Everyone wants their children to have the best education possible, right? I saw an article about advanced degrees and it got me thinking about my 2 and 4 year old. (I look a lot further forward than most people.) The education of our 2 and 4 year old has been rolling around in my mind for the last several months. That's why I'm writing about optimizing the FAFSA lately.
To get the best education, some people move to better school systems. Other people are crazy enough to consider private school. (Hello mirror, nice to see you!)
In the old days, the question was largely about if a child would go to college. Nowadays, that seems like a foregone conclusion (at least in my bubble). The biggest concern has turned to the cost of college. Again, since I look further ahead than most people, the idea of the potential cost of an advanced degree is rolling around in the back of my head.
This sounds the ultimate example of a first world problem, like a baseball team have 7 ace starting pitchers. We should be so lucky if our children (or ourselves) are in a situation where we can advance after college to get more education. And if you said, "Hey the cost of that advanced degree is up to the child", I wouldn't spend a second arguing with you.
I feel that many of us that don't have master's degrees probably could get them. I considered it for a long time, but it always failed my cost/benefit analysis. It amounted to losing a year of income earning, while paying a year of income... sometimes more.
Yes, it's an online degree. Stick with me because it is far from a typical one.
A $7,000 master's degree flips the cost/benefit analysis. It is a fraction of a year of income. You might have the flexibility to work while you earn it. (I have to look into the details more.)
I know what you are thinking around now... online master's programs are common and anti-prestigious. No one considers a masters at the University of Phoenix to be the same as one from Harvard Business School. One has to consider the value of the degree as well.
What if the $7,000 online degree was from a top school? That would change your mind, wouldn't it? The $7,000 master's degree is in Computer Science from Georgia Tech, a very good computer science school. You get prestige at a fraction of the price. Other universities make you pay full price (or near it) for the prestige.
According the NY Times article, the students are more engaged online. They ask more questions. They work together more. This makes a lot of sense to me. When I was in college, I didn't take advantage of office hours very often, but whenever I tried to, the professor wasn't around. It suppose it was because it was so rare of people to show up they just gave up.
Many of the students in Georgia Tech's online program are Gen Xers who can't uproot their family or income situation for a master's degree. (Hmmmm... sounds like me.) It's serving a very different audience. I've seen a lot of business school degrees, but I'm not sure they were nearly as reputable or as cheap.
What Does This Mean for the Future?
Back in 2006, Intel's Andy Grove had a saying, "A fundamental rule in technology says that whatever can be done will be done." Georgia Tech has paved the way and proven, "Yes! We can deliver great education online at a fraction of the cost."
I think the cost could even go down from there. There's no reason to think that Georgia Tech's curriculum wouldn't work elsewhere. Another fundamental rule of technology is "once the software is written, distribution is cheap (or free)." It costs a lot for Microsoft and Google to write the first version of their software, but very cheap to copy it or run the servers. A third rule of technology is that "You generally get more value and/or the cost goes down over time." Think about the power of your cell phone over the years. I'd say that Amazon's $50 tablet is at least as good Apple's original $500 iPad. (Though that would be a fun debate.)
Meanwhile, the costs of on-campus universities will probably still go up. They may only go up with the costs of inflation to repair buildings. Still, I believe prices online go down while offline will go up.
This is why I think an advanced degree can be 1/10th the cost... it's almost there. It can extend to all areas of education, including undergrad, but I went with advanced degrees in this article to fit with the proof of it working.
I wonder if it will be common to see Doogie Howsers enter the workforce. I'm envisioning people who completed high school level in middle school and who then went to compress online bachelor's and master's degrees during the high school years.
I'm not suggesting that's ideal or the right path. There's a lot more to life and growing up than education.
I simply think some students have the mental capacity, and perhaps more than ever, they'll have the means. Maybe "whatever can be done, will be done" is a fundamental rule of people too.
I recently wrote that college planning is impossible (but that you should do it anyway). The impossibility comes from having a 2 and a (newly) 4 year old boy. It's so far away, the best we can do is put aside a significant amount of money and adjust our plans over time.
One of the comments on that article said it best: The decision tree is enormous.
The College Funding Decision Tree
College may be free if some politicians have their way. College tuition could continue to climb at unreasonable rates forcing people to make hard-decisions about whether it's worth it. Our children may get into some schools and not others. They could be public or private. They could be on a 3-year plan with AP credit and credits from our local college. They could be on a 5-year plan if they switch majors or find it too difficult. All this, and I'm not acknowledging community college or trade schools.
Anything and everything is in play, leading the cost to be literally as low as $0 to as high as $250,000. It seems to make sense to budget for somewhere around $125,000 for each child and let the remaining gap be filled with grants, loans, scholarships, work-study, etc. As another commenter mentioned, many feel it is important for the child to fund part of their own college. I firmly believe in them having some skin in the game.
