529 Day: 5 Myths About College Savings

As I recently noted, the college class of 2015 is the most indebted ever. There a couple of ways to avoid the student loan trap: choose a cheaper educational route or be lucky enough to have family members that have enough dough that they are able to save money for education, hopefully after they have funded their own retirement accounts! This week, we are celebrating 529 Day (get it? May 29th is 5/29 or 529 Day), when states are trying to boost interest and participation in 529 college savings programs with various incentives. I have long said that the 529 plan is far and away my favorite education-funding vehicle, because it allows for tax-advantaged investing for college. Contributions within the account grow tax-free and are not taxed upon withdrawal, provided they are used for qualified higher education costs. The 529 is like a Roth IRA for education.

529 plans can also be a terrific estate planning tool, because wealthy grandparents can remove assets from their estates either by using the annual gift tax exclusion of $14,000 or by making a lump sum that is far larger (check with your plan to determine the maximum allowable limit). The nice part is that the donor can maintain control over the investments and the ultimate use of the money.

Just remember that while a grandparent’s assets are not included when colleges determine eligibility for financial aid, there is a big downside to using a 529 plan that is in the grandparent’s name: When money is withdrawn to make a payment on behalf of the beneficiary of the plan, students must disclose those amounts as income. For every dollar of income, a student’s aid eligibility may be reduced by as much as 50 cents. In order not to diminish the ability to receive aid, there are a few work-around solutions.

i. Wait to use money in the 529 until the student’s senior year: Tapping the account for the last year of school shouldn't affect eligibility, because the year in which the income will be reported (as income for the previous year) will also be the year in which the student graduates.

ii. Transfer ownership of account: A few years before the first aid application is due, grandparents could transfer ownership of the account to a parent of the beneficiary. Assets in a parent-controlled account get assessed for financial aid purposes, but disbursements do not appear on the income statement of either the parent or the student. Fair warning on this idea: some states, like New York, do not allow changes in account ownership unless there’s a court order or the owner dies.

iii. If the 529 plan ownership seems too complicated, grandparents might considering gifting the money to the parents, who can then deposit the gift into their own 529 accounts that have been established for the kids. It makes sense to wait until after the aid has been determined before making the gift. Alternatively, extended family members may choose to wait until the student has graduated and then help with college loan repayment.

There are some people who could afford to snag money or save for college, but fall prey to a number of misconceptions, which prevent them from acting. Let's dispel some of those myths right now!

1.“I’m not going to complete the Free Application for Federal Student Aid (FAFSA) form, because I make too much money to qualify.”

What’s the number one reason that families don’t qualify for financial aid? According to one college financial aid officer, the answer is obvious: because families do not complete the necessary paperwork. Those with household income below $250,000 and two dependents should spend the time and at least attempt to grab a few bucks. Maybe it will all be for naught, or maybe a few tedious hours of work will be worth a few thousand dollars next semester.

2.“I’m not going to save for college because it will count against me for financial aid.”

Some of your savings can reduce a portion of your need-based aid, but the amount of that reduction may be smaller than you think. The money in retirement plan accounts is not counted, nor is the equity in the family's residence. Additionally, a portion of assets held by the parents is not counted, based on the age of the older parent.

Assets owned by parents for a dependent child are assessed up to 5.64 percent, while assets in the child’s name are assessed at a 20 percent rate, which is why it's preferable to hold accounts in the parents’ names. Let’s say that by the time junior heads off to school, you have saved $100,000 in the kid’s 529 plan, your potential aid may be reduced by $5,640, leaving you with plenty of money to help pay for college.

3. "Rather than save for college, I’m going to count on government grants to cover costs."

Although grants are great, they will not cover the total nut for most colleges. The Pell Grant covers about 10 percent of current private four-year college costs and work study can add up to another 20 percent.

 4. "Why save now when I can borrow later?"

Before families start saving for college, I recommend that they get their financial houses in order. That means paying down consumer debt, establishing an emergency reserve fund of six to 12 months worth of expenses and maximizing their retirement savings. But once those big three goals have been accomplished, it makes sense to save today rather than worrying about whether interest rates will rise in the future. Put another way, when you save, you earn interest; while when you borrow, you pay interest.

