Keep Student Debt in Mind When Selecting College
Over the next two weeks, college-bound high school seniors and their parents will be making the all-important decision about where the student will attend college this fall. After months of discussions, campus visits, talks with guidance counselors, filling out forms, applications, “Decision-day” is here. Most colleges require a commitment, either way, by May 1st. Continue reading
When Investing May Be Like Dieting (other than being hard!)
A woman I know is currently on a vegetable and protein-drink diet, hoping to lose some lbs and look her best for her daughter’s wedding in the spring. The other day she reported that although she had been on the diet for several weeks and lost 16 lbs (which makes her happy, of course) she expressed some frustration that she was now “stuck” and hadn’t progressed further over the last couple of weeks. As those who have dieted in the past know, my friend has probably “plateaued”; the easy-to-lose weight has been dropped and diligent effort and persistence may be needed for further progress. Continue reading
Take Your Time Deciding What to Do with Sudden Wealth
Recently, a retired couple in their early 60’s met with me to discuss potential recommendations for some money they had inherited from one of their parents. As sometimes happens, this amount of money was more cash than these people had ever had at one time. In fact, to them it was similar to winning a fortune in the lottery. Continue reading
Plan and Budget Now for Holiday Spending Later
Halloween just occurred, yet you might already be seeing hints of the Christmas retail season appearing in some stores in your area already. Aside from the annoying reminder of the ugly commercial side of the holiday season, it might be time to start thinking about holiday shopping from a financial planning point of view.
Specifically, managing your holiday spending and potential debt. Continue reading
Your New Year’s Financial Resolutions; One Small Bite at a Time
One of the annual rituals around the holidays is a list of New Year’s Resolutions or “how I’m going to change my whole life around to be a better person.” These promises usually involve breaking habits we know are, well, detrimental to us, such as junk food and overspending. We also pledge to exercise more, diet, avoid chocolate, etc. While some succeed at changing their habits and attaining their goals, most fall far short of expectations and then laugh about it with friends or co-workers when comparing notes on how quickly these were broken. Continue reading
Saving for College: Why You Need to Plan beyond Financial Aid
Autumn signals the beginning of college preparation season, where parents and their high school students gather information about potential college choices, prepare essays and applications, and of course, consider how to pay for it all. Mention college-planning to parents and their first thought is usually how to get (more) financial aid.
While financial aid is indeed important to many families, it shouldn’t be the only focus in funding a college education. Parents who are new to the college financing game are often surprised to learn that financial aid awards include both grant/scholarship money and student loans. In fact, for many students there are often a higher percentage of loans versus grant money in the award. Student loans are still considered financial aid (at least by the government and the colleges) due to the low interest rates charged and the deferred repayment provisions.
Most financial aid is granted based upon the “need” of the family, which is determined by the Cost of Attendance for the particular school minus the Estimated Family Contribution or “EFC.” The EFC is calculated by an assessment of the parents’ and student’s assessable income and assets via one of two different formulas depending upon the type of school.
Often, a family is surprised to learn that despite qualifying for a certain amount of aid based on a level of need, most schools only award a percentage of that, often in the area of 70 percent t0 80 percent, leaving the remaining “Unmet Need” of 20 percent to 30 percent to be borne by the parents and/or student, in addition to the EFC. Many parents are also shocked to learn that while incomes of $100,000 – $150,000 may be just enough to meet living expenses, these incomes often disqualify the student from most need-based aid other than loans, yet the EFC obligation each college year may be $20,000 or more.
What parents often miss in college planning is how they will find the means to pay this EFC and Unmet Need. Families often don’t have the funds set aside and usually turn to the many loan programs available. While potentially solving the immediate problem, accumulated college loans can disrupt present family budgets (some loan repayments begin immediately) as well as future cash-flows for both the parents and eventually the students. There are many situations where students start their careers buried in loan payments, hampering plans to start families, buy first houses or even make ends meet in basic living expenses with entry-level earnings.
