“Help! My child is two years away from college and we haven’t saved much. What should we do?”
First, help your child investigate schools that provide a good value. Some less expensive state universities and second-tier private colleges may offer better programs than their more expensive private counterparts. Think creatively. Your child could attend a nearby school and live at home for a year or two to save money on room and board. He or she could attend a community college for two years and then transfer to a private four-year college. Or, your child could consider cooperative education, where semesters of academic work alternate with semesters of paid work. If your finances are severely limited, your child might consider taking a year off before starting college.
Second, learn all you can about financial aid. Do a dry run through the federal government’s financial aid application to determine whether your child is likely to qualify for financial aid, and, if so, for how much. When you’ve zeroed in on a few colleges, examine their financial aid statistics. For example, what percentage of students receive financial aid? What percentage of the average package consists of loans? What percentage of a student’s financial need is generally met — 100%? 75%? Does the college offer merit scholarships? Use a net price calculator on a college’s website to get an idea of how much grant or scholarship aid your child might receive at a particular college based on your financial information.
Third, start investigating potential scholarships. There are a number of websites where your child can type in his or her interests, abilities, and goals to obtain a list of relevant scholarships. FastWeb is free and excellent.
However, outside scholarships generally make up only a small portion of a student’s overall aid package, and the process can be very competitive. So don’t make the mistake of thinking that a private scholarship will magically cover most of your child’s college expenses. It’s important that this search be made in addition to, not in place of, the quest for federal and college-sponsored financial aid.
Savings and Investments
Fourth, examine any current financial resources that you can draw on for the early college bills. Do you have savings accounts, stocks, mutual funds, or cash value life insurance? Can you pay a portion of the tuition bills from current income? Can you increase the family income by getting a second job or having a previously stay-at-home spouse return to the work force? If you’re still short, you’ll need to investigate a personal loan, home equity loan, or federal Parent PLUS Loan. In other cases, you may need to tap your retirement accounts, though this is generally recommended only as a last resort.
Finally, you’ll need to start earmarking as much of your current income as you can for college bills that will come due in four or five years, when your child is a junior or senior in college. Because you’ll need the money relatively soon, you should avoid high-risk investments. Instead, choose a low-risk, stable investment, such as a certificate of deposit that is timed to mature when you need it, or a money market mutual fund.
Have A Plan
This process is complex and timing is critical. Often, families don’t have the bandwidth or resources by themselves to do the work necessary to ensure their college plan is right for them. If this sounds familiar, you aren’t alone. Many families with high school sophomores, juniors, and seniors are in the same situation. Help is available.
Speak to a college financial planner who has specific experience in the college planning space and have them review your plan and options. You can book a complementary personal consultation with SeaCure here.
How do you set goals?
The first step in investing is defining your dreams for the future. If you are married or in a long-term relationship, spend some time together discussing your joint and individual goals. It’s best to be as specific as possible. For instance, you may know you want to retire, but when? If you want to send your child to college, does that mean an Ivy League school or the community college down the street?
You’ll end up with a list of goals. Some of these goals will be long term (you have more than 15 years to plan), some will be short term (5 years or less to plan), and some will be intermediate (between 5 and 15 years to plan). You can then decide how much money you’ll need to accumulate and which investments can best help you meet your goals. Remember that there can be no guarantee that any investment strategy will be successful and that all investing involves risk, including the possible loss of principal.
Looking forward to retirement
After a hard day at the office, do you ask, “Is it time to retire yet?” Retirement may seem a long way off, but it’s never too early to start planning — especially if you want your retirement to be a secure one. The sooner you start, the more ability you have to let time do some of the work of making your money grow.
Let’s say that your goal is to retire at age 65 with $500,000 in your retirement fund. At age 25 you decide to begin contributing $250 per month to your company’s 401(k) plan. If your investment earns 6 percent per year, compounded monthly, you would have more than $500,000 in your 401(k) account when you retire. (This is a hypothetical example, of course, and does not represent the results of any specific investment.)
But what would happen if you left things to chance instead? Let’s say you wait until you’re 35 to begin investing. Assuming you contributed the same amount to your 401(k) and the rate of return on your investment dollars was the same, you would end up with only about half the amount in the first example. Though it’s never too late to start working toward your goals, as you can see, early decisions can have enormous consequences later on.
