Calculating the ROI of a 4-Year College Degree

People tend to assume that getting a college education is a good financial investment. But a new Brookings report Should Everyone go to College? [pdf] finds that the actual value of a 4-year bachelor’s degree can vary dramatically depending on factors such as field of study, type of college, graduation rate, and future occupation. As usual, I’m just plucking out the charts that I like from the study. As you read all this, remember that correlation does not mean causation.

The more selective the school, the higher the return on investment (ROI) as calculated by Payscale. Here the annualized ROI seems to average around 10%, while other studies have found it closer to 16%. Public schools tend have a higher ROI than private schools (remember that ROI isn’t in absolute dollars). The bad schools are pretty bad, as Payscale found that 1 in 5 have a negative ROI over 30 years.

The lifetime earnings of a graduate also varies widely with the type of major and subsequent occupation:

[Read more…]

Student Loan Debt Growing, Along With Delinquency Rate

Here are some interesting charts from a recent presentation about student loan debt by Donghoon Lee, an economist at the Federal Reserve Bank of New York.

Total student debt was the only type of household debt that continued to rise throughout the recent recession while most households were de-leveraging, and is now second only to mortgage debt. You’ve probably heard the “trillion dollar” number in the news.

Below is a recent breakdown of the student loan balances. While a greater percentage of students now have debt, 70% of loan balances are under $25,000. Six-figure debt loads only make up less than 4% of borrowers.

[Read more…] Contribute to 529 Plan with Credit Card

LivingSocial is currently offering a $50 Gradsave gift card for $24 (expired). The GradSave College Savings Gift Card can be redeemed for a $50 deposit into any national 529 college savings plan. So if you’re already meaning to contribute some money towards a 529 plan, it’s basically $26 in free money. I bought one and requested it to be transferred it to my daughter’s existing Ohio CollegeAdvantage 529 plan. Limit 1 voucher per customer, beneficiary, account, savings plan, or 529 plan.

(Reminder, you can save a little extra on your LivingSocial deals with cashback shopping portals like eBates ($10 new customer bonus), Mr. Rebates ($5 bonus), and BigCrumbs.)

Additionally, is currently waiving all credit card processing fees on their gift cards as another start-up promotion. So, if you wanted to contribute say $1,000 towards your 529 plan, now you could earn cashback, points, or miles on your credit card for that amount (with no fees) instead of via check or bank account transfer. Also potentially handy towards spending hurdles on $500+ credit card bonuses.

A day later, credit card fees are no longer waived. The fees are rather high as well, even for bank transfers.

529 contributions can be taken out without penalty. If you withdraw any earnings for unqualified expenses, then you will be subject to income taxes as well as a 10% penalty. Still, it may be a lot of paperwork and/or headache unless you keep your records very clean and simple.

Free Personal Financial Planning Course on Coursera

Online “open” education site Coursera has a free personal financial planning course starting January 14th, 2013. It will run for 7 weeks, requiring 3-6 hours of work per week, and you get (likely worthless) certification of completion at the end. I haven’t seen anything similar at the other major MOOCs, Udacity or edX. Here’s the course description:

This course was created to help those who cannot afford extensive planning assistance better understand how to define and reach their financial goals. It provides basic understanding so informed decisions can be made. The course can also be seen as a reference for individual topics that are part of personal financial planning.

Financial planning, in the broadest sense, is an effort to manage all aspects of a person / family’s financial affairs. Classically, that begins with planning family spending and extends through risk management (insurance), taxes, wealth accumulation, investing, and wealth distribution (retirement and estate planning).

I signed up as I’m interested in online education in general, and my hope is that it will be more interactive and engaging than just reading a good personal finance book. It appears to be based on a UC Irvine OpenCourseware course, which has all the modules online here. Interestingly, the course originated from a grant from the owners of the Certified Financial Planner (CFP) designation. However, if there aren’t good videos and/or assignments and it’s just a bunch of Powerpoint slides, then I’m going to be a MOOC drop-out.

