College & Retirement #3 of 4

February 21, 2017

February 22, 2017

Taken up in this blog:
  • Parent borrowing
Taken up in the upcoming 4th blog:
  • Social Security
Previous blogs in this series:
  • Retirement Readiness
  • Paying cash -- is it always best?
Loans to pay for the costs of college, for many people, seem an inevitable choice. There are two, common sources of loans that involve parents and/or grandparents.
  • PLUS
  • SallieMae
PLUS is the acronym for Parent Loan for Undergraduate Students. As with the Stafford Loan program which is a loan directly to the student, PLUS is federally guaranteed with an interest rate tied to the T-Bill. For the current school year, that rate is 6.31%. The loan origination fee is 4.276%.

SallieMae loans are often co-signed by the student and parent or grandparent. Although no loan fee is charged, interest rates are variable and approach 10%.

Either way the loan is offered based on credit-worthiness, and shows on future credit reports. PLUS and SallieMae loans begin accruing interest upon disbursement. Repayment forbearance is available upon application and approval, but the interest continues to accrue and capitalizes into the balance due on the loan anniversary.

What does that look like in real life? Take a family with two children. The parents are on the hook for $50,000 for each child (either PLUS or as co-signers on SallieMae). Let's assume SallieMae offers the same 6.31% as PLUS (just to keep the math simple). After ten years the $100,000 principle plus interest = $184,392. 

Let's say those parents were 45 when they took the loans to pay for college for the kids. Had they paid that $100,000 into their retirement accounts, netting a modest 5% (five and not 6.31) per annum, by their 75th birthday they would have an additional $432,000 for those later retirement years.

That number ($432,000) is called Opportunity Cost. It is, in fact, the true cost of paying for your children's college education.

Is that really what you want to do?

Posted in College Planning, Retirement Planning, Wealth Creation Strategies.

College-&-Retirement -- #2 of 4

February 14, 2017

Taken up in this blog:
  • Paying cash -- is it always best?
Taken up in successive blogs:
  • Parent borrowing
  • Social Security
Previous blogs in this series:
  • Retirement Readiness
Few people stop to think and realize that paying cash and borrowing are, in fact, both forms of financing a purchase. Paying cash is nothing less than self-financing.
Here's a specific illustration using the Federal Student Loan program as an example.
  • Parent "I don't want my child graduating with debt. Therefore, I will pay the costs of college."
  • Stafford Loan privileges = $27,000 over four years ($5,500, $6,500, $7,500, $7,500) @ 3.76% p.a.
  • Repayment amortized over 10 years.
  • Assuming you can earn 3.76% on your money, if you pay cash and thereby give up that principle plus the accumulating, compounding interest, over 10 years you will realize a cost of $39,054. If your student takes the Stafford Loan and repays over 10 years, the sum of the repayments equals $39,054.
  • In addition, by taking advantage of the Stafford Loan, you keep control over your money; you have the cash to pay off the balance owed at any time, and your student creates a positive credit history.
  • Obviously, if you can earn more than 3.76% on your money then borrowing makes even more sense. You are leveraging your cash to create wealth.
The single most important tool in wealth creation is to take advantage of uninterrupted, compounding interest. If interest rates are favorable to borrowing, then paying cash is less advantageous than it appears on the surface.
"Debt free" is the mantra of a money talking entertainer heard on radio stations across the land. What the talk-radio host fails to disclose is this fact: there is a difference between a debt and a loan.
  • Debt = a financial obligation which is not offset by collateral of equal or greater value, and which can be discharged only from future earnings.
  • Loan = a leveraged position using collateral to retain access, use and control of your cash. A loan, balanced by collateral of equal or greater value, can be satisfied on any given day. Amortization is a tool to retain access, use and control of your cash; or to perhaps even gain wealth through more favorable rates of growth than the loan rates cost.
Remember: you finance every purchase you make. You either pay cash and lose the interest you could have earned, or you borrow at the same or lesser interest and leverage your cash position. Given the relatively low interest rates of Stafford Loans, those should be considered as an option for college expenses. We can help you with the math. 

Posted in College Planning, Retirement Planning, Wealth Creation Strategies.