Some other points to keep in mind as you’re planning your retirement saving and investing strategy:
- Plan for a long life. Average life expectancies in this country have been increasing for years and many people live even longer than those averages.
- Think about how much time you have until retirement, then invest accordingly. For instance, if retirement is a long way off and you can handle some risk, you might choose to put a larger percentage of your money in stock (equity) investments that, though more volatile, offer a higher potential for long-term return than do more conservative investments. Conversely, if you’re nearing retirement, a greater portion of your nest egg might be devoted to investments focused on income and preservation of your capital.
- Consider how inflation will affect your retirement savings. When determining how much you’ll need to save for retirement, don’t forget that the higher the cost of living, the lower your real rate of return on your investment dollars.
Facing the truth about college savings
Whether you’re saving for a child’s education or planning to return to school yourself, paying tuition costs definitely requires forethought — and the sooner the better. With college costs typically rising faster than the rate of inflation, getting an early start and understanding how to use tax advantages and investment strategy to make the most of your savings can make an enormous difference in reducing or eliminating any post-graduation debt burden. The more time you have before you need the money, the more you’re able to take advantage of compounding to build a substantial college fund. With a longer investment time frame and a tolerance for some risk, you might also be willing to put some of your money into investments that offer the potential for growth.
Consider these tips as well:
- Estimate how much it will cost to send your child to college and plan accordingly. Estimates of the average future cost of tuition at two-year and four-year public and private colleges and universities are widely available.
- Research financial aid packages that can help offset part of the cost of college. Although there’s no guarantee your child will receive financial aid, at least you’ll know what kind of help is available should you need it.
- Look into state-sponsored tuition plans that put your money into investments tailored to your financial needs and time frame. For instance, most of your dollars may be allocated to growth investments initially; later, as your child approaches college, more conservative investments can help conserve principal.
- Think about how you might resolve conflicts between goals. For instance, if you need to save for your child’s education and your own retirement at the same time, how will you do it?
Investing for something big
At some point, you’ll probably want to buy a home, a car, maybe even that yacht that you’ve always wanted. Although they’re hardly impulse items, large purchases often have a shorter time frame than other financial goals; one to five years is common.
Because you don’t have much time to invest, you’ll have to budget your investment dollars wisely. Rather than choosing growth investments, you may want to put your money into less volatile, highly liquid investments that have some potential for growth, but that offer you quick and easy access to your money should you need it.
The following article about student loans was written by Jeff Gitlen and published on LendEdu on May 3, 2018. It is being presented here with permission from Andrew Rombach.
Figuring out how you’re going to pay for college? Congratulations – making it to this point is an accomplishment in and of itself. The fact that you are getting prepared for the financial questions of higher education means that you’re serious about your future.
Unfortunately, most of you will get hit with a massive reality check when you look at how much your preferred schools will cost us. If your family savings isn’t enough to cover four years of tuition, then you are most likely going to resort to some sort of financial aid.
For many students, savings, grants and scholarships don’t cover the full cost, so they need to turn to student loans in order to pay for college.
In general, there are two main types of loans that a student borrower has available to them.
The simplest federal student loans definition is a loan that is funded by the government and comes with more borrower-friendly terms and options. The basic private student loans definition is a loan that is funded by private lenders and typically comes with harsher terms.
Federal vs. Private Student Loans: The Different Types of Loans
Some of the first differences between federal student loans and private student loans become apparent when you look at the different offers available to borrowers. The federal government outlines multiple different loans for specific borrowers, while the private sector breaks it down differently. Either way, there are multiple sub-types of student loans within each category that borrowers need to carefully consider.
Types of Federal Student Loans
Direct Subsidized Stafford Loans
These loans are considered to have the friendliest terms to students. Only borrowers who fall under a certain financial need threshold can receive them. These are subsidized because the government pays off the interest during school until repayment starts. Here are a few more details:
- Only available to undergraduate students
- Eligibility and size of loan is based on financial need
- Students pay no interest while they’re enrolled at least half-time or during the six-month deferment period after graduation. After, they must pay interest.