Financial Independence Makes it A Little Complicated
Regular readers know I am a big believer in the FIRE movement. FIRE is an acronym for Financial Independence/Retire Early. That means you have money freedom before typical retirement age. Money freedom simply means that you've achieved Hakuna Matata... you have no worries about money.
When I started this blog ten years ago, I didn't know such terms existed, but I did know I wanted to get to that place. Years of maxing out retirement accounts, my wife's military pension, and our real estate have fortunately put us in a good position to achieve that.
It's so close that the biggest obstacle is the uncertainty of college costs.
Among all the uncertainty, there's one beacon that represents some stability: The Free Application for Federal Student Aid (FAFSA).
FAFSA and Real Estate
The Free Application for Federal Student Aid (FAFSA) is exactly what it sounds like. It has clear formulas and rules around a family's income and assets. While those rules may change over time, I would expect the changes to be minor ones.
In other words, it's something that can be planned around.
For example, retirement assets don't count. So this person with a hundred million IRA may be in decent shape if he were to fill out the FAFSA. (He's really not.) To an obviously lesser extent, we would be in better shape as well from years of nearly maxing out all our retirement accounts.
Many people who are financially independent get there by discovering that they can live a fulfilling life and be very happy on a smaller income. It's easier than trying to save $10 million dollars. We live that frugal lifestyle as well. Having a small income is a big part of the FAFSA application.
It's like all the pieces are falling into place... except for one... real estate.
One of the legs that supports our financial independence push is real estate. We didn't plan it that way, but my wife separately bought condos in 2002 and 2005 near the top of the market. When we moved so that my wife could serve in San Francisco in 2006 the properties were well under water. Even today, they are valued at between 25-33% less than what we paid for them.
Fortunately, we were able to rent them and over time the mortgages have started to get paid off. We got a double HARP to refinance them both to 15-year fixed mortgages. Despite all that, we lose a little money each month on them (and a lot when repairs are necessary) while we build equity. In about 10 years, before our children are ready for college, we'll have significant real estate assets.
Overall, I love real estate. I'm not second guessing the decision to keep the properties. The forced savings have really contributed to our net worth.
However, as you may have guessed by now, the FAFSA formula doesn't work well for those with significant real estate assets. If had taken the money we lost each month and truly maxed out our retirement options (there's a lot of small business stuff I can do with SEP-IRAs, solo 401Ks) we'd have "protected" assets from the FAFSA. If we created another business, it's value would also be "protected" from the FAFSA. (And it seems you can't throw the properties in an LLC and call it a business.)
At the most recent FinCon convention, I talked with a number of bloggers. Some were financial independent bloggers. Others were real estate bloggers. I don't think I found one person who fit in all the categories of financial independence, real estate owners, and having children... but I'm sure there are many people out there who fit this profile.
I tried to explain my situation to a few people, but it was difficult. It's taken nearly a thousand words just to paint the picture for you.
I think the correct answer is just to forget about the FAFSA. I have difficulty with that as I like to optimize things in the future. This is the best way for me to look to optimize things.
The other part of me thinks that it might be worthwhile to refinance the 15-year fixed mortgages to 30-year fixed mortgages. Then we'd actually be making money on the properties and we could use it to fund our living expenses which would free me to max out the small business retirement account options. We'd be earning less principle which would make the assets worth less.
Then I stop myself and ask "Is all that worth it for a better FAFSA formula?"
I don't have any answers here. Maybe you do? If so, please let me know in the comments. Thanks!
I'm often writing about frugality. Today, I'm writing about futility.
Over the last week, I've focused a lot of my attention on estimating college expenses. We have two young boys, ages 2 and 4 years old. Planning for college is an exercise that can't be ignored.
The spark for this article was inspired by Justin from Root of Good's article, How to Pay for College while Early Retired. (I highly recommend his website, it's one of the best resources on financial independence and retiring early.)
The article answers a question I had myself. It's one thing to retire at age 33 with a huge nest egg of savings, but affording college for 3 kids is a whole other thing. Before reading his article, I did some rough math in my head: $50K/yr for 12 years (3 kids at 4 years) and came out to a whopping $600,000 bill.
As you read the article, it becomes clear that Justin has a good plan to limit the expenses of college. The in-state, public university brings the number per year down to $24,000, more than cutting the $600,000 in half. That $24,000 is split into $10,000 tuition and $14,000 in room & board and expenses. He's already paying that $14,000 to some degree in his own budget. That $14,000 isn't $14,000. It's an average of what people spend. Justin and his family aren't average in their spending habits.
