Saving for Unemployment

An emergency fund is used to pay your living expenses during unemployment. It should hold 3-9 months of current earnings. Keep it for retirement.  

Protect Yourself

Unemployment means that you aren’t paid for doing work.  People who either lose their job or retire from work are unemployed. Could you pay for living expenses during unemployment?  If not, you should start building an Emergency Fund. There are two important savings plans during life: the Emergency Fund and Retirement Account (ref. 1).  

Emergency Fund  

The emergency fund is used to pay living expenses during temporary unemployment and other unusual expenses such as big bills.  Workers should save 3-9 months worth of earned income in a secure savings account (ref. 2).  That’s a difficult task when also planning to buy expensive items such as cars and houses, or paying-off college loans.  Get a headstart in childhood by slowly saving cash in a custodial bank account.    

Retirement Account 

The retirement account is needed to pay living expenses during permanent unemployment in old age.  Contribute to your own retirement accounts as soon and often as possible (ref. 3).  Begin by opening a Roth IRA during childhood when you start reporting earned income to the Internal Revenue Service (ref. 4).  Employer-sponsored and Self-employed retirement plans should be opened at the first opportunity (ref. 5).  

About forty to fifty years of regular investing are needed to build adequate savings for retirement (ref. 3). Plan on investing in quality securities such as stock index funds and government bonds (ref 1,6).  Begin with stock index funds early in life and add the bonds late in life, finishing with a 90% investment in stock funds and 10% investment in bonds (ref. 7).  

Retirement accounts have special rules for investing money (contributions) and removing money (withdrawals).  

  • Withdrawals before age 59½ years are generally not permitted without paying a fine and taxes [check the rules for exceptions in ref. 5].  There are no fines after age 59½ years. 
  • Roth IRA. You must pay taxes on all contributions and the contribution limits are $5,500 per year [check ref. 5 for changes].  Withdrawals after age 59½ are not taxed and there are no mandatory withdrawals. 
  • Other IRAs and retirement plans. The contribution limits vary from $5,500 to $19,000 depending on the account [check ref. 5 for changes].  You don’t pay taxes on any contribution, but withdrawals are always taxed.  The government requires partial withdrawals each year after age 70½ years. 

References

1. The Index Card.  Why Personal Finance Doesn’t Have to be Complicated.  Helaine Olen, Harold Pollack. Penguin Publishing, New York, 2013.

2. Emergency Fund Calculator, MoneyUnder30 . com:  https://www.moneyunder30.com/emergency-fund-calculator.

3. Retirement Income Calculator:  https://retirementplans.vanguard.com/VGApp/pe/pubeducation/calculators/RetirementIncomeCalc.jsf

4. Video on compound interest in a Roth IRA: https://youtu.be/6dzpNd3megg 

5. Retirement plans:  https://www.irs.gov/retirement-plans 

6. Saving and Investing for Students, SEC resources for youth:  https://www.investor.gov/search/node/students

7. Warren E. Buffett, Chairman of the Board. Letter to the shareholders of Berkshire Hathaway, Inc., 2013. Page 20, 2/28/2014.

Copyright © 2019 Douglas R. Knight

The Turtle and the Rabbit

Walt Disney made a wonderful cartoon about a famous race between the tortoise and the hare [‘tortoise’ and “hare” are old-fashioned names for ‘turtle’ and “rabbit”]. The story began when the rabbit teased the turtle for walking slowly.  To everyone’s surprise, the turtle challenged the rabbit to a race.  Their race course was a long track that had a starting line and a finishing line.  At the start of the race, the rabbit ran fast and far ahead of the turtle.  But the careless rabbit suddenly stopped to tease the turtle some more by going to sleep along the race course instead of crossing the finishing line.  The turtle quietly passed the sleeping rabbit and won the race by crossing the finishing line in first place (ref. 1,2).

What happened?  The turtle refused to feel bullied by the rabbit and fought back by suggesting the race and then running the entire length of the race course.  The turtle was determined to finish the race and didn’t quit running.

The moral for investors: success depends on determination and patience.

