Advanced Personal Finance

As a Gen-Xer, I know well the burden of student loans.  My wife and I, like millions of others our age, had to deal with a rather sizeable debt burden right off the bat when we left college.  But there’s a way to ease the weight of that burden.  Very soon, it may be the best time ever to consolidate student loans.  It can save you hundreds or thousands of dollars over the life of that loan.  Here’s how.

Student loan consolidation - what it is

If you have variable-rate federal student loans, you can consolidate them all into one fixed-rate loan.  This is totally above board.  In fact, it’s federally managed and regulated.  If you’ve exhausted your forbearance period and you can’t get your student loans cancelled, consolidation might be for you.

After consolidation (which is free, by the way), you have one payment per month.  There are four different repayment plans with various terms.  You might also qualify for a new deferment if you’ve already exhausted yours.

Who should (and shouldn’t) do it

If your monthly payment is a stretch and you have variable-rate loans, you might do well to consolidate.  On the other hand, if you’re aggressively paying off the loans and the end is in sight, consolidation is not a good option.  You should also know that, like a home refinance, consolidation might increase the total amount you repay, since it extends the number of years of repayment.

To consolidate, you must have Direct or Federal Family Education Loans (FFELs).  You cannot consolidate if you’re still in school, but you can if you’re in any other status, including default.  I’d like to note here that student loans cannot be discharged in bankruptcy, so if you’re in default, consolidation may be a good option.

Why soon it will be a great time to consolidate

The fixed rate on consolidations is set each July and it’s based on the three-month T-bill auction at the end of May.  I’ll spare you the charts and graphs, but T-bill rates are rock bottom, so it’s likely that when the new rate is announced, it will be an all-time low (we’re talking in the 3.5% range for Stafford loans and 4.25% for FFELs).

How to consolidate your student loans

Since consolidation is through the government, you must use their methods and they make it easy.

• Online at https://loanconsolidation.ed.gov/appentry/appindex.html
• By Phone at 1.800.557.7392

• By paper by downloading a form at: http://www.loanconsolidation.ed.gov/forms.shtml

This post published at Advanced Personal Finance.

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Times are bad and getting worse.  Consumer confidence is in the toilet.  Inflation is rising, as is unemployment.  A recession is likely either already in progress or is imminent.  Home values continue to decline.  Yet among all this, there’s one thing going up - the price of college.  And there is a time for stopping the funding of college funds.

Across the US, millions of parents are having to make hard decisions about funding their children’s education and competing household financial priorities.  I know.  My wife and I are two of them.

Several months ago we made the decision to move to a lower cost of living area and have my wife stay home with our two children.  It’s a decision we didn’t take lightly.  It was fraught with financial decisions.  One of the topics we had to tackle was whether, and how much, to continue funding of our kids’ college funds.

Even with a lower mortgage payment and work-related expenses (not the least of which is daycare!), the loss of a paycheck made for a hard look at our budget.  Ultimately, we decided to continue funding retirement accounts and our small monthly contribution to a taxable account.  Meanwhile, we made the decision to cut in half our contributions to the college funds.  It wasn’t as easy a decision as it sounds, though.

It’s a decision that lots of people are having to make.  And there is definitely a time to lower or stop the contributions to college funds.  I won’t enumerate them because to do so would be presumptuous and because the situations where doing so is prudent are likely obvious to everyone.

I was struck, though, by this article on CNN/Money.  The article itself is kind of the opposite of what I’m writing about here.  It’s an encouragement to start saving for college early and often - standard stuff.  But some of the passages seemed ridiculous to me (emphasis mine):

“New [529 college savings] accounts this year are down about 20%, according to T. Rowe Price, while existing customers are contributing 10% less to 529s [that’s us - our plan is with T. Rowe Price].

“It certainly appears as though it is the economy that’s impacting consumers,” says T. Rowe Price’s Tom Kazmierczak. “It’s very easy for parents to think to themselves that they can cut college savings when they have to choose between saving for college and paying for a mortgage,” he says. “It really can be the wrong thing to do particularly if you’ve got younger children at home.”

Financial advisor Thomas Henske of Lenox Advisors recommends that clients who can afford it tuck away $10,000-$12,000 annually in an investment account for each child beginning at birth.”

Oh, ok.  Save $10,000-$12,000 per year per child from age 0 for college.  Ok.  No problem.  Is this guy for real?!?  Seriously, if you save that kind of money for retirement you have to be in the top 10% of savers in the US.

And this guy Kazmierczak.  Dude - news flash - paying the mortgage allows the kids to have a home to live in.  I can’t think of another person who would choose college funds over paying the mortgage. “It’s very easy for parents to think to themselves that they can cut college savings when they have to choose between saving for college and paying for a mortgage.”  Damn right it’s easy, because that’s not even a decision.  That’s automatic.

