Monthly Archives: January 2019

Trends in Education Borrowing

The Federal Reserve Board of Governor’s Report on the Economic Well-Being of US Households has a wealth of data on student loans, including a breakdown of borrowing by age range, forms of debt, and payment status by school type. Some interesting points:

  • The report shows that borrowing rates– the percent who took out loans for education, whether or not they’ve repaid them– are more than double for 18- to 29-year-olds than for those over age 60. For example, 62% of the younger generation borrowed for their bachelor’s degree, compared with 28% of those over 60.
  • Almost 1/4 of those who borrowed to attend for-profit institutions are behind on their payments, compared with 9% of public college and 6% of private non-profit attendees. The study’s authors note that test scores, which correlate with loan repayment (higher test scores = more likely to be current or paid off), are lower at for-profit institutions, but even when selective schools are removed from the mix the repayment gap persists for for-profit institutions, likely due to lower earnings from the careers to which such degrees provide pathways.
  • While student loans are the primary for all borrowers, with 94% of student borrowers (those borrowing to pay for their own education) and 82% of those borrowing to pay for someone else’s education utilizing student loans, other forms of credit also get high utilization. 1/4 of those paying their own way use credit cards, either in addition to or instead of student loans; among those paying for someone else, credit cards are used by 22% and home equity loans by 14%. While there may have been a case to be made for using a home equity loan (which interest was deductible until the new tax law went into effect in 2018), most borrowers are doing themselves a disservice by using tools other than federal student loans to pay for education.

AOTC And New Tax Law

One of the big changes to the tax bill was making our young adult children less valuable to their parents from a tax perspective. The dependent exemption is gone and the child tax credit for 18- to 23-year-old dependents is only $500. The change does open a door to higher-income families for the American Opportunity Tax Credit, though.  The AOTC phases out at MAGI of $160,000, so it’s not unusual for families to be ineligible but to still find college unaffordable.

Here’s how the AOTC works, from irs.gov: Continue reading AOTC And New Tax Law