There's much more to the analysis, but he makes good points that "nobody pays sticker price for college." There are grants and scholarships. People can take Advanced Placement classes or even community college classes in high school to earn credits. (I took a computer science in high school at a local university and started with a few credits.) He also brings up the very important point that his children may foot some of the bill. I'm a big believer in this as I think it helps them have some skin in the game.
By all practical measures I can think of, Justin has figured out college planning.
But I claimed that college planning is impossible. I put that in the title!
College Planning is a Pile of Uncertainties
It feels to me that Justin has eliminated many of the uncertainties by focusing on one particular college option. He recognizes that they may go to another university, even a public one, but falls back on his in-state, public school. Without this decision, the discussion gets extremely difficult. This one decision guides all the math that leads to an article with 100 comments. It's clearly very helpful to so many people including me.
I'm not ready to declare where my toddlers are going to college. I've run some numbers for 2030 to create an average between public and private universities. The average public college cost should be around $42,500 assuming a 3% inflation rate. The average private college should cost around $57,500 assuming a 3% inflation rate. Thus I'm estimating that college will cost an average of $50,000 in 2030 dollars per year.
Did you spot all the assumptions there?
When I boil it down to $50,000 a year it sounds like $200,000 is a good estimate. However, choosing a public school would lead to a $170,000 avearge. Choosing a private school would be $230,000. That a $60,000 difference isn't trivial.
However, the averages I used for public and private are just that... averages. Some schools will be more expensive and some will be less. A particular public school may come in at $150,000, while a private one could be $250,000. That's a huge difference.
The other assumption here is the 3% inflation rate. While that rate may be accurate over the long-term, a small change in this number can have a dramatic effect when compounded over 15 years.
Should I try to save $150K, $200K, or $250K? What about scholarships and grants? How much should we assume we get from them? Whatever assumption we make is yet another unknown variable.
How is College Planning Different from other Types of Financial Planning?
At first glance this appears to be similar to planning retirement, but it is very different. If you save too much in retirement, there isn't a tax penalty. However, if you save too much for college, it can be difficult to get the money out without paying a penalty.
On the other hand, it is dangerous to save too little for retirement. There's little danger if you don't save enough for college. After all, the kids can usually get loans.
The difference-maker is that in retirement, you can control some costs without guilt. Skipping a vacation may not be preferred, but it's easier to justify giving up a luxury to pay bills necessary to live. How do you balance the difference between paying more for Harvard vs. a state school? Isn't harder to say that you should skimp and give up decades of potentially extremely-high earnings power?
What about Financial Aid?
When I started to research how much college would cost, I sunk my teeth into financial aid. I expected to find more ambiguity, but I was surprised to find some concrete formulas such as the FAFSA.
I felt like I finally found something that I could work with... until I did a little more reserach. I'll be writing why more in the next few days.
What if Saving for College Becomes Unnecessary?
That question is not nearly as silly as it seems. There's significant talk from politicians surrounding the potential free college. What will that talk look like in 15 years?
That says nothing about the potential of online learning. Fifteen years ago, feel people had heard of a company named Google. Facebook and YouTube didn't exist. Today there are abundant resources for learning almost anything online.
Let's take that 15 years and fast-forward from today. I believe that online learning will be off-the-charts awesome. That's not to say that all learning should be done through a computer screen. I simply think that such time will be extremely efficient in teaching people.
In the next few days, I'll cover a few areas that I purposely glossed over here. I don't want to leave people thinking that they shouldn't save for college. This is one area where we shouldn't be "Lazy." As my wife says, "We don't want to be caught with our pants down" when it comes time to pay for college. (Her way with words is reason #1372 why I love her.)
Instead, I'd like to spark a conversation on this complex topic. Obviously our crystal balls are going to be a little cloudy, but that doesn't mean we can't make wise decisions.
Editor's Note: While I usually try to write for a national audience, today's topic is more fitting for residents of my state, Rhode Island. However if you stick around until the end, you might have a chance at some free money.
It's good to be back to work after a week's vacation. We just got back from a trip that was very similar to last year's when we traveled from Rhode Island to kids' parks in New Jersey and Pennsylvania. Last year the stops included: Sesame Place, Hershey Park, Please Touch Museum, and the Crayola Experience.
This year we kept Hershey and Please Touch on the itinerary. We substituted out Sesame Place and Crayola for Diggerland and Knoebel's Theme Park. This article isn't about my vacation, but I do want to mention a couple of quick things. We should have waited until our boys were 5-7 for Diggerland as they weren't tall enough to do much. Knoebel's was much better than I anticipated, but we got a really hot day and it was last on the trip, so we couldn't really give it the fair shake it deserved.
When we got home yesterday, I noticed that the mail contained the new program description of CollegeBound Saver, Rhode Island's 529 plan. Rhode Island decided to change the management group of the 529 plan from CollegeBound Fund by AllianceBernstein to the new "Saver" by Ascensus. We were finally getting details about what the new program was about.
