Financial Thanksgiving 2014

Thanksgiving is a time when we can give thanks for all of the blessings in our lives, like health, loving spouse, a wonderful family and amazing friends. But this is a money column, so this week, I would also like to give thanks to all of the amazing people and resources that have improved our financial lives. The Financial Planning Coalition: The collaboration of the Certified Financial Planner Board of Standards (“CFP Board”), the Financial Planning Association® (“FPA”), and the National Association of Personal Financial Advisors (“NAPFA”) continues to work on behalf of consumers to make the fiduciary standard the gold standard for financial advice-givers.

The Employee Benefit Research Institute (EBRI): The mission of EBRI is to contribute to, to encourage, and to enhance the development of sound employee benefit programs and sound public policy through objective research and education. EBRI has also developed an easy to use retirement calculator, which I wholeheartedly endorse.

Life Happens: While I have been a critic of some of the practices of the insurance industry, this nonprofit, founded by seven producer organizations, is dedicated to helping Americans take personal financial responsibility through the ownership of life insurance and related products, including disability and long-term care insurance. Of particular interest is the Life Happens Insurance calculator.

Mark Kantrowitz/FinAid.org: Mark created this terrific web site for education funding in the fall of 1994 as a public service. It is the quintessential resource for every would-be college student, providing informative, objective and valuable advice for students and their families, who are looking for ways to finance their education.

SSA.gov: I know that everyone complains about the Social Security system, but the government’s web site is a great tool. You can manage your account online and use the estimator to determine your future benefit.

Jack Bogle: When he was a junior at Princeton University in 1949, Jack Bogle decided to use the concept of index funds as the topic of his senior thesis. That decision eventually led to the creation of the modern index fund. In 1976, The Vanguard Group – then a new mutual fund company – rolled out the First Index Investment Trust, which ultimately became the Vanguard 500 Index Fund. The fund, which was originally referred to as “Bogle's Folly” has become the single best friend to retail investors.

AnnualCreditReport.com: In the aftermath of the credit boom and bust, there were singing pirates and a myriad of online offers to help consumers take control of their credit histories, but there was only one official site, guaranteed by Federal law, where you can obtain a free credit report annually.

Consumer Financial Protection Bureau (CFPB): The CFPB was created out of 2010’s Dodd-Frank Wall Street Reform and Consumer Protection Act. The CFPB consolidated most Federal consumer financial protection authority in one place and focuses on one goal: watching out for American consumers in the market for consumer financial products and services. Although various regulators had consumer divisions, none has the sole focus of keep an eye out for us. The CFPB works to give consumers the information they need to understand the terms of their agreements with financial companies. They are working to make regulations and guidance as clear and streamlined as possible so providers of consumer financial products and services can follow the rules on their own.

Ann Marsh: Since we have just celebrated Veterans’ Day, I would like to highlight the work of Financial Planning Magazine’s Senior Editor and West Coast Bureau Chief. Ann’s phenomenal work highlighted how financial problems are weighing on our servicemen and servicewomen, and in some cases, contributing to suicide. Please read her article and if you are interested in supporting our veterans, please check out www.giveanhour.org, which is in the process of considering launching a financial planning arm of its services and www.psycharmor.org, which is putting together a new network of private sector professionals to help soldiers and vets, including financial planners.

Student loans: What you need to know

A recent Sallie Mae study found that parents are contributing less to fund total college costs, which means that students are borrowing more. Total student loan debt , which includes Federal and private loans made to students and their parents, is now estimated to be nearing $1.2 trillion – or an average of $26,000 per student who graduated in 2013. The reason is obvious: as the costs of education rise, families have been forced to borrow more money to earn those coveted degrees. Student debt has become pervasive: 19.6 percent of adults over the age of 20 owe money on student loans, and 57 percent of them are worried about repaying this debt, according to a study by the Urban Institute. Unfortunately, the mounting student debt is likely to become even harder to repay in the future, now that Congress has linked new federally subsidized loans to the 10-year treasury yield. Those yields have spiked from 1.61 percent in May to over a two-year high of 2.95 percent. Most economists expect rates to rise even more in the future as the economy improves and the Federal Reserve reduces its monthly bond purchases.