For the parents, the burden of their children’s college expenses can severely disrupt current family finances and jeopardize retirement savings contributions, retirement goals and other financial plans. For higher income families, the situation is sometimes worse, as these families generally pay the full price, get little to no financial aid (absent any merit scholarship awards), are taxed in a higher bracket and generally don’t qualify for any education tax breaks. So, financial aid planning is a good first step, but certainly not the only one. A comprehensive plan on how to pay the EFC, the Unmet Need, the loans used, and still meet other present and future financial objectives should be part of every family’s college preparation.
Kevin Worthley is a Certified Financial Planner™ professional licensed with a registered investment adviser that provides personal financial advice online for a fee. He enjoys fly fishing, other outdoor activities and is a dedicated yoga practitioner. Contact with virtually any financial need.
Even Divorce Requires Planning
One of the more traumatic events in life is when a couple chooses to end their marriage and begin the divorce process. Adding to the trauma are the financial issues of separating assets and agreeing upon various forms of support for the spouse and the children.
In most cases, today’s divorce proceedings are based upon “no-fault,” where the process focuses on dividing assets and not the marriage problems. In short, it’s about the money. Coupled with the raw emotion that often accompanies a divorce, financial questions potentially present a dilemma for both the divorcing client(s) and the attorney(s) handling the legal aspects – how to resolve the divorce in such a way that is not only amicable, but financially sensible for both parties.
Unfortunately, the client, attorney and Family Court judge may not be well trained in financial planning. Divorcing clients need to make important financial decisions and agreements that may have a lasting impact – positively or negatively – on the rest of their lives. With such implications, even cases involving modest assets and income may require divorce financial analysis and the services of a qualified financial professional.
Consider the following example: Sam and Diane decide to divorce after 17 years of marriage. Sam earns a good salary at Smothers Bros. & Co. and Diane earns a small salary at her bakery business. They have two children, Chip and Cookie, a home with a mortgage and some retirement assets, including Sam’s pension at Smothers, which he would like to keep.
Diane wants to stay in the home with her children. Sam agrees to provide $800 per month in spousal support and the state-mandated child support until the children are 18 years old. In addition, he agrees to pay for the children’s college expenses. Since their home has a fair amount of equity, Diane agrees to let Sam have half the savings and his full pension, so the asset split is about even. On the surface, this seems like a fair settlement.
Fast-forward a few years, however; and Diane is in trouble. Though Sam has fulfilled his obligations, Diane has no money in the bank, her retirement savings are gone and the mortgage payments are several months behind, to the point where she is in real danger of losing the house. Suddenly, the settlement that seemed so fair a few years ago doesn’t look so good from her point of view.
This outcome may have been avoided through the use of a full financial analysis that showed while Diane had an equitable share of the marital assets, her “working capital” over time (and with inflation) would deplete rapidly. Though she still has her home, she cannot “eat the equity,” so to speak. An analysis (including tax and other divorce-specific information) prior to the final divorce settlement may have demonstrated to both her and Sam (and their attorneys) that this division may not work for Diane.
The earlier the financial professional is brought into the matter, the more options there may be for the client(s). Divorce financial analysis works well either for one client or for a couple seeking to resolve their issues using mediation or collaborative methods. The divorce financial planner does not in any way supplant the attorney’s role, but works solely as a resource to the attorney and their client for the client’s benefit.
Kevin Worthley is a Certified Financial Planner™ professional licensed with a registered investment adviser that provides personal financial advice online for a fee. He enjoys fly fishing, other outdoor activities and is a dedicated yoga practitioner. Contact with virtually any financial need.
Student Loan Reform Not Enough For Most Families and College Students
In case you missed it, the recently passed Healthcare Reform bill causing all the hoopla between the Dems and GOP contained a major reform of the Federal student loan programs. In short, the government will be the provider and originator of federal student loans (not banks anymore), while private loan companies may still perform the servicing of these loans. In addition, Federal Pell Grant maximums will be raised from $5350 currently, to $5500 next year, and $6000 in future years.
In some respects, this is progressively good for financial-aid worthy students, as well as taxpayers, since the savings (on the subsidies no longer paid to the banks originating these loans) may amount to $61 billion and will help pay for the Pell Grant increases and financial assistance to community colleges and other education programs.
