Archive for the 'College & Education' Category
Wednesday, April 13th, 2011
The Ohio CollegeAdvantage 529 college savings plan is offering a $25 matching contribution if you open a new account and invest at least $25 of your own money. No promotion code required. Expires April 30, 2011. (Update: This offer is now expired.) A little kick to get started. Set up an automatic contribution of as little as $25 every month and you’ll barely notice it.
If your in-state plan doesn’t have good tax benefits, I would recommend looking plans with low-cost investment options such as the Utah and Ohio plans (really anyone that offers Vanguard investments). I like Ohio specifically because they offer good investments that suit my preference for very conservative investments for college, including high-yield CDs and inflation-indexed bonds.
Thursday, March 10th, 2011
After seeing my Grandparents and 529s article, a reader sent me a link to WhyPayTuition.com, which is a matchmaking site that promotes the idea of getting a “convenience” marriage solely for the purpose of reducing your tuition bill:
The easiest way to obtain free tuition is to get out from under your parents financial umbrella, and fall into the college’s low-income aid category. Most colleges offer free tuition, reduced tuition and reduced fees. [...]
The idea is to get married, remain married for the duration of your college years, then get a non-contested, no property divorce. The girl will keep her last name, you live separate lives, and no one will need to know you are married.
As long as both parties are US citizens, there appears to be nothing illegal about this. Certainly it seems a bit overboard, but so is giving any 18-year old with zero income the ability to take out $200,000 in loans. This NY Times article mentions several student-couples who have saved $50,000 or more by getting married and qualifying for in-state tuition:
Economically, in-state students have a huge advantage over non-Californians, for whom tuition costs an additional $22,000 a year (as of 2010-11). [...]
A few years ago, a student from the Midwest believed she could not afford the annual $30,000 in student fees (including $20,000 in out-of-state tuition), so she posted on Facebook that she was looking for a husband. [...] An out-of-state student whom she did not know responded to her post, and they married in 2007, the summer before her junior year. She graduated in 2009 and estimated that the marriage had saved her $50,000. The couple has divorced.
But being married has many potential pitfalls. This WalletPop article gets some opinions from a divorce lawyer:
“If you’re someone who is jumping through these hoops to save money going to college, at least be smart enough to get a prenuptial agreement,” he said.
Potential problems in not getting a prenuptual agreement, in addition to having to share earnings for life, include being responsible for the spouse’s debt and other issues that married couples face, such as inheritance if one person dies.
I know of people getting married for health insurance reasons, which outlines another societal problem. As the college tuition bubble also continues to grow, I expect more and more stories like this to pop up.
Monday, March 7th, 2011
There was a discussion on Bogleheads recently about giving money to grandparents so that could invest in a 529 college savings plan for their grandchildren. While it brought more light on what I think is a flawed financial aid system, it also presented a learning opportunity for me and any parent with college-bound kids.
The idea was that if a 529 plan is owned by someone other than the parent or child (e.g. aunt/uncle, grandparent), the plan will not be considered as an asset for financial aid purposes. It won’t be a parental asset, and it won’t be a student asset. This, in turn, will lower your “expected family contribution” and increase the possibility of receiving financial aid. Loophole! Note that this holds for the popular FAFSA, but not schools that use the CSS Profile, which requires you to list all 529 plans with the student as beneficiary.
However, there is a catch. If a qualified education benefit such as a 529 plan distribution is not reported as an asset on the FAFSA, then those distributions are reported as untaxed income to the beneficiary on the subsequent year’s FAFSA. (You must fill out a new one every year.) As a result, next year’s financial aid eligibility for the student can be significantly affected.
Still a loophole, just smaller. So what can you do? If a grandparent has money in a 529 plan for your child, they should delay taking a distribution until the student’s senior year in college, so next year’s financial aid picture won’t matter. (Assuming no graduate school or that you won’t need aid there.) According to Finaid.org, technically you can take the distribution any time after January 1st of the junior year in college.
Theoretically, the grandparents could fund a quarter of the undergraduate education this way, without the assets in their 529 plan ever counting against any financial aid eligibility. I never knew this, but it’s true unless future legislation changes it.
