The Hidden Economics of College Admissions

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NY Times Magazine has an interesting longread What College Admissions Offices Really Want by Paul Tough, adapted from his new book The Years That Matter Most: How College Makes or Breaks Us. Angel Pérez and Trinity College allowed an inside look at the admissions process of a small liberal arts college. The entire thing is definitely worth a read, but here are my notes and highlights.

  • Both public and private universities stress about making their budget numbers balance. Tuition, endowments, and government funds must cover their expenses. Many colleges lose money year, and some of these are eventually forced to shut down.

    Tuition revenue, which along with room and board provides about two-thirds of Trinity College’s operating budget, had been falling for several years, and Trinity was running a steep deficit, losing $8 million a year.

  • This financial stress makes it hard to be truly need-blind and offer every student the aid package they need to afford college.

    Enrollment managers know there is no shortage of deserving low-income students applying to good colleges. They know this because they regularly reject them — not because they don’t want to admit these students, but because they can’t afford to.

  • The simplest way to balance their budget is to admit more students who can afford to pay full tuition, even if they aren’t the best applicants.
  • “We were taking some students who probably should not have been admitted, but we were taking them because they could pay”

    There is a popular and persistent image of college admissions in which diversity-obsessed universities are using affirmative action to deny spaces to academically talented affluent students while admitting low-income students with lower ability in their place. Boeckenstedt says the opposite is closer to the truth. If you’re an enrollment manager, he explains, the easiest category of students for you to admit are below-average students from high-income families.

  • High-income household have advantages in a few different ways. There are always a certain number of spaces set aside specifically for alumni, big donors, and those who excel at collegiate sports. These all tend to benefit those of high income.

    Most of Trinity’s athletes play sports that are popular in prep schools and rare in low-income public schools: field hockey, lacrosse, rowing and, especially, squash. The result is that at Trinity, as at many other Division III schools in the Northeast, the recruited athletes are actually more likely to be white and wealthy than the rest of the freshman class.

  • SAT and ACT scores also tend to correlate strongly with income.
  • Boeckenstedt’s chart shows an almost perfect correlation between institutional selectivity and students’ average family income, a steady, unwavering diagonal line slicing through the graph. With only a few exceptions, every American college follows the same pattern.

  • Even though many of the most elite colleges now tout their “free tuition” for low-income students, the overall numbers haven’t changed much.

    The most selective colleges in America were the least socioeconomically diverse. […] At “Ivy plus” colleges (Chetty’s term for the Ivy League plus Stanford, M.I.T., Duke and the University of Chicago), more than two-thirds of undergraduates, on average, came from families in the top income quintile, and fewer than 4 percent of students grew up in the bottom income quintile.

  • Hardly anyone pays the full “sticker” price at private universities. In fact, on average, students pay half the sticker price.

    At private, nonprofit four-year colleges — a category that includes most of the nation’s highly selective institutions — 89 percent of students receive some form of financial aid, meaning that almost no one is paying full price.

    In 2018 the average tuition-discount rate for freshmen at private, nonprofit universities hit 50 percent for the first time, meaning that colleges were charging students, on average, less than half of their posted tuition rates.

  • Colleges use variable pricing based on how badly they want you in their class and how much they think you’ll pay. If you get an admission to a private college with zero “merit” aid, sorry but you’re probably on their low end and they want your money to help pay for lower-income students that they want more. “We’ll take you, but only if you pay full price.”

    “Admissions for us is not a matter of turning down students we’d like to admit. It’s a matter of admitting students we’d like to turn down.”

    “Everybody wants to have more selectivity and better academic quality and more socioeconomic diversity, and they want more revenue every single year,” he explained. “Part of my job since arriving at Trinity College has been educating this community about the fact that you can’t have it all at the same time. You’ve got to pick which goals you’re going to pursue.”

  • Capitalism works from the student perspective as well. Parents and students have come to expect such tuition discounts if they are a stronger applicant and have multiple aid offers.

    its wealthy admits were demanding steeper and steeper tuition discounts in order to attend, and overall tuition revenue was falling as a result.

  • Everyone seems to place too much power in “America’s Best Colleges” rankings by U.S. News & World Report.

    The U.S. News list is openly loathed by people who work in admissions; in a 2011 poll, the most recent available, only 3 percent of admissions officials nationwide said they thought the “America’s Best Colleges” list accurately reflected the actual best colleges in America, and 87 percent said the list caused universities to take steps that were “counterproductive” to their educational mission in order to improve their ranking.

