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:
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:
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?
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.
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.
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.
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.
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.
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 1417power.com. 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)?
The NY Times Economix blog had a provocative post a few days ago about student loan debt, pointing out a government study that showed that 90% of bachelor degree holders had less than $40,000 in student loans shortly after graduating.
The chart below, using data taken from the Beginning Postsecondary Students Longitudinal Study (BPS) by the Department of Education, shows the percentage of beginning undergraduate students who, six years later, had accumulated more than the indicated levels of debt. One bar is for college entrants, and the second is for the ones who actually received a bachelor degree in that timeframe.
- In a follow-up, the author clarifies that the study includes both federal loans and private loans via student survey.
- The study does exclude PLUS loans (Parent loans). About 15% of bachelor’s degree recipients have parents who took out PLUS loans.
- The chart does not include loan debt from graduate school.
- The chart does not include credit card debt incurred during school. According to a 2009 survey by Sallie Mae, the average student leaves college with $4,100 in credit card debt.
- The chart does not include other debt (home equity loan) taken on to pay for education.
- Debt amounts may grow over time as interest accumulates.
Only 10% with more than $40k in student loans? Only 1% with more than $75k? That’s still a lot of money, but somehow seems less than I would have imagined. I could have easily left school with more than $40k in loans, and that was a decade ago.
I feel like something is missing. Perhaps part of it is the exclusions I listed above. Perhaps I’m thinking about how fast student loan debt is growing overall. In 2010, there became more student loan debt outstanding than credit card debt for the first time. Via Fastweb:
Alex Tabarrok of Marginal Revolution writes that College Has Been Oversold:
Education is the key to the future: You’ve heard it a million times, and it’s not wrong. Educated people have higher wages and lower unemployment rates, and better educated countries grow faster and innovate more than other countries. But going to college is not enough. You also have to study the right subjects. And American students are not studying the fields with the greatest economic potential.
He shares the chart below comparing the number of graduates in various fields in 1984 vs 2009. Amazingly, compared with 25 years ago, there has been no increase in the number of students graduating in science, engineering, and math. Meanwhile, the number of students graduating in visual and performing arts, psychology, and communication and journalism has doubled.
This is a touchy subject. Just because you have a humanities degree does not mean you won’t find a meaningful career or financial security. The problem is the upfront price tag: can you really justify spending $100,000+ without a clear path to earning that money back?
From a supply and demand standpoint, the chart may help explain why college graduates are having a hard time finding jobs. For example over the last 25 years, I doubt the demand for psychology majors has doubled, and I really doubt the demand for engineering majors has stayed constant.
Here’s another 529 bonus that’s pretty easy to grab. (See Ohio 529 $50 bonus.) The FDIC-insured version of the CollegeInvest College Savings plan is currently offering a $50 bonus if you deposit $50 of your own money and set up automatic transfers. There is no minimum balance, and the terms only require a $1 monthly transfer for 6 consecutive months. Effectively, double your $50 to $100 in 6 months.
This is one of the several 529 plan options for Colorado, and you do get a state tax deduction for your 529 contributions if you’re a Colorado resident (subject to recapture if you don’t use it for a qualified expense). One that caught my eye was the stable value version that is paying a 2.84% rate for 2011.
Plan Review. This bank version itself is pretty bare, and is intended for people who want to invest very conservatively in FDIC-insured accounts. There are only two options: (1) a 1-year CD paying 0.30% APY, and (2) a savings account paying 0.05% APY on balances up to $20,000. Even if it’s tax-deferred… yuck. If you are currently in college or have a really short timeframe, then you could just grab this bonus and take a qualified withdrawal soon afterward. Otherwise…
Take advantage of plan rollovers. I’ve opened a lot of 529 plans for the bonuses over the years, and I enjoy trying out each new service. Some have surprisingly good online interfaces (Ohio), while others are shockingly bad (Oregon circa 2007). But the good thing is, it’s pretty easy to roll over funds from one 529 to another existing plan. You usually just have to fill out a rollover form.
Updated… The Ohio CollegeAdvantage Direct 529 college savings plan is now offering a $25 bonus contribution if you open a new account and invest at least $500 of your own money. A guaranteed 50% return-on-investment! The promotion code is PLAN. Offer ends June 1, 2012. The $25 bonus will be applied on or about June 15, 2012 as long as the account is still open with the original $500 initial contribution. You can easily set up an automatic contribution of as little as $25 every month. I’ve had mine going for over two years now, and I barely notice it anymore.
How is good is the Ohio plan relative to other state plans? Well, you should always check if your own state plan has special incentives. Mine doesn’t, and I hold my 529 assets in the Ohio plan. Another good one is Utah, although most plans with Vanguard investments are going to be well below-average in costs. I like Ohio because they offer low-cost conservative investments for college, including high-yield CDs and inflation-indexed bonds. (As of early 2012, TIPS and CDs are at record-low yields, so I am shifting a small percentage in to equities.) I should have bought more of that 10-year CD at 5% APY.
Expired Promotional Codes
PLAN (for $50 expired 11/18/2011)
Here’s some articles that caught my eye this week:
Calorie counts don’t change most people’s dining-out habits – Washington Post
Apparently, telling people the amount of calories on menu items doesn’t change their eating habits, cheap or not. Now, I know that I personally do find it helpful, because many times I’m eating out primarily to hang out with friends and the food is not the goal. But in general, we must fight our human nature:
Experts say that for most diners, the issue is not about having information but about lacking self-control. Behavioral economists have for years zeroed in on a logical hiccup: We are unable to balance short-term gains with long-term costs. Many humans are simply really, really impatient. With eating out, the gains are immediate (yummy giant burrito!) and the costs are delayed (staggering bills for heart disease!).
Working families’ incomes have grown in recent decades. But the gains came mostly because they worked longer hours than because of wage increases, according to new research by the Brookings Institution‘s Hamilton Project. […] Among two-parent families, median earnings did rise by an inflation-adjusted 23% from 1975 to 2009. But the parents’ combined hours worked increased by 26% during the same period–accounting for most of the income gains.
The median income for two-parent families rose to $70,000 in 2009, for working 3,500 hours a year on average, compared with working about 2,800 hours in 1975 to earn $56,600 (in 2009 dollars). Hmm.
Law School Economics: Ka-Ching! and Reactions – NYT
Law schools have the power to raise prices and increase enrollments without any decrease in demand… even as the job market worsens for lawyers. Result: Law school tuition rises 4x faster than even overall college tuition costs, which are already skyrocketing. Are law schools abusing this pricing power?