5. “My kid is a great soccer/basketball/football player, so he/she will get a scholarship.”

As a former varsity NCAA athlete, let me share something with you that few others will tell you: your kid is probably not as good an athlete you think. Of course I thought that I was an awesome soccer player when the collegiate recruiters came calling, but within the first week of practice, I quickly learned that I was a decent player and one who would never have been given a free ride. It is very difficult to earn a scholarship and it is not prudent to count on a future scholarship as the basis of your college funding plan.

Peak Oil Pukes

Remember when energy analysts were scaring everyone with the concept of “Peak Oil”? The theory was that global oil production had peaked and as a result, prices would shoot up to $200 a barrel and the cost at the pump would top $10 per gallon. Flash forward to this past week, when West Texas Intermediate (WTI) and North Sea Brent Crude touched new four-year lows. (The Energy Information Agency provides a good description of the two benchmarks here.) The combination of the U.S. shale boom and weakening Chinese and European demand has pushed down oil prices 30 percent since June. And according to the International Energy Association, lower prices are likely to continue into the first half of next year. Short of a geopolitical flare up, the IEA believe the we are entering “a new chapter in the history of the oil markets.”

The Energy Information Agency said that US oil production reached 8.9 million barrels per day in October, the highest monthly production since July 1986. The agency is forecasting that production will average 9.4 million barrels per day next year, which would be the most since 1972. As a result, the government cut its forecast for global oil prices next year by $18 a barrel to $83. The EIA notes that a $1-per-barrel change in the price of crude oil translates into a change of about 2.4 cents per gallon of gasoline (There are 42 gallons in one barrel, and 2.4 cents is about 1/42 of $1) and so the agency also predicts that the average price of gas will be below $2.94 a gallon next year, a 44-cent drop from an outlook issued a month ago.

If that holds, consumers will save $61 billion on gas compared with this year. That may not seem like a lot in the context of a $17.5 trillion U.S. economy, but economists say it matters because it immediately gives consumers more money to spend on other things…like holiday shopping!

Before we get too ahead of ourselves with visions of sugar plum fairies and the like, you may wonder if there is a downside to the drop in oil. A recent Sanford C. Bernstein report noted that oil at $80 a barrel makes one-third of U.S. shale oil production uneconomical. If that’s the case, there is a fear that state economies like Texas and North Dakota which combined, account for about half of the nation’s oil production, could take a hit to their energy-dependent economies.

But any pullback on the local level is likely to be outweighed by a more general increase in economic growth. Estimates range from a 0.3 to 0.5 percent bump in fourth quarter GDP from lower oil and gas prices. That might not seem like a lot, but it sure would come in handy for the holidays and kick US growth into a higher gear.

There was one other piece of good news for US consumers: College costs are still rising, but at a slower pace. According to a report from the College Board, tuition and fees for four-year public colleges averages $9,139 for in-state students, an increase of less than 1 percent after inflation (Room and board adds $9,804 to the total bill). In 2009-2010, the annual increase at public institutions was 9.5 percent. Tuition and fees for four-year private nonprofit colleges were $31,231 ($42,419 with room and board), up 1.6 percent after inflation, down from the recent peak in price growth of 5.9 percent in 2009-2010.

The College Board issued a separate report, which found that students and parents borrowed $106 billion in the 2013-2014 academic year from the federal government and other sources, down nearly 8 percent from the previous year after accounting for inflation, and down 13 percent from 2010-2011 peak of $122.1 billion.