Direct Unsubsidized Stafford Loans
These are similar to the previous Stafford loan, but they are unsubsidized. These are more widely available to more students without the same financial need threshold, but the government doesn’t cover the interest payments before the repayment period. Here are more details:
- Available to both undergraduate and graduate students
- No financial need requirement
- Students are on the hook for interest payments from start to finish. While they can choose to start paying interest until after the grace period, all interest is added to the principal balance at the start of repayment.
Direct PLUS Loans
Direct PLUS Loans are offered to the parents of undergraduate students or to graduate/professional students. A student’s parent or graduate student can take out as much as necessary to cover the cost of attendance. They are the only federal student loan program that takes into account applicant credit history.
- Undergraduate students’ parents are eligible, as well as graduate or professional students
- Loan limit based on cost of attendance
- Must not have bad credit to be eligible
The Perkins loan program was discontinued at the end of September 2017, so they are no longer available. They are included in this list because there may still be borrowers with outstanding Perkins student loan debt. With the Perkins Loans program, the school itself is the lender, and low interest loans are offered to borrowers under a certain financial need threshold. Here are a few more details:
- Payments made to the school or school’s servicer
- Exceptional financial need has to be demonstrated
- Program discontinued as of September 2017
Types of Private Student Loans
Private student loans cannot be broken down the same way as federal loans. There aren’t clearly defined programs from one source: the federal government. Instead, there are a wide range of options that are available through various different lenders and banks.
There are a few common denominators. First, they are not funded by the government which is obvious. Second, private student loan applications are subject to similar standards of approval as a typical credit application. This means that approval-decline decisions as well as the loan terms are based on an applicant’s (or a cosigner’s) credit history.
While federal loans can be broken down by program, private student loans are not so clear cut. Here’s a basic overview of what the private sector offers. At a high level, there are standard student loan options for undergraduate and graduate students. Additionally, some lenders do offer specialized graduate loans. You can find graduate loans meant specifically for students entering pre-med, law school, or other professions.
Qualifying for a Federal Loan vs. a Private Loan
Federal Student Loans
- Applicants are approved after filing the Free Application for Federal Student Aid (FAFSA); there is no other application.
- Loan offers are based on family income, expected contributions, and financial need.
- The only time credit history matters would be if you are applying for a Direct PLUS Loan.
- No cosigner is needed.
Private Student Loans
- Lenders have their own loan applications as well as eligibility criteria.
- Loan offers are based on credit history and income in most cases.
- Other factors such as employment, school, or major may factor into your eligibility in some cases.
- Unqualified borrowers may need a cosigner which are accepted on applications.
Applying for a Student Loan
Applying for Private Student Loans
In order to apply for a private student loan, the process really varies depending on which private lender you’re considering. Each bank, for example, has its own student loan application process. It typically involves an online application, a credit check, and other documents and information may be requested.
As mentioned earlier, you have the option of adding a cosigner to your loan application which may bolster your case for a private student loan. At any rate, you should check each individual private lender’s website to find out what their application process entails.
Applying for Federal Student Loans
For federal student loans, you must complete the FAFSA each year; it is necessary to be eligible for any federal financial aid for higher education. The application opens annually on October 1 and remains open for over a year afterwards. For the 2018-2019 school year, the window of completion is from October 1, 2018 to June 30, 2019.
It’s generally best to get the FAFSA done as early as possible. First, you want to avoid missing deadlines. Second, some programs have limited funding and require an early application (meaning don’t wait because it could be gone). Also, your school will most likely use your FAFSA results to determine your financial aid package – which is generally sent out to students in late winter or early spring.
The government will let you know what sort of financial aid, including student loans, you will be eligible for.
The Costs of Borrowing
Private Student Loan Rates
Private student loan interest rates are set by the lenders themselves, but they are all based on the market rate set by the US Treasury, the benchmark for loan products in the United States.
Looking at the industry as a whole, private student loan rates can range anywhere from as low as roughly 3.6 percent to as high as about 13 percent (maybe even higher depending on the lender). Keep in mind that the range of rates will vary by lender, and rates in general are always subject to change at a lender’s discretion.