Sources: FinAid.org, The Guide to Federal Student Aid
Wednesday, February 9th, 2011
Inflation. Deflation. Hyperinflation. It’s all people seem to talk about these days. I’m always reading that you should always consider your investment returns after inflation. But what is inflation? Most of the time, they are talking about the Consumer Price Index for Urban Consumers (CPI-U) published monthly by the Bureau of Labor Statistics. This is based on the price of a theoretical basket of goods. Here are the components of the CPI, made into a nice pie chart by dshort.com from this recent BLS CPI report.
However, common sense tells us that we do not all share the same inflation rate. A long-distance trucker will be much more sensitive to the price of gas than a couple living in Manhattan. A grandmother who has owned her home since 1940 and doesn’t plan on moving doesn’t notice if rents are rising 3% or 6% a year. The CPI could have very little correlation to your personal inflation rate.
In addition, it’s possible to manage our own personal inflation rates by changing our behavior or making some upfront investments. Let’s take a look at the largest components of the CPI.
This category includes the cost of rent (or owner’s equivalent cost) as well as utilities like gas and electricity. The most obvious way to deal with inflation is to own a house, either directly or via mortgage. With a 30-year fixed mortgage, your monthly payment is going to stay the same, and your total housing payment is only going to vary a bit as your insurance and property taxes go up. My neighbor used to have a mortgage of $300 a month.
As for utilities, a solution I plan to install is solar photovoltaic (PV)panels. In most states, you can sell back the electricity you generate with solar panels throughout the day, so that it cancels out your entire electricity bill. With a large enough system, you will never have a power bill again. Here is a helpful PDF consumer’s guide on solar systems from the Department of Energy.
The large upfront cost can be defrayed with federal and state tax credits, and the panels come with (about) a 25-year warranty. Other parts, like the inverter, come with a 10-year warranty. If you have the space you could also install a windmill, or contract electricity from other sources.
If you live in an especially hot/cold climate and much of your expense is cooling/heating, a very important area is insulation.
This category includes the cost of vehicles, public transportation, and fuel. I plan on owning all my cars for at 10 years each, so even though it will catch up to me eventually, the annualized cost should remain reasonable. Avoiding the hit of depreciation during the early years, either buy buying used or holding for a long time, is important.
As for fuel, again I plan on using my solar panels to create electricity for my plug-in electric vehicle. Range is currently an issue, but as battery technology improves, I expect that it will be feasible for most households to own at least one electric vehicle.
Food & Beverages (15%)
This category includes food at home, dining out, and also alcohol. Why not grow some of your own food? We are starting to dabble in square-foot gardening, which involves planting small, efficient gardens that use minimal water, pesticides, and labor. Dining out is one of those expenses that is almost all for pleasure and convenience, so if it becomes hurtful then we’ll cut back. I’ve already been cutting back on the alcohol for waistline reasons.
Education & Communication (6%)
I’m not sure why these two are lumped together, but I really don’t see communication costs rising very much in the future. It would appear that data transfer is only going to get faster and cheaper. On the other hand, education costs continue to skyrocket. (Okay, now I see why they are together… sneaky) Even though this is only 6% of the CPI, if you have kids then tuition prices are likely a huge concern. If you don’t have kids (and are done with school), then you don’t care at all.
There are still some limited opportunities for prepaid college tuition out there, which are worth exploring if you accept the penalties for not following their restrictions. An example is the Florida Prepaid college plan.
Any other ideas for controlling your personal inflation rate?
Thursday, January 27th, 2011
During recessions, interest in graduate school rises as people lose their jobs or otherwise decide to go back to school for better prospects. Are you thinking about law school? I’ve thrown the idea around, as I think estate law would be a growth area. Well, check out these stats from the National Association for Law Placement (NALP) first.
The NALP found the national median starting salary for full-time law jobs for the Class of 2009 was $72,000 and the average was $93,454. After adjusting for the fact that many smaller law firms don’t report salary details (and also tend to pay less), it found the adjusted average salary to be $85,198. But you should also consider the distribution of the salaries as well, shown below.