MARKETS: With stock indexes at record highs, investors are feeling good. The latest survey from the American Association of Individual Investors found that bullishness spiked to a four-year high of nearly 58 percent. Bearish sentiment, or expectations that markets will fall over the next six months was at 19.3 percent, below the historical average of 30 percent. If you believe that investors are often happiest at the wrong times, this could be seen as a warning… 

• DJIA: 17,634, up 0.4% on week, up 6.4% YTD
• S&P 500: 2039, up 0.4% on week, up 10.4% YTD
• NASDAQ: 4688, up 1.2% on week, up 12.3% YTD
• Russell 2000: 1174, up 0.05% on week, up 0.9% YTD
• 10-Year Treasury yield: 2.32% (from 2.30% a week ago)
• December Crude Oil: $75.82, down 3.6% on the week (7^th consecutive weekly loss)
• December Gold: $1185.60, up 1.3% on the week
• AAA Nat'l average price for gallon of regular Gas: $2.88 (from $3.21 a year ago; longest decline in gas prices since 2008)

THE WEEK AHEAD: Freddie Mac said fixed mortgage rates are hovering near 2014 lows, with 30-year fixed-rates averaging 4.01 percent, down from 4.35 percent a year ago. Will those low rates spur housing activity? We’ll learn more this week, when reports on Housing Starts and Existing Home Sales are released.

Mon 11/17:

Urban Outfitters, Tyson, Agilent

8:30 Empire State Manufacturing Survey

10:00 Industrial Production

Tues 11/18:

Home Depot, TJX

U.S. Senate may vote to approve the Keystone XL pipeline

8:30 Producer Price Index

10:00 NAHB Housing Market Index

Weds 11/19:

Target, Staples, Lowes, Williams-Sonoma

8:30 Housing Starts

2:00 Fed Minutes

Thurs 11/20:

Best Buy, Dollar Tree, Gap

8:30 Weekly Jobless Claims

8:30 Consumer Price Index

10:00 Philadelphia Fed Survey

10:00 Existing Home Sales

Fri 11/21:

Ann Taylor, Foot Locker

College Savings Myths

It is clear that college is indeed worth it, but assuming massive amounts of debt to attain the coveted degree may not be. That's why it's so important for families to get a head start on the process by saving as early as possible. Unfortunately, many simply do not have the resources to save for college. For those who could afford to save, there are misconceptions -- and flat-out myths -- which prevent them from acting. To help, it's time to dispel some of those myths right now! 1.“I’m not going to complete the Free Application for Federal Student Aid (FAFSA) form, because I make too much money to qualify.”

What’s the number one reason that families don’t qualify for financial aid? According to one college financial aid officer, the answer is obvious: because families do not complete the necessary paperwork. Those with household income below $250,000 and two dependents should spend the time and at least attempt to grab a few bucks. Maybe it will all be for naught, or maybe a few tedious hours of work will be worth a few thousand dollars next semester.

2.“I’m not going to save for college because it will count against me for financial aid.”

Some of your savings can reduce a portion of your need-based aid, but the amount of that reduction may be smaller than you think. The money in retirement plan accounts is not counted, nor is the equity in the family's residence. Additionally, a portion of assets held by the parents is not counted, based on the age of the older parent.

Assets owned by parents for a dependent child are assessed up to 5.64 percent, while assets in the child’s name are assessed at a 20 percent rate, which is why it's preferable to hold accounts in the parents’ names. Let’s say that by the time junior heads off to school, you have saved $100,000 in the kid’s 529 plan, your potential aid may be reduced by $5,640, leaving you with plenty of money to help pay for college.

3. "Rather than save for college, I’m going to count on government grants to cover costs."

Although grants are great, they will not cover the total nut for most colleges. The Pell Grant covers about 10 percent of current private four-year college costs and work study can add up to another 20 percent.

 4. "Why save now when I can borrow later?"

Before families start saving for college, I recommend that they get their financial houses in order. That means paying down consumer debt, establishing an emergency reserve fund of six to 12 months worth of expenses and maximizing their retirement savings. But once those big three goals have been accomplished, it makes sense to save today rather than worrying about whether interest rates will rise in the future. Put another way, when you save, you earn interest; while when you borrow, you pay interest.

5. “My kid is a great soccer/basketball/football player, so he/she will get a scholarship.”

As a former varsity NCAA athlete, let me share something with you that few others will tell you: your kid is probably not as good an athlete you think. Of course I thought that I was an awesome soccer player when the collegiate recruiters came calling, but within the first week of practice, I quickly learned that I was a decent player and one who would never have been given a free ride. It is very difficult to earn a scholarship and it is not prudent to count on a future scholarship as the basis of your college funding plan.

