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The quagmire of college finances

It seems that everyone sees college finances in America as a problem that needs to be solved.

Last month, the Pew Charitable Trusts, an independent nonprofit organization, announced it would fund a $3.5 million initiative to research ways to reduce student debt.

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The reason behind this initiative: Two-thirds of college graduates are burdened with student debt nowadays, compared to less than half of college grads in the early 1990s.

My first reaction was, why don't they just use that $3.5 million to defray existing student-loan debt? But that's a silly idea. In the 2003-2004 school year alone, more than 12 million Perkins and Stafford loans were taken out by students. If that $3.5 million were divvied up, everyone who took out loans that year would get about 29 cents per loan. That wouldn't even pay for a first-class stamp to mail in a payment.

Actually, the Partnership to Reduce the Burden of Student Debt, as this initiative is called, is potentially a great idea if something good comes out of it. The plan of the initiative is to work with leading experts to "identify practical policy options and ways to pay for them with current taxpayer dollars."

There's a crying need for research that results in practical policy options. You need only read the title of a July report from the U.S. Government Accountability Office to realize this. The report's title: "Student aid and postsecondary tax preferences: Limited research exists on effectiveness of tools to assist students and families through Title IV student aid and tax preferences."

OK, so the title of the report doesn't exactly roll off your tongue. Here's a loose translation: Students have access to grants and loans and their families can use education-related tax breaks, but the federal government really doesn't know if these things help them much.

A student-aid overview
If you have a couple extra hours, the GAO report is actually an interesting read. It explains the historical background of student aid beginning with the Higher Education Act of 1965, the genesis of the student grant and loan programs. This was pretty much the basis of student aid for three decades. Then, in the late 1990s, Congress came up with several new laws designed to provide education-related tax credits, tax deductions and tax-exempt savings programs to help families with college costs. The common denominator: The more recent changes all involve taxes.

In a nutshell, rather than help students with funds only while they attend college, as is the case with grants and loans, the newfangled "tax preferences" help families and students before, during and after the college experience. For example, the tax-exempt savings programs -- Coverdell education savings accounts, 529 savings plans and prepaid tuition programs -- give families vehicles that help them save for college costs before college, while children are growing up. When their children are in college, many families can take advantage of the Hope credit, the Lifetime Learning credit or a tuition deduction (scheduled to expire in December 2005). After the student graduates, up to $2,500 in interest on loans can be deducted each year until student loans are paid off.

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