A special day to remind us about the benefits of 529 plans

Darn! I missed 529 day.

The College Savings Plans Network sponsored National 529 College Savings Day this past Wednesday, 5/29/13.  Many states sponsored promotions for their 529 plans, with some offering special incentives that are still in effect.

Florida, for instance, is waiving the $50 enrollment fee for plans opened from May 20 through June 30.

You can check out individual states’ events and promotions by clicking on this map.

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In general, 529 plans are college savings and investment accounts sponsored by state governments. Money deposited in the accounts grows tax free, as long as the funds are used for educational purposes when withdrawn. You don’t have to be a resident of a particular state to use its plan, although some states offer additional tax benefits to in-state plan participants.

Most 529s are designed as traditional savings-and-investment vehicles, but some states offer prepaid 529 plans, which allow savers to pay tuition at certain schools in advance at current rates.

Related:  What you may not know about 529 plans (Cost of College)

 

Not enough borrowers take advantage of Income Based Repayment’s ‘mind-boggling’ generous benefits

The Obama administration and other supporters believe that not enough borrowers are taking advantage of Income Based Repayment (IBR), a student loan forgiveness program.  However, since it is higher-income college graduates who “ultimately end up benefiting overwhelmingly from IBR”, I’m not sure this is a problem.

IBR reduces loan payments based on a percentage of income, subsidizes interest charges, and forgives loan balances after 25, 20, or 10 years.  It sounds like a nice deal.  However, knowledge of the IBR “remains a largely obscure concept for many cash-strapped college graduates”.  It is estimated that only about one-half of qualified borrowers are taking advantage of this free money.

… according to DOE data as recent as January, a little more than 2.3 million borrowers had applied for IBR nationally, a small fraction of the estimated 38 million Americans with outstanding student loan debt…

Such low figures have shone a glaring spotlight on the DOE’s failure to sufficiently educate borrowers, according to consumer advocates like Mark Kantrowitz, the publisher of FinAid.org and FastWeb.com, who estimates that as many as 3 million students could qualify.

Hypothetical examples generated by using the New America Income-Based Repayment Calculator show how forgiven loan amounts can reach into the six figures.  (All numbers are approximate.)

Loan amount:  $70,000 combined undergraduate and graduate
Income:  $40,000 initially with 2.5% annual increase

Without IBR:  $550-600 monthly loan payments with total repayment cost of $165,000 including principal and interest

With Old IBR:  $300 monthly loan payments with total repayment cost of $98,000 including principal and interest  —  Savings = $65,000

With New IBR:  $160-170 monthly loan payments with total repayment cost of $49,000 including principal and interest  —  Savings = $115,000

Old IBR applies to initial loans dated on or before October 1, 2007, while the more generous New IBR applies to loans after that date.

The millions of borrowers who qualify but do not participate are “effectively leaving a rather sizable amount of money on the table”.  Some of the most generous IBR benefits go to graduates who take jobs in non-profit or government sectors because their loans are forgiven after only ten years.  Jason Delisle, director of the Federal Education Budget Project at the New America Foundation, advises college graduates to take advantage of this benefit.

“If you plan on doing any kind of public service, nonprofit or government work,” said Delisle, “then you should borrow as much money as [your school] will possibly let you.”

Under the New IBR, a student who owes $70,000 upon graduation would end up paying back only $22,000 if he stayed ten years at a government job with a starting salary of $40,000.  That’s a savings of $143,000 compared to how much that graduate would have paid had he not taken the IBR option.

Indeed, the IBR savings that accrue to borrowers who pursue such career paths can be mind-boggling.

IBR produces “far more benefits” to higher-earning graduates.

But it’s not only those who work in public service professions who benefit disproportionately from IBR, according to Delisle. “The program provides far more benefits to those at the higher end of the income spectrum,” he noted, such as doctors, lawyers and those with MBAs.

“While the program provides very large subsidies when your income is low,” he said, “it really doesn’t claw those benefits back if your income ends up being high,” meaning graduates with large sums in student loan debt—ordinarily graduates of medical, law and business schools, who typically make higher starting salaries—ultimately end up benefiting overwhelmingly from IBR.