Perhaps I am too jaded, but I don’t really mind a private college allowing some extra “full price” students in order to offer more low-income students a full scholarship. I found it more interesting that data analytics now optimize exactly how much tuition they can get out of you. Can you really call it “financial aid” when you have a $70k sticker price and “only” charge someone $60k a year? I always hated calling something a “financial aid package” when it was mostly loans.

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Can You Teach Your Kid To Be Rich?

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There is an ongoing debate about personal finance education in school. It sounds like a good idea, but multiple studies have found that financial literacy classes don’t really improve future behavior. It may be too much to expect an easy fix to such a complex problem.

As a parent, how do you best set up your kids for financial success? In the end, how can you really tell if you made a difference anyway? You can only try your best. My personal philosophy boils down to this famous proverb:

Give a man a fish, and you feed him for a day. Teach a man to fish, and you feed him for a lifetime.

Some parents plan on giving their kids a big pile of fish. An inheritance. Real estate. A business to take over and run. That’s out of love, and I am not judging that choice. I might leave them something, but I’m going to tell them to expect nothing. Instead, I hope they will see that I put in a lot of effort to help them develop the tools to go out and “fish”, and that as adults it’s up to them to make money for themselves.

To be clear, this is not the only thing that I am teaching them. Good relationships with family and friends are more important than an early retirement. However, I have observed several specific traits useful in navigating the financial world. As a result, I want to help them:

  • Develop good character traits like self-discipline, gratitude, and perseverance. If they can control their emotions, have empathy for others, and endure hard work, it helps everything else.
  • Obtain quality formal education. If they are going to solve the world’s problems, they need a strong, wide base of knowledge. A solid education and good teachers can really inspire and change a child’s life.
  • Experience entry-level hourly work in the retail, construction, and/or food service industries. They should understand how hard it is to make a living without specialized skills.
  • Create their own business ventures. I plan on helping them start any kind of micro-business that they want. It might be even better as a non-profit, donating the proceeds to the community. Through this, they will learn basic accounting, marketing, and interpersonal skills.
  • Improve interpersonal skills. Across all of their activities, from school projects to extracurriculars (sports/arts/music) to starting their own business, learning how to work with others is key.
  • Feel encouraged to take calculated risks. There are many ways to take asymmetrical risks where the upside is huge and the downside is small. This especially true when you are young and without dependents. I want them to take such risks.

None of the factors above require a ton of money, although private schools can be quite expensive. The best option may be maximizing the public school options available. My parents rented a small apartment in a good school district, as they couldn’t afford buying an expensive house with high property taxes. I only realized this recently when I visited our old duplex and found a house down the street listed for nearly $2,000,000 (median price in this city is $370,000).

I do plan to contribute to a 529 plan and minimize student loan debt. Maybe college tuition will be more sane in 15 years, but I think this is the best use of cash right now – keeping them from having to fight the power of compound interest in reverse. (I also classify paying for education as “teaching them to fish”.) I want to show them that we value education and also strive to avoid debt whenever possible.

Bottom line. How does anyone get rich? Most people who got rich quickly had equity in a business venture. This takes a combination of specialized skill, interpersonal skills, risk-taking, and luck. Most people who got rich over decades got there with a steady career, work ethic, patience, self-discipline when it comes to spending, and investing the difference repeatedly. I’d be happy with my kids taking either path, and tried to think up a list of ways to help promote these traits.

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529 College Savings Plans: All 50 States Tax Benefit Comparison (Updated 2019)

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Updated for 2019. When choosing a 529 college savings plan, you can open a 529 plan from any state. However, each state can vary widely in what they offer in terms of tax deductions and/or matching grants. You may have to weigh your in-state benefits against the superior investment options from an out-of-state plan. Morningstar has just published their 529 College-Savings Plan Landscape report for 2019, which included a state-by-state summary of the tax benefits:

Based on a previous M* article, their conclusion is that if your in-state tax benefit is greater than 5% of your contribution, then you should stick with your in-state plan. For example, if you contribution $100 a month ($1,200 annually), the tax benefit should be at least $60 to offset the chance that another state has a plan with slightly lower annual costs.

