college funding

How to Pay for College

How to Pay for College

As the college acceptance letters arrive, students are thrilled. However, while parents and grandparents are proud, they may also feel a little anxious about footing the bill for what they know is an important credential in today’s labor force. Before you sign on a dotted line, or heaven-forbid, raid your retirement account or borrow against your house, it’s time for a financial reality check. Here are the basic sources available to fund higher education, according to the Common Application, a not-for-profit member organization of more than 700 colleges and universities in the United States and around the world.

Economic Growing Pains

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While it was no surprise that the Fed took no action at last week’s FOMC meeting, there was something interesting contained in the officials’ economic projections. The central bank lowered its longer run expected growth rate from 2 percent to 1.8 percent. This downward revision started in 2012, when the Fed expected growth to be 2.4 percent, which at the time, seemed a far cry from the average pre-crisis annual growth rate of about 3 percent. 1.8 percent seems pretty rotten, but to judge it more effectively, historic data can help. From 1985-2015, GDP averaged about 2.75 percent, but during the post-technology boom through last year (2001-2015), growth averaged…1.8 percent. This more recent slowdown is at the core of the argument among the economic wonks: The doom and gloomers (think former Treasury Secretary Larry Summers) say that the US economy is plagued by “secular stagnation,” where individuals and companies are not tempted to invest, savings’ pile up and growth slumps. Amid this environment, central banks try to nudge participants to do something with their cash by slashing interest rates and buying bonds, but over time, these policy measures lose their oomph.

The other side, led by former Fed Chair Ben Bernanke, argues that weaker economic growth is due to temporary cyclical and special factors and eventually the economy will revert back to its old ways. For the past year and a half, Bernanke has argued that the US economy is working its way out of this “cyclical stagnation,” proof of which can be seen in the improving labor market, and “the availability of profitable capital investments anywhere in the world should help defeat secular stagnation at home.”

Hindsight will determine which side is right, but the bottom line, according to Paul Ashworth at Capital Economics, “is that GDP growth has been disappointing.” The lowered Fed projections are simply an acknowledgement of what we have been experiencing on the ground. This week, the government will release the final estimate of second quarter growth, which is expected to edge up to a still-paltry 1.3 percent from the previous reading of 1.1 percent.

The lowered estimate of growth is good to remember, especially when Republican presidential candidate Donald Trump predicts that his tax cut plan will boost economic growth of 3.5 to 4 percent, more than two times what the Fed believes will occur and well-above the 2.75 percent seen from 1985-2015. Trump cited 4 percent growth last week, after doing so earlier this month. As a point of reference, the US economy has not seen 4 percent growth since the height of the dot-com bubble in 2000.

FAFSA UPDATE: The Free Application for Federal Student Aid form (“FAFSA”) is the gateway to education money and it is now available on October 1, three months earlier than in previous years. Given how expensive it is to attend college, here’s a mind blowing statistic from NerdWallet: High school graduates left $2.7 billion in FREE federal grant money on the table over the last academic year, because they did not complete the form…for more on this topic, check out: College Money for the Taking!

MARKETS:

  • DJIA: 18,261, up 0.8% on week, up 4.8% YTD
  • S&P 500: 2164, up 1.2% on week, up 5.9% YTD
  • NASDAQ: 5305, up 1.2% on week, up 6% YTD
  • Russell 2000: 1254, up 2.5% on week, up 10.5% YTD
  • 10-Year Treasury yield: 1.62% (from 1.69% week ago)
  • British Pound/USD: 1.2973
  • November Crude: $44.48, up 2% on week
  • December Gold: $1,341.70, up 2.4% on week
  • AAA Nat'l avg. for gallon of reg. gas: $2.21 (from $2.19 wk ago, $2.29 a year ago)

THE WEEK AHEAD:

Mon 9/26:

10:00 New Home Sales

10:30 Dallas Fed Survey

Tues 9/27:

9:00 S&P Case-Shiller Home Price Index

10:00 Consumer Confidence

Weds 9/28:

8:30 Durable Goods Orders

Thursday 9/29:

8:30 GDP

9:00 Corporate Profits

10:00 Pending Home Sales Index

Friday 9/30:

8:30 Personal Income and Spending

9:45 Chicago PMI

10:00 Consumer Sentiment

Saturday 10/1

FAFSA Form Available (3 months earlier than in the past)