I knew much of the program wouldn't change. There are laws in place that govern the general details of the state's 529 plan. My biggest concern was that we'd have to leave the sweet, sweet, low expenses of the Vanguard funds at AllianceBernstein.
I'm a skeptic by nature and figured that because we were being thrust into this new system with no vote that it wouldn't be good.
I was wrong.
I found the CollegeBound Saver program description a little confusing. I think it was because it was designed to introduce people who are new to 529 plans and saving for college in general. The book is 80 pages long with some information about unrelated programs like Coverdells.
The "meat" of what I was interested in was the investing options. The new CollegeBound Saver program has three core "goals" which are each broken down into smaller investing options. There are target date portfolios, target risk portfolios, and individual portfolios. I can target 2030, an aggressive mix, or just choose the funds that I want.
I like to choose my funds, so that's the option I focused on. The CollgeBound Saver individual portfolios have names like "U.S. Stock Portfolio" and "Bond Portfolio." These are mapped to underlying funds such as Vanguard's Total Stock Market Index Fund and Vanguard's Total Bond Market Index.
It took a little digging, but I finally found what I was looking for. My assets were moved from my previous Vanguard Total Stock Index funds to the new Vanguard Total Market Index. I'm investing in the same thing!
The big change is that the expenses are estimated to be 0.04% which is the lowest I recall seeing outside of my wife's Thrift Savings Plan. The book includes a chart of hypothetical $10,000 investment cost chart. The easy math shows that I'll be spending a whopping $4 a year in management costs a year. In 10 years, it will be $51 total. The other investment options are also very low for the most part.
Years of reading personal finance magazine have drilled the following in my head: Control expenses, because you can't control the market and expenses add up over time. The new 529 plan has two funds with expenses over 0.16%: a 0.37% stable value option and a 0.61% Invesco Global Sustainable Equity option. As long as investors steer clear of those, the expenses mean almost nothing over the 15 years (give or take) that the money is going to be invested.
Now for that chance at free money. Later on this week, I'm going to be sending out my VIP email newsletter. It's free to join (of course). You can join it here. Readers of the newsletter will have a chance to win $25 (payable in Paypal or Amazon gift card, I haven't decided yet). I know it isn't life-changing money, but I will easy for even the laziest of people.
Star Wars day is extremely unlikely to put a dollar in your pocket. (Unless you are a Disney investor like a few of my friends.)
The best date pun in May is 529 day... which is today: 5/29.
Regular readers of personal finance blogs like this one know that 529 refers to Section 529 of the U.S. Internal Revenue Code that allows for a tax-advantage when investing for qualified education expenses (usually college).
That means that parents can at least get a small break when dealing with enormous, exploding college tuition prices.
It's also a well-timed reminder that now that tax season is over, it can be a wise move to start putting money into a 529 Plan. I started a 529 plan around 2007 or 2008 for my niece and nephew and one for each of my own children in 2012 and 2014.
It wasn't exactly easy picking the best plan either time. In fact, it reminds me of the NFL playoff rules where you get to the Nth tie-breaker and it's literally a coin flip that decides a team's entire fate.
Since 529 Plans are very state-specific, that should at least be a good place to start. Some of the specific data on plans are a little dated, but the concepts stand strong today.
Hopefully, today, you are enjoying a hamburger, hot dog, or whatever it is you like when you get to take a little time off of work. Let's put in a coupe of extra minutes to chew on the financial future of our children as well.
Ever have one of those tasks that seems like it should be simple and then turns into a mess that eats up hours and days of your time? For the last month, I've been trying to do something really simple...
... open a Coverdell account for my oldest son.
Opening one for my youngest son took my wife under an hour with USAA. They have exactly the same circumstances, just different names and Social Security numbers. So you'd think you could simply say, "Open one for the oldest son too."
For some unknown reason USAA's system got stuck in the application process. We reached a screen where we supposed to have a drop-down of the oldest's and the youngest's name. However, it displayed a blank entry and the youngest's name. After hours and three calls into USAA, they admitted there was a problem, but they weren't able to fix it. We could probably have spent many more hours and many more calls getting it fixed, but it seemed easier to just move to a different bank. After all we were able to get the youngest set up in an hour with USAA... another bank should be as efficient.
My wife next went to a local Navy Federal which can set them up. Unfortunately the Coverdell person only works one day a week and we were busy that day. We didn't want to lose another week as we have to get the account set up before tax day to make the contributions for the 2015 tax year.
I told my wife that I'd take the task over. (In hindsight, it might not have been my best idea.)