So a student who graduates from Harvard Law School with $150,000 in student loans and goes to work at a law firm making close to six-figures annually still stands to receive a “windfall”—as Delisle calls it—of six-figures in principal and interest forgiven on average.

IBR cheerleader says everyone should borrow for college because the taxpayers “pick up any downside risk or loss”.

Because of IBR there’s “no reason not to pursue a graduate degree and borrow to pay for it,” said Delisle.

“There’s only upside, because the government is stepping in to pick up any downside risk or loss,” he said. “It’s mind-blowing how generous income-based repayment really is.”

Sounds like a lousy program to me, speaking as a taxpayer.

Related:  Income Based Repayment (IBR) is a ‘moral hazard’ for high-income student loan borrowers (Cost of College)

Quick Links – The ‘science’ of psychiatry

Up to 20% of American children suffer from mental disorders, but the accuracy of reporting is questionable.

Scientists at the U.S. Centers for Disease Control and Prevention found that 13% to 20% of American children age 3 to 17 experience mental disorders each year, and that rates have been increasing.

A ‘hodgepodge’ of counting methods

The study also showed there are no standard ways of counting afflictions, but a hodgepodge including parental reports or reports directly from children. Some disorders, such as bipolar disease and anxiety disorders, weren’t included in the overall rates for lack of data. The disorders that were included span a wide range, including hyperactivity and severe autism.

Statistical experts are skeptical of the reported numbers.  Data collection is inconsistent, with random phone surveys of parents yielding higher results than other methods.  Families with health insurance report higher rates, and regional differences raise suspicion about different approaches in diagnosis.  Double counting children with multiple disorders leads to inflated rates.

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French children have much lower rates of diagnosed ADHD.

In the United States, at least 9% of school-aged children have been diagnosed with ADHD, and are taking pharmaceutical medications. In France, the percentage of kids diagnosed and medicated for ADHD is less than .5%. How come the epidemic of ADHD—which has become firmly established in the United States—has almost completely passed over children in France?

Different approaches to diagnosis and treatment

 In the United States, child psychiatrists consider ADHD to be a biological disorder with biological causes. The preferred treatment is also biological–psycho stimulant medications such as Ritalin and Adderall….

French child psychiatrists, on the other hand, view ADHD as a medical condition that has psycho-social and situational causes. Instead of treating children’s focusing and behavioral problems withdrugs, French doctors prefer . . . to treat the underlying social context problem with psychotherapy or family counseling…

Different parenting styles

And then, of course, there are the vastly different philosophies of child-rearing in the United States and France. These divergent philosophies could account for why French children are generally better-behaved than their American counterparts….

From the time their children are born, French parents provide them with a firm cadre—the word means “frame” or “structure.” Children are not allowed, for example, to snack whenever they want. …

… French parents have a different philosophy of discipline. Consistently enforced limits, in the French view, make children feel safe and secure. Clear limits, they believe, actually make a child feel happier and safer … French parents believe that hearing the word “no” rescues children from the “tyranny of their own desires.” And spanking, when used judiciously, is not considered child abuse in France.

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Psychiatry:  diagnosis is not scientific, but political and bureaucratic

In an interview with The Atlantic, Gary Greenberg, a practicing psychotherapist and author of The Book of Woe: The Making of the DSM-5 and the Unmaking of Psychiatry, says no one can define “mental illness”.

What is the difference between a disorder and distress that is a normal occurrence in our lives?

That distinction is made by a clinician, whether it’s a family doctor or a psychiatrist or whoever. But nobody knows exactly how to make that determination. There are no established thresholds. Even if you could imagine how that would work, it would have to be a subjective analysis of the extent to which the person’s functioning is impaired. How are you going to measure that? Doctors are supposed to measure “clinical significance.” What’s that? For many people, the fact that someone shows up in their office is clinical significance. I’m not going to say that’s wrong, but it’s not scientific. And there’s a conflict of interest — if I don’t determine clinical significance, I don’t get paid.

Is a child autistic or just awkward?  Special education services and insurance coverage are controlled by committee decisions on what is to be included in the DSM.

… You can’t just ask for special services for a student who is awkward. You have to get special services for a student with autism. In court, mental illnesses come from the DSM. If you want insurance to pay for your therapy, you have to be diagnosed with a mental illness….

