December 6, 2016

Student Loan Repayment: 12 Rules

It’s easy to drown in the financial details of student loan repayment.  Here’s a life preserver.

The rules of thumb listed below were culled from interviews with two experts on student loans. Betsy Mayotte is director of consumer outreach for American Student Assistance, a non-profit that educates people about their loans. Craig Lemoine is program director for the American College of Financial Services, which trains financial planners.

1. If you earn enough to make your payments, start paying.

The reason: Student loans in most cases must be repaid in full.  The sooner you start making your full monthly payments, the sooner your loans will be paid off and the less in total you will have to shell out.  A decision about how much extra to pay on student loans should be weighed in the context of other financial goals, including paying off high interest credit cards and putting enough money in a 401(k) to ensure you receive your employer’s match.

2. Open your student loan mail.   

The reason: Owing tens of thousands of dollars is serious business. Ignoring a letter from the company that holds your loan won’t make the problem go away – in fact, it could worsen things.

3. Call your loan servicing company.  But do not call without doing some homework first.  

The reason: If you’re struggling to pay your loans, the companies that handle your student loans can be very helpful.  They are experts not only on your particular loan account but also on the federal government’s rules for loan repayment. Nevertheless, student loan servicers are not perfect.  Representatives might not know much more than is on the U.S. Department of Education’s website, Lemoine said.  And sometimes their advice can conflict with information from another representative in an earlier phone call. To make sure you’re getting the best advice, it’s important to read the information on the federal website, know your potential options, and compile a list of detailed questions pertinent to your unique situation. “Going in blind can cost you money,” he said.

4. The best option for lower-income former students with high debt levels is an income-based repayment plan. …Learn More

November 15, 2016

The Needs of Working Folks

“The economy” was the top priority for the vast majority of American people in one poll last summer. Surely, what they were talking about was quality jobs and economic and financial security for themselves and their children.

Or as my brother, a father of three and service manager at an auto dealership outside Chicago, put it in a recent text message, “No one can afford anything anymore.”

This simple idea seemed to resound throughout the primaries and long presidential campaign. With the election over, I compiled the following wish list for working people based on what the polls and research studies reveal about what they are hoping for.

Good jobs. The disruption created by the transition from an industrial to a service economy has hollowed out the middle over three decades. Despite a remarkably low unemployment rate of 4.9 percent, middle-skill workers face a dilemma: there are a lot of jobs, but most aren’t the right jobs for them.

Consider this detail in the October jobs report. Retail employment increased by a total of 38,000 in August, September, and October. These jobs pay, on average, $553 per week. Meanwhile, 12,000 goods-producing jobs were lost during the same three months, meaning that fewer people are earning industry’s average weekly wage of $1,100. The urgent question is, what are the potential jobs that will bolster the middle class?  Healthcare and telecommunications technicians for the New Economy?  A related question is, what are the vocational and policy paths to securing better-paying jobs?

Cash on hand. Working Americans are severely strapped for cash. One in three surveyed by the FINRA Investor Education Foundation said they probably could not come up with $2,000 to cover an unexpected expense in the next month, and nearly half said they can’t pay off their full credit card balances every month. While working people are benefiting from the stronger economy, Finra concluded, “large segments of society continue to face financial difficulties, particularly minority populations and those without a college education.” …Learn More

November 10, 2016

Wyoming Retirement Education on Point

Wyoming government has brought some 535 employees of the state’s executive, legislative and judicial branches into its retirement savings plan since July 2015 under a new policy of automatically enrolling each new hire.

They are free to withdraw from the plan at any time, but only 15 of the 535 have done so – “and not a complaint from anybody,” said Polly Scott, who manages the savings plan and heads employee retirement education.

This technique, borrowed from behavioral economics, addresses the inertia that prevents many people from ever signing up to save in their employer’s plan.  So why wait for them to join? Instead, Wyoming uses inertia to benefit state workers: when people are automatically enrolled, research shows, they tend to stay put and save.

This is one piece of a larger effort to educate government workers about what’s required to properly prepare for retirement – and nudge them to do it.  The 457 retirement savings plan is crucial. Wyoming’s retired state workers receive Social Security, but the inflation adjustment in their traditional defined benefit pension has virtually been eliminated for the near future.  The 457 plan “is voluntary, but it’s not optional if you want a secure retirement,” Scott said.

The heart of the state’s education efforts is a website titled “Your Whole Story” that is on point and explains in clear language likely to benefit employees. Employees are encouraged to increase how much they’re already saving, resist the temptation to withdraw their savings prematurely, and prepare themselves for a long time in retirement in an era of increasing life expectancy.

This initiative is based on a campaign sponsored by the National Association of Government Defined Contribution Administrators (NAGDA) – Scott was NAGDA’s president last year – and designed by the National Association of Retirement Plan Participants.  Other states use some version of “Your Whole Story,” including the Missouri State Employees’ Retirement System and Montana Public Employee Retirement Administration.

One problem Wyoming is tackling is young adults who hurt their retirement prospects by withdrawing money from their 457 plans when they leave their state jobs, which “means they’re spending it,” Scott said. Another issue is that more older workers are rolling 457 savings over to private IRAs, which can have higher fees. …Learn More

November 3, 2016

Financial Distress is Set Early in Life

Young adulthood is the staging ground for financial success later in life, and today the stakes are higher than they’ve ever been.  Young adults are managing the burden of paying back student loans or feeling an urgency to save – and many are trying to do both.

