college fund

Is Student Loan Debt as Bad as It Seems?

Rod Griffin — Mon, 23 Oct 2017 09:00:06 +0000

College students are back on campuses across the country. For many, it's the first time they’ll be on their own.

Every year the first class begins with the professor asking something like, "Is everyone here for Business Essentials?"

After a brief, awkward silence, one student inevitably raises his or her hand and says, "Um, no, I gotta go. Where, exactly, is Crime and Justice in America located?"

This year the hand was attached to my grandson’s arm. Ironically, he'd visited each classroom the day before just to be sure he knew where he was going. For a young man who grew up in the country hunting and fishing, it’s remarkable he could be so directionally challenged.

But there’s a lot on a college freshman's mind. What line do I stand in first? Where do I sign next? Who cares about reading the document I'm signing? How do I meet that cute girl or handsome boy in the next line?

For many, like my grandson, the biggest concern is just getting to their first class on time. How they’re going to pay for that class, and the rest of their education, usually isn't at the top of their list of things to think about — or even on it. That's what parents and grandparents worry about.

Student loan debt has topped $1.4 trillion

And we worry a lot for good reason. Student loan debt has reached $1.4 trillion. According to the College Board, the average published cost of a four-year degree is $129,640 for a private college.

But have hope. It may not be as bad as it sounds. There are students and parents with overwhelming student loan debt facing tremendous financial crises. But when you look at the big picture across the population, it isn't necessarily as bleak.

An Experian study found that the average total student loan balance is currently $34,144. That’s pretty close to the College Board survey results that found the average cost for an in-state education for a four-year university is about $37,600.

Student loans versus car loans

Compare the student loan numbers with those for car loans. Auto loan debt reached $1.1 trillion in 2017, according to Experian’s Q2 2017 State of the Automotive Finance Market report. The average loan amount for a new car is $30,234. The length of auto loan terms also is creeping up, with a third of new vehicles being repaid in six to eight years. The repayment period for student loans is typically 10 years.

Another important statistic is that there’s been a 10.1 percent decrease in late student loan payments since 2009. Late payments for car loans, on the other hand, have been creeping up.

One last number. The average monthly payment for a new car is $504, according to Experian. Using a payment calculator from StudentLoanHero.com, the payment for that $34,144 average student loan debt would be only $373. So the average education is cheaper each month than the average car.

When you look at the big picture, student loan debt doesn't seem so bad compared with what we spend in this country for new cars.

Student loans are the best investment

However, there's one metric I don't think should be used to compare student loans with car loans, and that's in the context of return on investment (ROI). I've talked with people for whom I have great respect who believe a student loan should have an ROI of five or six years and be treated like a car loan in terms of repayment time frames. I disagree.

The reason? A car is a depreciating asset. It starts to lose value as soon as you drive it off the lot and at some point becomes worthless. An education, on the other hand, is a lifetime investment. Its ROI should be measured over the course of a career or a lifetime — 20 to 30 years or more.

While a car loses value, research continues to show that a person with a college degree will earn as much as $1 million or more on average over the course of his or her career. When you consider that, you can’t afford not to get an education, even if it takes student loans.

There are ways to save significantly on the cost of college:

Go to an in-state public school.
Complete the first two years at a local community college.
Attend a local school and live at home.
Apply for scholarships and grants.

If you're struggling to repay debts, there are options — especially for government-guaranteed student loans — including forbearance, deferment, and consolidation. I know each of them well because I used all three when I was repaying my student loans, which were about today’s average — but that was almost 30 years ago. My education will always be the best investment I ever made.

My grandson, I'm very proud to say, earned a full tuition scholarship at a small but very good college in Kansas. So he shouldn't face the student loan challenges I did — if he can just find his way to class.

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This article is from Rod Griffin of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Essentials for Building a Profitable Portfolio

Matt Bell — Wed, 26 Oct 2016 10:00:11 +0000

For many people, investing is the most complicated and intimidating aspect of managing money. But it doesn't have to be. Here are some of the essentials for building a successful investment portfolio.

1. Know What You're Investing For

Investing is best done with a purpose in mind. Investing for a child's future college costs is not the same as investing for your retirement. You would use different investment vehicles — a 529-plan account or Coverdell Education Savings Account for college, and an IRA or 401K for retirement.

2. Know Your Time Frame

Investing is for goals you want to accomplish in five or more years. Anything shorter than that and you can't afford to take much, if any, risk, so you would be best served by a savings account.

Still, a "five or more years" time horizon contains a wide range of options. Someone planning to retire in 10 years should invest quite differently than someone planning to retire in 30 years. The first person can't afford to take as much risk as the second person. By the same token, the second person can't afford the risk of playing it too safe.

3. Know Your Temperament

This has to do with how well you sleep at night when the stock market is in free fall. Vanguard has a decent free assessment that combines your investment time frame with your temperament to suggest an optimal asset allocation — that is, what percentage of your portfolio you should allocate to stocks and what percentage to bonds (or stock, or bond-based mutual funds).