College Money for the Taking

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Given how expensive it is to attend college, here’s a mind blowing statistic: High school graduates left $2.7 billion in FREE federal grant money on the table over the last academic year. According to an analysis from NerdWallet, the primary reason that families are missing on this money is because they are not completing the most important step in the process: completing the Free Application for Federal Student Aid or FAFSA. FAFSA is the gateway to education money and it is now available on October 1, three months earlier than in previous years. FAFSA is used to determine how much students and their families will receive in terms of college grants, scholarships and loans, which is why it is so important that families take the time to work through it.

For years, people have complained that the form is arduous, but the Department of Education says, “The FAFSA takes most people 21 minutes to complete.” OK, maybe 21 minutes undershoots it -- it’s probably closer to an hour, once you gather all of the documents that you need. But now that the IRS has created a way to send your tax information seamlessly to the Department of Education, the process has become a bit easier. (The IRS Data Retrieval Tool automatically fills in the online FAFSA form with the necessary tax information).

I asked Kelly Peeler, founder & CEO of NextGenVest, a service that helps students navigate the financial aid and student loan processes, what we are overlooking in the college money treasure hunt. “The biggest mistake by far is that families do not submit their FAFSA because they think they might not qualify for aid or they don't want to share tax information or Social Security numbers.” Even those that complete the form are sitting on it too long. Peeler notes that there needs to be a sense of urgency, “because families will have a higher likelihood of receiving more financial aid if they submit their correct forms earlier.”

While states, colleges, and the federal government each have their own financial aid deadlines, some states have a limited pool of funds that may run dry if you wait until the last minute to apply. To maximize your potential aid, Peeler advises submitting the FAFSA as early as possible after October 1, even though the 2017–18 deadline for federal aid is June 30, 2018.

To those who say they won’t qualify for financial aid, “so why bother going through the drudgery of doing it?” The Department of Ed clearly states, “contrary to popular belief, there is no income cut-off when it comes to federal student aid.” More importantly, you never know how your situation might change. Some of the factors affecting rewards include: a change in family income, the student’s year in school, the cost of attendance and multiple kids in college at the same time. So even if you did not get money last year, you could still be eligible for other types of aid, like work-study and low-interest loans.

Finally, if you are worried that you have not yet determined which colleges are on “wish list”, know that you can still file your FAFSA as long as you list at least one school. The Dept of Education advises that you “add every school you’re considering, even if you haven’t applied or been accepted yet. If you’re on the fence about a particular school, add it anyway. Doing so will hold your place in line for financial aid in case you end up applying for that school. You can also add or remove schools to your FAFSA later.”

#288 New FAFSA Date: Oct 1

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Kelly Peeler, the founder and CEO of NextGenVest is back on the show to discuss the NEW FAFSA availability date--October 1st! Considering that families leave $2.7 billion of unclaimed financial aid on the table, primarily because they don’t complete the FAFSA form, Kelly says it is important not to procrastinate! Her team at NextGenVest can help students make smart decisions around paying for college in an accessible way. One way they do so is to provide a "Money Mentor" (trained college students) for every high school or college student, who can make the process of applying for college and getting aid much easier…Just TEXT 646-798-1745 “I want help paying for college”

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NextGenVest will send you the list of documents that you need to assemble and will help you come up with your specific list of financial reach and safety schools. Kelly also explains that Financial Aid and applications are two separate tracks and details what families need to know about the merit aid/grant/loan process. Here are various sources of college money:

  • Family savings/income
  • Federal Grants: do not have to be repaid (Pell Grant-awarded annually, so you have to complete FAFSA every year)
  • State Aid: TAP – access for in state
  • Fed/State/Direct/PLUS loans
  • Institutional grant from a specific college
  • Private scholarships
  • HELOC/Private loan

After graduation, you can go to student.ed.gov to learn about repayment options for federal loans and you can also check out the private student loan refinancing market from companies like SOFI, Common Bond or Earnest.

Check out Kelly’s TED Talk!