What’s overlooked (again) by nearly everyone is,
a) Federal student loans, even if maximized by the undergrad student over 4 years, only cumulatively totals $31,000; less than 20% of the 4-year cost of attendance for most public and private colleges in the next 4 years ($180,000 on average). Apart from possible partial scholarships for students desired by the colleges and minimal savings by most families, the remainder of the expense has to be paid by borrowing, either by the parent or students themselves.
b) While it’s nice that Pell Grants annual awards could rise, these grants generally only go to the lowest-income families.
Most middle-income families don’t qualify for Pell Grants, so again, the real, crucial issue for college-bound students is NOT whether they qualify for Pell Grants or other college financial aid, but how will the family pay the Estimated Family Contribution (EFC) and additional “unmet need” each year?
THAT is the crux of financial stress for the average family and may significantly affect all other aspects of their financial lives, including, notably, Mom and Dad’s retirement plans. Remember, college planning IS retirement planning. All the money that goes to college costs is not going to retirement accounts for the future.
This legislation is a help, of course, but it still doesn’t directly solve most American’s college funding issues. Lower PLUS interest rates, expanded volunteer-for-loan-forgiveness programs and subsidies on student loan interest rates would have been more effective and welcomed, in my view.
Kevin Worthley is a Certified Financial Planner™ professional licensed with a registered investment adviser that provides personal financial advice online for a fee. He enjoys fly fishing, other outdoor activities and is a dedicated yoga practitioner. Contact with virtually any financial need.
Divorce is a Major Factor in College Financing
I recently spoke with divorce attorneys on the benefits of pre-divorce financial planning and how the financial consequences of a particular settlement could make a large difference to their clients after the divorce is finalized. The consequences on college planning for the children of a divorcing couple are often overlooked in divorce negotiations. Family cash flow during the college years, financial aid, and the ability (or not) to meet the Estimated Family Contribution (EFC) are all factors that are heavily influenced by divorce and how the divorce is structured. Given some cooperation and planning by the divorcing parents, they and their student(s) may avoid costly mistakes and actually benefit from a properly-structured divorce settlement.
For financial aid calculations, most colleges (especially the public schools) usually only consider the “custodial family” of the student. This means the “non-custodial” parent living elsewhere may not have his/her income or assets as part of the aid calculations. (Private schools requiring the CSS Profile financial aid application will ask for the non-custodial parent’s financials, however). There may be a significant difference in the financial resources between the two biological parents and ideally, the student could potentially benefit by being the custodial child of the parent with the lower income and assessable assets. Parents should be careful though, as a parent with higher income and assets may also have more obligations that may lower their net EFC below that of the other parent.
Although some state laws (such as RI) do not require provisions for college payments by divorcing couples, many parents often negotiate such obligations into their agreement to make sure one or the other contributes toward college in the future. If their students apply to private schools, documenting such obligations may actually work against the family, since colleges often ask (on the Profile application) whether the parents are divorced and if there is such a provision in the divorce decree. If so, the college chosen will often ask for copies of the divorce decree and this could work against the student in qualifying for aid. Assuming both parents are truly earnest in meeting college costs for their children, it may be better to leave such obligations un-documented if financial aid could be realized in the future. (Of course, if there’s a possibility someone will welsh on their promise, that’s another consideration and one’s attorney should certainly be consulted).
Many times, a student’s chosen college(s) will request financial information on the non-custodial parent, who then balks and refuses to provide tax returns, asset and income information. This is due to fears the college may require contributions from that parent that were not part of the divorce agreement. What many parents fail to realize is that colleges only assess certain assets in the aid calculations and even then, the percentage of value actually assessed of those assets are very low; often only 3-4%. Home equity and retirement accounts are often not even a factor either.
Divorcing parents with college-bound children may benefit by putting aside bitter memories or past conflicts and cooperate together to find the most efficient and cost-saving solutions to pay college costs. With open discussion and a little less ego-protection, divorcing parents might be able to give their children some financial benefits or even find some cost-savings for themselves in college financing. Such measures may go a long way in at least giving the children the best start possible in their own lives.
Kevin Worthley is a Certified Financial Planner™ professional licensed with a registered investment adviser that provides personal financial advice online for a fee. He enjoys fly fishing, other outdoor activities and is a dedicated yoga practitioner. Contact with virtually any financial need.
Ron Peremel
Kevin Condon