Top 529 Plans: SavingForCollege 5-Cap Ratings List 2012 is a popular privately run site for researching and comparing 529 college savings plans. In June 2012, they updated their rating system which represents their “opinion of the overall usefulness of a state’s 529 plan based on many considerations.” The judgement criteria include:

  • Performance. They selected similar “apples-to-apples” portfolios with 7 different asset allocations from each plan and rated them based on historical performance. Rankings are updated each quarter.
  • Costs. Total average asset-based expense ratios among plans are compared, in addition to separately considering program manager fees, administrator fees, and annual account maintenance fees.
  • Features. This includes other factors that affect participants, including the ability of the plan change their investment options quickly if called for; creditor protection under the sponsoring state’s laws; availability of FDIC-insured options; minimum and maximum contribution restrictions.
  • Reliability. The appears to measure the likelihood of a good plan staying a good plan. Do they have experienced program managers? Does the plan have a good amount of assets? What is the quality of the documentation and reporting? How restrictive are the withdrawal and rollover processes?>/li>

Here is the full list of 5-Cap Ratings for each state, on a scale of 0 to 5 Caps. Note that there are separate ratings for in-state and out-of-state residents. Out of the 100+ different plans they rated, here are the 8 programs available directly to the public that attained the top 5-Cap Rating for both in-state and out-of-state residents (alphabetical order):

  • ScholarShare College Savings Plan (California)
  • Michigan Education Savings Program
  • Nebraska Education Savings Trust – Direct Plan
  • Vanguard 529 Savings Plan (Nevada)
  • New York’s 529 College Savings Program – Direct Plan
  • Ohio CollegeAdvantage 529 Savings Plan
  • Oregon College Savings Plan
  • Utah Educational Savings Plan (UESP)

In general, I would agree that the plans on this list are among the best, but remember to consider your in-state plan first for potential tax advantages.

College Tuition Inflation: Net Out-of-Pocket vs. Published Sticker Prices

Now that I have a renewed interest in college costs (read: a kid), I’m paying more attention to the ongoing student loan debt discussion. One major talking point is the rising cost, but there seems to be a big difference between the published or “sticker” prices and the actual prices paid by students after grants and scholarships. As illustrated by this SmartMoney article, only 1/3rd of private university student pay the full sticker price, and the most attractive students get the best aid packages. Therefore, I wanted to find information comparing the differences between actual and sticker prices. The results were surprising:

[Read more…]

Ken Robinson and Finding Your Passion

Passion can actually be a controversial subject when it comes to the early retirement / financial independence discussion. If you truly love your work, then why ever stop working? Alternatively, what if your passion is racing cars or playing basketball? The odds of making a living doing either is very slim. So is the answer to maximize yourself financially (even if you hate it) until you can pursue your passion in retirement?

Ken Robinson is an Professor of Education who argues that passion and creativity are the key for transforming education and the economy. He wrote a book called The Element: How Finding Your Passion Changes Everything that expands on his views and also includes many stories of people finding their passion. I find his ideas interesting and added this book to my reading queue.

Of all places, I learned about Robinson in an interview inside Costco’s monthly magazine for members (emphasis mine):

Costco Connection: Can you define what you mean by finding one’s element for readers who haven’t read your book The Element?

Ken Robinson: The element is finding that point where talent meets passion. Both are important. If you’re in your element, you’re doing something for which you have a natural aptitude. You get it. I’m not suggesting that you have to be the best in the world or the best in history, but you get it and you have a natural feel for it.

I know people for whom that’s true in every type of work. Aptitude takes many different forms. But being good at something is only part of this. To be in your element, you really have to love what you’re doing. If you love something that you’re good at you never “work” again. And you can tell. If you love something, time changes when you’re doing it. An hour feels like five minutes. But if you’re doing something that you don’t care for or doesn’t resonate with your own particular energy, then five minutes feels like an hour.

I really like this idea of time relativity (having it fly by also known as a “flow” state) as it really applies to me and many activities. It also reminds me of the following Venn diagram:

Finally, watch or listen to Robinson’s related TED talk about how schools kill creativity:
[Read more…]

The Future of Online University Education

I just noticed that perhaps my most “Liked” post is one comparing how rising cost of college tuition crushes the housing bubble and even the rising cost of healthcare:

The current rate of tuition hikes is clearly unsustainable, and I believe that within the next 10 years there will be a big disruption. The traditional 4-year college experience won’t go away, but what if you could also earn credits with an online class taught by an Ivy League professor and graded to equivalent standards of mastery? What if it cost less than community college?

Below is a recent TED talk by Daphne Koller about her startup Coursera which offers university courses online. Now, there is already lots of free lecture material online. That’s easy.