Arbitrary?
Homosexuality was declassified as a DSM disorder in 1973.  And I’m sure I’m not the only one who has considered that Oppositional Defiant Disorder (ODD), characterized by “negativistic, defiant, disobedient, and hostile behavior toward authority figures that persist for at least six months“, is a particularly arbitrary disorder.

Parent PLUS loans are similar to no-doc mortgage loans

Parent PLUS loans, which are “both remarkably easy to get and nearly impossible to get out from under“, can be a trap for uninformed borrowers.

Remember no-doc mortgage loans?  Parent PLUS loans, federally sponsored and available for parents of college students, are eerily similar.

The loans are both remarkably easy to get and nearly impossible to get out from under for families who’ve overreached. When a parent applies for a PLUS loan, the government checks credit history, but it doesn’t assess whether the borrower has the ability to repay the loan. It doesn’t check income. It doesn’t check employment status. It doesn’t check how much other debt—like a mortgage or other student loans—the borrower is already on the hook for.

Designed for families who may not qualify for other types of debt, PLUS loans “sometimes hurt the very families they are intended to help”.

Of course, Parent PLUS can be an important financial lifeline—especially for those who can’t qualify for loans in the private market. An iffy credit score, high debt-to-income ratio, or lack of a credit history won’t necessarily disqualify anyone for a PLUS loan. Applicants are approved so long as they don’t have an “adverse credit history,” such as a recent foreclosure, defaulted loan, or bankruptcy discharge.

No cap on loan amount

Unlike other federal student loans, PLUS loans don’t have a cap on borrowing. Parents can take out as much as they need to cover the gap between other financial aid and the full cost of attendance. Colleges, eager to raise enrollment and help families find financing, often steer parents toward the loans, recommending that they take out thousands of dollars with no consideration as to whether they can afford it.

Harsh treatment for debtors who run into trouble

When it comes to paying the money back, the government takes a hard line. PLUS loans, like all student loans, are all-but-impossible to discharge in bankruptcy. If a borrower is in default, the government can seize tax refunds and garnish wages or Social Security. What is more, repayment options are actually more limited for Parent PLUS borrowers compared with other federal loans. Struggling borrowers can put their loans in deferment or forbearance, but except under certain conditions Parent PLUS loans aren’t eligible for either of the two main income-based repayment programs to help borrowers with federal loans get more-affordable monthly payments.

Parent PLUS spending has shot up over the last decade.

Last year the government disbursed $10.6-billion in Parent PLUS loans to just under a million families. Even adjusted for inflation, that’s $6.3-billion more than it disbursed back in 2000, and to nearly twice as many borrowers.

An interactive list of schools with accompanying Parent PLUS data shows that many of the institutions with the highest average loans are art and music colleges.  New York University is ranked 11th, with an average loan balance of $27,305.

Related:

• Qualifying for a parent Direct PLUS loan (Cost of College)
• Federal Direct PLUS or home equity loan for college costs? (Cost of College)

The challenge of paying for college and saving for retirement at the same time

Especially for parents who had their children when they were in their 30s or later, the crunch of paying for college while trying to save for retirement can be tough to manage.  The Family CEO gives advice for families who find themselves in this situation.

Reduce other expenses to free up cash for these goals.

… It might be something big, like driving a car with high payments. Or something small, like have premium cable channels that you never watch. Big or small, eliminating some of these expenses and directing them to retirement or college savings can help you meet those goals.

I have neighbors who put their kids through college debt-free using this strategy.  Exercising great discipline, they gave up one of their cars, fancy vacations, most clothing purchases, and housecleaning services during the six years they were paying college tuition.  It’s certainly not easy, but it can be done.

Create new streams of income or boost the ones you have.

In some cases this is quite feasible – consultants can take on extra clients, teachers can tutor on the side, SAHMs can go back to paid employment.  But sometimes it’s hard to find new money, and even then the amounts are meager.  The whole family can get in the act; maybe a teen can earn spending money from a summer job.

If you need to choose one, choose retirement.

… there are multiple ways to pay for college, but no one is going to fund your retirement for you.

Since time is not on their side, older parents in particular should avoid skimping on their retirement savings.  It can be a hard decision for parents to put their needs above those of their children, but here’s one way to think about it.

