Prioritizing Savings for College and/or Retirement
The November 2018 AAII Journal, American Association of Individual Investors, included an interview with Harold Pollack. The discussion was about “The Index Card: Why Personal Finance Doesn’t Have to Be Complicated” (Portfolio, 2016). He wrote it with Helaine Olen.
The following passage is from a response to a question about prioritizing where to direct money.
“There are different ways that people can do this. You should match your method with what gives you the mojo to actually do it.” … “Suppose I’m a young parent and I’m choosing between prioritizing my retirement and savings for my kid’s college. Mathematically, retirement tends to be the answer for most people, but your kid’s college gives you mojo in a different way. If you’re walking with your seven-year-old daughter in a store and you see a sweet $500 camera lens, you can point to it, and tell your daughter: “I really want that lens, I’m going to put that $500 toward paying for your college. Maybe some day you’ll do that for your daughter.’ That’s powerful and motivating.”
2018 Nov.Beyond-the-Index-Card-Implement
Interest Rates Rise on Federal Student Loans for 2018-2019
Interest rates on federal student loans are set to rise for the second year in a row. This table shows the interest rates for new loans made on or after July 1, 2018, through June 30, 2019. The interest rate is fixed for the life of the loan.
| New rate 2018-2019 | Old rate 2017-2018 | Available to | Borrowing limits | |
|---|---|---|---|---|
|
Direct Stafford Loans: Subsidized Undergraduates |
5.045% |
4.45% |
Undergraduate students only Subsidized loans are based on financial need as determined by the federal aid application (FAFSA) |
For dependent undergraduates: 1st year: $5,500 ($3,500 subsidized) 2nd year: $6,500 ($4,500 subsidized) 3rd, 4th, 5th year: $7,500 ($5,500 subsidized) Max: $31,000 ($23,000 subsidized) |
|
Direct Stafford Loans: Unsubsidized Undergraduates |
5.045% |
4.45% |
Undergraduate students only; all students are eligible regardless of financial need |
For dependent undergraduates: 1st year: $5,500 ($3,500 subsidized) 2nd year: $6,500 ($4,500 subsidized) 3rd, 4th, 5th year: $7,500 ($5,500 subsidized) Max: $31,000 ($23,000 subsidized) |
|
Direct Stafford Loans: Unsubsidized Graduate or Professional Students |
6.595% |
6% |
Graduate or professional students only; all students are eligible regardless of financial need Unsubsidized loans only |
$20,500 per year (unsubsidized only); max $138,500 ($65,500 subsidized) |
|
Direct PLUS Loans: Parents and Graduate or Professional Students |
7.595% |
7% |
Parents of dependent undergraduate students and graduate or professional students Unsubsidized loans only |
Total cost of education, minus any other aid received by student or parent |
College Board releases 2016/2017 college cost data.
The College Board has released college cost figures for the 2016/2017 college cost data in its annual Trends in College Pricing report. “Total average cost” includes tuition and fees, room and board, books, transportation, and personal expenses. Here are the highlights:
Public colleges (in-state students):
- Tuition and fees increased an average of 2.4% to $9,650
- Room and board increased an average of 2.9% to $10,440
- Total average cost for 2016/2017: $24,610 (up from $24,061 in 2015/2016)
Public colleges (out-of-state students):
- Tuition and fees increased an average of 3.6% to $24,930
- Room and board increased an average of 2.9% to $10,440
- Total average cost for 2016/2017: $39,890 (up from $38,544 in 2015/2016)
Private colleges:
- Tuition and fees increased an average of 3.6% to $33,480
- Room and board increased an average of 3.0% to $11,890
Total average cost for 2016/2017: $49,320 (up from $47,831 in 2015/2016)
Link to “Trends in College Pricing 2016” https://trends.collegeboard.org/sites/default/files/2016-trends-college-pricing-web_0.pdf
College costs are a major expense. Understanding the current cost will help to plan how to meet the costs in the future. The information can also be helpful to grandparents in their gift planning.