My first thought was to go to Fidelity. I already have a Solo 401k with them and as one of the biggest banks, they seemed like the best bet. A Coverdell isn't very common nowadays. In most cases, a 529 plan is a better option. Well, it seems that Fidelity believes that Coverdells are completely useless, because they no longer offer them.
Fortunately, as a personal finance blogger, I know what sites I can trust and Jonathan from My Money Blog has a list of best brokers for Coverdells. I noticed TD Ameritrade on the list. Since I have a Roth IRA with them dating back to 2002 when they bought Datek, I figured I'd give them a shot.
I went to the website and followed all the prompts to open a new Coverdell. I was expecting it to work like USAA where I'd open it all online, especially since I'm an existing customer. Unfortunately, TD Ameritrade seems to work by creating a PDF form that you have send to them. While they claimed that they could pre-fill my application from my existing information, they could only produce a blank PDF application.
I spent an hour filling out the application. It's a typical application except for the page on trading options. Trading options in a Coverdell seems weird to me. The contributions are limited to $2000 a year and the purpose, to fund an education, does seem to lend itself to making such speculative investments. It really doesn't seem like it should be a significant portion of the application, but it was. I think they should assume that people don't want to trade options unless they specifically choose to fill out additional paperwork and send that in.
I printed out the application, wrote a check (with an additional contribution form), and put it in something called an envelope with "postage" for it to be delivered very slowly to TD Ameritrade for their review.
I was happy to finally cross it off my list because I was going on vacation (which is why you didn't too many posts from me last week).
Halfway through the vacation I got notice from TD Ameritrade that it wasn't able to open the account due to a missing signature. I think I signed everything, but there's a chance that I only signed the options agreement and not the main application. That's my fault, but honestly I'm surprised that's the only error they found as it was an extensive application with no error checking that you'd get if they simply did it online like USAA.
While on vacation, I didn't have easy access to printing documents like I do at home. I was away from the hotel for about 16 hours of the day which would have been a natural solution (albeit at a likely high expense).
I tried to convince TD Ameritrade to process it since they at least had my signature in one place, but they wouldn't budge. You'd think that in 2016, we'd have a digital signature solution that very big financial companies could use... especially if you already have an account with that very big financial company.
I decided to wait until I got back from vacation. Today is the first business day since I've been back, so it was time to pick it up and give it another shot.
Fortunately, I had saved the PDF with all the information, so it was just a matter of printing it, signing it, and faxing it. Mailing isn't really an option, because we're now down to one week until the tax day deadline. I've never been able to get faxing to work with our VOIP phone. I decided it would be easiest to go to the local Kinko's FedEx Office and use their fax. TD Ameritrade's fax is toll-free so it doesn't cost anything other than overhead for FedEx to send it. They really don't need an employee since I'd be doing the faxing myself.
Unfortunately the cost was about $1.50 a page. I'm sure some people would have paid the $12 just to the end this headache, but I couldn't support that pricing on principle. One page was just fine print and I would have been tempted to save the $1.50 to leave it off, but I couldn't risk wasting $10.50 for an incomplete application only to have TD Amertitrade tell me that I need to fax the complete thing again.
I left and went home to look for other options. I was able to scan the signed as a PDF and use a free service from MyFax.com to send it. They needed my email address which probably means that I'll be spammed forever (I used my junk email account), but it got the job done...
... or at least I think it did. We'll see if TD Ameritrade will finally open the account and deposit the check that I sent now nearly two weeks ago.
Why a Coverdell?
Some of you might be asking why I would open a Coverdell in the first place. Coverdells can be used for a wider variety of educational expenses such as computers. Also, they can be used for private high school where 529s can not. Who knows if that's in the cards for our kids... they are only 2 and 3 years old. However, it seems like smart idea to have the option. We can always use it for college if that doesn't pan out.
If you are still reading this rant, you are some kind of saint. I usually don't like to complain, but I had to get this out of my system. I'm allowed a few financial rants a year, right?
I'll write about Coverdells more in the future. If this had gone smoothly, I would have been writing about them today.
Student loans have become a huge problem and a topic of much debate in our nation lately. In fact, 7 out of 10 graduates are graduating with a diploma in one hand and a bag of student loan debt in the other. If you are one of these people and have been looking for ways to save money on your repayment, you may come across refinancing. Before you jump in, make sure that you have considered the pros, cons, and other options that are available. The following sections will go over what student loan refinancing is, the pros, and the cons.
What Is Refinancing?
Refinancing your student loan is just like refinancing your house or car. In short, a private lender and gives you a new one with different terms. Typically, the new loan will have either a lower interest rate or lower monthly payments. Eligibility for refinancing is based on credit worthiness, and lenders typically have strict requirements. Most require at least a minimum FICO credit score of 660, but many are higher.