It’s like putting on your oxygen mask first on an airplane. Make sure you’re taking care of yourself, so you can in turn take care of them.

Related:

• Paying student loans in your 20s, 30s, and beyond interferes with saving for retirement (Cost of College)
• Your retirement savings are not included in determining EFC (Cost of College)

Does the government make a profit on student loans? It’s complicated

The question of whether the federal government profits from student loans has come up recently in discussions about the various proposals to prevent the scheduled Stafford subsidized loan rates from doubling to 6.8% on July 1.  This question puzzled me when I wrote about it last November.  At that time I found conflicting accounts, which frankly made my brain hurt.  Since I was left with a lingering curiosity about these illusive profits, the recent discussions on the topic caught my attention.

On May 16  the Huffington Post reported of projected federal profits exceeding those of Exxon, Apple, and other corporate giants.

Figures made public Tuesday by the Congressional Budget Office show that the nonpartisan agency increased its 2013 fiscal year profit forecast for the Department of Education by 43 percent to $50.6 billion from its February estimate of $35.5 billion.…

The Education Department has generated nearly $120 billion in profit off student borrowers over the last five fiscal years, budget documents show, thanks to record relative interest rates on loans as well as the agency’s aggressive efforts to collect defaulted debt.

But that rate is set to double to 6.8 percent, the rate for unsubsidized loans (for richer students, or poor students with debt above the subsidized loan program’s limits), on July 1.

The Washington Post, in reporting on the political disagreements in Congress, referenced the DOE’s $51 billion projected profit.

Democrats … objected to increasing the rates within a program that generates vast income for the federal government. The Congressional Budget Office this week revised its figures this week, reporting that federal loans will generate almost $51 billion this year. Over the last five years, that sum is almost $120 billion.

“That $51 billion is more than Exxon,” Miller said.

“It’s time we stop using federal student loans as a profit center,” added Rep. John Tierney, D-Mass.

Writing for Yahoo Finance, Jason Delisle disputes this notion of student loan profits, pointing out that the high risk of default must be considered.

What about Senator Warren’s claim that the government makes money off loans to low-income students? Senator Warren is not telling the whole story here either. She points to figures that the non-partisan Congressional Budget Office says “do not provide a comprehensive measure of what federal credit programs actually cost the government and, by extension, taxpayers.” In fact, when the budget office “accounts more fully… for the cost of the risk the government takes on when issuing loans,” it reports that Subsidized Stafford loans – those made to low-income students – cost taxpayers $12 for every $100 lent out, or $3.5 billion per year….

The claim that the government makes money on these loans is even more dubious given that the Department of Education estimates that 23 percent of the Subsidized Stafford loans it makes this year will default. That puts it among the riskiest loan programs that the federal government runs. By comparison, about 7 percent of the loans under the Federal Housing Administration mortgage program are expected to default. That program provides loans to high-risk borrowers who do not qualify for a traditional mortgage because they lack the savings, income or credit history.

Finally, in the May 20 Washington Post WonkBlog Dylan Matthews concludes that the “federal government does not profit off student loans”, at least not “in some years”.

Matthews reiterates that the interest rates do not reflect market risk.

… they set the interest rate on student loans below the market rate. And because they’re below the market rate, that costs the federal government money. Contrary to popular belief, and many a breathless article, the government does not, in fact, book a profit on student loans. As New America’s Jason Delisle has explained, that’s because the Congressional Budget Office is required by law to use a bizarre and faulty method for determining the cost of government loans.

Matthews goes on to explain what is essentially an unresolved dispute on the profitability of government student loans.  Additional details complicate the picture.  For example, even according to the CBO’s “bizarre and faulty” calculations, some years with higher subsidies actually show a loss.

I suspect there’s no profit.

After reading all these explanations, the most definitive statement I will accept is that it appears the government does not make a profit on student loans, but it might depend on the level of subsidies for any given year.  As the headline says, it’s complicated.

Peer teaching for my kids? No thanks

Peer teaching has serious downsides.

Peer teaching* has become increasingly popular over the last 30-40 years, in conjunction with the rise of mixed ability grouping in K-12 public schools.  Typically involving a slower learner receiving instruction from an advanced student, this practice has significant downsides for both parties.