References

  1. The Tortoise and the Hare, by Walt Disney. 1934.  [https://youtu.be/MeZe2qPLPh0 ]
  2. The Aesops Fables: The Hare and the Tortoise.  Library of Congress. http://www.read.gov/aesop/025.html

Copyright © 2018 Douglas R. Knight

Advice for young adults on getting started with investing

An excellent article in today’s newspaper (ref. 1) presented clear advice on how to become wealthy without paying hefty fees:

  • Begin by finding good, free financial advice in the internet.  Search for tools and advice on creating a budget, finding affordable housing, building a financial plan, and saving for retirement.
  • Build the foundations of a budget, rainy-day savings, and retirement savings.
  • Invest money you won’t need for 5 years.  
  • Begin investing as early as possible and compound your interest.  

Numerous writers and seasoned investors offer the same advice.  Find more useful information in references 2-6.  

References

  1. Ny Anna-Louise-Jackson. Make your money grow before hiring an advisor. The Columbus Dispatch, November 4, 2018, page H7.
  2. Helaine Olen and Harold Pollack. The Index Card. Why Personal Finance Doesn’t Have to Be Complicated. Penguin Random House, New York, 2016. 
  3. Do-it-yourself investing- Introduction.  Small Trades Journal, 2013.
  4. Warren Buffett’s advice to nonprofessional investors. Small Trades Journal, 2014.  
  5. My Money Five. MyMoney.gov.
  6. Overview. RaisingInvestors.blog, 2018.

Story: Saturday morning with the grandchildren

I recently shared stories about grandchildren with one of the partners in our investment club.  Her 6 years old grandson and 4 years old granddaughter visit her every Saturday morning.  Soon after arrival, the 4 year-old runs to the penny jar and puts a few coins in the piggy bank, counting their value during the process.  It’s a play activity without feelings of ownership by the child.  The 6 year-old performs chores for which he receives a salary of $2.  He originally wanted $5, but agreed to $2 after negotiations with grandmother.  In the near-future she will take them to the Dollar Store and let both of them spend a $1 anything they want.  They will make the purchase and live with their decision.  She wants them to learn shopping skills and the value of money.  Later on, their father will open a savings account for them at the local bank.  It’s the making of a family tradition.

Paying for College

For the purposes of this discussion, “college” refers to any postsecondary school [ vocational school, 2- & 4-year college, university, professional school ] that offers student aid administered by the U.S. Department of Education.  

SUMMARY: The cost of a 4-year college is over $20,000 a year and continues to increase at nearly 4% annually.  Paying, not borrowing, is the better way to finance a college degree.  Parents can start a payment plan early by investing in a tax-free “529” college savings account.  Adults should avoid using their retirement savings to pay a child’s college expenses. 

The more effort a family puts into creating a college budget, the better their student’s chance for educational and financial success.  There are six important issues to address in the budgeting process:

  1. Cost-reduction
  2. Affordability 
  3. Savings plan
  4. Scholarships and grants  
  5. Family income
  6. Student loan as the last resort

1. Reduce the cost

High school programs which are designed to reduce the cost of college can prepare students for academic achievement and save them thousands of dollars in college expenses.  Families are encouraged to consult teachers, counselors, principals, and colleges about available programs. Here are several types of programs: 

  • Advanced placement (AP) courses and exams are sponsored by the College Board and participating high schools (ref 1).
  • Early college high schools (ECHS) enable students to earn a high school diploma and a two-year associate’s degree or 2 years credit toward a bachelor’s degree.  Recruitment starts in middle school (ref 2).  
  • Community college classes are open to high school students without a diploma.  Completion of the classes demonstrates a student’s readiness for college and the earned credit might be eligible for transfer to other colleges (ref 3).
  • College-level examination program (CLEP), also sponsored by the College Board, is designed to award college credit for knowledge already acquired.  There are 33 CLEP exams that award 3-12 credit hours toward a college degree (ref 1).  

Students who wish to get a bachelor’s degree can save money by transferring credits from a community college to a four-year school.  Money is saved by paying less at the community college and taking fewer courses to graduate from the four-year school.  Firstly, it’s important to earn an associate’s degree before entering the receiver school.  Secondly, there’s a risk of losing credits during the transfer unless the participating colleges have an “articulation agreement” on which courses will be credited.  Thirdly, the participating colleges may have a transfer agreement that guarantees admission to the receiver school.  Try searching for information about “transfer students” in the school websites (ref 4). 