If your potential in-state tax benefit is less than 5% of your contribution, then it is a close call. You should weigh various factors like relative fee amounts and quality of investment options. If your state does “tax parity” – meaning it offers the same tax benefits for any 529 plan – then you should simply choose the best nationwide plan.

It’s hard to cover all possible situations, but here is an older 2015 chart that quantifies tax benefits for a hypothetical family saving for college (two adults, two children, $100 per month savings per child) at both the $60,000 and $200,000 household income levels. Tax breaks do change regularly, so I would double-check before making a contribution based on these numbers.

mstar_529state3

For reference, here’s an older chart from 2014:

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My observation as someone who has been tracking these plans for several years is that many of the factors considered here are subject to change. State-specific tax breaks may come and go. 529 plan costs and investment options also change from year to year, with the overall trend being that the worst plans tend to get better due to competitive pressure. (No state wants to be the “worst” plan, and an expensive plan can switch administrators and transform into a cheap plan within a year.) Meanwhile, the top plans tend to stay that way.

Therefore, I would also consider trying to grab any significant tax break that is available now and hope that the plan gets better in the future. Some states even let you grab the tax deduction and then immediately roll over the assets to any outside plan; other states “recapture” the tax deduction if do you that within a certain time period. Sometimes you can wait out the recapture period and then roll funds over to a better state 529 plan for free (once every rolling 12 months).

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529 Day (5/29) College Savings Plan Promotions

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5/29 is “National 529 College Savings Plan Day” and certain state plans are offering promotions and/or giveaways. Some end on 5/29 and others end on 5/31, so that’s why I’m posting this early. Many are simply sweepstakes drawings which don’t really excite me, but here are some fixed bonuses:

  • California Scholarshare 529$50 bonus when you open a new ScholarShare 529 College Savings Plan account with a $50 contribution and sign up for ongoing automatic contributions of $25 or more per month for a minimum of 6 months between May 28, 2019, at 12:01 a.m. and May 31, 2019, at 11:59 p.m. (PST).
  • Florida PrepaidUp to $50 bonus. “Open a Florida 529 Savings Plan, from now through May 29, and we’ll seed your account with $25. Set up an automatic monthly contribution of $25 or more, and we’ll add another $25.”
  • Idaho Ideal$25 bonus. Open an IDeal – Idaho College Savings Program account online between May 1-29, 2019. It only takes a few minutes! Make an initial contribution of $25 or more and we’ll add $25 to your account.”
  • Nebraska NEST 529$10 bonus. Either start a new (or increase an existing) monthly Automatic Investment Plan (“AIP”) into a beneficiary’s account with $25 or more before May 31, and receive a $10 bonus.

Let me know if I’ve missed any.

My brief take on 529 college savings plans in general. I believe that you should worry about having adequate emergency and retirement savings first. Take care of yourself, so your kids won’t have to take care of you financially in old age. That’s a gift to them as well. However, if you are on track otherwise, a 529 plan can be a handy package of automated savings, automated investment, no annual tax paperwork, and valuable tax savings. For example, setting up an auto-deposit of $50 every month could add up to nearly $20,000 at the end of 18 years (assuming 6% return).

In terms of picking a specific plan, remember to first consider your state-specific tax benefits via the tools from Morningstar, SavingForCollege, or Vanguard. Morningstar estimates that an upfront tax break of at least 5% can make it worth investing in your in-state plan even if it is not otherwise a top plan (assuming that is required to get the tax benefit).

If you don’t have anything compelling available, anyone can open a 529 plan from any state. Also, you can roll over your funds into another 529 plan once every rolling 12 months. (Watch out for tax-benefit recapture if you got a tax break initially.) Here are the Morningstar Top 529 College Savings Plan Rankings for 2018. I personally invest in the Utah My529 Plan for my children due to their many DIY features, but would also recommend the Vanguard Nevada 529 Plan if you want something that is more “set-and-forget”. There are other solid plan options, but if you ask me for a quick recommendation, those are mine.

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Morningstar Top 529 College Savings Plan Rankings 2018

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Investment research firm Morningstar has released their annual 529 College Savings Plans analyst ratings for 2018. While the full research paper appears restricted to paid premium members, this is still useful as while there are currently over 60 different 529 plan options nationwide, the majority are mediocre and there is really no reason to put your hard-earned money into them since anyone can invest in any state’s 529 plan.

Here are the Gold-rated plans for 2018 (no particular order). Morningstar uses a Gold, Silver, or Bronze rating scale for the top plans and Neutral or Negative for the rest.

All 4 of these plans were Gold last year as well. There were no new additions or subtractions.

Here are the consistently top-rated plans from 2011-2018. This means they were rated either Gold or Silver (or equivalent) for every year the rankings were done from 2011 through 2018. These were also the same as last year. No particular order.

  • T. Rowe Price College Savings Plan, Alaska
  • Maryland College Investment Plan
  • Vanguard 529 College Savings Plan, Nevada
  • CollegeAdvantage 529 Savings Plan, Ohio
  • CollegeAmerica Plan, Virginia (Advisor-sold)
  • My529, formerly the Utah Educational Savings Plan

The “Five P” criteria.

  • People. Who’s behind the plans? Who are the investment consultants picking the underlying investments? Who are the mutual fund managers?
  • Process. Are the asset-allocation glide paths and funds chosen for the age-based options based on solid research? Whether active or passive, how is it implemented?
  • Parent. How is the quality of the program manager (often an asset-management company or board of trustees which has a main role in the investment choices and pricing)? Also refers to state officials and their policies.
  • Performance. Has the plan delivered strong risk-adjusted performance, both during the recent volatility and in the long-term?
  • Price. Includes factors like asset-weighted expense ratios and in-state tax benefits.

State-specific tax benefits. Remember to first consider your state-specific tax benefits via the tools from Morningstar, SavingForCollege, or Vanguard. Morningstar estimates that an upfront tax break of at least 5% can make it worth investing in your in-state plan even if it is not a top plan (assuming that is required to get the tax benefit).

If you don’t have anything compelling available, anyone can open a 529 plan from any state. I would pick from the ones listed above. Also, if you have money in an in-state plan now but your situation changes, you can roll over your funds into another 529 from any state. (Watch out for tax-benefit recapture if you got a tax break initially.)

My picks. Overall, the plans are getting better and most Gold/Silver picks are solid. If your state doesn’t offer a significant tax break, I would recommend these two plans to my friends and family:

  • Nevada 529 Plan has low costs, solid automated glide paths, a variety of Vanguard investment options, and long-term commitment to consistently lowering costs as their assets grow. (It is not the rock-bottom cheapest, but this is often because other plans don’t offer much international exposure, which usually costs more.) This is only plan that Vanguard puts their name on, and you can manage it within your Vanguard.com account. This is the keep-it-simple option.
  • Utah 529 plan has low costs, investments from Vanguard and DFA, and has highly-customizable glide paths. Over the last few years, the Utah plan has also shown a history of passing on future cost savings to clients. This is the option for folks that enjoy DIY asset allocation. Since I like to DIY, I have the majority of my family’s college savings in this plan.

Morningstar offers their own additional insight into the Gold-rated plans. I feel that a consistent history of consumer-first practices is most important. Sure, you can move your funds if needed, but wouldn’t you rather watch your current plan just keep getting better every year?

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How Much Do You Need To Save For College? Vanguard 529 Calculator

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Thinking about 529 plans and like playing around with interactive calculators? This Vanguard tool helps you visualize how much you’ll need to save for college and how changing up a specific factor would affect your results. It adjusts for age, contributions, investment returns, tuition inflation, and even looks up the current cost of your favorite university. A formal report is spit out with lots of charts, just like a financial advisor might create for you. Here’s a sample screenshot:

Tuition inflation is something that I think is hard to predict. However, I couldn’t think of anything better than accepting the default assumptions that investment return will only barely outpace tuition inflation.

If you’d rather have a quick, simple scenario, check out this Vanguard article on the power of automatic savings. If you put away $130 a month automatically every month for 18 years, at a 6% return you’d end up with $50,000. Putting away $50 a month reliably would get you to $20,000.

Nearly half of your final amount would be due to investment growth, which thanks to the 529 plan can be tax-free when used towards qualified educational expenses.

I’m still in the camp that retirement should be prioritized over college savings, but I definitely understand the parental instinct to provide the best educational opportunity possible. I’m still pondering the idea of targeting funding college with 1/3rd savings, 1/3rd spending from current income, and 1/3rd grants/scholarships/loans.

Finally, here is another set of handy Vanguard tools, a 529 Plan Interactive Comparison Map and Tax Deduction Calculator.

