Millenials’ declining financial literacy skills

Studies show that a majority of young people in the United States have poor financial literacy, a trend that has been consistent over the past decade and shows few signs of improving. This at a time when young adults face a difficult job market and more personal debt, and yet must take greater responsibility for their financial future.

Today’s twentysomethings hold an average debt of about $45,000, which includes everything from cars to credit cards to student loans to mortgages, according to a PNC  financial independence survey released last month. Unemployment for those 18-29 is 12.4%, well above the national rate of 8.2%; and young people face an increasingly complex global economy that is credit-driven and puts more responsibility on individuals to plan for and manage their retirement accounts….

How bad is the problem? The Treasury Department and Department of Education have teamed the past three years to assess financial literacy in U.S. high schools, and the results haven’t been pretty: the average score of almost 76,900 students in 2010 was 70%. Last year’s testing of about 84,000 students and this year’s of about 80,000 students were both a point lower: 69%….

The problem has been a long time coming. A biennial survey by Jumpstart Coalition for Personal Financial Literacy, conducted from 1997 to 2008 (when many Millennials were in high school) showed high school seniors doing even worse. In 1997, the average score on a 31-question financial literacy exam given as part of the survey was 57.3%. In 2008, the average score was at its lowest ever, 48.3%.

Surveys show that parents, not teachers, have the greatest influence on a child’s financial literacy….

“Today’s parents are concerned, busy, overwhelmed, trying to keep kids off drugs and alcohol. They do not wake up in the middle of the night in a cold sweat thinking, ‘Oh my God, I didn’t teach them about money,’ ” she says.

Parents may not be teaching their children about personal financial planning, and in fact may be over-indulging them and shielding them from the realities of living within their means.  Schools have so far taken a limited role in teaching financial literacy.  Only 13 states require a personal finance class, and fewer than half mandate economics instruction.

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… Students who had taken such courses were more likely to go on to save money and pay off a credit card bill in full each month, and less likely to be compulsive buyers, max out credit cards and make late payments.

New York State requires a one-half semester economics class that focuses primarily on personal finance.  My son, who took the course in high school a few years ago, tells me he learned the basics of interest rates, mortgages, investments, and other similar topics.  I’m glad he took it, but other resources like the free online FoolProof program are also available to help educate young people about money, financial responsibility, and the realities of the free enterprise system.

You can test yourself with some sample questions from a financial capability test given to high school students each year.  When I saw question 4, I realized that poor math skills could be a factor in declining financial literacy.  Click the link below to take the quiz.

Financial Literacy Quiz

Federal Direct PLUS or home equity loan for college costs?

If you will be borrowing to pay for part of your child’s college costs, is it better to take out a federal Direct PLUS parent loan or a home equity loan?

Of course, there’s no single right answer for everyone because each option offers some advantages.  You should only consider a home equity loan if you have plenty of equity in your home.  Also remember that the window for taking out a PLUS student loan closes when your child finishes college but there is no similar time constraint on a home equity loan.  Here are a few points to keep in mind when deciding which is better for you.

Direct PLUS student loan

• Fixed interest rate of 7.9%
• Keeps home equity available for other borrowing needs
• Automatically insured against death and disability
• Interest may be tax deductible depending on income level
• No collateral needed
• Payments may be deferred until after student graduates
• Eligible for Public Service Loan Forgiveness (PSLF) and Income-Based Repayment Plan (IBRP)
• High (4%) loan origination fee
• Harsh default penalties – not dischargeable in bankruptcy and wages can be garnished without court order

Home equity loan or line of credit (HELOC)

• Lower interest rate, but HELOCs typically have high rate caps
• Interest may be tax deductible, with some limitations and exceptions (deduction not allowed when using AMT method)
• May be discharged in bankruptcy
• Ties up home equity, making it unavailable for other borrowing needs
• Risk of creating negative equity in home, limiting options to move and causing other problems.
• Default puts home at risk for foreclosure

More information at these links:
The Federal PLUS Loan vs. Home Equity Loans
Federal Plus Loan vs. Home Equity Loan

Still paying down student loans when you’re middle aged or older

Still paying on student loans when you’re middle aged or older can certainly dim the outlook for a financially secure retirement.