Thanks to everyone who participated this week, especially Mark, the Best Producer/Music Curator in the World. Here's how to contact us:

  • Call 855-411-JILL and we'll schedule time to get you on the show LIVE 

Bad Trade: College for Retirement

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“Sometimes self-interested is the most generous thing you can be.” - Tony Kushner This quote came to mind after fielding a question about using retirement funds to pay for tuition. For most people, tapping retirement accounts or funding college education before retirement, is a bad trade. These parents, who want to help their kids, could be jeopardizing their own futures with these decisions.

Before thinking about putting money toward your kid’s education, you need to make sure that you have covered “The Big Three”: (1) Paying down consumer debt (2) Establishing an emergency reserve fund (3) Funding retirement. If any one of these items is outstanding, you need to put education funding on the back burner.

Before you say, “But I have to make sure my kid gets a college education and I don’t want him/her to be burdened by student loans,” let me remind you that there is no reason that you can’t help your children both earn a degree and do so without mounds of debt. To do so, you need to be more careful about how you choose which school to attend. Perhaps a community college, combined with a state school or attending the school that will provide the most money or best financial aid package, but the idea of raiding your retirement account to allow your child to attend ANY school she wants, should not be an option.

The problem is that many parents are reluctant to have difficult conversations with their children early enough to prepare the kids to make different choices. According to T. Rowe Price's 2016 Parents, Kids & Money Survey, 62 percent of kids 8 to 14 years old expect their parents to cover the cost of “whatever college I want to go to.” A near equal percentage of parents (65 percent) will only be able to contribute some to the cost of college. There is clearly a disconnect between expectations and reality here.

You can’t really blame the kids, if the parents are not raising the issue. One main reason parents are reluctant to do so is that they feel bad about not being able to give their kids what they want. The survey found that 63 percent of parents agreed with the statement “I feel guilty that I won't be able to pay more for their college” and a 42 percent said they are losing sleep worrying about college costs.

These deep emotions are luring parents into dangerous territory. In addition to pulling money from retirement accounts or shortchanging plan contributions, they are going to hock. The survey found that more than half of parents (57 percent) are willing to take on $25,000 or more in debt to pay for their kids’ college education, with 19 percent willing to borrow $100,000 or more.

How are these people ever going to retire, if they are servicing these huge debt loads? 76 percent of them say that they will delay their retirement and 68 percent said that they would be willing to get a second or part-time job to pay for college education. Sounds like a great plan, except that how can they ensure that they will be able to hold on to their job or find another to fund the gap?

I worry that in an effort to provide the golden opportunity of college, many parents are actually creating a future burden for their kids. After all, if you are struggling to meet your retirement needs, your children will likely be on the hook for you. That’s why “Sometimes self-interested is the most generous thing you can be.”

FAFSA Freak Out

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While dorm move-in day is months away, now is the time for college applicants hoping to receive financial aid to complete the much-maligned Free Application for Federal Student Aid (FAFSA). While each school sets its own financial aid due date, some of the money is available on a first-come, first-serve basis, so it’s time to get busy! Before you start moaning, you should know that you have lots of company: the National Center for Education Statistics (NCES) found that over 70 percent of all undergraduate students received some type of financial aid in recent years, of which one-third was provided by the federal government. Over 20 million people completed FAFSA forms last year.

Many parents tell me that they won’t qualify for financial aid, “so why bother going through the drudgery of doing it?” According to the U.S. Department of Education, “the FAFSA takes most people 23 minutes to complete…and contrary to popular belief, there is no income cut-off when it comes to federal student aid.”

Maybe the procrastinators are already coming up with an excuse: “I’ll wait until after April 15th, so I’ll have my tax returns in hand." Contrary to conventional wisdom, you don’t have to wait until you file to start the FAFSA. Use your 2013 return as a guide to estimate your 2014 numbers so that the government can process the application immediately - you can submit your actual 2014 return later.

In fact, there is now a partnership between the FAFSA site and the IRS, allowing students and parents to automatically transfer the necessary tax info into the FAFSA using the IRS Data Retrieval Tool. In most cases, your information will be available from the IRS two weeks after you file. You can also change your mind about which schools you’re applying to, by logging in to the FAFSA site and updating school information – the same goes for when family income drops.

Those who don’t complete the FAFSA could be leaving a lot of money on the table and frankly, it is a pretty good trade: your time for a potential reduction in college costs. According to the College Board, the average cost of tuition and fees for the 2013–2014 academic year totaled $8,893 for state residents at public colleges; $22,203 for out-of-state residents attending public universities; and $30,094 at private colleges.

