Archive for College Planning

Financial aid: sorting through student loans

English: A vector image of a mortar board hat.

When I see clients with really big student loans, the money has been used not for college, but for graduate or professional education. Many people will borrow $20,000-$40,000 for college. I view that as an acceptable amount if the person has any reasonable hope of employment after graduation. The rule of thumb is don’t borrow more than you can reasonably expect to make your first year of employment. That way, you’ll end up paying about 10% of your income, and that’s doable if you are at least a little frugal. After all, many people spend that much on a car and pay it off in 5 years.

Where there’s really trouble in River City is when the student has an undergrad loan for that much, and then goes on to graduate school. Getting a masters or PhD in an academic field is pretty chancy unless you’ve carefully researched employment possibilities. Without getting significant aid you’re probably wasting your time and money—we all know how difficult it is to get a job in academia. Even with a free ride, you need to think very carefully about the lost income over the years when you continue to be in school.

If your career really requires an advanced degree, you should first look into whether your employer will foot the bill for at least some of it, whether you can study part time, attend a weekend intensive program, etc. But let’s say you’re determined to pursue a professional degree that pretty much requires full time study (Physical Therapy, Occupational Therapy, prestigious MBA and law school programs, etc.) Let me exclude from this discussion medical school because I must confess I don’t know how even affluent middle class people can pay for it any more. Medical school, particularly an advanced specialty, can cost hundreds of thousands of dollars and unless family is willing to foot the bill, I think young medical students are, under our current system, pretty much faced with career-long debt.

The kinds of loans available to you are going to be quite different from the more favorable ones that you might have had as an undergrad.

Basically, the fun subsidies are over. You’re not going to see that lovely subsidized loan (where the Feds cover your interest while you’re in school) at that 3.76% interest rate. The Ford Unsubsidized Loan (also known as the Stafford loan) is the best deal you can probably get as a graduate student. Interest begins accruing as soon as you take the loan, although payment of interest and principle can be delayed until 6 months after you graduate. And the rate (currently) is 5.31% + a 1.069% origination fee.  The loan limit is $20,500/year.

Do you need more than that, Bunkie? First, explore everything you can to cover other costs—teaching assistantships, a job, choosing a state school, scholarships and awards, and living at home with mom and dad. Your next option is a Direct PLUS loan, where you can borrow up to the cost of attendance (including reasonable living expenses) minus any other loan amounts (like the Ford Unsubsidized). You must have good credit for these loans. The interest rate on this loan is currently 6.31% plus a loan origination fee of 4.276% deducted as dispersed (so you have to borrow more in order to cover the fee).  You can choose a 10 to 25 year (ouch!) repayment plan on these loans.

Once you exhaust these possibilities, you’re into private loans. Some are made directly through the school and some come from private lenders. These are fraught with perils:

  • Are they fixed or variable? The fixed rate can be 5% (usually only if you’re already earning money or have a parent co-signer) up to more than 12% (thanks Sallie Mae). Before you sign for a variable with teaser rates, think about whether you expect interest rates to go up significantly over the term of the loan (yes, probably).
  • Do they require a co-signer? Note to parents: no, no, no. If you don’t know why, we need to talk.
  • Do you have to make payments while in school? Interest?
  • Do they have financial hardship forbearance? This doesn’t mean you get off the hook—it just means they won’t go after you while you’re ill or unemployed—but interest continues to accrue.

 

As you can probably tell by the length of this post, graduate school financial aid (and it’s almost all loans) is really complex and you really need to know what you’re signing before you choose how much, and how to borrow. Please use those research skills you learned in college to understand the different possibilities and traps of these types of loans.

 

Resources:

For more specifics on Federal student loans, comb this site.

More information on the terms and pitfalls of private loans can be researched here.

 

Save

Save

Bernie Sanders’s “ridiculous” proposals

U.S. Senator Bernie Sanders of Vermont

U.S. Senator Bernie Sanders of Vermont (Photo credit: Wikipedia)

I can hardly open the Wall Street Journal without seeing an article about why Bernie Sanders’ proposals won’t work, but I’m not buying it. Sure, any sort of change at all is going to have some unintended consequences. But that’s been true of just about every single governmental policy in the last, oh, 100 years or so. Of course, some people will benefit more than others—just as they did under the Republican presidencies. But, like Bernie, I’d like to see the greatest good for the greatest number, and I’d most like to see policies that will benefit the hard working middle class, tamp down extreme disparities in wealth, and provide basic social supports so that no one lacks basic healthcare, housing, nutrition, and the opportunity for an education.

I like government to stay out of my hair as much as the next person. Hey, I homeschooled my kid for 10 years while paying a pretty big property tax bill to support the local schools. I’ve yet to meet the person that actually enjoys paying taxes. But, as a financial planner, I ask what return I’m going to get on my investment—is there benefit for my (many) bucks?