What made this talk different is that they are tackling the hard problems of making a affordable, accessible education both effective and legitimately recognized with grades, credit-hours, and eventually degrees. This means scaling the little things that usually work best in small groups – encouraging discussions, grading homework and exams, answering questions and providing feedback. How do you manage this in a class of 100,000 students? The ideas of peer-grading and peer-teaching are very intriguing. Also, they point out that technology can make eduction more personalized to the student as compared to traditional lecture-based classes.

Embedded video after the jump.
[Read more…]

Best Broker for Coverdell ESA / Education IRA

As a follow-up to my Coverdell ESA vs. 529 Plan comparison, I was looking for the best discount brokerage to open up a Coverdell Education Savings Account. Although you could also open an ESA at a bank for slow but steady growth, many people prefer to invest at a brokerage firm where they can invest in stocks and bonds.

Coverdell ESA information can be hard to find for many brokers. Sometimes the only way I could tell if they offered ESAs was to start an application and look to see if it was an option. Many of them consider the Coverdell ESA as an IRA and list it under “Educational IRA” alongside Traditional, Roth, and SEP IRAs. Therefore, when looking at the fee schedules you should assume that an IRA annual fee or IRA maintenance fee will apply to your Coverdell unless otherwise listed. Other things to look for:

  • Annual maintenance fees.
  • Minimum opening amount or minimum contribution size requirements.
  • Investment options – mutual funds, ETFs, individual bonds, etc.
  • Commission costs.

Two of the biggest mutual fund companies surprisingly do not offer Coverdell ESAs: Fidelity and Vanguard. (Vanguard no longer opens new ESAs, but still services old accounts.) My guess is that the low contribution limits and thus low balances don’t offer them much opportunity for profit, especially with all the additional paperwork involved for tracking contributions and withdrawals. Many mutual funds also have minimum initial investments higher than the $2,000 annual limit.

Top Pick

TD Ameritrade. The main reason why I picked TDA is that it provides the best available access to low-cost index ETFs due to their list of 100 commission-free ETFs which include the most popular ETFs from Vanguard, iShares, SPDR, and Powershares. This means you can build a very diversified portfolio with both no commission costs and using best-of-breed ETFs with high trading volumes. TDA also has no account maintenance fees and no minimum contribution requirements. $9.99 equity trades otherwise.

Other Worthy Options
The following brokers also offer Coverdell ESAs and have been ranked in various “top broker” lists from SmartMoney, Barron’s, and Consumer Reports. Many people may simply choose to open an account where their other accounts already reside. In no particular order:

  • Scottrade. $7 equity trades. Must open with $500. No account maintenance fees.
  • E-Trade. $9.95 equity trades. Must open with $1,000. No account maintenance fees.
  • Schwab. $8.95 equity trades. Schwab offers own line of low-cost index ETFs with no commission, albeit with limited volume. Must open with $1,000 or sign up for automatic monthly transfer of $100 or more. No account maintenance fees.
  • TradeKing. $4.95 equity trades. No minimum to open, no account maintenance fees.
  • Capital One 360 Sharebuilder. $4 scheduled window trades (not real-time). Offers dollar-based trades. No minimum to open, no account maintenance fees.

Coverdell ESA vs. 529 Plan Comparison Chart

I’ve been doing some research into college savings plans, and here is a side-by-side comparison of the Coverdell Education Savings Account (ESA) and the 529 College Savings Plan. The Coverdell used to be known as an “Education IRA” and still functions similar to a Roth IRA for qualified educational expenses. However, 529 plans also offer tax-free growth and seem to be much more popular these days. Each plan has its own set of strengths and weaknesses.

Coverdell ESA 529 Account
Federal Tax Advantages Earnings grow tax-deferred and withdrawals are federal income tax-free when used for qualified education expenses.
Earnings grow tax-deferred and withdrawals are federal income tax-free when used for qualified education expenses.
State-Tax Deduction for Contributions No. Possible, state-specific.
Qualified Expenses Qualified elementary, secondary, and college education expenses.
Qualified college expenses only
Contribution Limits $2,000 annually for 2012. After that, it reverts to $500 annually unless extended again by Congress. Technically, the limit is the “anticipated cost of a beneficiary’s qualified education expenses”. This results in state-specific total limits of ~$200,000 or more.
Income Limitations Contributions are phased out for married filing jointly with MAGI $190,000 to $220,000; single filers MAGI $95,000-$110,000. (2012) None.
Investment Flexibility Open at broker of your choice and invest in any bank deposit, mutual fund, or individual stocks and bonds. Buy/sell as you like.
Limited to the selection provided by each state-specific plan. Investment changes only allowed twice a year.
Beneficiary Limitations Can change beneficiary. Beneficiary must be under 18 during contribution phase, and the funds must be withdrawn by age 30. Can change beneficiary. No age restrictions.
Financial Aid Treatment A parent-owned Coverdell ESA is reported as a parent asset on FAFSA. If owned by grandparent, it is not included in FAFSA.
A parent-owned 529 Plan is reported as a parent asset on the FAFSA. If owned by grandparent, it is not included in FAFSA.