Carefully selected online degree programs may provide another opportunity to reduce college expenses (ref 4).  Other cost-reduction strategies include adequate, —not luxurious—, room & board, frugal spending habits during college, and graduation on time (ref 5,6).  

2. Choose an affordable college

Financial safety schools are those which are most affordable and likely to accept your academic credentials (ref 7).    Here are some tips for choosing a college that satisfies your needs:

  • Have a study goal and search for colleges that satisfy that goal.  
  • Search for colleges which are recommended by teachers, guidance counselors, and college-rating websites.
  • Use college-ratings to help find affordable colleges [hint: try finding schools with the lowest net prices such as those listed in ref 8; net price is what you might have to pay after receiving financial aid].
  • Attend a college fair [hint: ask your guidance counselor for information].  
  • Visit the websites of colleges that interest you.
  • Contact admissions offices and request guided tours of your chosen colleges. 
  • Review your acceptance letters and visit the admissions office to negotiate the best financial agreement.  

3. College savings

It’s cheaper to save than to borrow for college.  I would like to join others (ref 9,10,11,12) in advising parents to own a tax-free 529 Savings Plan (“Qualified Tuition Program”; “QTP”) for the benefit of their young child.  Owners of 529 savings plans receive favorable tax treatment on the investment returns.  The best time to start is before birth or in the first year of the child’s life.  It’s important to make regular deposits into the account, preferably by a payroll deduction plan.  Here are some strategic details:

  • By today’s rules, withdrawals from a parent-owned 529 Plan will have the least impact on the child’s eligibilty for financial aid in college (ref 13). 
  • The designated beneficiary of the Plan is either the child or a member of the child’s family. The designated beneficiary can be changed without transferring Plans, which allows an adult to start a 529 Plan before the birth of the child by designating a family member as the beneficiary (ref 12).
  • The accumulated savings can be transferred from one 529 Plan to another by way of a roll over.  The new Plan must be for the benefit of the same designated beneficiary (ref 12).  There are several potential advantages, including the transfer of ownership from a third-party (e.g., grandparent) to the parent, but; beware that some states prohibit the transfer of a 529 account unless the owner dies and the transfer is mandated by court order (ref 14,15)
  • 529 Plans started in year 2018 can be used to pay qualified educational expenses for primary, secondary, and postsecondary school.  Misuse of the Plan for unqualified expenses will incur a financial penalty.  529s started before 2018 cannot  pay for primary and secondary education; only the Coverdell ESA will pay those expenses (ref 12).
  • The maximum investment is several-to-many hundred-thousand dollars depending on the specific plan. The total contributions may not exceed an amount needed to pay qualified education expenses of the beneficiary.  The federal gift tax exclusion allows a tax-free limit of $14,000 ($28,000 if married, filing jointly) on annual contributions. 

There are other tax-advantaged ways of saving for college (ref 12,16): 

  • Coverdell Education Savings Accounts receive favorable tax treatment on investment returns when used to pay qualified educational expenses from kindergarten through college.  Eligible owners who file joint tax returns must have a modified adjusted gross income below $220,000. Their contribution limit is $2,000 per year up to the student’s 18th birthday (no more after age 18) and the account must be used before the student’s 30th birthday.  Owners may change the Coverdell account or its beneficiary (ref 12).  Owners may also rollover the Coverdell to a 529 (ref 17).  
  • Education Bonds are U.S. series EE Savings bonds issued after 1989 or U.S. series I Savings bonds, both of which are purchased by someone at least 24 years of age.  The earned interest is tax-free if the benefiiciary is named as a dependent on the owner’s tax return, the owner’s modified adjusted gross income is below an acceptable limit, and the education expenses are qualified (ref 12). 
  • IRA distributions are tax-free when used to pay qualified educational expenses, but: beware that any educational withdrawals will severely impair the advantage of earning compounding returns for retirement savings. 

