Paying them down and managing their financial impact.
Total student loan debt in America is now around $1.6 trillion. Since 2008, it has more than doubled. Federal Reserve data states that 44.7 million Americans are dealing with lingering education loans. The average indebted college graduate leaves campus owing nearly $30,000, and the mean monthly student loan payment is about $400.1
Economically, the country is feeling the impact. The National Association of Realtors says that 25% of recent homebuyers have outstanding student loans, including 41% of first-time buyers. A 2018 study by the Center for Retirement Research at Boston College concludes that under-30 employees carrying education debt typically have just half as much saved in their workplace retirement plan accounts as other workers their age.2,3
If you carry sizable education debt, how can you plan to pay it off? If you are young (or not so young), budgeting is key. Even if you get a second job, a promotion, or an inheritance, you won’t be able to erase any debt if your expenses consistently exceed your income. Smartphone apps and other online budget tools can help you live within your budget day to day or even at the point of purchase for goods and services.
After that first step, you can use a few different strategies to whittle away at college loans.
*The local economy permitting, a couple can live on one salary and use the wages of the other earner to pay off the loan balance(s).
*You could use your tax refund to attack the debt.
*You can hold off on a major purchase or two. (Yes, this is a sad effect of college debt, but it could also help you reduce it by freeing up more cash to apply to the loan.)
*You can sell something of significant value – a car or truck, a motorbike, jewelry, collectibles – and use the cash for paying down the debt.
Now, in the big picture of your budget, you could try the “snowball method” where you focus on paying off your smallest debt first, then the next smallest, etc., on to the largest. Or, you could try the “debt ladder” tactic, where you attack the debt(s) with the highest interest rate(s) to start. That will permit you to gradually devote more and more money toward the goal of wiping out that existing student loan balance.
Even just paying more than the minimum each month on your loan will help. Making payments every two weeks rather than every month can also have a positive impact.
If a lender presents you with a choice of repayment plans, weigh the one you currently use against the others; the others might be better. Signing up for automatic payments can help, too. You avoid the risk of penalty for late payment, and student loan issuers commonly reward the move by lowering the interest rate on a loan by a quarter point.4
What if you have multiple outstanding college loans? If one of them has a variable interest rate, try addressing that one first. Why? The interest rate on it may rise with time.
Also, how about combining multiple federal student loan balances into one? That is another option. While this requires a consolidation fee, it also leaves you with one payment, perhaps at a lower interest rate than some of the old loans had. If you have multiple private-sector loans, refinancing is an option. Refinancing could lower the interest rate and trim the monthly payment. The downside is that you may end up with variable interest rates.5
Maybe your boss could help you pay down the loan. Some companies are doing just that for their workers, simply to be competitive today. According to the Society for Human Resource Management, 8% of employers offer this perk. A 2018 Employee Benefit Research Institute poll of 250 firms revealed that 13% planned to offer such assistance in the future.6
To reduce your student debt, live within your means and use your financial creativity. It may disappear faster than you think.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
1 - fool.com/the-ascent/research/student-loan-debt-statistics/ [9/23/19]
2 - nar.realtor/student-loan-debt [11/12/19]
3 - washingtonpost.com/business/2019/06/25/heres-what-trillion-student-loan-debt-is-doing-us-economy/ [6/25/19]
4 - nerdwallet.com/article/loans/student-loans/how-to-lower-student-loan-interest-rate [8/7/19]
5 - nerdwallet.com/blog/loans/student-loans/consolidate-student-loans-2/ [10/8/19]
6 - tinyurl.com/uzedpg2 [10/10/19]
A good professional provides important guidance and insight through the years.
What kind of role can a financial professional play for an investor? The answer: a very important one. While the value of such a relationship is hard to quantify, the intangible benefits may be significant and long-lasting.
There are certain investors who turn to a financial professional with one goal in mind: the “alpha” objective of beating the market, quarter after quarter. Even Wall Street money managers fail at that task – and they fail routinely.
At some point, these investors realize that their financial professional has no control over what happens in the market. They come to understand the real value of the relationship, which is about strategy, coaching, and understanding.
A good financial professional can help an investor interpret today’s financial climate, determine objectives, and assess progress toward those goals. Alone, an investor may be challenged to do any of this effectively. Moreover, an uncoached investor may make self-defeating decisions. Today’s steady stream of instant information can prompt emotional behavior and blunders.
No investor is infallible. Investors can feel that way during a great market year, when every decision seems to work out well. Overconfidence can set in, and the reality that the market has occasional bad years can be forgotten.
This is when irrational exuberance creeps in. A sudden Wall Street shock may lead an investor to sell low today, buy high tomorrow, and attempt to time the market.
Market timing may be a factor in the following divergence: according to investment research firm DALBAR, U.S. stocks gained 10% a year on average from 1988-2018, yet the average equity investor’s portfolio returned just 4.1% annually in that period.1
A good financial professional helps an investor commit to staying on track. Through subtle or overt coaching, the investor learns to take short-term ups and downs in stride and focus on the long term. A strategy is put in place, based on a defined investment policy and target asset allocations with an eye on major financial goals. The client’s best interest is paramount.
As the investor-professional relationship unfolds, the investor begins to notice the intangible ways the professional provides value. Insight and knowledge inform investment selection and portfolio construction. The professional explains the subtleties of investment classes and how potential risk often relates to potential reward.
Perhaps most importantly, the professional helps the client get past the “noise” and “buzz” of the financial markets to see what is really important to his or her financial life.
The investor gains a new level of understanding, a context for all the investing and saving. The effort to build wealth and retire well is not merely focused on “success,” but also on significance.
This is the value a financial professional brings to the table. You cannot quantify it in dollar terms, but you can certainly appreciate it over time.