According to a study linking economics and psychology, what most strongly separates young adults who start out on the right foot from those already experiencing financial distress is whether they are conscientious or neurotic individuals.

University of Illinois researchers followed more than 13,000 teenagers and young adults between 1994 and 2008 in the National Longitudinal Study of Adolescent to Adult Health.  The survey asked questions about both their psychology and finances.  The six measures of financial distress in this study were determined by survey questions such as whether the respondents were keeping up with their rent and utility bills, whether they were worried about having enough food, and whether their net worth was positive or negative.

The personality measures were based on the Big Five traits widely used in psychology research: conscientiousness, agreeableness, neuroticism, openness to new experiences, and extroversion (known collectively as CANOE).  The survey respondents were grouped in this way based on the extent to which they agreed or disagreed with various statements. Examples included “I get chores done right away (conscientious),” and “I get upset easily (neurotic).”

The researchers found clear links between two of the Big Five traits and financial distress.  Being conscientious – following through, controlling one’s impulses, and being organized – strongly reduced the likelihood of having all six of the study’s financial distress outcomes. …Learn More

October 20, 2016

Your Social Security: 35 Years of Work

This blog is for a part-time Macy’s saleswoman and immigrant whom I met in a hospital waiting room – she’d never heard of Social Security.

It is also for a 22-year-old contingent worker I know who lacks steady employment and isn’t regularly accruing credit toward the Social Security pension he will probably need when he retires.

And it is for a 62-year-old eager to claim his benefit right away, possibly short-changing his retirement.

A substantial share of retirees would fall into poverty were it not for the Social Security program passed during the Great Depression.  It’s especially important for two groups of people to understand how Social Security calculates their pension benefits: young adults making employment decisions that will impact them decades from now and older people figuring out when to retire.

Yet research shows that many people do not know the basic workings of a program that is crucial to their financial security.

Steve Richardson, a Social Security official in Boston, holds regular seminars to explain the pension program to the public. “The first thing I ask is – before I say my name – ‘How many people in this room know how many years Social Security looks at to determine your pension payment?’

“Not many of them know it’s your high 35 years of earnings.”

To qualify for a pension benefit at all, a person must work full- or part-time for 40 quarters – a total of 10 years. That’s not a difficult hurdle for most to clear during decades in the labor force. What’s central is the size of your future benefit check, which is determined by your highest 35 years of indexed earnings, Richardson said – and that brings us to the math thing. …Learn More

October 6, 2016

Starting the College Conversation Early

Parents have finished the summer college tours with their teenagers.  Now comes the hard part: figuring out how to pay for college. But Judith Ward, a senior financial planner for T. Rowe Price in Baltimore, urges parents to prepare for this moment well before their child’s high school graduation to help minimize college costs when the time comes.

Squared Away interviewed Ward, whose advice comes from a combination of her professional experience and putting her own two kids through college. They are now 23 and 27, employed, and paying back modest student loan balances.  

Your company’s 2016 survey of parents and children between ages 8 and 14 about paying for college points to a disconnect between what young kids are expecting in terms of paying for college and what their parents are planning on.

Yes, we found in our survey that 62 percent of kids expect their parents to cover most of whatever college they want, but 65 percent of parents say they’ll only be able to contribute some to their college. There’s definitely a disconnect. But it’s easy to rectify – just start talking to your kids about college.

Question: Can parents really talk to their kids about college at 8, 9 or 10? And what do they talk about?

In fairness to the kids who answer these survey questions, they have no idea what the cost of college is. It’s not the enormous number it is to their parents. But start when they’re young by having conversations that are not necessarily about the cost of college. Just start making college part of the conversation and sharing your own stories. That will have them thinking about college and thinking, “I’m going to be expected to go to college.” …Learn More

October 4, 2016

Day Care Costs Factor into Mom’s Work

In 26 states, the average cost of full-time care for just one infant at a day care center approaches or exceeds $10,000 a year, according to ChildCare Aware of America.

No wonder many new mothers (and sometimes fathers) ask themselves: Is it even worth it to work in the first place?

Proposals by both presidential candidates to subsidize care for the nation’s 11 million pre-schoolers amount to non-partisan recognition that parents need some help.

The IRS does provide a child care tax credit of up to $3,000 for one child and to $6,000 for two. But despite this, the United States lags well behind Europe in the financial assistance extended to parents of young children.

The result is that the child care costs shouldered by two-earner American families – the percent of their after-tax incomes that go toward care – are two times what parents pay in countries that subsidize care, such as Germany, Australia, Sweden, Denmark, France and Greece, according to the OECD.

A series of academic studies over more than two decades document a deep and enduring link between steep child care costs and mothers’ decisions to drop out of the labor force.

One study in 2005 found a “striking” impact on mothers when Quebec made child care for pre-schoolers affordable by putting in place subsidies for private day care in the late 1990s, which capped parents’ daily costs at $5. The program spurred big increases in child care use in the province. The study found that universal day care also significantly increased married women’s labor force participation, by 14 percent. …Learn More