While there is a rough range of possible rates outlined above, individual borrowers will know more about their interest rate during or after the application process. As mentioned previously, loan terms, including interest rates, are dependent on credit history and other criteria. In general, a creditworthy borrower may expect a rate closer to the low end, while a less creditworthy borrower may expect a rate closer to the high end.
Contrary to federal loans, private lenders usually offer both variable or fixed rates on their student loans, and these can have an impact on the cost of your loan. Variable-rate loans are typically offered at a lower APR. Additionally, these rates are subject to change with the market, so they could end up rising or falling over time. The other option is a fixed-rate loan. These are usually offered at higher APRs relative to variable-rate loans, but they do not fluctuate with the market after the loan is disbursed.
Federal Student Loan Interest Rates
Federal student loan interest rates are also based on the market rate, but they are set by the Federal government each year. Contrary to private loans, they are fixed-rate loans, so there is no fluctuation in APR during repayment. Since federal loans are broken out simply by program, it’s much easier to break down the interest rates. Here is a list of the current federal rates for loans taken out after July 1, 2017:
- Direct Subsidized Undergraduate Loans: 4.45%
- Direct Unsubsidized Undergraduate Loans: 4.45%
- Direct Unsubsidized Graduate/Professional Loans: 6%
- Direct PLUS Loans: 7%
- Perkins: 5% (discontinued)
Origination Fees and Prepayment Penalties
Federal student loans some with several different origination fees. Direct subsidized and unsubsidized student loans come with a 1.066 percent loan fee on loans disbursed between October 2017 and October 2018. Direct PLUS loans come with a fee of 4.264 percent if disbursed over the same time period.
Many private lenders advertise no origination fee. However, there are still some lenders that charge the fee as a percentage of the loan amount.
Prepayment Penalty Fees
There are no prepayment fees associated with federal student loans. Also, there are many private lenders who do not charge origination fees. However, there are still some lenders that do, but these will vary on a case-by-case basis.
Student Loan Repayment Options
Federal student loan repayment options are much more flexible compared to private student loans. In a broad overview, there are four category repayment plans.
The ten-year Standard Repayment Plan is the first default option; it involves 120 installment payments over ten years. The Graduated Repayment Plan is another option. Graduated repayment involves 120 payments over ten years, but payments start low and gradually increase over time. The Extended Repayment Plan entails 300 installment payments over 25 years, and the borrower can choose a standard or graduated repayment schedule.
Finally, there are four different income-driven repayment (IDR) plans: income-based repayment (IBR), income-contingent repayment (ICR), income-sensitive repayment, Pay As You Earn Repayment (PAYE), and Revised Pay As You Earn Repayment (REPAYE). All of these plans base monthly payments off of discretionary income, and repayment terms vary from 15 to 25 years. If eligible, some borrowers can have their remaining balances forgiven after the repayment term is up.
Private student loan repayment options are nowhere near as flexible. The industry standard is the ten-year repayment plan – 120 installment payments over ten years. Throughout the industry, student borrowers can find lenders offering repayment terms from five to 15 years.
Federal vs. Private Student Loans: Which is Better?
Federal student loans are the clear winner here – they are available, have interest rates that are better geared to college students who are new to credit, a six-month grace period and deferment options, flexible repayment options, and other benefits and protections.
Private student loans can be reasonably priced, but they will generally come with a double-digit interest rates for new-to-credit borrowers. You or a cosigner must have a strong credit history to be considered, and there are fewer protections and benefits.
Try to get federal student loans first, then only turn to private sector lenders as a last resort to cover any remaining expenses.
NOTE: The following disclaimer appears on the LendEdu website above this article:
Our research, news, and assessments are scrutinized using strict editorial integrity. In full transparency, our company may receive compensation from partners listed on our website. Learn more about how we make money here.
January is typically a strong month for the municipal bond market, but 2018 began with the worst January performance since 1981, driven by rising interest rates and uncertainty over changes in the Tax Cuts and Jobs Act (TCJA).1 The muni market stabilized through April 2018, but uncertainty remains.2 The tax law changed the playing field for these investments, which could affect supply and demand.