Healthcare

Really, I have to laugh when I listen to the Republicans pounding their chests about how long you’ll have to wait for a doctor’s appointment if we get Bernie’s single payer national health program. In January I decided to find a new internist, since my previous one has decided that he can’t make a living billing even the best health insurance around. Of course, maybe if he downsized his suite of offices on Lake Shore Drive and didn’t have 4 receptionists chatting to each other at the front desk(who, by the way, NEVER answer the phone), he might be able to eke out a living of, oh I don’t know, a pitiful $300k or so. I had to call 5 recommended internists before I found 1 who was even taking new patients, and then I had to carefully check just WHAT Blue Cross insurance they would take (i.e. not many from the Health.gov marketplace). And then, I have to wait 4 months (mid-April) to get in to see her—and I have no idea whether I’ll even like her, so theoretically if I interviewed 3 practitioners, it could take the better part of a year of waiting to see a doctor for actual examination. For a dermatologist I saw in October, I was told to go home immediately and schedule my 6 month checkup or there wouldn’t be anything left. I can’t imagine that it COULD get all that much worse.

What about the charge that your taxes will skyrocket? Right now I pay $10,144.20/year for a plan that covers me and my daughter, with a $3,500 deductible. It’s an old policy—yes, I liked my insurance and just as President Obama promised, I got to keep it. I haven’t seen any proposal at all that suggests that your taxes will go up by $10,000 a year if we get a single payer. Yes, if you’re employed by a company that pays most of the health care cost, you probably don’t see that kind of bill, but you’re paying it nonetheless—in lower earnings. Unless, of course, companies find a way to offload a cost without any salary compensation. Oh wait, that’s already happened to your retirement. Remember that antique thingy that your parents had—a pension?

I’d happily pay more taxes for better health care for all—prenatal care, lead screening, diabetes prevention, you name it. The comment about how it will never work? It DOES work in every other Western nation, all of whom have better health outcomes than we do. Yeah, maybe hospitals and insurance companies would make less. But something tells me they’d find a way to survive—perhaps by providing the same healthgap insurance they currently provide to Medicare users. Maybe it would create more elite stratification—it all depends on how high the basic bar is set. Once it’s a universal, there’s a limit on how much extra most people will pay. It seems to me that in Europe people still become doctors, and in interviews I’ve heard even they all talk about the better quality of life.

Incremental change is easier than radical change and usually works better. Obamacare was that incremental change. Now, let’s make another one.

Public education for everyone

Some bonehead Republican (I think it was Trump but he says so much crap I lose track) declared that a free university system would make us like Europe, and foreign students all want to come to the U.S. for our superior education. Simply not true. It’s true there are a lot of foreign students on U.S. college campuses for at least two reasons I can see: colleges heavily promote it because these students generally pay full freight, and they’re coming from countries where the university system is generally rigid or substandard (India and China) or where the system offers little potential or is in political turmoil (especially women from Middle Eastern countries). European students are absolutely NOT in evidence as undergrads—in fact, the traffic is the other way since even the best Euro universities are cheaper and easier to get into than the U.S. equivalent. Sure, graduate students come from all over (but again, not predominantly Europeans) but plenty of traffic goes east across the pond, too. There’d probably be more if most U.S. students weren’t so completely incompetent in and terrified of functioning in another language.

Would this put private colleges out of business? Probably, yes and no. The financially weaker ones might have to recast their mission to actually offer programs that would be worth paying for, and a lot of them would fall by the wayside. Oh wait, that’s already happening. The elite schools? Not so much—over half the attendees are already paying full freight, and an awful lot of parents around here would pay absolutely anything to get their kid into those places (you know who you are). I don’t think that will change, and most of these places could already fill their freshman classes three times over with qualified applicants. I don’t think they’ll see empty seats if their application ratio goes from 10 for every 1 accepted to 3 for every 1 accepted. And maybe an expanded public system will stop the horrendous college arms race we’re currently experiencing, and the horrible impact on the mental health of college students.

Right now, its college or you’re a failure. Maybe some changes would produce quality technical and trade education as a viable and respectable option. Pinch me, I’m in Europe.

Social Security

This is actually a Hilary Clinton proposal—that Social Security be redesigned so that it doesn’t penalize women who have stayed home with children. Now there’s a family friendly proposal. Republicans will certainly continue braying that Social Security was never designed to completely fund your retirement. Right. Because when Social Security was designed, people had PENSIONS. Social Security should be redesigned to offer people a respectable retirement consistent with what they earned in their working life. It’s just ridiculous that contributions cease at $118,500 in income. And why not tax people with very high retirement incomes? If it would provide a decent life for the elderly (which we all hope to be someday)—I’ll pay. The societal good seems just compelling to me—and like all income increases, it would raise consumer demand (more money to spend) and not necessarily discourage savings, since everyone would want to live above the minimum. People who save now would continue to save, and people who save very little (the vast majority) would not endure a desperate old age. Our system right now punishes stay at home parents, people who’ve dedicated themselves to socially useful lower paid work, people who’ve gotten ill or taken care of their own elderly parents or got a late in life divorce. Don’t even get me started on the need for long term care—it’s going to take the tragedy baby-boomers are surely facing to confront society with that disaster.