Student loan debt amassed by parents is growing faster than loans taken out by the student.

Parents’ loan debt has more than doubled over the last decade — exceeding $100 billion dollars or 10 percent of all outstanding student loan debt, according to the independent research firm FinAid.org.

“Parents of every income level are increasingly borrowing for their children’s college education. It doesn’t matter whether the parents are low income, middle income or upper income. There’s been dramatic growth in the percentages of parents who’ve been borrowing,” says FinAid.org founder and publisher Mark Kantrowitz.

Many parents who co-signed loans or borrowed money on their own for their children’s education now face the loss of their retirement nest eggs, homes and other assets….

Parents have an average of about $34,000 in student loans and that figure rises to $50,000, including interest, over a standard 10-year loan repayment period.

Aging Americans 60 and older owe about $36 billion in student loans.

Some of these older Americans are still grappling with their first wave of student loans, while others took on new debt when they returned to school later in life in hopes of becoming more competitive in the labor force. Many have co-signed for loans with their children or grandchildren to help them afford ballooning tuition.

It’s probably best to avoid the twenty-year plan for paying student loans.
I recently read where a 40-something mom explained that since she and her husband were still paying down their student loans, saving for retirement and for her children’s college education had taken a back seat.

11.8 million borrowers aged 40 and older owe $278 billion in student loans, averaging almost $24,000 per debtor.

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It’s relatively easy for a parent to qualify for a student loan:  Qualifying for a parent Direct PLUS loan

No shame in living at home after college (usually)

Young adults living with their parents is on the rise, but it’s not always a bad thing.

“Few are proud to carry the stigma of a ‘boomerang kid’ — someone who moves back in with their parents after failing to make ends meet on their own. But the move makes a lot of financial sense, and could serve as a springboard that can get boomerang kids off to a flying start when they head back out into the cruel world.

Amanda Grad Meets World justifies boomeranging, describing how the plan is working for her. Thanks to help from her parents, she’s able to plot out her career without burying herself in debt.

‘Think about it — how many of you would rather be in debt up to your eyeballs instead of having the ability to put money away in the bank? How many of you would rather struggle, and I mean really struggle, during a Recession rather than taking it easy and trying to do things the smart way?

On the other hand, there are lessons to be learned  from early struggles that may prove valuable in the years ahead.  Let me put it this way.  Surviving hard times by depending on your own resources, both personal and financial, can help you gain the confidence that will buoy your chances of success during the next difficult episode in your life.  Because you know there will be more, right?

But it’s also true that  sometimes those rough early struggles can break your spirit, weaken your confidence, and set you back financially in a way that is difficult to recover from.

I am open to the possibility that my own kids will boomerang back home at some point, and I would be happy to help them if this happens.  However, I’ve seen unhappy, dysfunctional  cases of slacker kids postponing adulthood indefinitely while being enabled  by weak-willed parents.  I don’t want to fall into that trap.

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Rising contributions to 529 plans and other trends

Rising Contributions to 529 plans

Recent market performance and the corresponding jump in personal savings bode well for college savings plans, even if the national savings rate is still not back to its 2010 levels. According to FRC, 2011 saw the most new contributions flowing into 529 plans on record, as shown by the chart below. If the financial markets continue to improve, we expect similar or even greater growth in 2012.

…
Other trends in 529 plans as reported by AKF Consulting Group:

• Total number of plans has increased from 89 in September 2010 to 94 in February 2012, with the number of investment options offered among all plans now up to 1132.
• More conservative investment options are being offered, with additional choices in money market funds, Treasury Inflation Protected Securities (TIPS) funds, and federally insured savings accounts and CDs.
• Fees have dropped among direct-sold 529 plans, with an average reduction of nearly 10%.

A Return to Equities

AKF foresees a return to equities, in particular ETFs and index funds, based on investor activity in the fourth quarter 2011.  As college costs continue to rise, long-term investor realize they need to take on the risk of stocks in their 529 plans.