Investments in mutual funds and custodial accounts (UTMA/UGMA) offer an unlimited opportunity for funding college.  However, the balances reduce the student’s eligibility for financial aid and the returns are taxable (ref 16). 

4. Scholarships and Grants

Scholarships and grants are awards of ‘free’ money to students that don’t require repayment.  The application process demands time and effort by the high school student, but it’s well worth the effort (ref 18).  Guidance counselors, reference librarians, and college financial aid officers are excellent sources of help.  Free listings can be found online (ref 19,20).    

5. Family Income

Students from high income families can rely on parents for financial help.  Otherwise, they may need to earn money to pay for college.  The work-study programs offered by colleges and private employers are good opportunities for students with a financial need (ref 21). 

6. Borrow?

Student loans can delay college graduates from saving for retirement, a mortgage, and other big projects (ref 22).  Still worse is the possible financial stress of paying a large debt (ref 9).  Therefore, use student loans as a last resort.  Federal student loans are generally the cheapest and safest when offered by the college financial aid office (ref 21).     

Third parties (e.g., grandparents)

The student’s immediate family and the college are counterparties to each other when it comes to paying for college.  Grandparents, relatives, and friends belong to the category of third parties.  Third parties are valuable sources of financial aid under the right circumstances:

  • Gifts less the $14,000 per year ($28,000 if married filing jointly) are exempt from the federal gift tax.  A special exemption of $70,000 per donor may be paid as a one-time, five-year gift to a 529 savings plan (ref 14).   
  • Gifts are excluded from the gift tax when they bypass the family as direct payments to the college.  Unfortunately, direct payments are counted by the college as “other income” that may disqualify the student from future aid.  The disqualification is not a practical concern during the student’s final year of college (ref 14,15).
  • Indirect payments to the family are likely to reduce the student’s eligibilty for need-based financial aid by inflating the “expected family contribution” (“EFC”) toward college expenses.  The inflation of EFC is less when gifts are paid to the parents instead of the student.  The best strategy for indirect payments is to contribute to a 529 savings account owned by the parents with the child as the beneficiary (ref 14, 15).  
  • A 529 account owned by a third-party does not inflate the EFC until payments are made toward the student’s college expenses.  To avoid inflating the EFC, the third-party owner should transfer their account to the parents before the student applies for college.  Beware that some states prohibit the transfer of a 529 account unless the owner dies and the transfer is mandated by court order (ref 14,15).
  • Money borrowed by parents does not hurt their student’s chances for financial aid.  Third parties can plan to make a legitimate loan to parents that includes a charge for interest.  Once the parents are done paying for college, the third party has the option of forgiving the loan (ref 15).  

Parents and grandparent-guardians should both avoid dipping into retirement savings to pay for a child’s college education.  Instead, the child can earn income and apply for student loans.  

Consultants

Families who want professional help with the process of paying for college can hire a financial aid consultant.  Before hiring a consultant, review the excellent advice given in references 23 and 24. 

Conclusion

Students are required to submit a Free Application for Federal Student Aid (FAFSA) one year before attending college.  Some colleges also require students to submit a CSS/Financial Aid Profile.  The FAFSA and CSS Profile reveal how much a student can pay without borrowing money.  It’s best if the student, with the help of the family, pays without borrowing.  

References

1.  Getting College Credit Before College. BigFuture, https://bigfuture.collegeboard.org/pay-for-college/college-costs/getting-college-credit-before-college. 

2.  Christina Tyman-Wood, What is an early college high school?  https://www.greatschools.org/gk/articles/early-college-high-school/ , 3/7/2016.

3.  Start college early.  Rise Out, Inc. http://www.rise-out.com/start-college-early/ .

4.  Taking Credit: How to Make Sure Your Course Credits Transfer When You Do.  College Affordability Guide., https://www.collegeaffordabilityguide.org/transfer-credit/ .  

5.  Managing College Costs.  College Resources.  https://www.mycollegeoptions.org/Core/SiteContent/Students/Advice/College-Resource-Center/For-Parents/Paying-For-College/Managing-College-Costs.aspx .

6.  10 Ways to Reduce College Costs. Education Planner Org.   http://www.educationplanner.org/students/paying-for-school/ways-to-pay/reduce-college-costs.shtml.  