Pros of Student Loan Refinancing
Lower Interest Rates
When you refinance your student loans, you often receive a lower interest rate than the one you are currently paying. After you graduate and have secured a well-paying job, you are seen as more financially trustworthy to the lenders, so they are able to offer appealing rates. Though your rate may only drop by a few percentage points, when you are dealing with tens of thousands of dollars, the savings add up fast.
Shorter Repayment Terms
Though you may end up paying more per month, you can also refinance to shorten the repayment length. This means that instead of being on a 10-year plan, you may be on a 2-year or 5-year repayment plan. If you have the finances to do it and it makes sense for you, it is a great option. If you pay off your loans faster, less interest accrues overtime and less will capitalize, saving you a considerable amount of money in the long run.
Reduction in the Monthly Payment
While you can choose to shorten the length of the loan, refinancing sometimes allows you to lengthen the repayment period, resulting in a lower monthly payment. Some people may find themselves struggling to meet the minimum monthly payments and desire to pay less. It is important to note that extending your repayment over a longer period of time will usually result in paying more over the life of the loan.
Switch to a Fixed Interest Rate
When you refinance your student loans, you have the option to decide between variable and fixed interest rates. Because fixed rates are guaranteed to stay the same over the life of the loan, many people prefer them to variable rates. Refinancing is a smart option for those who fear that they will end up paying more with their variable rates, especially with the Federal Reserve’s recent announcement that they would be raising interest rates for the first time in nearly a decade.
Consolidate Multiple Loans Into One
Another great benefit of refinancing student loans is the opportunity to consolidate multiple loans into one. Private lenders will refinance both federal and private loans into one new private loan. This not only saves you money, but also makes repayment much more manageable.
Cons of Student Loan Refinancing
Losing Eligibility for Forgiveness
When you refinance your student loans, you are no longer eligible for the government’s forgiveness programs. In these programs, people working in certain occupations can have their loans forgiven after a certain amount of qualifying payments are made. If you are working toward forgiveness, you may be better off remaining where you are and working with your federal loan servicer to work out a better payment plan. The reason behind this is because you usually need to make 120 payments before forgiveness kicks in and if you refinance, you automatically disqualify yourself. It should be noted, however, that many of these programs have very strict eligibility requirements and most borrowers will not qualify.
Losing Federal Protections
The next thing to consider when it comes to refinancing is that there is not much protection for you and your family in the event of unexpected disability of discharge. The government will discharge your debt in these cases, but not all private lenders offer the same protections.
Losing Eligibility for Federal Repayment Plans
When you refinance with a private lender, you also are no longer able to switch to the federal repayment plans designed to help those struggling with debt. These Income-Driven Repayment Plans base your monthly payments on your discretionary income, ensuring that you have enough to meet the minimum standard of living. Many private lenders do, however, have similar programs in place to help those struggling with repayment.
Final Thoughts on Student Loan Refinancing
Before you refinance your student loans, you want to make sure that you are consider your financial situation and think about what you may be giving up. It is also important to shop around with different lenders to see where you can get the cheapest rate. Many people are unaware that they can refinance their student loans and are, in turn, leaving thousands of dollars on the table. If you have a solid credit history and a secure job, refinancing may be a great option for you!
Over the last year, I've been collecting little snippets from the web on colleges and getting your money's worth. I may have collected too much information, because my brain is swirling trying to figure out how to organize it all.
Let's start with student debt
Most of this is a summary of the insights I heard from Mark Cuban on student debt, but it makes sense. Americans have 1.2 trillion dollars in student debt. That's a number so large that it drags on the economy. This debt causes young adults to delay buying houses, cars, and investing in their retirement.
In short, instead of creating jobs by consuming or securing their future, they are funneling money back to schools. That wouldn't be a problem if schools are spending it well. As Mark Cuban points out, they aren't. They build new buildings when they don't need because they have to compete with other schools. In fact, it turns out that research says, colleges are likely to gain applicants by spending more on amenities than academics.
This might be why we are seeing lazy rivers, steakhouses, and ski reports at colleges. Yes, it's true.
It occurred to me that maybe John Oliver did a bit on student debt on his HBO show Last Week Tonight. It felt like the huge topic that he'd cover in depth. I was half-right. He did cover student debt, but most of his rant was at the particular evils of for-profit colleges:
That was quite a learning experience, right? Rather than beat that dead horse, let's just assume that we're going to eliminate any for-profit colleges from any discussion of getting an ROI on college. I realize it is a blanket statement, and maybe there's a good one out there, but for the sake of narrowing down this long list, we'll have to concede any potential one as collateral damage.
My Take on Student Debt
Access to money has gotten too easy for colleges. It seems to be a never-ending cycle. Raise tuition to build awesome stuff to recruit students. Students get bigger loans to cover tuition. Student debt grows and grows.
