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The United States has one of the most convoluted higher
education schemes in the world, in terms of both tuition and required graduate
study. It took me three years of saving and moderating spending to pay off my law
school loans with post-tax income. I consider myself extremely fortunate to
have no college debt due attending Drexel University on a scholarship and thus being able to focus on repaying graduate loans only. Although I eventually made my
way out of debt, there is a fundamental problem with the American education
system, which continues to burden hard-working, low-income and middle-class
families.
Graduate Study Outside the U.S.
Although we are used to the idea of obtaining a college
bachelor’s degree immediately after high school —as a possible precursor to
further graduate study —this system is not universal even in countries with a comparable
quality of education.
Rather than spending four years on a degree that will only
be subsumed by an additional graduate degree spanning from 2-7 years depending
on the field of study, other countries incorporate a program leading directly
to one’s chosen vocation. For example, in the U.K. students pursue an
undergraduate legal program, such as an LLB (Bachelor of Laws), which takes only three years to complete. From there they will complete a one-year practical training course, and will
then transition into a trainee position directly with an employer.
Excessive Cost of Tuition
The amount of time lost on a degree is one systematic
problem of American higher education. One would think that given the prolonged
degree process, at least tuition would be lower? Of course, that’s not the
case. The average cost of attending college in the U.S. is around $25,000 for in-state public colleges, and a whopping $50,000 for private colleges.
Our neighbor, Canada, offers comparable high-quality education,
especially at world-renowned universities such as McGill in Montreal and the
University of Toronto. McGill offers Canadian students annual tuition at the rate of $7,227 (CAD) (~$5,797 USD) and the cost is even lower at the University of Toronto (~$5,286 USD).
Let’s not forget to tack on the cost of graduate school in
the U.S., which far exceeds that of any other country and has exceeded our rate
of inflation. The average cost of a private two-year MBA program is around
$150,000. The median cost of a four-year medical degree is an astronomical $280,000.
A three-year J.D. from a top law school, which is lamentably
necessary to place at a high-paying firm, costs around $180,000. Law students incur crippling six-figure debt of over $150,000 from both lower-ranked
and prestigious schools such as Georgetown and NYU. Over 50% of graduates ineach of these institutions are saddled with debt.
These are costs that do not even exist within the higher
education system elsewhere. Annual legal tuition in the U.K., already limited
to the single-tier Bachelor of Laws requirement, is around $20,000. As British lawyers must complete a trainee
period as part of their vocation, their education costs are somewhat offset by
their trainee salaries — a paid externship of sorts. By contrast, law students
in the U.S. will only typically get a paid summer internship with a law firm in
the summer of their second-year of law school. That’s after the four years of
college and two years of law school, by which time they have already amassed an
inordinate amount of debt.
Borrowers owe a staggering $1.4 trillion in student debt
—exceeding the national credit card debt by $620 billion —and most is in the
form of government-backed student loans.
Proposals to Change the System are Met with Resistance
Proposals to consolidate J.D. programs have been met with
surprising pushback. One popular suggestion, encouraged by President Barack
Obama, is to reduce the traditional three-year J.D. program to two years. This makes sense to the many law students who “check out” in their final year
of law school. By that time, they already have a job offer lined up. There are
also no required classes beyond the core first-year courses (contracts, torts,
criminal law, civil procedure) that are tested on the bar. The few remaining
requirements can easily be met in the second year. By the third year, students
fill their time with elective courses such as Sports Law or Law in Hollywood.
These are fun classes, and some electives do offer the opportunity to focus on
niche areas. However, they are nowhere near worth the hefty $60,000 price tag
to study (IMHO).
From personal experience, reducing law school to two years
of required study, with perhaps an optional LLM for those wishing to specialize
in the third year, would be reasonable. But law schools have no incentive to
implement the reforms when doing so would cut into their tuition revenue,
comfortably prepaid by student loans.
The government makes a business out of student loans. It
took over the student loan business from the private sector by rolling up
funding provisions into budgetary reforms that passed alongside the Affordable
Care Act in 2008.
