The 4 Year Myth -- Hidden Costs

$600 million dollars a year in unanticipated, if not unnecessary college education costs due to students transferring from one college to another. According to Complete College America's "The Four Year Myth" 60% of undergraduates transfer at least once prior to completing a four-year-degree track. In so doing they lose credits for courses taken, and extend their length of stay in college by a year or more.

Six hundred million dollars is an eye-opening number, yet it still leaves you thinking about "all those poor people," rather than, "That's me!" Furthermore, there are other, often hidden costs associated with lingering around the ivy-covered walls longer than prescribed.

In a previous blog, The Four Year Myth A True Story (March 20, 2017; scroll to read it), there is cited the costs of two extra years. That includes cost of attending four extra semesters plus income not earned over that same period of time. The dollar figure cited ($220,000) is not theoretical, but actual and is borne by one family for one student for one undergraduate diploma.

Other hidden costs, seldom considered, include the time value of money, also known as opportunity cost. Here are two examples:

  1. Jack and Jill use retirement funds to defray education expenses. They take advantage of the IRS exception permitting a penalty-free withdrawal from their 401k account. But they still owe the tax due on the amount withdrawn. Even that, however, is not the hidden cost to which I allude. Let's assume J&J were earning, without a hiccup, 6% annually as their return on investment in a well-managed retirement fund; and they withdrew $40,000 to cover education costs of $10,000 per year for four years. If J&J are 45 years old, and retire at age 67 they lose 6% compounding growth on $40,000 for 22 years. What does that add up to?  One hundred forty-four thousand, one hundred forty-one dollars and change ($144,141.50). That amount may well equal their entire tax obligation on the full value of their 401k at retirement. Assuming their student is attending at the average cost of $23,000 per year, and assuming it takes only four years to graduate, the college education they are telling everyone cost them $92,000 in fact cost them more than $236,000.
  2. And now the example becomes even more hair-raising. Assume they avoided raiding their retirement fund and, instead, took out a line of credit on their residence (HELOC), paying 6% for the privilege. Let's also assume that, following the four years of college they got that loan repaid in ten years, totaling fourteen years of debt service.  Principle + interest equals $59,219, plus origination fees and other incidental costs. Add that onto the lost, compounding growth they could have gained had they invested $40,000 instead of borrowing it, and the cost of a four-year education approaches $300,000.
My question is, "What else could you do for your student with $300,000?" Until that question is answered it is hard, if not impossible to answer the question, "Four years of college: how much is that worth?"

Granted, there are other virtues beyond the "sheepskin." Many students find their life partner at college, enter into a career path that is fulfilling and remunerative, and develop a network of strong relationships that serve a lifetime.

I advocate, therefore, it's not just price, but value. Determining value takes work that, I believe, most families would do if they knew to do it. You've read this so now you know.

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

College-&-Retirement -- #4 of 4

Taken up in this blog:

  • Social Security
Previous blogs in this series:
  • Retirement Readiness
  • Paying cash -- is it always best?
  • Parent borrowing -- it costs more than you may think
Can the federal government seize your social security benefit to satisfy delinquent education loans?
Yes, your social security benefit can be, and will be reduced in order to satisfy a delinquent education loan balance.

There is another interesting survey-based indication that, across three generations from baby-boomers to millenials, people indicate they plan to continue working in their retirement years. Fifty-percent and more say they do not look forward to idleness as part of old age. They want to work. The follow-up question is, however, do you want to have that choice, or do you want to be forced to continue working in order to make ends meet?

Social Security is not a retirement income. However, for those who plan well, that universal benefit does provide an irreducible minimum, a floor if you will, and a hedge against inflation for a diminishing nest egg as the years roll on.

A "must-know" fact for parents and grandparents who are borrowing money, or co-signing loans to help fund their children's educations, is that most of those loans are federal guaranteed. What that means is the federal government can, and will attach your assets, including your Social Security benefits in order to satisfy the debt.

Succeed Where It Counts, Inc. advises against borrowing for college, beyond the Federal Student Aid opportunity. FSA loans are limited to $27,000 over the course of undergraduate studies (that ceiling may rise by an additional $4,500 for some students). For students who earn their degrees, and who secure employment in a career-quality job, that is manageable -- in the $250-$300 per month range, depending on the interest rates.

And that brings us to another subject -- student debt and the expectation of loan forgiveness -- for our next blog.


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

College-&-Retirement -- #3 of 4

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

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

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.

Posted in College Planning Strategies, Retirement Planning.

College Affordability -- the sooner you know, the better

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;.

Tax Deferred = Tax Postponed

http://www.atr.org/obama-has-proposed-442-tax-hikes-taking-office

The link will take you to a splash of cold reality.  And I'm not picking on the current President and Congress.  Since the 16th Amendment to the U.S. Constitution was ratified in 1913 tax increases have been a way of life for "we the people."

Tax-deferred accounts not only postpone the tax due, but also the tax calculation -- and you will have no say-so in what that calculation is.

Is your retirement leaning on tax-deferred (that is to say, postponed) accounts?

I am available to discuss with you facts that may change your life in retirement.

Posted in Retirement Planning.

Your best interests are my first concern

It is true that we live in a caveat emptor world. That means, "Buyer - beware!" I always advise my clients to understand thoroughly my process and recommendations. At any point along the way, your questions are relevant and of great importance; always ask your question. In addition to that, I strive to raise your level of confidence in me to a point where you can sleep at night after following my process and advice.

As part of that I am required to complete 24 hours of Continuing Education (minimum) bi-annually. (In fact, I am working on that this month; which is what prompted me to write this.) Above and beyond that I participate in weekly training, review and education; plus I attend conferences for multi-day training and education at least 4 times per year, every year.

It does not make me perfect. It does, hopefully, lend credibility and trustworthiness to my processes and services in your eyes -- the only ones, in the final analysis, that matter. Read more

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

How can you achieve growth and protect your principle?

http://www.telegraph.co.uk/finance/markets/10965052/Bank-for-International-Settlements-fears-fresh-Lehman-crisis-from-worldwide-debt-surge.html

We advocate balance. Discuss equities and risk with your investment advisor. Discuss with us alternative positions. Achieve balance, while still experiencing growth and the potential to leverage a cash position. Read more

Posted in Retirement Planning, Wealth Creation Strategies.

Your Greatest Financial Asset

We all have one great financial asset -- T I M E. Uninterrupted compounding of our money at interest, given enough time, will create substantial wealth.

Uninterrupted compounding at interest -- there is a lot packed into that short phrase. First, placing your dollars in an account that earns a competitive rate of interest, with a minimal risk of loss is the due diligence every wise person follows.

Second, the dollars must be left there to compound at interest. It has been said that compounding of interest remains, without rival, the single, most effective strategy to create wealth.

Third, that compounding must be uninterrupted. The single greatest mistake in wealth creation is interrupting compounding by "draining the tank." For example, saving money to pay cash for the next automobile is a great idea. It remains great until you withdraw the money to make your purchase. After that, you must start all over again.

The question naturally arises, "Well, if I save my money and never spend it, what's the point?" The question is important and the answer is this: collateralize your money, rather than spend it. Keep it gorwing over the longest possible period of time and you will create significant wealth.

Time is the difference-maker. Dollars saved in a compounding account, uninterrupted, given enough time, will make you wealthy. Read more

Posted in Retirement Planning, Wealth Creation Strategies.

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