One way to fund college expenses is to use a “529” plan. These are offered by state or educational institutions. Earnings are not subject to federal tax and generally are not subject to state tax when used for “qualified education expenses” of the “designated beneficiary”. Some states offer tax incentives for state residents that contribution to the plans in their states.
Not everyone should use a 529 plan. Review the alternatives, benefits and drawbacks to determine if 529 plans should be part of your planning.
What priority do you place on your retirement?
The New York Times Feb. 28, 2014 article, “Save for Retirement First, the Children’s Education Second”, applies to other financial goals also. Two critical financial planning steps are to identify your financial goals and determine the priority of each. The cost of each goal and when you want to achieve the goal are also needed.
One objective in financial planning is to determine how much is needed to achieve your goals. Saving is almost always the way to have the funds needed. The longer you wait to start to save for financial goals, the harder it is to achieve. That is because more needs to be saved each year.
The challenge to be able to save for retirement becomes more difficult as the number of goals increase. You can borrow for some goals. Borrowing for retirement is generally not an alternative. Financing goals before retirement may decrease the ability to borrow in the future and increases future cash needs.
Children’s education, helping a child with the purchase of a home, helping children with their loans could reduce the amounts needed to maintain a comfortable retirement.
Possibly the expenses can be reduced. Attending local and in-state colleges are generally less expensive than private colleges. Having the children take out student loans also reduces the amount the parents will have to pay.
Contributing less into qualified retirement plans, including IRAs, (Plans) and borrowing from Plans reduces the amount that can be saved for retirement. Contributing to Plans allows the funds to grow free of annual income tax. This allows the income and growth to grow faster in Plans. Borrowing from a Plan reduces the potential return on the amount in the Plan. If the interest rate charged by the Plan is less than the amount a financial institution would charge, the amount of income in the Plan will be reduced.
A reserve account for the unexpected and emergencies should be given a very high priority. Without reserves, these types of expenditures could require the liquidation of investment when their values are low.
There are unintended consequences of not saving for retirement first. Your children may need to support their parents in retirement. A child may need to give up a job to care for a parent if the funds are not available for health care.
Set your priorities for yourself first. Any excess can be left to your heirs.
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College Costs 2013/2014: Increases Slow, but So Does Growth in Grant Aid
Every October, the College Board releases its Trends in College Pricing report that highlights college cost increases for the current academic year along with trends in the world of higher education. While costs can vary significantly depending on the region and individual college, the College Board publishes average cost figures, which are based on its survey of nearly 4,000 colleges across the country.
In its report, the College Board noted that even though this year’s increases in tuition and fees were the smallest in many years, the growth in student grant aid from previous years has not kept pace. As a result, many students will be facing higher costs, even in the face of smaller price increases.
To read the full Trends in College Pricing 2013 report, go to trends.collegeboard.org.
Following are cost highlights. Note that total cost figures include tuition and fees, room and board, books and supplies, and a sum for transportation and personal expenses. Together, these items are officially referred to as the “total cost of attendance.”
Public colleges (in-state students)
Tuition and fees increased an average of 2.9% this year to $8,893
Room-and-board costs increased an average of 3.6% this year to $9,498
Total cost of attendance for 2013/2014 is $22,826 (up from $22,261 last year)
Public colleges (out-of-state students)
Tuition and fees increased an average of 3.1% this year to $22,203
Room-and-board costs increased an average of 3.6% this year to $9,498
Total cost of attendance for 2013/2014 is $36,136 (up from $35,312 last year)
Private colleges
Tuition and fees increased an average of 3.8% this year to $30,094
Room-and-board costs increased an average of 3.5% this year to $10,823
Total cost of attendance for 2013/2014 is $44,750 (up from $43,289 last year)
Cost trends
In its Trends in College Pricing 2013 report, the College Board noted that college prices have been rising more rapidly than the prices of other goods and services over the last three decades and that “the increasing economic inequality in the United States over recent decades has exacerbated the difficulty in paying for college for many students, in addition to straining federal, state, and institutional budgets.”
The College Board noted that even though this year’s increases in tuition and fees were the smallest in many years, the growth in student grant aid from previous years has not kept pace. As a result, many students will be facing higher costs, even in the face of smaller price increases.