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Postponing remarriage to get more college financial aid

There are a many “tricks” that will increase your odds of getting college financial aid, including postponing remarriage so that household income looks low.

I Do! (In a Few Years)
The Fafsa asks a seemingly absurd question: “Who is considered a parent?” Yet frequently families react with frustration when I explain how the government defines parents for financial aid purposes. If both parents are alive and married to each other, they check off the “married” box and include their information on the Fafsa.

If there has been a divorce or legal separation, you need to determine who the student lived with more than 50 percent of the time the previous year. That’s the custodial parent. Only the custodial parent’s income and assets appear on the Fafsa; the noncustodial parent’s income and asset information don’t (though a child support question and another untaxed income question can reflect household support).

This is true even if the divorce arrangement says the noncustodial parent has to pay for the whole expense, or things are split evenly.

Here’s the surprise for some stepparents: Let’s say mom, the custodial parent, marries stepdad. Both mom and stepdad’s income and assets appear on the form. Maybe when they married they had a deal: he would pay for his children, she would pay for hers. Not happening. Of course, I don’t recommend holding off on saying, “I do!” (again) until after all the children have their degrees, but be aware of the rules.

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What young people are saying about (not) buying homes

Derek Thompson in The Atlantic compiled anecdotes illustrating young people’s views on buying a home versus renting.  Here are some selected quotes from his piece, following up a previous post about student loans as a reason that young people are not buying homes.  

‘WE WISH LIKE HELL WE HAD NEVER BOUGHT’
‘Get the hell out of debt as soon as possible’
‘Buying has really worked out for us’
‘I love the mobility that renting allows me’
‘JOB SECURITY NO LONGER EXISTS’
‘My generation wants more freedom to travel, to see and live in new places’
‘I did the math and buying came out cheaper than renting‘
‘A house is nothing but a huge time and money suck’
‘RENTING IS FINANCIAL SUICIDE’
‘I could not imagine ever wanting to buy a house’
‘Student loans: A drag on credit that negate the chance to save up a downpayment.’
‘Is home owning right for everyone? Goodness no.’
‘We got tired of building someone else’s equity’
‘I’m a committed renter’
‘I’M 28. I LIVE WITH MY PARENTS. IT’S MY CHOICE.’
‘I was so glad we were renting when our water heater blew out’
‘BUY SEVERELY BELOW YOUR MEANS’
I don’t think buying makes sense: We’ve weathered three layoffs since the crash’
‘I would recommend home ownership — in my Texas community only’
‘Don’t buy a fixer-upper unless you really, really know’
‘The days of home ownership being a good investment are NOT over…’
‘There are simply not enough places I want to live where I could afford a house/condo’
‘I would buy the house’

Back in my 20s when I had my first job out of college, the conventional wisdom was that buying a home was great investment.  Many of us felt pressured to invest in real estate, which had been increasing in value at a healthy clip over the previous decade.  So I bought a home, along with many of my fellow petroleum industry workers who were reaping the financial benefits of an oil boom.  Mortgage rates were 12-14% at that time.  Shockingly, home prices tanked shortly afterwards.  Gee, who could have seen that coming?

The market value of my home declined to about one-half of its purchase price, and I was stuck.  I don’t remember using the term “underwater” at that time, but that was me.  After leaving town and renting at a loss for several years, I was finally able to get rid of my house through a short sale.  It was a long and painful experience, but it taught me to be on the lookout for future economic bubbles.  It seems there’s always a new one on the horizon.

46% of people under 30 have outstanding student loans averaging $23,000

A report released this week by the Federal Reserve Bank of New York highlights the drag that student loans have placed on the economy and recalls the notion that this debt burden may be creating a generation of wage slavery.

Forty percent of the people under 30 had outstanding student loans, and the average outstanding debt is $23,300. About 10 percent of borrowers owe more than $54,000 and 3 percent owe more than $100,000.

After adjusting for the estimated number of individuals still in school or who otherwise qualified for payment deferral, the report found that 27% of student borrowers are delinquent in their payments.
… 

…
It’s probably not going to get better any time soon.