College-&-Retirement -- #1 of 4

February 8, 2017

Taken up in this blog:
  • Retirement Readiness
Taken up in successive blogs:
  • Paying Cash
  • Parent Borrowing
  • Social Security
RETIREMENT READINESS

In a Prudential Investments [http://www.prudential.com] study of American's preparations for retirement the facts revealed are
  • 80% of us claim that retirement is our top financial priority;
  • most surveyed adults gave themselves a grade of C or worse for their own preparation;
  • 40% claimed they have no idea how to better prepare;
  • 63% say investing is too confusing; and
  • well over half plan to work beyond retirement age, at least to supplement retirement income.
There are four questions, the answers to which everyone must know:
  1. For your nest egg to provide you with the standard of living you want, and still last your natural lifetime, what rate of return must you earn in your current retirement plan?
  2. For your nest egg to provide you with the standard of living you want, and still last your natural lifetime how much more do you need to be saving on a monthly or annual basis?
  3. For your nest egg to provide you with the standard of living you want, and still last your natural lifetime how many more years will you have to work?
  4. If you make no changes to your current retirement plan, by how much will you have to reduce your lifestyle so that your nest egg will last your natural lifetime?
Given that the number one fear of currently reitred Americans is that they will outlive their money, would you like to know your answers to those 4 questions? Contact me via the tab "Contact Us" -- top right corner.

Insights Gleaned from Top Economist

January 19, 2017

      Sarah Watt House
Economist at Wells Fargo Securities
 spoke this morning (January 19, 2017) at the Business Today Newsmakers Breakfast, Cornelius, NC. My interpolations from her insights include:

  • Be ever more careful and reluctant to borrow money to pay for college
  • By exploiting relaxed repayment plans, more students and parents are loan-current, but . . .
  • Employment outlook for college graduates is looking favorable.
Borrowing Be Reluctant
Federal Student Aid and the Parent Loan for Undergraduate Students (PLUS Loan) are linked to the Treasury Bill rate. Inflation is rising, interest rates are rising, and each (more than likely) shall continue to rise. Although Federal loans are at a fixed interest rate, that rate is adjusted annually (linked to the T-Bill rate) for each new installment.

In other words, assuming you graduate in four years, you do so with four different loans, each carrying its own interest rate. As T-Bill rates rise, so will each, successive year's loan rate. If you enter college depending on borrowing as your primary means of paying, you may find yourself, financially, between-a-rock-and-a-hard-spot before you complete your degree.

I recommend that no parent use PLUS. If you do not see how you can send your child without that, please contact me. I may be able to help you discover alternatives (usually; but not always call me and let's talk).

Pros/Cons of Repayment Plans
According to Ms. House more students are utilizing the federal IBR (Income-Based Repayment) plans [https://studentaid.ed.gov/sa/repay-loans/understand/plans/income-driven]. The upside is that your debt-service is more manageable, relating to your income. The down side is that, often, repayment is stretched out over many, many years. That impacts debt-to-income credit worthiness when you are seeking a loan for a major consumer purchase (house and car, in particular).

There are also possibilities for student loan forgiveness based on tightly defined public service jobs. Although an option, remember that any amount forgiven is 1099'd in the year forgiven, and creates a tax-obligation for which you may be unprepared. I know a woman who successfully applied for forgiveness of over $100, 000 (one hundred thousand!) in student debt. She was elated until, the following January, the 1099 came in the mail. Her income for the previous year jumped from under $30,000 to more than $130,000 with the consequent income tax due by April 15.

Employment Outlook
Sarah is confident that employment outlook for college graduates is good, and shall remain so, at least in 2017, if not beyond. Good news for sure!

My caveat to that is, depending on your degree and planned career, not all job markets are equal. At the breakfast where Sarah spoke I was sitting with a gentleman whose 11th grader was thinking of either a degree in business or a law degree. My advice to him was to check the Bureau of Labor Statistics employment forecasts for specific professions, trades and industries. If the family heeds my advice the choice of majors will be resolved, I feel confident.

Posted in College Planning, College Planning Strategies.