What’s the answer? Students and their families should be very careful not to assume too much debt for education. A good rule of thumb is to keep total education debt less than the borrower’s projected first year’s salary. Of course, income varies considerably by profession. Engineering and computer science jobs can see first year salaries of over $75,000 per year, while entry level clerical jobs can be just half of that.

Another way to keep a lid on your education tab is to consider alternatives to traditional four-year colleges.  Two-year technical degrees from community colleges can be incredibly valuable; with average first-year salaries often more than graduates with bachelor’s degrees in some areas, according to collegemeasures.org.

For those who are jumping into the student loan fray, here are answers to 8 important questions about student loans:

1) What are the different types of college loans? There are three ways to borrow for education: Student loans (Federal Stafford and Federal Perkins loans), parent loans (PLUS loans), and private student loans.

2) What is a Stafford loan? A Stafford federal loan is awarded to students who are enrolled at least half time in college, complete the (dreaded) Free Application for Federal Student Aid and demonstrate financial need. Two-thirds of these loans are awarded to students with family adjusted gross income of under $50,000. Stafford loans come in two flavors -- subsidized and unsubsidized. With a subsidized loan, the government pays the interest while students are in school; with an unsubsidized loan, the student pays the interest and can defer payment until after graduation. So subsidized Stafford loans are preferable to the unsubsidized variety. The term is 10 years, although other terms are available via consolidation.

3) What is the interest rate on Stafford loans? Dating back to 1992, Congress set the interest rate on federal student loans at fixed rates ranging from 6 percent for loans issued in the 1960s to 10 percent for loans issued between 1988 and 1992. By the end of 2006, student loan rates were at 6.8 percent. The College Cost Reduction and Access Act of 2007 phased in a reduction of the interest rates on subsidized Stafford loans for undergraduate students starting July 1, 2008. The phase on newly originated undergraduate loans was 6 percent for 2008-09; 5.6 percent for 2009-10; 4.5 percent for 2010-11; and 3.4 percent for 2011-12 and 2012-2013. The rate is scheduled to revert back to 6.8 percent for the 2013-2014 school year unless Congress agrees to keep it where it is, which it is expected to do.

4) How much can an undergraduate borrow through a Stafford loan? 

Dependent Students	Annual Loan Limits
First Year	$5,500 ($3,500 subsidized/$2,000 unsubsidized)
Second Year	$6,500 ($4,500 subsidized/$2,000 unsubsidized)
Third Year and Beyond	$7,500 ($5,500 subsidized/$2,000 unsubsidized)

5) What is a Perkins loan? A Perkins loan is a subsidized federal loan offered though colleges. It works like this: The U.S. Department of Education provides funding to the school; the school determines which students have the greatest need; and then the school combines federal funds with some of its own funds for Perkins loans for qualifying students. The government pays the interest on the loan while the student is in school and also during the 9-month grace periods. There are no origination or default fees, and the interest rate is 5 percent for the 10-year repayment period.

6) What is the Federal Parent Loan for Undergraduate Students (PLUS)?PLUS loans allow parents to borrow money for uncovered education costs. Unlike with Stafford or Perkins loans, larger loan amounts are available up to the total cost of college, at a fixed interest rate of 7.9 percent. Interest is charged from the date of the first disbursement until the loan is paid in full. Credit checks are conducted for the loans, and PLUS loans are the financial responsibility of the parents, not the student.

7) What is the difference between a PLUS loan and a private loan? Private lenders may offer more flexible repayment options and perhaps a lower interest rate. However, more private loan rates are variable, which means the cost of the loan can rise in the future.

8) Can I refinance an existing loan? If you have a federal loan, then the process is pretty easy – just go to the government’s re-fi web site,  and determine if the current rate is lower than your current combined rates. The process is much more difficult for a private loan, especially for recent graduates who have not yet established a solid credit history. Additionally, there are only a half dozen private consolidation loan programs and it is notoriously difficult to qualify for a re-fi with them. The Consumer Financial Protection Bureau recently issued warnings about refinancing student loan debt.