   In sum, student loan debt is not just a concern for the young. Parents and the federal government shoulder a substantial part of the postsecondary education bill. Moreover, the student loan delinquency picture is not fully captured in the broad statistics since a significant proportion of borrowers and balances are not yet in the repayment cycle. The implications of this last fact for future changes in the student loan delinquency rate are a very important area of research.

Tax season reminders about education tax benefits

This summary of popular education tax credits and deductions is by Dee Lee of CBS Boston.  REMINDER – income limits apply to all except for 529 plans.

1. The American Opportunity Credit – This credit can help parents and students pay part of the cost of the first four years of college. Congress modified the Hope Credit, making it available to a broader range of taxpayers. Eligible taxpayers may qualify for the maximum annual credit of $2,500 per student.

The income limits: For singles, it phases out between $80,000 and $90,000 and those filing jointly it’s $160,000 to $180,000. This credit is due to expire at the end of 2013.

2. The Lifetime Learning Credit – This credit can help pay for undergraduate, graduate and professional degree courses – including courses to improve job skills – regardless of the number of years it takes you to get a degree.  Eligible taxpayers may qualify for up to $2,000.

3. Tuition and Fees Deduction – Students and their parents may be able to deduct qualified college tuition and related expenses of up to $4,000. This deduction is an adjustment to income, which means the deduction will reduce the amount of your income subject to tax. The Tuition and Fees Deduction may be beneficial to you if you do not qualify for the American Opportunity or Lifetime Learning credits. You do not have to itemize to get this deduction!

4. Student Loan Interest Deduction – There also is the deduction for the interest you pay on your student loans. Limit is $2,500 for the year. As usual there are income limits as well. The deduction is phased out for incomes between $60,000 and $75,000 and there is no deduction once your income reaches $75,000. If you are married filing jointly it’s $120,000 and gone once you reach $150,000. This deduction can also be used whether you itemize or file the short 1040.
You cannot claim the American Opportunity and Lifetime Learning Credits for the same student in the same year. You also cannot claim any of the credits if you claim a Tuition and Fees deduction for the same student in the same year. To qualify for an education credit, you must pay post-secondary tuition and certain related expenses for yourself, your spouse, or your dependent. The credit may be claimed by the parent or the student, but not by both. Students who are claimed as a dependent cannot claim the credit.

5.  529 College Savings Plans – Although not a credit or a deduction it is worth mentioning that the income generated in a 529 plan is free of federal taxes. And Congress expanded the definition of qualified higher education expenses to include expenses for computers and Internet access.

IRS Publication 970 gives a comprehensive explanation of all education tax benefits, including:

• Tax treatment of scholarships, fellowships, grants, and tuition reduction
• Tax treatment of student loan cancellations and repayment assistance
• Coverdell Education Savings Account (ESA)
• Education exception to tax penalty on early IRA distributions
• Education Savings Bond Program – tax-free distributions from U.S. savings bonds
• Employer-provided educational assistance – tax exclusions up to $5,250
• Business deductions for work-related education

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The ‘problem’ of extra money in your 529 plan

If you’re lucky enough to have left-over money in your 529 plan, there are ways to handle that problem.  Besides paying for traditional two- or four-year colleges, other options exist for 529 funds.

1. Vocational education - money in a 529 plan can be used to pay for postsecondary vocational or technical training at schools eligible for financial-aid programs administered by the U.S. Department of Education. This includes schools that teach a variety of trades, such as automotive and aerospace maintenance, hairstyling and computer skills. 
2. Graduate school – 529 funds can be used for postgraduate education
3. Change the beneficiary to another family member – siblings, first cousins, parents, or grandchildren
4. Leave the money in to grow tax-free – as long as there is a living beneficiary
5. Charity – donating the proceeds to charity allows you to take a tax deduction if you itemize deductions

Tax penalties waived if a scholarship covers college costs

Say there is money left over in a 529 account because your child got a big scholarship that reduced his or her college costs. In that case, money withdrawn would be subject to tax on the earnings but the 10% penalty would be waived, as long as the withdrawal doesn’t exceed the amount of the scholarship. The penalty on withdrawals also would be waived if the beneficiary dies or becomes disabled.

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