Student loan interest rates are set by Congress and are tied
to the auction of 10-year Treasury notes. Qualifying graduate students were initially eligible for federal loans in
which interest was subsidized while in school. However, as part of budget cuts,
the government eliminated the graduate federal subsidy program as of July 1,
2012, which was estimated to save the government $18 billion. The fixed interest rate on graduate student loans ranges from 5-7.5%. Although
payment is deferred while in school, interest keeps accumulating.
Tax Treatment for Education Expenses
As fundamental as education is, one would expect that the
costs of obtaining a degree would at least be deductible. The tax code allows
for the deduction of expenses necessary to uphold one’s vocation, such as
licensing fees. These are usually trivial costs associated with application
fees and trainings. Wouldn’t it make sense to allow deductions for education
expenses? After all, a degree is a requirement for virtually any job nowadays.
The tax code throws us a bone by permitting the deduction of
only the interest payments on student loans. Compare to the provision
permitting deductions for the entire principal of a mortgage, not just the
interest payments. Undoubtedly, the tax code is antiquated and incorporates
policies favoring more traditional lifestyles. (Such as permitting mortgage interest deductions, but not rent payments. Let’s also not get into how jointly-filing
married couples are favorably treated). To add insult to injury, there is a cap
on the total amount of annual interest payments that may be deducted: $2,500.
In reality, tax savings for education expenses are reserved
for wealthier individuals, who ironically, would not have as much of a need to
save on taxes after completing a degree. 529 plans are state-sponsored
investment vehicles offering tax benefits for future higher education expenses.
A 529 account allows for the deductions of contributions at the state tax
level, and maintains the funds and any returns in tax-free status. If
withdrawals are made for qualified higher-education expenses, such as for
tuition payments, books, and campus housing, the payments are ultimately tax
exempt.
A Government Accountability Office report issued in 2012,
used in support of arguing for repealing these tax breaks, estimated that 47
percent of those with 529 plans had incomes over $150,000, while their median
assets of $413,000 were 25 times higher than the median of $15,400 in assets
for families without the plans. The ultimate financial beneficiaries of a 529 accounts tend to be wealthier
families: Saving in a 529 with a state tax deduction would result in 22 percent
more money for a low-income family, 35 percent more for a middle-income family
and 39 percent more for a wealthy family. The plan also allows contributors to
circumvent the annual $14,000 gift-tax exclusion by front-loading 5 years’
worth of contributions at once, which would be $70,000 or $140,000 if
contributed by a couple.
This scheme relieves some of the burden, but is primarily an
ex ante tool for those who have
enough resources to engage in wealth planning. The 529 program does not work
retroactively —i.e.
the account cannot be used to repay loans already applied for tuition.
Those who cannot afford education in the first instance
continue to be saddled with debt with no tax exemption mechanism available to
offset the burden.
As part of an effort to cut tax breaks for the wealthy, in
January 2015 President Obama (the Obamas famously took advantage of the 529
program in 2007 by front-loading $240,000 to fund their daughters’ education) attempted to repeal the tax cuts offered by the 529 plans with the overall purpose of
using the savings to offer a tax credit accessible to all families. After meeting surprisingly strong opposition from both sides of the aisle who each
vouched for protecting the interests of the “middle-class,” the proposal was dropped.
There have been some efforts to remove the ex post limitations on education
spending by expanding the deductions available for student loans. For example, a
bill was proposed in 2015 to remove the deductible interest cap, but the bill
is still pending in Congress with no optimistic prospect for passage.
In a way, tax reforms address the symptoms but not the root
of the outlandish costs of higher education in the U.S. Significant reform is
necessary at the institutional level, which would require the private education
enterprises to place fundamental education principles above profiteering. In
turn, the career system will eventually need to catch up with modern trends of unorthodox career paths, and be accepting of a more
diverse array of skill sets acquired outside of the institutionalized, expensive
educational settings.
*Sources are hyperlinked in the text. This article reflects
personal opinions only, and is in no way intended to be construed as legal
advice.
