July 2012

word 'debt' being erased

Student Loan Prevention: Part 2

Last week, Squared Away published the first five of 10 strategies to help parents and their college-bound kids limit their borrowing through student loans.  As promised, readers can find the remaining five ideas below.

On a complexity scale, finding a college is comparable to buying a house, and some of these debt-cutting strategies are extremely difficult to put into practice.  In addition to the financial challenges involved, the emotional aspects of parent-child dynamics and the college application process are daunting.

But the soaring cost of an undergraduate education has made student debt prevention a top priority for most families.  Here’s more help from college financial advisers.

  • Get Practical

Deborah Fox of Fox College Funding LLC in San Diego said the days of majoring in English, philosophy or history are over – or should be.  Given the financial pressures of college, she said, students can’t afford to “just study what’s interesting to you.”  When weighing future earnings for graduates with such majors, the numbers just don’t add up, especially if the English degree is from a high-cost institution like Columbia University (high cost among private colleges) or the University of Illinois at Urbana-Champaign (expensive for in-state students).

Fox asks her clients to identify skills the college-bound teenager is good at.  When entering college, they should already have a handful of potential occupations in mind.  Then they can focus on relevant internships, jobs, courses and life skills that will help them get a job when they graduate – and begin paying back their loans.  Freshmen should immediately begin testing their theories about the work they’ll want to do – “possibilities they could get excited about,” she said.  She tells clients’ kids to “start exploring them immediately, shadow [people in their field], take someone out for coffee.  Find out what is the day-to-day work like.” …Learn More

Student Loan Prevention: Part 1

It’s panic time! College-bound teenagers and their parents are excitedly touring colleges this summer, or they’re signing the dreaded Stafford loan documents to pay for college in the fall.

One thing is crystal clear in the emotional fog of this exhilarating rite of passage: parents and their teenagers both need to get serious about limiting their dependence on student loans. Squared Away asked several experts on financing a college education for their best tips on minimizing total borrowing for college.

Some of their debt-cutting strategies are difficult to swallow. But since 2005, student loans have shot up 55 percent, to $24,301 per student, for an undergraduate degree that has, as one financial adviser noted, become “ubiquitous.” Yet college places an unprecedented financial burden on parents also saving for retirement and on graduates when they get their first full-time jobs. Debt prevention also requires families to face head-on the emotional roadblocks to an affordable education.

Squared Away came up with 10 debt-prevention strategies. Here are the first five ideas, with five more scheduled for next Tuesday. Links to Web resources are also sprinkled throughout the article.

  • Aid Deadlines Are Crucial

Buy a calendar and red marker and closely track every single deadline for merit or need-based aid – they’re different for each college under consideration.

“If I could give you one piece of advice that would be it,” said Lyssa Thaden, a financial education manager for American Student Assistance, which educates and counsels student-loan borrowers.

Thaden listed four common mistakes that cost parents dearly, requiring them to borrow more: …Learn More

Image: decisions: work or retire?

Little Thought Put Into Retirement Date

When to make the break and apply for Social Security benefits is one of the biggest financial decisions an individual will make.  But new research suggests that people may put more thought into buying a car or a mattress.

The goal of a new research study was to determine how people make this critical decision and how to possibly influence them to delay claiming – delaying is often the best thing financially for retirees, since doing so increases their monthly benefits.

But what’s striking is a basic finding of the research.  Individual decisions about the timing of an application to start up Social Security benefits depend simply on the order in which the person thinks about the benefits of his actions: those who first think about the advantages of claiming early – before they consider the advantages of claiming at a later age – prefer to claim early, and vice versa.  That’s it!

This finding, which comes out of the Columbia Business School’s Center for Decision Sciences, complements one survey that found that close to half of all people contemplate their date of retirement for no more than 12 months. …Learn More

Brain scan image

Discovery: Dopamine as ‘Risk Avoider’

Famously known as the brain’s “feel-good chemical,” dopamine is no longer associated only with thrilling activities: it can have the opposite effect.