I’m an educated guy.  I value education highly.  But from a personal finance standpoint, saving for college is fairly far down the list.  It’s well below paying the mortgage.  There is most definitely a time to stop putting money into the college fund. 

For many people, that time is now.

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Some big things are happening in our family.  I started a new job that has an incredibly cool feature (which I’ll write about sometime soon).  We’re selling our house, buying another, and moving to another state.  My wife will also be staying home with our second child for the next couple of years, so the budget’s been completely up-ended.  Busy, busy.

Since our family’s money situation will change radically, we’ve had to make a number of changes to our financial priorities.  One of those priorities has been saving for our two kids’ college funds.  After wrestling a little with whether paying for college for them is a good idea, we’ve been saving pretty aggressively toward that goal.  One of the priority shifts I just mentioned is that we’re scaling this back a bit until my wife returns to work.  We’ll still be saving, just at a slower pace.

We have a couple of decisions we have to make.

1. Do we continue to contribute to the 529 we already have set up (in our soon-to-be former state)?
2. If not, do we open an account in the new state’s plan?
3. Should we roll over the old account into the new?

I’m going to leave it as a given that we’ll continue to use a 529 savings account plan.  There are, of course, lots of other ways to save for college, but this one works best for us.

The old state’s 529 was one of the best rated by savingforcollege.com, the premier site for information on saving for college (with which I have no affiliation).  It offered a state tax deduction for contributions, it was low fee and run by T. Rowe Price, and it had lots of good investment options.  So it’s going to be tough to beat in a 529 plan.

The new state’s 529 is also really good, though.  It also offers a state income tax deduction for contributions (up to a certain dollar limit); is low fee and run by Vanguard; it also has plenty of appropriate investment options.

This is a no-brainer.  We’ll suspend contibutions to the old plan and open an account in the new state’s plan and begin contributions there.  It’s obvious because the plans are similar in every respect - it’s not like we’re moving to a state with a bad 529 plan.  What makes the decision easy is the tax sweetener.  Getting a tax deduction for something we’d do anyway is very nice.

Someone else’s situation may be different.  If you’re considering these questions, you have to compare the two (or more since there’s no reason you have to invest in your state of residence’s 529 plan) plans side by side.  If the old state’s plan was solid and the new one isn’t (e.g. high maintenance fees or bad investment options), your decision will be different.

Now we come to the question of the rollover.  In short, you can roll over your 529 account from one plan to another just like an IRA rollover.  Whether we should, however, is the question.

On the one hand, I am a big believer in consolidation for simplicity.  Keeping all the money in one place has a great deal of appeal.  On the other hand, moving it is a little bit of a hassle and like I said, the old plan is very good.  Incidentally, there are no tax consequences either way.

We still haven’t decided for sure, but I’m inclined to move the accounts to the new state’s plan.  I think maybe we’ll establish the accounts, make sure there are no issues with administration we don’t like, then make the rollover happen.  We shall see, though.

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I can hardly believe it, but it seems asking for contributions to my child’s 529 college savings account in lieu of toys actually works.

I wrote before about how making contributions to a college savings account is a great gift. Well, when our baby was baptized recently, people actually did it! Seriously, he got two contributions to his 529 as gifts. I was completely shocked, not because it’s a radical idea, but that someone actually did the sensible thing.

If I could convince everyone to do it, we’d have a lot fewer toys around the house that just end up going to Goodwill after a few months.

It seems like the old-fashioned notion of giving a savings bond, stock, or cash as a gift to a child has been largely forgotten. That’s a shame, because a small sum of money at an early age can grow to a ridiculously large amount by the time the kid has grown old enough to use it. Guess I’m an old-fashioned kind of guy. Or maybe I’m just old. Probably both.

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We’re in the midst of adjusting our family budget to account for some major changes that will be happening over the next couple of months. In the process, everything is getting looked at, including savings. Just like anybody, we have lots of things competing for our dollars. We save a pretty sizable portion of our income right now:

• Retirement
• College
• Short-term savings for known expenses
• Taxable index mutual fund

Since everything is being evaluated, the topic of saving for retirement versus college came up. This should be an easy one. Everything you read says save for your own retirement first and college funds come somewhere lower down on the list. It’s in any personal finance book or blog. Easy.

Only it’s not so easy if your a parent.

Any way you look at it, saving for yourself first seems like putting yourself in front of your kids. And something happens to your mind when a child arrives. You become incapable of putting yourself before your offspring. What’s a positive genetically speaking can be a serious negative financially speaking.

So we’re at a decision point. Which gets reduced and by how much? First, the changes to the budget will be temporary. Second, they may not be necessary at all if things fall right.  As things stand right now, though, it looks like they’ll each take a hit.  We’ll be saving a little less in each of our children’s college funds and a little less for retirement.  It goes against all the personal finance advice I’ve read, but it’s the right decision for us.

Now let’s cross our fingers and hope it won’t be necessary…

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