1 - cnbc.com/2019/07/31/youre-making-big-financial-mistakes-and-its-your-brains-fault.html [7/31/2019]
Three important factors when it comes to your financial life.
Regardless of how the markets may perform, consider making the following part of your investment philosophy:
Diversification. The saying “don’t put all your eggs in one basket” has real value when it comes to investing. In a bear or bull market, certain asset classes may perform better than others. If your assets are mostly held in one kind of investment (say, mostly in mutual funds or mostly in CDs or money market accounts), you could be hit hard by stock market losses, or alternately, lose out on potential gains that other kinds of investments may be experiencing. There is an opportunity cost as well as risk.1 Asset allocation strategies are used in portfolio management. A financial professional can ask you about your goals, tolerance for risk, and assign percentages of your assets to different classes of investments. This diversification is designed to suit your preferred investment style and your objectives.
Patience. Impatient investors obsess on the day-to-day doings of the stock market. Have you ever heard of “stock picking” or “market timing”? How about “day trading”? These are all attempts to exploit short-term fluctuations in value. These investing methods might seem fun and exciting if you like to micromanage, but they could add stress and anxiety to your life, and they may be a poor alternative to a long-range investment strategy built around your life goals.
Consistency. Most people invest a little at a time, within their budget, and with regularity. They invest $50 or $100 or more per month in their 401(k) and similar investments through payroll deduction or automatic withdrawal. They are investing on “autopilot” to help themselves build wealth for retirement and for long-range goals. Investing regularly (and earlier in life) helps you to take advantage of the power of compounding as well.
If you don’t have a long-range investment strategy, talk to a qualified financial professional today.
1 - forbes.com/sites/brettsteenbarger/2019/05/27/why-diversification-works-in-life-and-markets [5/27/19]
You might be surprised at its potential.
An IRA is a retirement savings account, right? Indeed. IRA stands for Individual Retirement Arrangement. Even with that definition, however, there is no prohibition on using an IRA to save for other purposes, such as funding a college education.
Why would anyone choose an IRA as a college savings vehicle? At first glance it may seem strange, since there are other types of investment accounts specifically dedicated to that objective. On closer inspection, though, IRAs (especially Roth IRAs) present some features that may be quite attractive to the parent or grandparent who wants to build education savings.
Flexibility. Parents are urged to save for their children’s college education as soon as possible, but what if their children end up spending little or no time in college? Some young adults do start careers or businesses without any higher education. Others have no interest in going to school any longer. Another, more pleasant, circumstance worth mentioning: what if a child ends up getting a significant college scholarship or even a full ride?
If any of these things happen, parents or grandparents who have opened a conventional college savings account may face a dilemma. Withdrawals from such accounts are tax free as long as they are used for qualified educational expenses, but if the money is withdrawn for other purposes, the Internal Revenue Service defines the distribution as taxable income (and the account gains are subject to a 10% penalty). The account assets can often be transferred to another family member, but not all families have that option.1,2
Assets saved and invested for college in an IRA have the potential to be repurposed as retirement savings, if necessary.
Tax-deferred growth and the possibility of tax-free withdrawals. You probably know the basic distinction between a traditional IRA and a Roth IRA: the former permits tax-deductible contributions as a tradeoff for eventual taxable withdrawals, while the latter offers no tax deduction on contributions in exchange for tax-free withdrawals later (provided an investor follows I.R.S. rules). Either IRA gives you tax-deferred growth of the invested assets.3
Can you open a Roth IRA, own it for five years or more, and withdraw its assets tax free even if you use the money for something other than retirement? If that something is a college education, the answer is (a qualified) yes.3
Withdrawals from Roth (and for that matter, traditional) IRAs taken before age 59½ face no early 10% withdrawal penalties if the money withdrawn is used for qualified educational expenses. Does this mean you can take $100K out of a Roth IRA today and use it to pay for your child’s college education? Probably not that large an amount, as some restrictions apply.1
If you own a Roth IRA and are younger than 59½ (or are older than 59½, but have owned your Roth IRA for less than five years), your Roth IRA’s earnings are ordinary, taxable income if withdrawn. Roth IRA contributions may be withdrawn tax free at any age. So, as a hypothetical example, if you have contributed $45,000 to a Roth IRA and followed I.R.S. rules, as much as $45,000 could be taken out of that IRA tax free and used for qualified educational expenses.3,4
Not considered an asset on the FAFSA. When students apply for college aid, they routinely fill out the Free Application for Federal Student Aid (FAFSA), which helps the federal government figure out the Expected Family Contribution (EFC), or the degree of college costs the family finances can handle. Conventional college savings accounts need to be reported as assets on the FAFSA, but IRAs and other retirement accounts do not need to be.1
What are the shortcomings of building college savings with an IRA? First, this idea may not work for retirees: you must have earned income to make IRA contributions, and you cannot make traditional IRA contributions past age 70½. Phase-outs for high earners may reduce or even prohibit annual Roth IRA contributions for some. Lastly, the annual contribution limit for Roth and traditional IRAs is currently set at $6,000 ($7,000, if a catch-up contribution is included), and that may be frustrating for a household needing to build college savings in a hurry. Even so, families who seek more flexibility in their college savings options may see an IRA, particularly a Roth IRA, as an intriguing potential savings vehicle.3
1 - thebalance.com/ira-college-savings-accounts-795254 [3/27/19]
2 - merrilledge.com/ask/college/can-you-transfer-or-rollover-529-plans [6/1/18]
3 - thestreet.com/retirement/ira/traditional-ira-vs-roth-ira-14920371 [4/9/19]
4 - fool.com/retirement/2018/09/09/your-first-ira-is-roth-or-traditional-the-best-way.aspx [9/9/18]