student loan debt.  

When you look at today's job market, you see that there are more high paying jobs than ever that don't require a college degree. Vocational jobs, sales jobs. Entrepreneurial gigs. These are now valid alternatives to going to college. Air traffic controllers earn $130,000 on average. All they need is an associate degree, which you can get for free in two years. Commercial pilots earn $100,000. They don't need any college education at all. Same for nuclear technicians and elevator and escalator mechanics.  

There are dozens of jobs paying as much as you earn as a brand-new CPA without having to spend five years and 150 grand on a degree: Dental hygienist, MRI technologist, aircraft and avionics technicians, manufacturing sales reps, electricians, plumbers, paralegals, audio video technicians; the list goes on and on. I'm not saying don't go to college. I'm saying don't waste 4 or 5 years of your life on 100 or 200 grand pursuing a degree you're not going to use or attending a college that might not exist by the time you hope to graduate. Recognize instead that you have options today. Watch my Masterclass How to Prevent College from Ruining your Life. It's free. The link is in the show notes.  

And here are a couple of examples of how the system is trying to make things better at West Texas A&M University. Students starting next fall won't have to pay for their core textbooks. That usually costs about $1,000 a semester. This is going to save those kids thousands of dollars. Good start. 

And in Pennsylvania, the governor there, Josh Shapiro, knows there's a problem. He just said that the state's college education system is broken and he's doing a complete do over. He's going to consolidate ten of the state's universities and all 15 of its community colleges under one structure. The bottom line: tuition is going to go down for many students, as little as $2,000 a year.  

This is definitely a problem that Pennsylvania's got to fix. The state currently ranks 48th in college affordability and 49th in spending for higher ed. In other words, the state is spending such a small amount of money on higher education, they're forcing their students to spend huge amounts. This doesn't make any sense, and it's so bad in Pennsylvania that it's one of only four states where students are paying 20% or more of their household income to go to college.  

It's not just the governor who has begun to figure out that the situation is untenable. The state's residents realize that already ten years ago, there were 115,000 high school graduates who chose to go to college at a state school in Pennsylvania. That was ten years ago, 115,000 of them. Now, only 83,000 Pennsylvania high school graduates choose Pennsylvania colleges. That's a drop of 28% in the last decade. The state is producing a product that fewer and fewer people want to buy. And glad to see the governor is starting to fix it. I hope to see additional examples and trends in other states at other colleges where we reduce the cost.  

The bottom line is this: if I had a baby today, a newborn, I would not be saving a nickel to send that child to college in 18 years. I'm convinced that by the time today's babies go to college, college will be darn near free. There are already so many ways to get a college degree at little to no cost. Imagine how affordable it's going to be in ten or 15 or 20 years. Pretty much the same in cost as a high school diploma.  

Financial advisors, you need to rethink your college planning strategies for your clients. You need to help them realize that college in the future is not going to be like college of the past couple of decades.  

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