4. Know How to Choose Specific Investments

If investing is the most complicated and intimidating aspect of managing money, choosing specific investments is the most complicated and intimidating aspect of investing. Very few people have the wherewithal to do this on their own. It's helpful to acknowledge that. As Clint Eastwood's Dirty Harry character noted, "A man's got to know his limitations." Of course, the same is true for women!

There's just too much to know. There are thousands of different investments to choose from. And it can be crazy confusing (and dangerous) to make these decisions based on the all-too-common articles about "Last Year's Best-Performing Mutual Funds" or "Where to Invest to Take Advantage of Advances in Wind Power."

The crucial decision you need to make is not so much about which investments to choose; it's about which investment process to use. Here are three options.

Go With a Target-Date Fund

The simplicity of such funds has made them tremendously popular. Most of the big mutual fund companies offer them. You just choose the fund with the year closest to the year of your intended retirement as part of its name (Fidelity Freedom 2050, for example). The fund is designed with what the fund company believes is the ideal asset allocation for someone with that retirement date in mind, and it even changes the allocation as you get closer to that target date, becoming increasingly conservative. It's a very simple process, but all target-date funds are not alike. So, be informed.

Go With an Investment Adviser

He or she will get to know you and your goals and then tailor an investment strategy to you. Along the way, you will typically pay 1% of the amount of money you have the adviser manage for you each year. Also, advisers usually won't work with anyone with less than $100,000 to manage. If you go this route, ask friends for referrals and opt for a fee-based adviser (as opposed to one compensated by commissions) who works as a "fiduciary."

Go With an Investment Newsletter

Whereas an investment adviser works with clients one-on-one, an investment newsletter works with investors on a one-on-several thousand (or however many subscribers they have) basis. There are hundreds of investment newsletters, each with their own investment strategies. Subscribers gain access to the strategies along with the specific investment recommendations needed in order to implement the strategies. Subscription costs range from less than $200 per year to over $1,000 per year.

5. Know Some Market History

One of the biggest threats to your success as an investor can be seen in the mirror. When the market falls, it's easy to give in to fear and sell. When the market is booming, it's easy to give in to greed, and invest too aggressively.

Far better to understand that the market cycles between bull markets and bear markets (growing markets and declining markets). Even within a specific year, there will be ups and downs.

That's why it's so important to have a trusted investment selection process. With a good process in place, you should have some sense as to how your portfolio is likely to perform under a variety of market situations and you should be content to stay with it in good times and bad.

This article is from Matt Bell of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

3 Reasons Not to Save for Your Child's College Fund

Xin Lu — Mon, 09 Jul 2012 09:49:59 +0000

Since I had my son, I have often heard from family and friends that college is going to be extremely expensive, and it is best to start saving now. After much research I decided that I wouldn't put too much into a college fund. This may be against the usual advice of saving for the future, but here are some sane reasons why parents should not pump too much money into their children's college funds. (See also: How to Save Money for College)

1. A Large College Fund Can Lower Financial Aid

This is mostly due to how financial aid offices calculate need. Most public schools use the FAFSA, and many private schools use a combination of the CSS/PROFILE and their own formula. Regardless of the method used, generally parents and students have to list their assets, and more savings means less need. So it is actually possible for two families with equal incomes to receive different amounts of financial aid, and the family with less savings would receive more. Retirement accounts are usually excluded from these calculations, so it is to the parents' advantage to sock away more for retirement rather than a child's college fund. The calculations also usually count a student's assets fully, so if you put a college fund under your child's name, then that would hurt your financial aid numbers as well.

2. Working During College Can Be Beneficial for Students

Research from the U.S. Department of Labor (PDF) showed that young adults who had to work and pay for at least part of their college actually did better in school than those who did not have to work. This is not that surprising since the kids that had to work and study at the same time are more invested in their education and are generally more disciplined to be able to manage work and school. Those who had to work probably valued their education more than those who didn't. Additionally, these students who had work experience usually fare better after they graduate in their job searches because any job experience is better than none in the eyes of employers.

3. College Isn't the Right Choice for Everyone

There are currently many college graduates with no marketable skills who are not doing better than those who pursued an apprenticeship in a trade. If parents put away a lot of money in a college fund like a 529 plan and later find that their children no longer wanted to go to college, then they would have to take a tax penalty to take the money out for other uses. I think it is best to wait and see what a child's pursuits and talents are before deciding on that college is the best path.

My son will be college bound in about 15 years. I don't yet know what he will do, but if he decides to go to college, we will definitely support his decision. For now we are putting in $100 per month into a 529 account. In 15 years it will grow to a significant amount, but it probably will not be enough money for four years of college given the rate of increase in higher education costs. However, we're not that worried about it because ultimately I think that young adults should start taking responsibility and shoulder at least some of the costs of college. I think the whole point of raising and educating children is so that they can be independent and survive on their own, and it would be good for my child to learn that as soon as he is able.

What do you think? Are you currently saving a lot for your children's future college costs?

This article is from Xin Lu of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: