Advisors' Roundup - May 1, 2015

These caught my attention this week:

Good job investors!
The Reformed Broker

Thinking about a loan for law school? Think again:
NY Times

In case you forgot, index investing rocks:
Forbes

Cost of College 2015-2016

The College Board has yet to release their 2015-2016 college cost averages, but working off last year's numbers, we are using the following for our planning for undergraduate costs. Starting at the top:

PRIVATE FOUR-YEAR

Tuition & Fees/Room & Board: $43,692

PUBLIC FOUR-YEAR (OUT-OF-STATE)

Tuition & Fees/Room & Board: $33,745

PUBLIC FOUR-YEAR (IN-STATE)

Tuition & Fees/Room & Board: $19,511

PUBLIC TWO-YEAR (IN-DISTRICT)

Tuition & Fees/Room & Board: $11,307

and because two-year students often live at home . . . 

Tuition & Fees only: $3,447

ASSUMPTIONS & CAVEATS

• 2014-2015 averages (Source: College Board) adjusted for inflation
• Reflects published costs before financial aid
• Inflation assumptions:
• Tuition & fees: 3.0% (or roughly 2x projected one-year CPI-U)
• Room & board except two-year: 3.0%
• Two-year room & board: 2.0%
• These are national averages - your circumstances may vary greatly. The two-year numbers in particular are skewed heavily by California. Without California, tuition & fees are higher, but room & board is likely lower.

ITEMS OF NOTE

• Last year, the trend of cost increases of roughly 2x inflation continued.
• The big jump in tuition occurs at the state border, especially for prestigious state universities such as Michigan, Virginia, and the University of California system.

Pay As You Earn - Temporary Relief for Student Loan Debt

For many recent graduates, student loan debts may seem insurmountable. According to the Federal Reserve Bank of St. Louis, over 30% of borrowers in payment status (i.e. not currently being deferred) are at least a month behind on their payments. Some borrowers may benefit from the Department of Education's Pay As You Earn (PAYE) program

WHAT IS IT?

One of the Education Department's three income-driven repayment programs, this programs sets an upper bound on monthly loan payments.

HOW DOES IT WORK?

As the name implies, your payment obligation under this program is tied to your family income and size. Specifically, your monthly payment is expected to be 10% of your discretionary family income (as determined by the Department based on your family's earnings and size. Link to the calculator here). In no case, however, would the payment amount exceed the amount calculated under the Standard 10-year Repayment Plan.

FORGIVENESS

At the end of 20 years (or less in the case of qualifying occupations), any remaining balance is forgiven. There are two catches to this forgiveness: first, you must make all your payments in a timely manner. Second, any amounts forgiven will be treated as income by the IRS, just like ordinary debt forgiveness. On the plus side, months that you are in economic hardship deferral count as on-time payment months.

The occupations that qualify for forgiveness after 10 years (technically, 120 qualifying months) are public service jobs as defined by the Education Department:

Qualifying employment is any employment with a federal, state, or local government agency, entity, or organization or a not-for-profit organization that has been designated as tax-exempt by the Internal Revenue Service (IRS) under Section 501(c)(3) of the Internal Revenue Code (IRC). The type or nature of employment with the organization does not matter for PSLF purposes. Additionally, the type of services that these public service organizations provide does not matter for PSLF purposes. 

A private not-for-profit employer that is not a tax-exempt organization under Section 501(c)(3) of the IRC may be a qualifying public service organization if it provides certain specified public services. These services include emergency management, military service, public safety, or law enforcement services; public health services; public education or public library services; school library and other school-based services; public interest law services; early childhood education; public service for individuals with disabilities and the elderly. The organization must not be a labor union or a partisan political organization. 

Additionally, only Direct Loans are eligible for forgiveness under the 10-year option.

ELIGIBILITY

Only new borrowers as of October 1, 2007 are eligible. Additionally, you must have received a disbursement after October 1, 2011. Also, your income situation must be such that Pay As You Earn payments are less that the Standard payments - usually this means the initial debt is more than your family income.

Private loans are not eligible nor are Parent PLUS loans. Unconsolidated Direct loans and PLUS loans to graduate or professional students are always eligible if they meet the criteria above. Stafford loans are eligible only if they have been part of a one-time loan consolidation. Consolidation loans that include Parent PLUS loans are not eligible.

CONCLUSIONS

Obviously, lower payments in a situation where you are facing many other expenses are welcome in the short run and loan forgiveness, even if you have to pay taxes on it, may save you money. On the other hand, the longer you stretch out the payments, the longer interest continues to accrue on larger balances. Without forgiveness, and even sometimes with, you could end up paying far more in total than you would have under the Standard repayment plan. 

PAYE is just another tool for you to use in managing your finances. If it's the right one for you, it could bring you welcome relief.

AVAILABLE RESOURCES FROM THE EDUCATION DEPARTMENT

Income-Driven Plans

Public-Service Loan Forgiveness Program (PSLF) 

Repayment Estimator

529 Plans and Financial Aid

529 Plans sound like a good idea, right? Start socking that money away when Baby Einstein is young, let it grow tax-free, and it'll be there when it comes time to pay for school.

Because these plans are often set up long before - sometimes a decade before - parents have the pleasure of dealing with financial aid forms, not a lot of thought goes into how the funds in a 529 plan affect the financial aid process.

TWO SIDES OF THE SAME COLLEGE COIN

I can hear some of you right now: "Wait a minute! I thought the whole idea of saving for college was that my child wouldn't need financial aid." Or you expect your child to earn enough in grants and scholarships to pay for everything.

The reality is, most student need both savings and financial aid to fund four years (or more) of school and getting those pieces to play together nicely requires a little planning up front.

The most crucial choice is deciding whose name to put on the 529 plan as owner.

THE CHILD AS OWNER

If the child is still a dependent, child-owned 529 plans are treated the same as parent-owned accounts (see below), otherwise schools expect you to use 20% of your 529 assets each year in calculating your expected family contribution (EFC) towards the cost of tuition, room & board, and supplies. The 20% rate applies to other non-529 plan assets owned by the child such as savings accounts. IRAs, if the child is fortunate enough to be working and saving, do not count toward the EFC.

The other good news is spending from the 529 is not counted as student income in determining financial aid.

One caveat: prior to the 2009 - 2010 school year, child-owned 529 plans were treated like any other child-owned assets - that is, subject to the same 20% that non-dependent students face. Be aware that rules change, not always to your advantage.

Finally, being owned by the child means that if there are funds left when they reach the age of majority, there is nothing stopping them from paying the taxes and penalties and using those funds for non-educational purposes.

THE PARENTS AS OWNERS

Parent-owned 529 plans get preferential treatment in the financial aid process compared to non-dependent student-owned plans and the same treatment as other (non-retirement) parental assets. On a sliding, income-based scale, only 2.6% - 5.64% of the 529 balance is counted towards the EFC.

Again, spending from the 529 is not counted as student income in determining financial aid.

Parents retain control over the accounts, including the ability to switch beneficiaries if one child in the family is fortunate enough to receive scholarships to the point their need is less than planned for.

GRANDPARENTS (AUNTS, UNCLES, FRIENDS, ETC.) AS OWNERS

You are not required to report (yet) 529 plan assets where the child is beneficiary on the FAFSA form. Therefore, none of the assets held outside of the child/parents counts against your financial aid under the Federal formula.

HOWEVER, and it's a big however, any money spent on the child's behalf out of these accounts count as income in the financial aid calculations, and 50% of the child's income is expected to be included in the EFC the following school year.

Again, owners retain control over the accounts, including the ability to switch beneficiaries.

TIPS

In general:

1. Put 529 plan money in the parent's name, not the child's
2. If the child is working and will not need the money for school, an IRA will take those assets out of the financial aid calculation and may be a better choice than a 529 plan
3. Schedule withdrawals from grandparent-owned 529 plans as late as possible, preferably the final year of school

Everyone's circumstances are different. To have your's evaluated properly, see a fee-only financial planner in your area.

Advisors' Roundup - April 24, 2015

What caught my attention this week:

That free community college thing? Not so fast:
FiveThirtyEight

Where's the biggest threat to your portfolio? In the mirror:
The Reformed Broker

Think you're ready for retirement? Try a dress rehearsal first:
Fortune

Advisors' Roundup - April 17, 2015

Grabbing my attention this week:

It's expenses, expenses, expenses:
The Reformed Broker

Yikes! Over 30% of student loan borrowers in payment status are behind on their payments:
WSJ

Deciphering those Financial Aid letters:
The College Solution

Advisors' Roundup - April 10, 2015

Articles from this week:

So that's why college costs so much:
NY Times

Or maybe it's those nice digs kids have these days:
Hechinger Report

And in economics - even perfect information doesn't help:
The Irrelevant Investor

Advisors' Roundup - April 3, 2015

Grabbing my attention this week:

Index fund investors are more likely to close the behavior gap
Market Watch

FICO to create credit scores for people currently outside the system
FiveThirtyEight

Deciphering college financial aid offers
The College Solution