How to Prep for New SAT, ACT Writing Tests

April 13, 2016

Posted on  by WOW Writing Workshop http://www.wowwritingworkshop.com
By Jed Applerouth
Applerouth Tutoring Services

Jed Applerouth
Beginning this spring, students will need to flex their critical thinking and composition skills when they tackle the new writing sections on both the SAT and ACT. The SAT has been completely redesigned, and the ACT has made multiple updates. As a result, the essay sections for both tests are now completely different from what they looked like a year ago. They are more rigorous than prior versions, however, these tests better reflect the kind of writing assignments students will typically face in college.
To succeed on either writing test, students need to get the basics right first. They need to understand the formats for the new essay prompts, and know what the graders will be looking for in a student's response.
The SAT essay
The SAT essay writing exercise has been transformed from an opinion piece into an exercise in textual analysis and critical thinking; this is similar to exercises on certain AP exams. Students will be asked to read a short (600-700-word) persuasive passage and write an essay response that explains how the author develops and supports an argument.
It is irrelevant whether or not the student agrees with the author (the task of the old SAT essay); the student's task on the new test is to articulate how the author uses evidence, rhetorical devices and structure to support a claim. Students will be evaluated on three measures:
  • Reading of the provided text
  • Analysis of the text
  • Writing skills
To optimize their scores, students will need to:
  • Actively read the passage
  • Scour for evidence that supports the author's main argument
  • Use quotes that demonstrate they understand the author's argument
  • Write a structured, organized essay that stays on topic
  • Use smooth transitions between paragraphs
  • Have an introduction, body and conclusion
  • Use a variety of sentence structures
  • Skillfully use vocabulary
  • Write significantly longer essays
While longer essays typically generate higher scores, students will be evaluated on both the quality and the length of their essay. The College Board, which administers the SAT, has doubled the time (50 minutes!) allotted for the new essay, and will provide four pages (up from two) of paper to write.
The ACT essay
On the ACT's revamped essay, students will get 40 minutes to analyze and respond to three distinct perspectives on a topic that concerns a broad, national issue. Students will be asked to:
  • Analyze and evaluate the three given perspectives
  • State and develop their own perspective
  • Explain why they agree or disagree with the perspectives given
  • Support their ideas with logical reasoning
  • Support their idea with detailed, persuasive examples
Essays will be evaluated using four metrics:
  • Analysis
  • Development and support
  • Organization
  • Language use
To generate higher scores, students must take their critical thinking up a level to identify the overarching themes across the three perspectives. For instance, do the perspectives address tension between change and tradition, or between the needs of an individual versus that of the collective?
Graders want students to critically evaluate the logic of the perspectives, and also to identify errors, assumptions, and potential pitfalls. Students need to organize their essay, use words properly, pay attention to grammar, transition smoothly between paragraphs and vary the sentence structure.
Is the essay optional?
Both the SAT and ACT have now moved their essays to the end of their tests and made them optional. But some colleges might require a writing test. It's best for you to find out how a school uses the writing test in admissions before making the decision to not take it. We always encourage students to write the essay, even if they think their schools won't require it. We've seen too many students discover after taking the test without the writing section that their new stretch schools require the essay. The additional time spent to stay for the essay can save a student unnecessary stress and headaches down the road.
The new SAT and ACT essays raise the bar for critical thinking and analysis, allowing students a chance to show off their thinking and writing skills. Students aiming for a highly competitive essay score would benefit from timed practice with the new forms and corrective feedback. This will help identify strengths and weaknesses early, allowing students to make adjustments and go into the official test ready to hit their optimal score.
Jed Applerouth is the founder and CEO of Applerouth Tutoring Services, an education services company with offices in major metropolitan areas across the country. A graduate of the University of Pennsylvania and Georgia State University, Jed is a Nationally Certified Counselor with a PhD in Educational Psychology. Since 2001, Jed and his team of educators have helped thousands of students across the country optimize their scores on the SAT, ACT, and other admissions tests

Posted in College Planning, College Planning Strategies.

Free Tuition for All?

March 31, 2016

Free Tuition? What might that look like? This is my thinking, and nothing more. I may be completely wrong, entirely right or (likely) a little right and a little wrong.