Past research has linked dopamine to risk-taking – it can explain the thrill of sky-diving or venturing out on the Grand Canyon’s glass-bottom walkway.  But new research on the brain has uncovered dopamine’s role in the tendency of people to avoid risks.  The new findings, by Harvard Medical School researcher Michael Treadway and colleagues at Vanderbilt University, have implications for all types of human behavior – including whether we’re willing to take financial risks.

Different people exhibit “different appetites for a certain amount of risk and how they experience risk and how gun shy they are,” Treadway said.  This may depend on where the effects of dopamine take place in the brain.

That’s a dopamine molecule.  We typically talk about financial behavior and psychology or use terms like motivation and decision making.  The truth may be hard to grasp, but it all comes down to gooey chemical interactions in our gray matter. … Learn More

Free Financial Advice Goes Online

The summer slowdown might be a good opportunity for some readers to jump start a long-overdue review of their personal finances.

This summer and fall, the National Association of Personal Financial Advisors is throwing out a lifeline.  NAPFA selects members from its national roster of fee-only advisers to give free financial advice online.  In mid-June, advisers in Vermont, North Carolina, and Georgia answered questions from participants.

NAPFA’s next session is this Thursday, July 19, with three more sessions scheduled for August, September, and October.  Click here to find out how to participate.

Another free resource is a new website with a comprehensive program to help individuals put together a financial plan.  Developed by the Financial Security Project, an initiative of Boston College’s Center for Retirement Research, which sponsors this blog, the website has tools based on solid academic research.  Personal financial information entered into the website is confidential.

To read a prior blog post about the site, click here.  Since it’s still operating as a beta test site, users are welcome to send in their comments for how to improve it.

Learn More

Businessman amongst a crowd

How Can Debt Enhance Self-Esteem?

The media went crazy last month over research determining that debt – whether college loans or credit cards – is a major source of self-esteem for young adults.

Judging by the tone of these articles, the reporters were so flabbergasted that they didn’t think to ask the logical follow-up question: Why? Credit cards aren’t inherently bad, though they can get people who abuse them in trouble. But equating self-esteem with debt seems to turn the notion of financial judgment on its head.

So Squared Away consulted therapist Dave Jetson and financial planner Rick Kahler, both of Rapids City, South Dakota. They often work together with clients on their financial issues but offered different explanations for this puzzling phenomenon.

Because debt is increasingly required to get a college education, Kahler said it may benefit from the glow of what an education represents. Debt has become a mark of being “smart enough to get through college.”

Jetson sees a dramatic cultural shift that is influencing today’s young adults. This shift coincides with shrinking economic opportunity for many college graduates. …
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Chart: U.S. Credit Card Balances

Credit Card Act Increased Payoffs

Government policies often seek to alter human behavior: a 2009 tax credit for first-time homebuyers, for example, encouraged more people to buy houses.

Now research has determined that the first federal update since 1968 to the interest rate disclosures on credit card statements has changed card users’ behavior for the better.

The Credit Card Accountability, Responsibility and Disclosure Act of 2009 (CARD) increased the number of users who pay off their bills each month, from about 60 percent prior to the act, to between 64 and 69 percent currently, concluded Cornell University doctoral student Lauren Jones, Ohio State University professor Cäezilia Loibl, and Cornell professor Sharon Tennyson.

They also found that the size of card holders’ payments, relative to their debt levels, increased, and that fewer card users are paying only the minimum. Their findings, though somewhat mixed, provide support for the increasingly popular notion that more precision and clarity in financial-product disclosures can be effective.

Their research controlled for the effects of the Great Recession and its aftermath, when consumers slashed their debt; in other words, card holders improved their behavior on top of the belt tightening forced upon them by lower wages, unemployment and other recessionary impacts. A previous report also suggested that other provisions of the CARD Act that made it more difficult for college students to obtain credit cards have curbed card use on campus.

However, Jones cautioned against being complacent about CARD’s impacts, because they are “positive and significant” only for a subset of credit card users. …
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