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Completed Sample IRS Form 709 Gift Tax Return for 529 Superfunding / Front-Loading

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529Updated for 2018. Let’s say you are fortunate enough to be able to make a large contribution to a 529 college savings plan, perhaps for your children or grandchildren. You read from multiple sources that you are able to contribute up to $75,000 at once for a single person or up to $150,000 as a married couple (2018), all without triggering any gift taxes or affecting your lifetime gift tax exemptions. (From 2013-2017, these numbers were $70k/$140k). What you are doing is “superfunding” or “front-loading” with 5 years of contributions, with no further contributions the next four years.

Those are pretty big numbers, but any contribution above $15,000 will require you to file a gift tax return because that is the annual gift tax exclusion limit for 2018. ($14,000 for 2013-2017.) You’ll need to fill out IRS Form 709 [pdf], “United States Gift (and Generation-Skipping Transfer) Tax Return”. The instructions are quite long and confusing. You ask your accountant and they suggest talking to your estate lawyer. You may wish to avoid paying the $400 an hour or whatever it will cost as the form should be pretty straightforward.

So how do you fill out form 709 for a large but simple 529 contribution? Here are the resources that I found most helpful:

(Note that I have found what I consider minor errors and/or inconsistencies in some of the sample 709 forms above.)

Here’s a redacted version of my completed Form 709. Let me be clear that I am not a tax professional or tax expert. I am some random dude on the internet that did his own research to the best of his abilities and filled out the form accordingly. This is what my form looks like. It could be wrong. You’ll need to make changes to conform to your specific situation. Feel free to offer a correction, but please support your statement.

For my version, I am assuming that you and your spouse contributed the maximum $140,000 together. (I didn’t actually contribute that much.) The 2014 form is shown below, but I just did this for another kid using the 2017 form and I couldn’t find any differences. Note that you’ll need to file two separate gift tax returns, one for you and one for your spouse. Mail them to the IRS in the same envelope, and I like to send them certified mail.

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f709_generic2

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Here is my Form 709, Schedule A, Line B Attachment

Form 709, Schedule A, Line B Attachment

– Donor made a gift to a Qualified State Tuition Program (a 529 plan).

– Total amount contributed $140,000 in 2014.

– Donor elects pursuant to Section 529(c)(2)(b) of the IRS Code of 1982, as amended to treat the gift as having been made equally over a 5-year period.

– The gift was made jointly by the taxpayer and the taxpayer’s spouse on January 1st, 2014 and will be split equally in half.

– Election made for $140,000 over 5 years is equal to $28,000 total per year, or $14,000 per person per year.

– The contribution is for

Juniper Doe
Daughter
1234 Main St
New York, NY 10001

When to file Form 709. When taking the 5-year election, you must fill out the gift tax return (Form 709) by April 15th of the year following the year in which in the contribution was made. So if you make the contribution in 2018, you must file Form 709 by April 15th, 2019. If you make the upfront contribution in the first year and then make no future contribution in the next four years, you do not have to file a gift tax return after the one you did for the first year.

What if you’re late? Well, you should file the Form 709 as soon as possible. If you did not exceed the limits then technically there is no gift tax due, and there is no penalty that I could find for late filing when there is no taxes due. Still, I would file ASAP.

The tax information set forth in this article is general in nature and does not constitute tax advice. The information cannot be used for the purposes of avoiding penalties and taxes. Consult with your tax advisor regarding how aspects of a 529 plan relate to your own specific circumstances.

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Open University: UK-Based, Regionally US-Accredited Online Bachelor’s Degrees

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ou200If you are interested in online college education, definitely read How Open University Works: An Insider’s Perspective by Manoel Cortes Mendez. The Open University (OU) is a public, nonprofit UK university that was founded in 1969 with a focus on distance-learning. I was not familiar with the OU at all before reading this.

In this article, I retrace my steps at the OU, from enrollment to graduation. The goal is twofold: first, to give you a sense of what it’s like to study with the OU; second, to highlight particular aspects of the OU experience that aren’t readily apparent from the outside, but that every prospective student ought to know.

The author earned a Bachelor’s degree in Computer Science from the OU, spending a total of $18,000. He is now halfway through the Online Masters in Computer Science from Georgia Tech.