If beginning January 20, 2017 the next President declares free college tuition for everyone, this is what I think that would look like:

  • Tuition will not appear as a "cost" line item at colleges continuing to participate in the Federal Student Aid program. Some private colleges will opt out.
  • Costs may change at first, but they will creep up year-by-year until the "free tuition" is replaced by other fees and charges. Even with free tuition, room and board, mandatory fees and books will not be free.
  • Admissions criteria will roil with confusion. If college is free because of federal tax supplements, how can a student be denied admission? To manage enrollment, free tuition will be offered for limited college choices based on students' home zip codes?
  • If anyone can attend, and everyone attends tuition-free, there will be an impact on the marketplace value of a college degree. Degrees from private colleges that have opted out, and continue charging tuition, will be perceived as meritorious, and a two-tiered market value will emerge.
  • If college is tuition-free, what will be the motivation to complete a degree in four years? Students may find it much easier to stay, and stay and stay in the crafted comfort of higher education.
  • The federal government will seize some portion, or the entirety of current 529 Plan accounts, using the rationale that they are no longer needed. The argument will be made those funds are needed by the federal treasury to cover the costs of making college free.
  • The IRS will impose a new federal surtax to cover U.S. Treasury disbursements. It may be a tax added to filers with AGI above a certain dollar amount. It may be a surtax on filers above a certain income level who also have students attending college during that tax year. It may be a tax on intercollegiate sporting events and revenue. It may be all of those, and more.
  • Colleges participating in the free-tuition-program will be monitored as to salaries and capital expenditures. The federal government will not, you can be certain, pay a per-student tuition reimbursement college comptrollers think is fair (to wit: Medicare and Medicaid reimbursements to doctors). Tuition reimbursement will be according to a federal schedule, based on per capita census, with regional cost-of-living adjustments.
  • Professors will retire early; will exit for higher-paying, private-sector employment, or will devote less time to education and more time to writing, speech-making, fee-based private education, and other means of sustaining and increasing their personal incomes.
Where's the "free" in all of that?

Posted in College Planning.

College Affordability -- the sooner you know, the better

March 1, 2016

Do you understand affordability? How much money, per year, can you lay out on college costs for your children?  What factors must you consider?  What can you do to bridge the gap?

  1. How much money per year can you lay out on college costs for your children?
    1. Know the actual costs per year.
    2. Colleges publish "Cost of Attendance" estimates.
    3. Cost of Attendance includes tuition, mandatory fees, dormitory rent, on-campus meals, books and supplies, travel costs to and from home, miscellaneous out-of-pocket expenses
    4. Without borrowing any money, how much of that total can you pull from your monthly cash flow?
  2. What factors must you consider?
    1. What is the anticipated college-costs inflation rate? The prices do tend to go up every couple of years.
    2. Never, never, never touch retirement funds to pay for college. That includes money already set aside, and monthly contributions from current income.
    3. There are four questions about retirement to consider, all determined by your current retirement funding plans.  Based on what you are doing now (err on the side of caution), for your money to last throughout your spouse's and your life expectancy:
      1. What Rate of Return must your accounts average?
      2. How many more years will retirement needs require you to work?
      3. How much more do you need to be saving monthly?
      4. By how much will you be forced to reduce your lifestyle in retirement?**
**if you think you can do that, why not start now and put those extra dollars into your retirement account?
 
3. What can you do to bridge the gap?
a. Every student is eligible for the Federal Student Aid program (college loans to the student for which the parents have no obligation).  The loan amounts top out at around $27,000 over four years (with some additional possible up to about $31,000 total).
b. Federal Pell Grants may be offered for students from lower income families.  Those are need-based grants-in-aid, not loans.
c. Draw on resources that present the lowest, possible risk. Some people go to home equity.  The risk is, should something happen to your income down the road, you could lose your home to foreclosure. Obviously, reducing current lifestyle expenses during the college years is the safest option (although not the most pleasant) to free-up extra cash.

Sometimes families are transferring wealth away unknowingly and unnecessarily.  We offer a no-obligation/no-charge audit to help you know.

Posted in College Planning, College Planning Strategies, Retirement Planning. Tagged as Cost of College; College Affordability;.

You Interview the College

October 19, 2015

Interview the colleges before applying.  A formal campus visit is the perfect time for that.  Develop a set of questions that cover the details of things most important to you.  Ask those questions and make certain they are answered specifically. 
 
Campus culture has changed a lot since mom and dad were in school.  Some campus policies are greatly relaxed, others are more restrictive.  For example, words that you may use commonly even absentmindedly  around your home and in your community may be taboo at some collegeshttp://(http://www.campusreform.org/?ID=6770)
 
 What are the school's Core Values? ( for example:  http://www.udel.edu/prominence/principles.html) 
Learn the details of the specifics behind broad and benign statements of 
ideals.  How are those values practically applied on campus, in the students' lives?  Remember, you're going to be living at this place for four years.  Make sure it's a good fit for who you are as a person.  The most expensive decision you can make is to transfer colleges.  It adds time toward earning a degree; and time is money. 
 