Distribution of Reported Full-Time Salaries — Class of 2009
From this Law.com article:
That’s because salaries are clustered in two areas — a phenomenon known as the bimodal distribution curve. One cluster is in the $40,000 to $60,000 range and the other around $160,000. The lower range tends to include attorneys in public interest and government jobs, while the higher cluster includes associates at large law firms.
This means that after three years of law school and probably accumulating more student debt, lots of new grads are still far away from six-figure salaries. For the Class of 2009, 1 out of 4 are working temporary jobs. Going to law school primarily for the money can be a long road.
What about after the entry-level? This article quotes the Department of Labor as stating that the median lawyer makes $113,000 per year, and those in the 25th percentile make $76,000 per year. Certainly, many people still make solid livings as lawyers. I know a lot of other JDs that are doing things unrelated to law as well, and most of them are doing alright. However, I don’t know if they would have still gone to law school again if given a redo.
Wednesday, November 3rd, 2010
Morningstar recently released its annual 529 College Savings Plan study [pdf] for 2010. You can read about the final product Top 5 plans here (using some subjective judging components), but the paper also had some stats that I felt were note-worthy for those not wanting to read all 48 pages of it.
Broker-sold plans make up 52% of all 529 plan assets, direct-sold make up the other 48%. I guess I shouldn’t be, but I was surprised that only half of assets are by parents not going through a broker or financial advisor.
The average 529 balance was $9,700, which is a bit more than one year of tuition at a in-state public university (average $7,020) and much less than half a year of tuition of an out-of-state public school ($18,548) or a private college or university ($26,273). I wonder what the median is, to negate the effect of the tiny accounts.
Parents typically open accounts for their children when they are between the ages of 7 and 10, giving most families about a decade to save before their first tuition bill comes due. With only a decade, I would be wary of putting a big chunk in stocks. Many providers have already changed their “age-based” portfolios to hold less stocks. Only after the market drop, of course…
Here is a chart showing the industry average “glide path” for age-based investment options:
Roughly estimating, I see about 60% stocks for an 8-year old with a decade left before college. Before choosing such an option in your own 529, it’s important to see what your specific age-based glide path is. Many now have multiple options for conservative, moderate, and aggressive.
The asset-weighted total average expense ratio for direct-sold plans is between 0.49-0.64% annually, depending one if the plan allows investment options outside the program manager’s. The asset-weighted total average expense ratio for advisor-sold plans is between 1.16%-1.52%.
The five cheapest direct-sold 529 plans, ranked by asset-weighted total expense ratios, are:
- New York’s Direct 529 Program (0.25%)
- Utah Education Savings Plan (0.28%)
- The Vanguard 529 College Savings Plan, Nevada (0.28%)
- CollegeAdvantage 529 Savings Plan, Ohio (0.29%)
- College Savings Iowa 529 Plan (0.34%)
Keep in mind that this is based on actual assets held by savers, not just based on the cheapest option available in a plan. Many of these plans offer some actively-managed options for those that wish to partake.
Thursday, October 21st, 2010
Even though the current interest rates on Series I Savings Bonds aren’t much higher than other alternatives, these I-Bonds do have some unique characteristics that can keep them attractive.
Along with TIPS (Treasury Inflation-Protected Securities), these are the only investments you can make that are explicitly tied to a measure of U.S. inflation. (Some foreign-countries also have inflation-linked bonds.) Interest rates don’t always move perfectly with inflation, so having such protection can be helpful.
Exempt From State and Local Income Taxes
The interest from I-Bonds are exempt from state and/or local income taxes. Of course, this is only an advantage if you are subject to such taxes.
You can use to either report your interest earned on an annual basis (like a bank CD), or have the interest reporting deferred until maturity or redemption. This can be especially advantageous if you are in a relatively high tax bracket now, but sometime in the future you believe you will have at least one year where you will have lower taxable income (possibly on purpose) and thus can redeem at a lower tax rate (perhps even zero). I-Bonds keep earning interest for up to 30 years.
Educational Tax Exclusion
If you meet several requirements, you can even avoid federal income taxes completely when paying qualified higher education expenses at an eligible institution. More information at this TreasuryDirect page.