When considering these dynamics, keep in mind that bond prices and yields have an inverse relationship, so increased demand generally drives bond prices higher and yields lower, and vice versa. Any such changes directly affect the secondary market for bonds and might also influence new-issue bonds. If you hold bonds to maturity, you should receive the principal and interest unless the bond issuer defaults.
Tax rates and deduction limits
Municipal bonds are issued by state and local governments to help fund ongoing expenses and finance public projects such as roads, water systems, schools, and stadiums. The primary appeal of these bonds is that the interest is generally exempt from federal income tax, as well as from state and local taxes if you live in the state where the bond was issued. Because of this tax advantage, a muni with a lower yield might offer greater value than a taxable bond with a higher yield, especially for investors in higher tax brackets.
The lower federal income tax rates established by the new tax law would cut into this added value, but the difference is relatively small and unlikely to affect demand. Many taxpayers, especially in high-tax states, may find munis even more appealing to help replace deductions lost to other TCJA provisions, including the $10,000 cap for deductions of state and local taxes.3 Tax-free muni interest can help lower taxable income regardless of whether you itemize deductions.
The large corporate tax reduction from a top rate of 35% to 21% is likely to have a more significant effect on demand for munis. Corporations, which own a little less than 30% of the muni market, may hold on to bonds they currently own but become more selective in purchasing future bonds.4
|Federal Income Tax Rate||Taxable Equivalent Yield on 3% Muni|
A tightening market
The supply of new municipal bonds dropped after the fiscal crisis as local governments became more cautious about borrowing. The TCJA further tightened the market by eliminating “advanced refunding” bonds, issued to replace older bonds at lower interest rates, which have accounted for about 15% of new issues.5
This is expected to reduce the supply of bonds for the next three years or so, but the long-term effects are unclear. If interest rates continue to climb, there is less to gain by replacing older bonds, but local governments may issue taxable bonds if they see an opportunity to reduce interest payments. There may also be changes to the structure of future muni issues.6
Risk and rising interest rates
Munis are considered less risky than corporate bonds and less sensitive to changing interest rates than Treasuries, making them an appealing middle ground for many investors. For the period 2007 to 2016, which includes the recession, the five-year default rate for municipal bonds was 0.15%, compared with 6.92% for corporate bonds. Most of those defaults were related to severe fiscal situations such as those in Detroit and Puerto Rico. The five-year default rate for investment-grade bonds (rated AAA to BBB/Baa) was just 0.05%.7
Treasuries, which are backed by the full faith and credit of the U.S. government as to the timely payment of principal and interest, are considered the most stable fixed-income investment, and rising Treasury yields, as occurred in early 2018, tend to put downward pressure on munis.8 However, Treasuries are more sensitive to interest rate changes, and stock market volatility makes both Treasuries and munis appealing to investors looking for stability.
The most convenient way to add municipal bonds to your portfolio is through mutual funds, which also provide diversification that can be difficult to create with individual bonds. Diversification is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss.
Muni funds focused on a single state offer the added value of tax deductibility for residents of those states, but smaller state funds may not offer the level of diversification found in larger states. It’s also important to consider the holdings and credit risks of any bond fund, including those dedicated to a specific state. For example, in October 2017, many state funds still held Puerto Rico bonds, which are generally exempt from state income tax but carry high credit risk.9
If a bond was issued by a municipality outside the state in which you reside, the interest may be subject to state and local income taxes. If you sell a municipal bond at a profit, you could incur capital gains taxes. Some municipal bond interest may be subject to the alternative minimum tax.
The return and principal value of bonds and bond fund shares fluctuate with changes in market conditions. When redeemed, they may be worth more or less than their original cost. Bond funds are subject to the same inflation, interest rate, and credit risks associated with their underlying bonds. As interest rates rise, bond prices typically fall, which can adversely affect a bond fund’s performance. Investments offering the potential for higher rates of return involve a higher degree of risk.
Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
1, 8) CNBC, February 28, 2018
2) Bloomberg, 2018 (Bloomberg Barclays U.S. Municipal Index for the period 1/1/2018 to 4/16/2018)
3-4, 6) The Bond Buyer, February 12, 2018
5) The New York Times, February 23, 2018
7) Moody’s Investors Service, 2017
9) CNBC, October 10, 2017