To reiterate: the college scene, since your parents graduated, has changed so drastically as to be unrecognizable to them.  There is no safe assumption about campus life, about course-work and about costs of attendance. 

Posted in College Planning, College Planning Strategies.

Choose Your College On Purpose

October 4, 2015

Will where you grew up impact your college experience? Will your grades be enhanced or will they suffer based on your hometown? If you have a choice, is it better to greet your favorite professor with "Hey" or "Mahnin" (that's Yankee for Good Morning)?

Dialect and Influences on the Academic Experience of College Students is a research paper out of North Carolina State University and published in The Journal of Higher Education. The report indicates that "students from the South or Appalachian regions face challenges of perception in university classes. " Their accent makes them "sound stupid." (Ouch! Right?)

That report underscores the importance of each student choosing thoughtfully and intentionally a college or university -- choosing on purpose.  Facts, rather than imagination, will serve you better. Campus visits are worth the time and money.

High school students from Hough, North Meck, Lake Norman Charter, Pine Lake Prep, SouthLake Christian, Hopewell, Mooresville, South Iredell, Lake Norman High, Davidson Day, East Lincoln and a handful of others in the Charlotte, NC and Lake Norman regions are where most of our students attend. When asked which colleges or universities they are thinking about, with rare exception, a short list of two or three are mentioned. Digging a little, it becomes apparent that the students' preferences are based on what they imagine the college is like, rather than on facts they know for certain, and impressions they have gained from first-hand experience.

Research online and e-correspondence plus telephone calls to the Admissions Office of a college under consideration are invaluable in making good decisions as to where to apply and, ultimately, where to matriculate. Every college that gains a spot on your "seriously interested" list is worth a scheduled campus visit. Your list of questions, prepared in advanced, will significantly help you make the final decision.

We know that growing up in the South produces a lovely articulation. We also know that Southern students daily accomplish the highest levels of academic rigor. Let's be very patient with, and understanding towards those who don't know those facts -- even if they are PhD's.

Posted in College Planning, College Planning Strategies.

"I've got a full ride" and other urban myths

September 27, 2015

Students say the most amazing things.  They say them to us, but the most amazing they reserve for each other.  Among them is, "I'm going to the University of Havagreatime on a full ride."  Also popular is, "I'm going to get a lot of scholarships instead of student loans."  A common delusion suffered by parents is, "We're planning on scholarships to help us pay for college."
  • "On a full ride" -- remember high school?  It is a professional sport in high school to "one-up" your peers; to put down your rival; to stretch the truth while talking about yourself.  Yes, there are non-athletic, full rides.  There are also people who win the Mega-Zillion-Jackpot lottery.  I do not know any of those people, but I read about them in the news.  In SWIC's five-year history we've had one student go on a merit-based 100% scholarship.  She was valedictorian at a private high school.  And, by the way, we know of another valedictorian from a different but equally prestigious high school who is attending a well-known university with $0.00 (zero) in financial aid awards. 
  • "Lots of scholarships" -- according to the U.S. Department of Education only about 1% (one percent) of all educational dollars comes from private scholarships.  Many of those are linked to very specific qualifications.  For example, in my Sunday, Sep 27, hometown newspaper there was an article about a local student who received a very generous scholarship which he qualified for as an employee of Autobell Car Wash, Inc.  Many scholarships, if not most, are attached to very specific criteria.  It is worthwhile to check, and apply for all you qualify for.  Furthermore, many scholarships are "one offs," meaning you are awarded them once and that is all.  It is important to let your financial aid office know that fact.  
  • "Pay for college" -- Money for college comes predominantly from parents' check books, from student and parent loans, from a university's own resources (endowment, and tuition discounts) and from work-study earnings.  We advise parents to be prepared to pay one hundred percent of the cost of attendance, minus any student loans their child undertakes.  Any outcome better than that is a plus!  At SWIC we help families do better than that, nearly all of the time.  However, there is more art than science in the achievement.  Furthermore, if you will scroll down to previous blogs, you will understand that it is anything but automatic.
 

Posted in College Planning, College Planning Strategies.

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