It seems like the housing bubble to me. Let's create a way to allow people to borrow more and more money, even if they can't afford it. Let's push people to interest-only loans and 50-year fixed loans so that they can buy even more house. We'll all show off our nice homes to our friends the way colleges show off their lazy rivers.
The whole thing is bananas and it isn't going to end well, but that should be obvious by now.
So what can we do about it?
Get Value for Your College Dollar
When I was choosing a college in 1993, there seemed to be one or two lists. They were the top 25 schools in the country. They were only helpful if you were in the position of trying to decide between MIT, Harvard, Princeton, Yale, and Stanford. Then you could decide to put Berkeley, Brown, or Dartmouth as your safety schools. It was ridiculous.
I've noticed that the lists are not as much about the top schools as they are about the top values. Perhaps that's in direct response to the aforementioned mounting student debt problem.
Kiplinger's and Money magazine seem to list a good mix of top schools (Princeton, Harvard), while mixing in some lesser known schools as values (Babson, Haverford). Princeton Review's seem to focus on how awesome Massachusetts schools are, which is something I won't argue (Boston Strong!). You have to be careful with Princeton Review's list as the top few colleges are "Featured", which I think is a way of saying that the position was paid for and not part of the natural ranking (I could be wrong). I think I like PayScale's list the best, it fits with what I would have imagined if someone asked me.
Each list processes a bunch of statistics to help them come up with value. You can read their methodology and use tools to tailor it to your situation.
I can't tell you which school is the best value for you. I ended up going to a school that was top 15 on at least one list. If I had to do it again, I'd probably shoot for Stanford and MIT, but have Babson and a few of the under-the-radar ones as back-ups. I know these lists have made me curious to see what's so great about Harvey Mudd. I know nothing about the school except that it turns up time and again.
I wouldn't use these lists as a definitive source of where to go college, but as a way to generate some ideas and narrow down the field.
It's Not the School. It's the Study
As I've been writing this article, my wife has been on my mind. I know that's nothing unusual, but it's actually relevant to college ROI. She went to a state school to get her Pharm. D. That's the champion of all college ROI moves. Pharmacy pays very well and state school is generally a lot cheaper than private school. The end result was a small student loan debt that melted away quickly.
With that in mind, I want to present you another set of lists. This is also from PayScale. It allows you to find the best school based on your major. See PayScale's ROI by Major.
You might not know what your major is when you choose college. Even if you don't, this data is useful. If you click on the art majors you'll see that the 20-year ROI is less than $450,000 for the top school. It quickly drops under $400,000. In computer science and math, the same 20-year ROI is $1.6M and drops down to under $1,200,000. The ROI over 20 years is roughly 3x more for computer science than for art.
That might not be a surprise, but it is worth emphasizing. If you are art major outside of top 105 schools, college has a negative 20-year ROI. After the the top 105 schools for computer science, you'd still handily do better than the very best art school.
These are extremes and there are clearly many majors in the middle. The point is that going to Harvard might not necessary be the best college ROI choice even though it at the top of several lists.
You have to know how to get the most of the school you are choosing.
[Happy May 29th... or 5/29... or 529 Day! Get it? I originally wrote this article in 2007 after days of reading about to best gift money for my nephew's college. Eight years later, the specifics of the plans may have changed, but the overall lessons and logic remain the same. This is exactly how it was published in 2007, mistakes and all.]
I mentioned yesterday that I'm looking to give my newborn nephew a head start in his education savings. Having gone through a number of options, I decided that a 529 Plan was my best option. Unfortunately, a lot of research may be necessary to decide on the right state's 529 Plan for you. Here are the steps I took to determine which state will receive my money. Remember that I'm looking to give $500 initially and $100 a year after that.
Check your own state first
My home state is California. I thought it would be very easy to see if there was a tax benefit for my state. However, states don't often advertise that your invest is NOT tax-deductible. They are in the business of getting you to invest with them, so it doesn't serve their cause to advertise a fact that could be construed as a negative. When the originating source isn't helpful, I suggest looking for a third party. Kiplinger.com came to the rescue with a list of states that offer a 529 Plan tax deduction. It's not the most recent list, but the best I could find. If your state is on that list, chances are your best option is to invest in your own state's 529 Plan and take the tax deduction. The exception is if your own state has a significant reason to reject them, such as the ones below. If your state, like mine, isn't on that list, there's no particular advantage that I could find for going with that state. In fact, you may be better off looking at another state's for a variety of reasons that we will cover now.
How is a state's 529 Plan sold?