According to this FinAid.org page (via Bogleheads Wiki), you can even contribute your proceeds to a 529 plan or Coverdell Educational Savings Account.
Series EE and I US Savings Bonds issued after December 31, 1989 may be redeemed tax-free in order to contribute the proceeds to a section 529 plan or Coverdell Education Savings Account. (To take advantage of this, file IRS Form 8815 to claim an exclusion for the interest after rolling the proceeds of these US Savings Bonds into a section 529 college savings plan or Coverdell Education Savings account. Write “529 College Savings Plan” or “Coverdell Education Savings Account” in the answer to 1(b), where it asks for the name of the educational institution. The specific citation in the tax code for this guidance is IRC Section 135(c)((2)(C).)
One of the restrictions that concerns me is that there is an income phase-out. In 2010, full phase-out occurs at a modified adjusted gross income of $135,100 for married filing jointly filers and $85,000 for single filers.
Wednesday, September 22nd, 2010
Here’s an interactive chart from the NY Times of how various groups of people spend their time over the course of a day.
Like many of you, I have fond memories of college. Here’s one reason why; The pie chart below shows the average full-time college student spends their day.
“Educational activities” only take up 4.5 hours a day (including studying!), and even if you add in work it totals only 6.5 hours a day. This paper says this is over 30% less than a few decades ago.
Full-time students allocated 40 hours per week toward class and studying in 1961, whereas by 2003 they were investing about 27 hours per week.
While college is more cush, like we discussed before tuition is growing more expensive at an alarming rate. And even while people say “tuition bubble”, this chart shows that it’s been going on consistently for a long time. Hat tip to Economix blog.
So it seems, we are either getting a lot less education for our money, or we’re just getting charged more for giving them more amenities for their paid vacation, or both. At this rate, my kids will just download course material directly into their brains from iTunes, spend the rest of the four years on vacation, and college will cost a full decade’s worth of income. That $100 auto-investment into a 529 just ain’t gonna cut it…
Wednesday, September 1st, 2010
Since we’re on the topic of college tuitions, I have recently adjusted the investment mix in my Ohio CollegeAdvantage 529 Plan. As I’ve mentioned before, I choose a very conservative mix because I think a 20-year or less horizon with a 4-year or less withdrawal period is actually a pretty short horizon. I just want to see gradual but reliable increases in my balances. In contrast, I view retirement as a 30 year horizon with another 20-30 year withdrawal period.
Previous Asset Allocation
My original asset allocation was 100% Treasury Inflation-Protected Securities (TIPS) through the Ohio 529′s Vanguard Inflation-Protected Bond Option which is essentially the Vanguard Inflation-Protected Securities Fund (VIPSX) with a slightly higher expense ratio. Back in 2009, I ran a comparison of the CollegeSure Tuition-Indexed CDs vs. Inflation-Protected Bonds, and picked TIPS. However, back then the real yield was 1.7%, and it is now 0.49%. Accordingly, the fund has a pretty good performance since then.
Updated Asset Allocation
20% Stocks (simple low-cost index option)
40% Inflation-protected bonds
40% Bank CD 10-year initial term, paying 5% APY.
The reason I chose to add stocks is that historically, adding 20% of stocks to a portfolio has actually reduced volatility while increasing returns. Here is a chart from my Choosing An Asset Allocation series of posts. As I get closer to college start date, this 20% portion will go down to zero.
Adding a 5% Bank Certificate of Deposit
Right now, a regular nominal 10-year Treasury Bond yields less than 2.50%. The real yield on a 10-Year TIPS bond is 0.95%, so the market is basically predicting inflation over the next 10 years to be about 1.50% annually.
However, the Ohio 529 plan offers a FDIC-insured certificate of deposit with a 10-year term earning 5% APY through Fifth Third Bank. (Heads up via Bogleheads.) That’s quite a big boost in yield. For every $10,000 I put in today, I’m guaranteed over $15,000 in 10 years. Early-withdrawal penalties are steep at half of accrued interest, so I had to be sure I wouldn’t need the money sooner.