Unlike most Open University (OU) students, who are usually in their mid-thirties, I joined the OU in my early twenties. I chose the OU over a brick university because I had started working full time after high school, and I wanted to continue working during my university studies. Furthermore, I lived in Belgium, but I envisioned my career in the US. So I wanted to study in English and my degree to be recognized internationally. As it happens, the OU is one of a handful of UK universities to be fully accredited in the US. That settled my choice.

Here’s how that was possible:

Despite its unconventional mode of delivery, the OU is on paper a university like the others. More precisely, it’s a recognized body in the UK, which is british legalese for fully accredited. And it’s one of the few UK universities to also be regionally accredited in the US. So if after your OU degree, you want to pursue further studies in a brick university, you can. And this includes prestigious universities. For instance, one of my OU classmates went on to study a master’s degree in computer science at Oxford University.

In other words, a degree from Open University has a certain level of respect and reputation for high-quality education (at least in the UK) that is not present at many for-profit US universities. Would it be possible for there to be an equivalent institution in the US? How many US residents have gotten undergraduate degrees at Open University? I bet they would get more foreign applicants if they renamed it to something that sounds traditional like “London-Bletchley University”.

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Georgia Tech Online Master’s Degree Update: Computer Science $7,000, Data Analytics $10,000

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georgiatech

Maybe I’m foolish, but I remain hopeful about the potential of software leading to more affordable, accessible education. In 2014, Georgia Tech launched an Online Master of Science in Computer Science (OMSCS) with the goal of offering an accredited, top-tier education at a surprising price of $7,000. The program has been regularly ranked in the Top 10 by U.S. News & World Report, and the traditional residential program costs $28,000 two years of tuition (out-of-state, not including housing).

OMSCS offers the same lectures from the same professors, the same homework assignments, and the same exams. A few other top universities have online versions of their masters programs, but they charge the same tuition as in-person ($40,000+). The diploma is exactly the same as those of on-campus graduates, with no special “online” designation.

Would there be enough interest from qualified candidates? Would it remain financially viable? Would the online program cannibalize from the traditional on-campus program? Would employers discriminate if they found out that this was an online degree? Would the careers prospects be different due to the lack of in-person networking opportunities?

EducationNext recently published an article An Elite Grad-School Degree Goes Online addresses some of these questions. InsiderEd has a an article Online, Cheap — and Elite that summarizes the findings.

Analyzing the first six cohorts of the online program, from spring 2014 to fall 2016, the report found that the typical applicant to the online program was a 34-year-old midcareer American, while the typical applicant to the in-person degree was a 24-year-old recent graduate from India.

Of the 18,000 students who applied to the in-person and online degrees, less than 0.2 percent applied to both, the report said.

Students admitted to the online program typically had slightly lower academic credentials than those admitted to the in-person program, but they performed slightly better in their identical and blind-marked final assessments — a finding the study hailed as “the first rigorous evidence that we know of showing that an online degree program can increase educational attainment.”

Overall, the program has been a success in terms of expanding access to high-quality computer science education. Total enrollment is now over 6,000 students. The questions about career effects will be addressed in future studies.

In 2017, Georgia Tech announced a new Online Masters Degree in Analytics for under $10,000. This is also a nationally-ranked Top 10 program where the traditional in-person tuition ranges from $36,000 for in-state students to $49,000 for out of state. The data analytics program is an interdisciplinary collaboration between the College of Engineering, College of Computing and the Scheller College of Business.

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Never Worth It? Overdraft Protection, Student Loan Assistance, and Payment Accelerators

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piggybank_feesA lot of financial articles are all about optimizing or finding the “best”. The best bank account, best credit card, best mutual fund, etc. However, this CurrentAffairs.org article Nothing For Money takes a different perspective. They outline three “Bullsh– Financial Products” (BFPs) that are never, ever worth the money. There is no “best” to recommend. The best advice is to simply avoid them completely.

Overdraft Protection. The banks say they only want to offer “help” with this “protection”, but then why did it require governmental intervention make it opt-in only? You may be opted-in today due to old rules or by accident (you can still call them and opt-out). The fact is that most people would probably save money overall if it didn’t exist and banks simply rejected the transactions instantly.

I would really love to hear from anyone who has had a positive experience with overdraft protection. If you exist, write in and let us know about an instance when you were glad to pay your overdraft fee in order to have your transaction processed on the spot. What was the transaction? Why was it worth the extra $35 or whatever the fee amount was? Why was that better than using a credit card if you had access to one?