Financial transaction tax

Whew, this one hurts. Bernie is proposing a .5% tax on every $1,000 transacted according to WSJ this morning. That’s pretty high for individuals, but maybe it will return some sanity and thoughtfulness to the process of investing, and slow down the rapid fire high stakes trading that individuals cannot possibly compete with. Does anyone seriously think that it will topple our markets, the strongest in the world? I would like to see some protection for individual investors, but my guess is that if this ever passes it’s going to be a lot more complex than what is currently proposed.

However the election resolves, I think we need to read the handwriting on the wall. Bernie’s policies are overwhelmingly popular with the millennials. Unlike the baby boomers who had no real political agenda except ending the Vietnam War (and then taking up the culture of hedonism), millennials seem to have real political beliefs and economic issues that they intend to fight for. As they get older and move into positions of control, I think we will all have to acknowledge that the times, they are a changin’.

 

The Right Design for Your Financial Plans

Cover of "The Spirit Catches You and You ...

Cover via Amazon

One of the real delights of having a kid in college is the terrific books they bring home. Much as I lament the lack of survey courses, and the fact that students can get out of college almost completely ignorant of the Western Canon (don’t stone me), some profs manage to force them to read haunting, thoughtful pieces that will follow them through life.

Recently, dearest daughter brought home The Spirit Catches You and You Fall Down. a study of the terrible collision between Western medicine and a Hmong refugee family over the treatment of their severely epileptic child. Anne Fadiman, the author, knows a thing or two about writing—she won a National Book Critics Circle Award  for the book, and she probably imbibed literature with her pablum, her father being Clifton Fadiman, the famous editor and author of the Lifetime Reading Plan. (Footnote: we used his wonderful book as a guide while homeschooling, so DD did get some smidgen of aforesaid Canon).

Spirit is so thought provoking and spellbinding that not only did it keep me up nights but two weeks after finishing it I’m still thinking about it every day. I’m not giving away anything to say that it’s all a horrific train wreck. If you’ve ever had experience with serious illness, you will find yourself identifying mightily with the Hmong family, and if you’ve ever dealt with annoying clients or even a recalcitrant child, you’ll feel for the doctors, too.

One of the most interesting questions the book raises is oh-so-relevant for financial planning—is perfect compliance with a plan necessary? or is there some lesser change that would work nearly as well? Is the correct answer always the one justified by numbers (and science) or are our beliefs and feelings (aka behavioral finance) just as compelling and important? Is there any middle way?

No, yes, no, yes, yes. We financial planners like the certainty and precision of numbers, so much so that we even believe them ourselves. If our projections say your money will last your lifetime, and you can spend exactly $84,237 per year (pick a number), we breathe a sigh of relief, print out the report, have a reassuring client meeting, and off you go. But change the assumptions, the conditions, or the faith of the people involved, and maybe the medicine doesn’t work quite so precisely. It’s critically important to recognize that the best prescription is dependent on certain conditions, but must be tweaked for individual circumstances, personality, and life situation.

Of course, the best plan won’t work if you don’t carry it out. But as Lia’s doctors found out, the plan won’t work if your beliefs, abilities, and commitment disrupt it. I see this so often when people come to me with some robo-advice that proves they can never retire or afford college for their children. Faced with the model that says they must save umpteen thousand dollars, they get terrified and give up (and don’t take the medicine). But even less than perfect action can be life-saving. If you have only managed to save $20,000, or $10,000, or $5,000 (instead of $250,000) for college, more power to you! Believe me, you won’t be sorry to have it.

Other perennial questions—should I pay off the house or invest the money? Should I take the lump sum or the pension?—depend as much on what will bring you peace of mind as on what the numbers might indicate. These are questions that must be sorted through with an advisor who tries to get to know you, not just someone who will crunch numbers.

If you leave an advisor’s office (including mine) with a plan for investments and it turns out to require changes that you put off, and put off, and put off…then maybe the plan, while excellent, is simply not the right design for you. Moving in the right direction is better than doing nothing at all, and revisions should be made until you feel confident that you can proceed.

One of the horrible truths the book demonstrates is that not speaking the language can result in devastating  and costly consequences. In financial planning, too, advisors and the industry can speak a foreign and fatally confusing language. Witness the firestorm over fiduciary, which is a difficult word meaning only that the advisor must act in the client’s best interest. Why on earth would this be controversial, and why would the brokerage industry be conducting a bombing campaign to scare the individual investor into believing that this is somehow an evil requirement cooked up by the Obama administration? Because their bull (er, ox) might be gored and they might not be able to make usurious profits on the backs of people whose lack of industry comprehension they exploit. Or the confusion over fee-based (brokerage jargon that means we’ll collect a commission and charge you) vs. fee-only (which means we’ll charge you by the hour or based on assets managed). Fee-based is a subterfuge to confuse you and make you think you’re getting a better, and honest, deal. The brokerage industry is counting on the fact that most people won’t understand the difference, and that they’ll look like they’re wearing the white hats, too. They’re not.

If you don’t understand what an advisor is saying, how that advisor is being paid, why they are recommending what they are, and how they arrived at those conclusions, don’t stop until you do. Even the best doctors make mistakes, and learn from them, but patient, and client, input can have better outcomes if the plan fits well. And sometimes the questioning can produce a thoughtful change in tactics, one which might save the future.