Students Act as Teachers sums ups the story of frustrated teachers in Manhattan who created a buddy program, enlisting older students to help teach struggling readers.  Part of the goal was to have the older students “get a dose of their own medicine by seeing how difficult it can be to teach”. How did it turn out?

The results, they said, were mixed.

This mirrors my observations, even though I’ve had at least one teacher insist there was abundant research strongly supporting the use of peer teaching.  That’s what she learned in graduate school.  As in many other aspects of “innovative” pedagogy, research of questionable quality is used to support instructional practices that are often implemented in a haphazard manner.  In one case I know, a student struggling in geometry was asked to tutor another student who was struggling in algebra.  The teacher insisted both would benefit, but as it turned out  the struggling geometry student received no help in her area of weakness.  Based on other conversations with this teacher, it was clear that the intended benefit was to strengthen social connections, promoting compassion and self-esteem that would ultimately pay off in improved geometry skills.  Spare me.

Not supported by research

The 2008 National Mathematics Advisory Panel reviewed “instruction in which students are primarily doing the teaching”, finding “only eight studies that met our standards for quality”.  Additionally, the Panel found 20 high-quality studies of cooperative and collaborative learning.   The only definitive benefit to students shown by any of these studies was an improvement in computation skills.  I’m imagining a scenario where one student is helping another in drilling math facts.  I can buy that.  Otherwise, peer teaching seems to be a waste of precious classroom time.  Here is how the Panel puts it.

There is suggestive evidence that peer tutoring improves computation skills in the elementary grades. However, additional research is needed.

Are most kids good at teaching?

Some math kids like to tutor and are probably good at it, but I tend to think of teaching as a separate gift. I know many people who are masters at what they do but can’t explain it worth a darn.

I want expert teachers, not other students, teaching my kids.

Unfortunately, I have many anecdotes about the downsides of peer teaching.  A bright fifth-grader I know decided it was best to clam up after being derided as a know-it-all in his collaborative learning group.  So much for learning compassion and self-esteem.

* Peer teaching is included as part of various “cooperative”, “student-centered” learning strategies, with names like Team Assisted Individualization, Student Teams-Achievement Division, and peer-to-peer learning.

Related:  Proficiency grouping makes more sense than differentiated instruction (Cost of College)

Quick Links – Weaker teachers assigned to struggling students; all jobs are temporary; average students should skip college

Study finds that “high-achieving students tend to get the most experienced teachers”.

From an analysis of ‘teacher assignments in the nation’s fourth-largest school district, Miami-Dade County Public Schools’

Even within the same school, lower-achieving students often are taught by less-experienced teachers, as well as by teachers who received their degrees from less-competitive colleges, according to a new study by researchers from the Stanford Graduate School of Education and the World Bank. The study, using data from one of the nation’s largest school districts, also shows that student class assignments vary within schools by a teacher’s gender and race….

Previous research indicates that high-quality teachers can significantly improve education outcomes for students.  However, not all students have equal access to the best teachers.

The assignment of teachers to students is the result of a complex process, involving school leaders, teachers and parents. While principals are constrained by teachers’ qualifications – not all high school teachers, for instance, can teach physics – they also may use their authority to reward certain teachers with the more desirable assignments or to appease teachers who are instrumental to school operations.

Teachers with more power, due to experience or other factors, may be able to choose their preferred classes. Parents, particularly those with more resources, also may try to intervene in the process to ensure that their children are taught by certain teachers….

… certain teachers – those with less experience, those from less-competitive colleges, female teachers, and black and Hispanic teachers – are more likely to work with lower-achieving students than are other teachers in the same school.

Do AP teachers need to be the most knowledgeable?

 … Teachers from more competitive colleges may have deeper subject knowledge than their colleagues from less-competitive colleges, leading principals to assign them to more advanced courses, the researchers said.

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‘There is no longer such a thing as a linear career path.’

Bloomberg Businessweek gives us the The New Rules for the Modern Workplace.  New college graduates probably understand these new rules better than older workers do.

The current state of our economy has transformed the workplace and how we manage our careers. There is no longer such a thing as a linear career path. A college degree doesn’t magically turn into a job and an MBA doesn’t mean you’ll automatically get a promotion. Even if you get a job, it’s not stable and you won’t be staying with the same employer for life….

