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Plan for college savings

The Honorable Sheila C. Bair

(Baltimore Sun) – While the event didn’t get the attention it deserved on this side of the Chesapeake Bay Bridge, one of the unsung heroes of the 2008 financial crisis was officially installed as president of Washington College last Saturday. Sheila C. Bair, the former chairwoman of the Federal Deposit Insurance Corporation and one of the few who warned of the subprime mortgage mess before the meltdown devastated Wall Street and the nation’s economy, became the first woman to be inaugurated president of the private liberal arts college on the Eastern Shore.

And appropriately enough, she had a new financial warning to offer.

There’s been entirely too much borrowing going on and too much short-term thinking, and that applies to how baby boomers are paying for their children’s college educations, Ms. Bair told her audience in Chestertown. This is a generation with an “excessive reliance on cheap credit” instead of real wage growth to fuel economic expansion, she said.

Certainly, it’s hard to argue that student debt isn’t becoming a legitimate national crisis. At $1.3 trillion and growing, student debt is now second only to home mortgages as the largest source of borrowing in the United States. As Ms. Bair noted, the “explosion” of student debt “holds disturbing parallels to the subprime mortgage frenzy which led to the 2008 financial cataclysm.”

But here’s where Washington College’s new leader veered from conventional wisdom on the student debt crisis as well as the typical responses from those who are running for the nation’s highest office (particularly those who expect taxpayers to pick up the college tuition bill in the future): The first people she points a finger at are parents who didn’t save money to help pay for their son’s or daughter’s post-secondary education.

“Because of the growing complexity of the global economy, we are handing our young people a labor market which requires a college degree to navigate,” she said. “Yet too many of us have failed to exhibit sufficient far-sightedness to save enough money to pay for our kids’ education, even when we have had the financial wherewithal to do so.”

Now there’s a point you won’t hear Sen. Bernie Sanders making too often, but the facts back it up. While tax-deferred 529 college savings plans are growing, their participation rate is relatively modest — 12.3 million accounts as of last June, according to the College Savings Plans Network. Those accounts hold assets worth $258.2 billion, which may sound like a lot of money, but it translates to an average balance of less than $21,000, which covers about one year of tuition, fees, room and board for an in-state student at the University of Maryland — and not even close to that at a private or out-of-state college.

Not every American can afford to save for their children’s college education, of course, and millions aren’t saving enough for their own retirements either. But many aren’t even trying. A survey conducted earlier this year by Edward Jones found that two-thirds of Americans don’t even know what a 529 college savings plan is.

A failure to save sufficiently is only part of what’s driving the crisis, as Ms. Baier acknowledged on Saturday. Many schools have not contained their rising costs adequately, pumping big bucks into pricey extras like luxury dorms and student recreation spaces. Meanwhile, some for-profit institutions have taken advantage of guaranteed student loans to attract marginal students, a large number of whom ultimately default on their debt. And federal policies that sought to make college available to everyone have helped drive up borrowing, too.

The consequences of high student debt are serious. Much like those subprime loans, a high rate of default could lead to a financial crisis, a cost ultimately borne by taxpayers, not banks. But even without widespread defaults, millennials are entering the workforce so encumbered with debt that many can’t pay for a mortgage, buy a car or start a business, and that could have long-term adverse consequences for the economy.

Clearly, some serious reforms are needed, but reducing college debt can start with an act as simple as parents setting aside whatever money they can afford for tuition soon after a child is born. One can open an account in the well-regarded College Savings Plan of Maryland, for instance, with as little as $25 a month. What better gift for a child than a head start on 529 savings? If colleges and the government need to be more financially disciplined (and they surely do), so do parents, grandparents and anyone else invested in the future of a child.

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