Student Loan Assistance. Student loans are big business and unfortunately the long list of options can be confusing. Don’t let one of these outfits take advantage of you.

So the student loan assistance companies will literally charge you many thousands of dollars to do something that: a) is not even necessarily the right thing for you; and b) is extremely easy and fast to do yourself if it is the right thing for you.

Payment Accelerators. I am also a big proponent of DIY payment acceleration. I have never found a payment accelerator program that I would recommend to a family member.

First, they generally charge you a lot. The companies that do this for your mortgage will sometimes charge you a full mortgage payment up to $1,000 to start the program, and then a fee of $5 or so every time they withdraw a payment from you, which is usually every two weeks. If you used a payment accelerator for your whole 30-year mortgage, you’d pay almost $5,000. There are also companies that do this mainly with auto loans. They charge a little less, but it’s still a lot. Most of them will charge you $399 at the beginning and then $2-3 per withdrawal, again usually every two weeks. So for a five-year loan, even if you pay it off six months early, you’re still looking at almost $700 in fees.

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529 Plans Will Allow Private School K-12 Tax-Free Withdrawals

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529Starting in 2018, qualified educational expenses for 529 plans will include up to $10,000 a year in tuition and expenses for primary and secondary school expenses (public, private, or religious). Previously, you could only use it towards qualified college expenses. There were also some related changes to ABLE accounts for individuals with special needs – listed here.

Put simply, you can now pay for up to $10k a year of private K-12 school through a 529 plan. If this impacts you, you may consider making a 529 contribution now before December 31st, 2017 as you are allowed annual contributions of $14,000 per person ($28,000 per couple) while still avoiding gift taxes. You would then be able to make contributions in both 2017 and 2018.

Front-loading a 529 early and with a lot of money. The NY Times lays out a scenario where a wealthy family puts in $200,000 at birth (not sure why they use this amount as it would exceed annual gift tax limits even with front-loading) and then uses the money to pay for K-12 private school. This could theoretically save a wealthy family $30,000 in taxes.

If you have that kind of money, it may be worthwhile to explore front-loading, but be careful as their example assumes a reliable 6% return every single year. In the real world, investment returns can be quite volatile, and if you make a $10,000 withdrawal every year, you run the risk of depleting your account entirely before college. Other possible options are to start funding a 529 even before your child’s birth to start accumulating those future tax-free capital gains.

Using the 529 as a just-in-time passthrough. Around 30 states offer a in-state tax benefit on 529 plans. If you are paying for a private school anyway, you may be able to save some money by simply using the 529 as a passthrough account. Contribute to 529, grab the tax benefit, and then immediately withdraw (starting in 2018) to pay for K-12 tuition. Some states like Montana and Wisconsin specifically disallow this in-and-out practice, but most do not (although they could start).

Things can still change. This Reuters article points out that states may change their own laws in response. They could add minimum holding periods, cap their deductions, or add income restrictions. I am also curious as to what, if any public school “expenses” are technically eligible.

Personally, I don’t think this will change my 529 usage plans significantly. My state does not offer a tax benefit, so there is little benefit to the passthrough option. Maybe if short-term rates go up high someday and you can earn 5% in a bank account, it might become worth the effort to park some money in there temporarily. The other primary benefit is federal tax-free investment gains, and it takes a while for that compounding action to accumulate. If I get lucky and my balance gets really big, I could perhaps see taking some money out before college if they end up in private high school. Realistically though, I doubt my balances will greatly exceed four years of college tuition (times three kids!).

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Infographic: 529 State Tax Deduction Value Comparison Map 2017

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Amongst the many things to consider at years-end is a contribution to a 529 college savings account. (I just made my contribution for kid #3.) In addition to the federal tax-free growth towards qualified college expenses, more than 30 out of 50 states offer some level of tax deductions for 529 contributions. Some require you to contribute to the official in-state plan, while others let you contribute to any plan.

SavingForCollege.com offers a visual comparison of these state tax benefits in the following infographic. They assume a couple filing jointly with a $100,000 taxable income and contributing $100/month for each of two children. The darker the blue, the bigger the benefit.

529state_infog2

This may not apply exactly to your situation, but it can still provide you a quick take as to whether you should investigate further. They do have a calculator that churns out specific numbers, but unfortunately you must pay for a premium subscription. Here are some related posts:

My Money Blog has partnered with CardRatings for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.