As long as the real yield on the TIPS fund stays below 1%, then as long as inflation stays below 4% over the next decade the CD will win out over TIPS. If inflation somehow goes nuts, then the TIPS will keep the portfolio from falling too far behind. (Hopefully the stocks will help out as well.)
Since these are all in a 529 plans, the gains will be tax-free if used for qualified college expenses, which is good because otherwise federal and state taxes on a bank CD would be pretty high for us.
Tuesday, August 31st, 2010
This chart from Clusterstock (via Carpe Diem) shows the cost of college tuition comparison to historical housing prices and the Consumer Price Index (CPI) over the same period. The CPI is designed to track our cost of living by estimating the average price of consumer goods and services purchased by households. Everything was normalized to 100 starting in 1978.
While housing went up 4x at its peak (~400), college tuition has gone up over 10x. Instapundit Glenn Reynolds says the higher education bubble is about to burst:
It’s a story of an industry that may sound familiar. The buyers think what they’re buying will appreciate in value, making them rich in the future. The product grows more and more elaborate, and more and more expensive, but the expense is offset by cheap credit provided by sellers eager to encourage buyers to buy.
Buyers see that everyone else is taking on mounds of debt, and so are more comfortable when they do so themselves; besides, for a generation, the value of what they’re buying has gone up steadily. What could go wrong? Everything continues smoothly until, at some point, it doesn’t.
Yes, this sounds like the housing bubble, but I’m afraid it’s also sounding a lot like a still-inflating higher education bubble. And despite (or because of) the fact that my day job involves higher education, I think it’s better for us to face up to what’s going on before the bubble bursts messily.
The college tuition prices being tracked in the chart was done by the CPI for US cities for “College Tuition and Fees”. According to this BLS.gov link, this tracks actual expenditures by households, and not some measure of median college tuition, which is often just the “retail price” before various forms of financial aid and/or scholarships.
Another hot topic is the rapidly rising cost of health care. Well, college tuition CPI beats that too, from this Wikipedia chart:
I know that I’m scared to imagine what college will cost in another 20 years. Dealing with this issue will be tricky, with huge amounts of easy government credit being given to 18-year-olds that are being told by everyone (including parents) that it is totally worth it. For many people, it will indeed be worth it. For others, not so much.
In my humble opinion, it also seems obvious that this trend can’t survive forever. But will it burst like a bubble? Perhaps if the government turns off the loans suddenly, but that seems unlikely. I like Reynold’s idea that there may be an educational revolution with the internet, online coursework, and changing educational standards.
Tuesday, July 13th, 2010
Amazon.com has a new program called Amazon Student where you can get “exclusive deals”, the best of which is a free one-year subscription to Amazon Prime. This allows you to get the convenience of free 2-day shipping on most products (including textbooks and even some used books) with no minimum order amount. Usually costs $79 a year.
You can even keep your existing Amazon.com account, just click here, enter your .edu e-mail address, and click on the confirmation e-mail to activate. If you have an .edu e-mail, try it!
This is a really nice perk, and would go great with the Citi Forward® Card or the Citi Forward® Card for College Students which gives you 5 ThankYou® Points for every $1 you spend at restaurants and on entertainment, like bookstores, of which Amazon.com counts regardless of what you are actually buying at the bookstore. Up to 2% APR reduction when using credit wisely. This equates to 5% back in the form of gift cards at select retailers, or a 3.45% pure cashback return. Really, I’ve done it. 2,500 bonus ThankYou Points after spending $500 within the first 3 months of cardmembership and up to 1,200 bonus ThankYou Points for paying on time and staying under your credit limit. Watch your interest rate go down and your ThankYou Points go up.
See my Citi Forward review and rewards follow-up for more details.
Saturday, June 19th, 2010
This is just a reminder that the Ohio 529 College Savings Plan is still offering a $25 bonus if you are referred to open a new account and deposit at least $25 by June 30, 2010. You can apply for and fund the account all electronically, so you still have time. The referrer gets $50, and refer others after you sign up. I have an account with them, and my Ohio CollegeAdvantage referral code is 2439350. If you use it, thanks!
You can read more promotion details, account opening tips, and a review of the plan itself here.