It should be noted that the same report also found that the actual amount that most students pay is lower, because of increased discounts, grants and tax benefits. Still, families need to tap whatever resources are available to finance higher education, which is why outstanding student loan balances stand at $1.13 trillion, as of September 30, 2014. There could be some relief from that mountain of debt: analysis from the New York Times shows that legislative changes to the Income-Based Repayment program (IBR) "may make it much easier for students to get out from under their debts."

Before you go into shock with all of these numbers, it might be helpful to utilize the FAFSA4caster, a free financial aid calculator that gives you an early estimate of your eligibility for federal student aid and helps families plan ahead for college.

And while not every student should attend a four-year private college, some higher education gives the average worker an advantage in the current labor market. Through the end of 2014, the national unemployment rate stood at 5.6 percent, but those who held an associate’s degree or had some college under their belts, were in much better shape, with just a 4.9 percent unemployment rate. Graduates with a bachelor’s degree or higher had a rate of just 2.9 percent. On the other end of the spectrum, those who did not finish high school have a still-high 8.6 percent rate.

And college degrees really do pay great dividends: a 2014 New York Federal Reserve study found that the return on a college education remains at about 14-15 percent, "easily surpassing the threshold for a sound investment." Separately, a San Francisco Federal Reserve study showed that the average college graduate could expect to earn at least $800,000 more than the average high school graduate over a lifetime.

Meanwhile, if you have younger kids or grandchildren and you are considering the various ways to save for college, the 529 plan is still my favorite vehicle. Under current law, 529 plans allow 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.

There was some concern after 529 plan changes ended up in President Obama's tax reform plan. Under the proposal, you would no longer be able to withdraw 529 funds on a tax-free basis. (The changes in would apply only to new contributions.) After harsh criticism, the Administration dropped the plan so 529 plans remain safe!

#162 Taxes, Target Date Funds, Timeshare Hell

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With days to go before the tax filing deadline, don't fret! We have these Last Minute Tax Resources to help you with the process.

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Sandra, Roger, Julius and TC are all in different stages of retirement planning mode, while Ali, Barbara and Janet need help determining what kind of investment advisor makes sense for them, which led to a discussion about target date funds.

Are you in "Timeshare Hell" with caller Joyce? We try to help rescue her with some ways to exit these tough investments.

Thanks to everyone who participated and to Mark, the BEST producer in the world. If you have a financial question, there are lots of ways to contact us:

  • Call 855-411-JILL and we'll schedule time to get you on the show LIVE 

#161 Hitting it Big, Retirement Planning

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Is your team out of the Final Four? Don't fret - we have a great show, where we dreamed about winning lotteries and planning retirement.

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Although Patricia is 15 years from retirement, she is planning ahead. We help her consider factors about a home purchase. Also planning ahead is Kathlyn, who wants to make sure she knows what to do if she were to win the lottery!

Pete and Kristen were talking about education funding, while Sandy and Jon are just starting their retirement savings process.

We dug into retirement numbers with Joe and helped Louise determine whether she needs long term care or disability insurance...or both!

Thanks to everyone who participated and to Mark, the BEST producer in the world. If you have a financial question, there are lots of ways to contact us:

  • Call 855-411-JILL and we'll schedule time to get you on the show LIVE 

#160 Real Estate, Audit Red Flags, Retirement

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Spring is in the air...which means that the tax filing deadline is around the corner. In addition to fielding lots of retirement and ed funding questions, we discuss audit red flags.

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The college acceptance letters are rolling in...now the hard part: paying for that coveted degree. Roy, Tom and Matthew all have questions about footing the bill for education.

Dick, Brian and Jay are trying to ascertain whether they are on sound enough financial ground for retirement; while Rob and Bola are just starting their retirement planning and need advice on the best vehicles to use.

Chris is seeking guidance on his old 401 (k) plan and Liz wants to know which retirement funds to tap for home improvement.

Thanks to everyone who participated and to Mark, the BEST producer in the world. If you have a financial question, there are lots of ways to contact us:

  • Call 855-411-JILL and we'll schedule time to get you on the show LIVE 

College is Worth It!

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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!