There are two basic ways to invest in a 529 Plan. The plans are sold directly or through an advisor. Some states may offer either one or both options. The direct sales is the do-it-yourself method and the advisor option is for people that wish to have a little more guidance. If you've been reading my writing for any length of time, you know that I'm a direct kind of guy. I hate paying fees when I can do the research myself, so I eliminated any plans that didn't have a direct sales option.
How do I know if a state's plan is any good?
Put simply, this is the biggest question for those that are looking outside their own state. With 50 states and some having multiple plans, you could spend a week reading about each of them. I typically find this stuff fun, but it has it's limits. I spent a lot of time researching various articles that listed 4 or 5 good states, but none of them gave me anything to compare or went into detail on why they are good. I finally stumbled upon Saving for College's 5 Cap Rating System. With their list you can pretty quickly scan through and weed out quite a few sub-par states. In my research, I only looked at plans that had 4.5 Caps for the out-of-state and had a direct sale option. This left me with just a handful to consider. I still needed to narrow it down which required me to reject some plans.
Reasons to Reject a state's plan:
Since I intend to invest only $500, any plans that required more than that had to be excluded. I came across a few that were $1000 to start and some that seemed to require automatic deposits of $25 a month. After eliminating those I was left with about 4 or 5 different options.
Some states charge $25 a year if you don't have $25,000 in assets with them. We are expecting to contribute $100 a year in addition to our initial deposit. Those maintenance fees would be 25% of each year's investment. This eliminated Utah for me despite the fact that it's one of the best state plans according to most reviews.
Like mutual funds, 529 Plans have expenses. Like you and me, the financial folks have to make their living. There are numerous reports on how index funds often outperform the managed funds, so I prefer to go with them. They typically have very low expenses since they aren't out visiting companies to research their investments. So I looked at the expenses of the remaining choices. I was happy to stumble upon two states with expenses as low as 0.30% that matched all the above criteria.
I might be getting a little picky here as most plans offer the basics - age-based plans, equity plans, balanced plans, etc... However, a few plans go above and beyond and offer more choice. Other plans offer fund families you might already know and trust.
Ohio passed all the tests with flying colors. I don't have the beneficiaries social security number, so I haven't signed up yet. Maybe during the final review there will be some kind of gotcha, but right now all systems are go. They seem to have put together a best of breed program. There are no fees, no significant minimums (just $15 per investment option). Their expenses are amongst the lowest I found (except for you lucky folks who live in Louisiana) as long as you go with their Vanguard option. I've read that you can mix and match a few different Vanguard funds, which, if true, is going to be icing on the cake. If it's not true, then I'll go with the Aggressive Growth option as it's 85% Vanguard Total Stock Market Index and 15% Vanguard Institutional Developed Markets Index Fund. I love the way that Vanguard has handled my ETF portfolio, so I'm excited to give them a little more money to work with.
Michigan almost had it all - it really was a photo-finish. The only differences I could find were in the investment options. TIAA-CREF is a great organization, but I don't know them like I do Vanguard. They also had only three static investment options and it didn't seem like you could build a portfolio from them at all. Though their all equity option was tempting, I'm passing Michigan for more choice.
Have you invested out-of-state 529 Plan? If so, I'd love to read in the comments what factors influenced your decision.
I've been a believer in using 529 plans to save for college for years. Many years ago, I wrote an extensive article on how to choose a 529 plan. My reasons for investing in them were the small state tax savings and bookkeeping.
It wasn't until recently, when reading about Obama’s 529 taxation plan that it hit me that the money comes out the 529 plan without paying taxes on gains. Typically one has to pay long or short-term capital gains. 529 plans offer a way around that, which can save some significant money.
If I were to put $20,000 in a plan for my two kids now, that may appreciate to $80,000 by the time they are ready to go to college in around 15 years. If I didn't have that money in a 529 plan, I might have to pay 15% or 20% long-term capital gains tax on the $60,000 of gains. That's a tax bill of somewhere between $9,000 and $12,000. I'd rather have that cash go to my kids education.
I had always known that it's better to save for own retirement than your children's college. They can get loans to fund their education. You can not get loans to fund your retirement (at least not typically).
However, I had never thought about managing my finances in a way to maximize financial aid for college. I was blessed a full-scholarship, so I've never had to navigate the muddy waters of financial aid. This article makes the point that assets in retirement accounts are shielded from financial aid calculations.
Additionally it appears that assets in a company may be shielded from that calculation. However, investment property in our names are likely to not be shielded. I've long thought about putting our real estate investment properties into a corporate structure, but this would be the kick in the pants to get me to act on it. Of course, this assumes that it really is this easy to shield such assets. It's something that I have to look into more.
Obviously income is going to be an important factor. I have to consult our tax advisor, but maybe there is a way, I could invest in growing my business and purposely keep my income low for a short time. It's an idea, not sure how practical it is. Unfortunately, I "only" have 15 years to figure it out.
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