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.

Student loan forgiveness—is it possible?


No doubt about it, student loans have become a crushing burden on young adults. Sure, we older folks can be all self-righteous and make speeches about how we put ourselves through college—I did, both college and graduate school. I don’t believe it’s possible any more—what a student is able to earn summers and part-time will not be the $30,000 or so that is needed to attend a year at the University of Illinois. Forget the $60,000 needed at a private school. Even if you could do it, I’d hate to see your grades.

Yes, of course there’s the extraordinary student who can put together a scheme to spend two years at a junior college, start a business on the side, etc., etc. That’s not my kid, probably not yours, and it’s not do-able public policy for how to go through college. I’m not even going to get into how the Europeans have it so good, because I’ll only start frothing at the mouth. Queue up the methods of loan forgiveness.

Actually, no. If you want to know about how you can work for a non-profit for 10 years and get the remainder waived at the end, read this. For certain mostly health-care professions, you might be able to unload the Perkins loans this way.

I doubt anyone has actually had their loans cancelled in these ways. If you have, I’d like to talk to you.

Here are some reasons why I think you need to be extremely careful about depending on these programs for a solution to your debt. No such thing as a free lunch and you’re going to jump through a lot of hoops and there’s a pretty good chance they’ll still get you in the end. So be careful:

The non-profit repayment is only good for money you borrowed under the Ford Federal Direct Loan program. Perkins loans and others can be consolidated under a Direct Consolidation program, but all the payments you made before you consolidated will not be counted towards the 120 required payments (10 years). No payments before October 1, 2007, will be counted. So as far as I can tell, NO ONE yet has had their loans actually forgiven.

The Perkins loans are often the smallest of your loans, because the limit per year is $5,500 for undergrads, $8,000 for grads, and an interest rate of 5%. Even if you were granted the limit (and most people aren’t granted the full amount), getting this forgiven may not help you much.

Being chained to working for a non-profit for many years may cost you more in lost salary and promotion potential than the loan forgiveness is worth. It may not seem like it for a year or two, but the forgiveness for public service is because public service may pay so low (and have low promotion potential) that no one with loans could afford to work in it.

You must be fully employed in a non-profit. Want to take time off to have a baby or stay home with a child? Uh-uh. Get fired? Quit an untenable job? Get reduced from full-time to part-time? Your forgiveness evaporates. You are now responsible, again, for the full amount of the loan (even though your earnings for some part of your career were lower by working for a non-profit).

Income based repayment is another option that has some hidden consequences. If you’re drowning in the amount of loans in relationship to your salary (or lack thereof), you will probably look into it. This is probably a situation where you would be considering bankruptcy if those loans were anything but student loans. However, don’t get married. If you do, family income will be taken into account and unless you file separately (costing the higher earning spouse a nice chunk of change in increased taxes) you may lose eligibility. You will also pay a lot more in interest under these plans (for 20 years) than you would under a standard 10 year payment plan.

In most cases, your energies would be better focused on making a financial plan that includes job strategizing, spending reduction, and minimizing living costs.

These plans have been touted as relief for student borrowers crushed under our now-outrageously inflated college costs, as if they are some kind of get-out-of-jail free card. I wonder if anyone can actually use these programs, or if they’re just window dressing with some pretty heavy penalties.




College planning—this year’s version of what we’ve learned

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I’m the sort of person who mulls over mistakes, but it’s mostly to do better next time, or advise other people in a better way. There’s no point in it if it’s just to beat yourself up for something you can no longer fix. In all financial planning, you have to go forward from where you are. However, dear daughter is now a junior, and there’s nothing like continuing first-hand experience.

