Maryland Bar Bulletin
Publications : Bar Bulletin

Editor: W. Patrick Tandy

May, 2004

“On May 17, 1954 at 12:52 p.m., the United States Supreme Court issued a unanimous decision that it was unconstitutional, violating the 14th Amendment, to separate children in public schools for no other reason than their race. Brown vs. Board of Education helped change America forever.”

The Brown case affirmed the legal right of equal education for all students regardless of race, but as with many legal decisions the desired outcome has yet to be completely achieved. Although Brown vs. Board of Education legally prevents any form of racial discrimination, the high cost of education today is essentially creating two classes of students: post-secondary and others. Discrimination has recast itself not along racial lines but rather along economic ones.

Economic Value of Higher Education

To understand the economic impact of higher education on individuals, let’s review some figures based on a March 2000 U.S. Census Bureau report. A college graduate can expect to earn $949,770 more than a high school graduate over an expected work life of 45 years. A professional degree (in business, law or medicine) increased that gap to $3,438,675.

Spiraling Costs and Overcrowding

State legislatures have been reducing funding for public colleges for decades. Decreasing appropriated monies to fund state colleges and universities usually results in an increase in tuition rates. The University of Maryland, for example, experienced a 14 percent cut in state aid last year and reports that double-digit tuition increases will be needed for two years to make up for the loss in revenue. In addition to the spiraling cost of education, many state college systems are too crowded. The California State University system is warning that it may have to turn away 20,000 students next year; other high-growth states such as Texas and Florida report similar situations.

Financial Aid and Grants

Many families look to financial aid to provide funds for college. However, a family earning $75,000 with $50,000 of liquid assets and $50,000 of home equity, sending an only child to a college costing $25,000 per year will be eligible for funding that represents less than half of the cost. The definition of financial aid includes loans, work study and grants to low-income families. Therefore, the above family would likely have to repay most of the aid that it received.

Pell Grants provide funds to low-income students and do not need to be repaid. In 1976, a Pell Grant covered about half of the cost of a college education; today it covers only 20 percent of the costs. Additionally, the Pell Grant system will soon be $3.7 billion in the hole, according to the US Department of Education. A Department panel says that “43 percent of qualified middle-class youngsters can’t afford to go to a four-year university.”  Additionally, for low income families “college now represents 70% of their yearly earnings, up from 40 percent in 1976.”

Although the benefits of a long-term investment in education (almost $1,000,000 or more in future earnings) are clear, for many families it is an unimaginable goal. It also seems that the likelihood of future increases in financial aid and grants for middle-class and lower-income families may be unlikely.

Systematic Savings Can Help Make College Goals a Reality

The importance of attending college along with the lower probability of financial aid makes it more important to start a systematic savings program. The good news is that by starting early college costs can be relatively manageable. Monthly savings over time means you have compound interest and time working in your favor; however, repaying loans after college means that time and interest are working against you.

There are several vehicles available to fund college education. The most recent and perhaps most publicized are the Section 529 plans. Section 529 accounts grow federal income tax-free if the funds are used for qualified higher education costs (books, tuition, room and board) at any accredited US college. There are no income limitations on contributions. The owner of the 529 account can change the beneficiary at anytime and may use the funds for personal spending. This provides for great flexibility when planning for multiple children or grandchildren.

Brown vs. Board of Education paved the way to provide the right to equal education to all individuals. However, the high cost of post-secondary school still creates a large gap along socio-economic lines. Consider investing as much as possible as soon as possible to help fund college tuitions. The long-term benefits of a college degree are dramatic. Just as a lack of education can create a “cycle of poverty,” the benefits of education can help create a cycle of prosperity.

Jason L. Ditto, MBA, is Director of Investments and Financial Planning at FranklinMorris, Coordinating Broker for the Bar Associations Insurance Agency, Inc.