[Read more…]

CollegeAdvantage $50 Tax Refund Bonus Offer (Existing Customers)

The Ohio CollegeAdvantage 529 Plan has a new promotion for existing account holders linked to tax refund season. If you make a new one-time contribution of $3,000 or more by April 30th, they will give you a $50 bonus. The $50 bonus will be applied on or before June 15, 2012. Account must be opened prior to March 1, 2012.

I received this offer by e-mail, but you can see it when you log in. There is no promotion code required. The $50 bonus contribution will be invested in the CollegeAdvantage investment option with the largest balance as of June 15, 2012.

$50 is only 1.7% of $3,000, but if you were going to contribute anyways it’s something – and sadly double what a savings account would pay you in interest on that same $3,000 over an entire year. Also, rollovers from outside 529s do indeed qualify as a contribution. I have money in the Ohio plan and have found it a solid plan with low-cost investment options, so if you’re in a more expensive 529 then this could be good time to move money over. It’s regularly ranked as a top plan by Morningstar.

Pay Your Kids To Fund Their Own Roth IRA?

You’re probably aware of the wonders of the Roth IRA and how it allows your money to grow completely free from taxes, even upon withdrawal. An added wrinkle is the lack of age restriction, so that even kids with earned income (wages, salaries, tips) can contribute to a Roth IRA up the lesser of their taxable income or $5,000.

Along those lines, I received a PR e-mail from a site called The idea is that you pay them “tuition”, and in return they pay your kids official job income that makes them eligible to contribute to a Roth IRA. They claim to follow all applicable child labor laws for those aged 14 to 17 (thus the name). Your kids do thing like fill out marketing surveys, but you’re essentially buying them a job. Digging through their fee structure, roughly 50% of what you pay them is skimmed off to go to the site owners.

Naturally, my question was – why can’t I just do this myself? The idea of paying your kids to do things like babysitting, lawn care or landscaping work, or manual labor seems simple enough. However, this Fairmark article argues that paying your own kids for chores is usually not considered taxable income, so you can’t “switch it” to taxable income for Roth IRA purposes when it benefits you. I’m not completely convinced, but for the sake of argument let’s explore other options:

  • Have the teenager earn money via traditional jobs like grocery bagger, cashier, food delivery, waiting tables, etc.
  • The child earns income from other neighborhood families doing things like babysitting, lawn care, or painting. The pay rate would have to be at reasonable market rates. You could even work out a “I’ll pay your kid if you pay mine” agreement, if you find a like-minded parent.
  • If you run your own business, you could pay the child for more clerical or administrative-type duties such as proofreading, delivering documents, or office organization.
  • If the teenager is especially industrious, they could be doing more skilled work like graphic design or making iPhone apps.

There would still be some loss, as their gross income would be subject to payroll taxes like Social Security and Medicare, as well as a small amount of federal income taxes (less than 10%). But if your child has the discipline to not touch the money for decades, the tax-free growth could be enormous. You’d have to be comfortable with the fact that they could do whatever they wanted with the money at age 18 as they can withdraw the money after taxes and penalties.

The Parental IRA Match
Another move taken from this Forbes article for those that are already parents of teenagers with part-time jobs is to match their earned income. If little Jane earns $3,000 being a lifeguard, then let her spend her all or part of her take-home pay, but help her fund a Roth IRA to the full $3,000.

Effect on College Financial Aid
From my quick research, it appears that retirement accounts like Roth IRA are not considered an asset by the generic FAFSA form, but individual universities may deem them as a student asset. This could make for example 25% of the IRA to counts toward the student’s expected contribution, which doesn’t seem too bad.

Here’s a question for the parents out there – have you done anything along these lines? What did you do and why (or why not)?