Rule No. 1: Your job is temporary. Where you start isn’t where you’ll end up. Your job, company, and profession may completely change because of mergers and acquisitions, layoffs, outsourcing, automation, and various other factors that are outside your control. The U.S. Bureau of Labor Statistics reports that the average American will have about nine jobs from the age of 18 to 32. The job you’re in now is just a stepping stone along your path.

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New York City Mayor Mike Bloomberg says average students should skip college.

New York Mayor Michael Bloomberg has some advice for high-school students who are mediocre students: skip college and become plumbers. Bloomberg said on Friday that teenagers who aren’t in the upper echelon should learn how to be plumbers rather that envision a career starting at a prestigious university and obtaining a college degree:

“The people who are going to have the biggest problem are college graduates who aren’t rocket scientists, if you will, not at the top of their class. Compare a plumber to going to Harvard College — being a plumber, actually for the average person, probably would be a better deal. You don’t spend … four years spending $40,000, $50,000 in tuition without earning income.”

Mark Kantrowitz disagrees, believing that most students should attend college and pointing out that many colleges cost less than $50,000.

Getting answers to essential questions about a college’s financial aid policies

College financial aid policies can vary significantly, so be sure to check with each school.

The CollegeBoard suggests an interested student or parent “schedule a phone meeting or an interview with a member of the financial aid staff” to get answers to any questions that are not answered by information on the college website.

A list of 12 questions to get you started on gathering information is provided.  In my experience, the answers to most of these questions can usually be found on college websites, so be sure to check there before you make a call.

A dozen questions to get you started:

1. What’s the average total cost — including tuition and fees, books and supplies, room and board, travel, and other personal expenses — for the first year
2. How much have your costs increased over the last three years?
3. Does financial need have an effect on admission decisions?
4. What is the priority deadline to apply for financial aid and when am I notified about financial aid award decisions?
5. How is financial aid affected if I apply under an early decision or early action program?
6. Does the college offer need-based and merit-based financial aid?
7. Are there scholarships available that aren’t based on financial need and do I need to complete a separate application for them?
8. If the financial aid package the college offers isn’t enough, are there any conditions under which it can be reconsidered, such as changes in my family’s financial situation or my enrollment status (or that of a family member)?
9. How does the aid package change from year to year?
10. What are the terms of the programs included in the aid package?
11. What are the academic requirements or other conditions for the renewal of financial aid, including scholarships?
12. When can I expect to receive bills from the college and is there an option to spread the yearly payment over equal monthly installments?

If you want to be super organized, you can create a spreadsheet with all relevant data.

Amid declining household debt, rising student loans remain a drag on the economy

Total household debt continues to decline, but rise in student debt hampers economic recovery.

The total amount of debt held by Americans fell again in the first three months of the year and stood at the lowest level since the middle of 2006, the New York Federal Reserve said Tuesday….

The level of household debt in the first quarter fell by $110 billion, or 1%, to $11.23 trillion, mainly because consumers reduced mortgage balances and used their credit cards less.

A…
Auto and student loans rise.

The increase in the value of auto loans was the smallest in four quarters, suggesting that car companies might have cut prices to attract buyers as demand for new vehicles slackened. Still, auto loans rose $11 billion to $794 billion to mark the ninth straight quarterly gain.

Student loans have ‘surged 46% since the end of the recession’.

Student loans, which climbed $20 billion in the first quarter, have surged 46% since the end of the recession to an all-time high of $986 billion. More students are going to college or remaining in school longer to obtain graduate degrees to improve their chances of finding a job amid a slow economic recovery.

Yet the escalation in student loans is also leaving many young people saddled with large debts. Although the delinquency rate on student loans fell slightly in the first quarter to 11.19%, that’s still the second highest rate ever. Before the recession, delinquencies averaged around 7%.

The decline in household debt is good for a recovering economy, but economists believe growing student loans are ‘acting as a drag on growth’.

The anemic economy has left millions of younger working Americans struggling to get ahead. The added millstone of student loan debt, which recently exceeded $1 trillion in total, is making it even harder for many of them, delaying purchases of things like homes, cars and other big-ticket items and acting as a drag on growth, economists said.