6. "I don’t want to ask my parents for help."

It takes a village and often many generations to fund a college education. If you have parents with means and and education is important to you and your kids, ask for help! Just remember that how the extended family helps can have a big impact on a student’s financial aid chances.

A grandparent’s assets are not included when colleges determine eligibility for financial aid. However, there is a big downside to using a 529 plan that is in the grandparent’s name: When money is withdrawn to make a payment on behalf of the beneficiary of the plan, students must disclose those amounts as income. For every dollar of income, a student’s aid eligibility may be reduced by as much as 50 cents. In order not to diminish the ability to receive aid, there are a few work-around solutions.

i. Wait to use money in the 529 until the student’s senior year: Tapping the account for the last year of school shouldn't affect eligibility, because the year in which the income will be reported (as income for the previous year) will also be the year in which the student graduates.

ii. Transfer ownership of account: A few years before the first aid application is due, grandparents could transfer ownership of the account to a parent of the beneficiary. Assets in a parent-controlled account get assessed for financial aid purposes, but disbursements do not appear on the income statement of either the parent or the student. Fair warning on this idea: some states, like New York, do not allow changes in account ownership unless there’s a court order or the owner dies.

iii. If the 529 plan ownership seems too complicated, grandparents might considering gifting the money to the parents, who can then deposit the gift into their own 529 accounts that have been established for the kids. It makes sense to wait until after the aid has been determined before making the gift. Alternatively, extended family members may choose to wait until the student has graduated and then help with college loan repayment.

Is Student Loan Debt Killing the American Dream?

Three years into the national housing recovery, mortgage rates remain at still-low levels (yes, 4.5 percent is low!) and the cost of ownership is cheaper than renting in most areas, so why aren’t younger people jumping at the chance to own their piece of the American Dream? The answer may surprise you. In the most recent Existing Home Sales report, the National Association of Realtors said that student loan debt is hurting home sales.“20 percent of buyers under the age of 33, the prime group of first-time buyers, delayed their purchase because of outstanding debt. In our recent consumer survey, 56 percent of younger buyers who took longer to save for a down payment identified student debt as the biggest obstacle.”

Total outstanding student debt is nearing $1.2 trillion or a median of $27,000 per student in 2012. The numbers are even worse for graduate students whose debt levels soared an inflation-adjusted 43 percent between 2004 and 2012, with a median debt level of an eye-popping $57,600, according to the New America Foundation. The government says that the recent surge in student loans appears to come from for-profit colleges, which account for 13 percent of students in higher education but nearly a third of all student loans and half of all defaults. As a result the Education Department recently announced a plan to deny federal loans to students at institutions for which the default rates exceed 30 percent.

While the student loan crisis is garnering attention, it doesn’t help the people who graduate with the bulging debts. It’s easy to understand how the burden of a fat loan payment might make a home purchase out of reach for many. Even if the young debtors have jobs that allow them to keep current with their obligations, it’s still difficult to qualify for a home mortgage. According to the WSJ, “The average FICO score for a conventional mortgage – one that’s sold to mortgage giantsFannie Mae and Freddie Mac— was 755 in February, according to Ellie Mae’s latest mortgage origination report.”

The combination of high debt burdens, combined with the difficulty in qualifying for a loan has resulted in homeownership levels dropping to just 36.8 percent for the under 35 group, down from 42 percent in 2007. Yes, the recession took a bite out of total homeownership, but there is no doubt that the rising tide of student loan indebtedness (Econbrowser notes that the dollar value of outstanding student loans has surged, growing from 4 percent of GDP in 2007 to over 7 percent today) is playing a role in the housing numbers.

How did we get to this place? Education inflation has increased at about twice the pace of overall inflation and at the same time, a college degree has become more valuable.Pew Research Center found that Millennials with a college degree earn more than those who stopped their formal educations during or after high school. Between 1965 and 2013, median annual earnings, among college-educated full-time workers aged 25-32 rose to $45,500. Meanwhile, their high-school-educated peers lost more than $3,000, with earnings falling to $28,000 over that time period. In other words, a college degree is worth more and a high school degree alone is worth a lot less. Additionally, college grads earn more over their lifetimes. A college degree offers a 30-year wage premium of over $200,000 in extra income compared to a high school graduate’s salary, according toPriceonomics blog.