  1. Order it online. I strongly urge you not to buy a lot of stuff for the dorm room for your child’s first year. Dorm rooms can be shockingly small (maybe smaller than your master bath). Once you see it, you’ll be able to drive to the local Target or Bed, Bath, and Beyond and purchase identical items to what every other parent/child team is purchasing at the same time (wait until you see the lines during move-in week!) However, if you thought the dorm room purchases were then over, well, ha! Ha! Chances are your little darling will discover new stuff he or she needs every year. Do your looking at home, then order online and have it sent. The benefits? You get to curb what your kid is buying, they may deliver it for free (instead of you paying to send it), and in the case of Target they also give you 5% off—and another 5% if you wait for a one-day pharmacy rewards discount pass. Not a plug for Target, it’s just a card we have.
    Yes, I hate paying shipping. Particularly since it’s been 4 times a year—back to school, home for the month at winter break, back after winter break, home again for the summer. Oh wait, there’s that other season: the-stuff-I-forgot-on-the-first-shipment. Then there’s the care package season, the mom-misses-you season, the can’t-find-this-nearby season…
  2. The job on campus is sometimes better than any at home. Dear daughter has had more responsibility and learned more skills with her on-campus jobs than the few crappy jobs she’s landed during the summer. Don’t bank on the summer job—at least for DD, they’ve been really hard to land. And be sure your child looks hard for some good jobs on campus where they might actually learn something.
  3. Think carefully about choosing a school far from where you live. Although DD’s school has been perfect for her in many ways, we both wish she was in driving distance. I’ve blogged before about the cost of transportation and shipping, so I won’t hammer that again. However, even a prominent school’s best network may be in a fairly close radius to campus. Resources for internships, summer jobs, etc. may be best nearby. If your child wants to stay on either coast, that’s fine, but if she wants to return to the Midwest, not so much.
  4. Find a doctor near the school, but make sure they’re in your provider network. The farther away, the less likely your current doctor really knows anyone. Student health services can handle a lot (although they generally won’t bill insurance—have fun) but some events require real medical consultation. I hope you will never confront this, but be sure you understand the benefits available if your child needs emergency treatment or has any sort of psychological crisis. Mental health reimbursement varies greatly.
  5. If your child has the option of taking classes among several different schools, find out how they’ll get there. It’s a trend lately for nearby schools to form consortiums which allows schools to tout 5,000 classes available through our consortium. Okay, this is dumb but be sure to ask what transportation is available. Is there a dedicated van? How often does it run? How long a trip? (really affects scheduling of other classes) How can the student meet with the prof on another campus (particularly those who are, ahem! somewhat cavalier about office hours). If there’s no van and it’s a lab class, it might meet 4 times a week x $8 for the train and it can really add up over a semester.
  6. What will the school do if the student needs a class that’s not offered at the school? Now we know that every single child knows exactly what they will major in and want to do in life at the point where they enter college. And they’ll never, ever change their minds or develop other interests, right? Okay, I have the only one. But let’s say your child discovers that they want to go into a medical field after choosing the school based on the archaeology department. Will the school help your child find an Anatomy Lab? Any extra cost on that one? If you have to pay thousands for them to snag the class over the summer at another school, well, you’re not going to get any financial aid for that one.
    This requires some pretty close scrutiny if it happens. After all, the child who has to take a summer class isn’t going to be earning money, she’s going to be costing more. It’s probably only going to result in “extra credits”, not a reduction in tuition at the primary school. If the primary school arranges the class at a nearby school, check to find out if the academic calendars mesh—we had already booked the return-to-campus flight when we found out the other school started a week earlier.
  7. Make sure your child checks into what other people are giving away. You absolutely cannot believe what kids throw out. DD’s school has a “free box” system at every dorm. I think a kid could make a business selling on eBay what they can scrounge from these boxes. Some of DD’s major finds: bags of unopened pistachios, a new pair of Ugg boots, countless t-shirts and tops, and a $300 pair of Bose noise-cancelling headphones that were still under warranty and which Bose replaced for $97. (Then again, there was the container of Jello shots.) If your child’s school doesn’t have a free box, encourage them to suggest starting one. If you have some means to store the stuff, check out what’s dumped the week before graduation—refrigerators, coffee makers, bookshelves. I’d have a heart attack if I were the parent that paid for this stuff.

We’ve got one more year after this one. I can’t wait to see more surprise costs—I bet they’re still out there.