College may be worth it, but going into debt up to your eyeballs to earn that coveted degree may not be. Not only might it rob you of the ability to buy a home, it could also force you into taking the highest paying job, instead of the one that might put you on the best career path for you.

Image by Flickr User Herkie

College is Worth It!

Attending college is costly, but according to new research, not going to college is even more costly. Pew Research Center found that Millennials with a college degree earn more than those who stopped their formal educations during or after high school. Between 1965 and 2013, median annual earnings, among college-educated full-time workers aged 25-32 rose to $45,500. Meanwhile, their high-school-educated peers lost more than $3,000, with earnings falling to $28,000 over that time period. In other words, a college degree is worth more and a high school degree alone is worth a lot less. That differential adds up over time: According to Priceonomics blog, a college degree offers a 30-year wage premium of over $200,000 in extra income ($6,667 a year) compared to a high school graduate’s salary.

For Millennials, like the broader population, going to college may help you get or keep a job.  The unemployment rate for high school grads is 12.2 percent, while for those with a degree, it is two-thirds lower, at 3.8 percent. Those with two years of college fall in between at 8.1 percent.

I know what you’re thinking: “What about the escalating costs of education and those ballooning student loans?” In the survey, 66 percent of Millennials said they had borrowed to pay for school, compared to 43 percent of boomers. That explains why outstanding student loans have soared to over a trillion dollars. One way to keep debt levels in check is to only assume a total student debt load that matches what you think you will earn in your first year of work. If you’re going to be an engineer, you can borrow more than say, an art history major.

The good news is that the College Board has reported that the rate of tuition increases at U.S. colleges and universities has slowed down in recent years, it is still a huge burden for American families.  The average annual tab for public colleges is $8,893, though after subtracting grants and financial aid, the net cost is $3,120. Private universities total $30,094, with a net cost of $12,460. Tack on room and board, and the price tag increases by another $10,000 or so.

Because the value of a college diploma is so great, families are increasingly seeking the help of older generations to foot the bill. But, how the extended family helps can have a big impact on a student’s financial aid chances. That’s why it’s important to understand some of the rules surrounding college savings and financial aid.

On the positive side, a grandparent’s assets are not included when colleges determine eligibility for financial aid. My favorite education-funding vehicle is the 529 plan, which allows for tax-advantaged investing for college. Contributions within the account grow tax-free and are not taxed upon withdrawal, provided they are used for qualified higher education costs.

Another benefit of 529 plans is that they can be a terrific estate planning tool, because wealthy grandparents can remove assets from their estates either using the annual gift tax exclusion of $14,000 or by making a lump sum that is far larger. The nice part is that the donor can maintain control over the investments and the ultimate use of the money.

However, there is a big downside to using a 529 plan that is in the grandparent’s name. When money is withdrawn to make a payment on behalf of the beneficiary of the plan, students must disclose those amounts as income. For every dollar of income, a student’s aid eligibility may be reduced by as much as 50 cents. In order not to diminish the ability to receive aid, there are a few work-around solutions.

1. Wait to use money in the 529 until the student’s senior year: Tapping the account for the last year of school shouldn't affect eligibility, because the year in which the income will be reported (as income for the previous year) will also be the year in which the student graduates.

2.Trasnfer ownership of account: A few years before the first aid application is due, grandparents could transfer ownership of the account to a parent of the beneficiary. Assets in a parent-controlled account get assessed for financial aid purposes, but disbursements do not appear on the income statement of either the parent or the student. Fair warning on this idea: some states, like New York, do not allow changes in account ownership unless there’s a court order or the owner dies.

3.If the 529 plan ownership seems too complicated, grandparents might considering gifting the money to the parents, who can then deposit the gift into their own 529 accounts that have been established for the kids. It makes sense to wait until after the aid has been determined before making the gift. Alternatively, extended family members may choose to wait until the student has graduated and then help with college loan repayment.

It takes a family, a village and just about everyone else to fund an education, but the investment is worth it!