7.  How to Choose Dream, Target, and Safety Schools.  https://www.princetonreview.com/college-advice/dream-match-safety-schools .

8.  College Affordability and Transparency Center, U.S. Department of Education.   https://collegecost.ed.gov/catc/ 

9.  Mark Kantrowitz, It’s cheaper to save than to borrow,  Saving For College, 4/27/2018. https://www.savingforcollege.com/article/it-s-cheaper-to-save-than-to-borrow .

10.  Mark Kantrowitz, How to save for a child’s college education before the child is born, Saving For College, LLC. College Savings 101, https://www.savingforcollege.com/article/how-to-save-for-a-child-s-college-education-before-the-child-is-born , 4/5/2018.  

11.  Frequently Asked Questions About 529 Plans, ICI Investment Company Institute, ici;org, https://www.ici.org/pubs/faqs/ci.faqs_529.print , 2014.

12.  Tax Benefits for Education.  Publication 970, Tax Benefits for Education, Department of the Treasury, Internal Revenue Service, https://www.irs.gov/forms-pubs/about-publication-970 , 1/31/2018.

13.  Joseph F. Hurley and Brian Boswell, 2018-2019 Family Guide to College Savings, Saving For College, LLC.  www.savingforcollege.com , 2018. 

14.  Robert Farrington, The Smart Way Grandparents Can Help Pay For College, Forbes/Education. https://www.forbes.com/sites/robertfarrington/2014/10/13/the-smart-way-grandparents-can-help-pay-for-college/#69ad07a17927 , 10/13/2014.

15.  Safe Ways for Grandparents to Help with College Costs.  Dowling & Yahnke, LLC. https://www.dywealth.com/resources/blog/safe-ways-grandparents-help-college-costs

16.  Kathryn Flyn, 6 ways you can save for college.  https://www.savingforcollege.com/article/6-ways-you-can-save-for-college , 9/1/2018. 

17. Kathryn Flynn, When to consider a Coverdell ESA to 529 plan rollover.  June 26, 2018. https://www.savingforcollege.com/article/when-to-consider-a-coverdell-esa-to-529-plan-rollover , 10/9/2017. 

18.  Kristina Ellis, Confessions of a Scholarship Winner. Worthy Publishing, Brentwood, 2013. 

19.  Scholarships. College Scholarships Org.  http://www.collegescholarships.org/scholarships/  .

20.  Finding and applying for scholarships.  www.studentaid.gov/scholarships.  

21.  Federal Student Aid, U.S. Department of Education. https://studentaid.ed.gov/sa/.

22.  Matthew S. Rutledge, Geoffery T. Sanzenbacher, and Francis M. Vitagliano. How Does Student Debt Affect Early-Career Retirement Saving?  Center for Retirement Research at Boston College, May 2018. http://crr.bc.edu/wp-content/uploads/2016/09/wp_2016-9_rev.pdf.

23.  Evaluating Financial Aid Consultants.  http://www.finaid.org/scholarships/consultants.phtml .

24.  Deborah Ziff, Decide if you need a private financial aid consultant, usnews;com, https://www.usnews.com/education/best-colleges/paying-for-college/articles/2017-07-05/decide-if-you-need-a-private-financial-aid-consultant , 7/5/2017. 

Copyright © 2018 Douglas R. Knight 

Jim Simon: Financial literacy is America’s Achilles’ heel

My Nov. 7, 2017, inaugural column for The Dispatch, “Civics education in schools needs reboot,” noted there are “loud” and “quiet” crises. An example of the latter is the decline in civic literacy, or basic knowledge of how our government works.

Another and equivalent crisis in the quiet category is financial literacy. For years, numerous polls and studies have revealed how little millions of Americans know about the basics of personal finance and investing.

A 2015 study of more than 27,000 people by the FINRA Foundation estimated nearly two-thirds of Americans could not pass a basic, five-question quiz covering credit, interest, diversification in investing, and inflation. Disturbingly, the percentage of those who passed had fallen from 42 percent in 2009 during the financial crisis.

Results of a survey of six age groups released in January by the National Financial Educators Council estimated that lack of knowledge of personal finance cost America more than $280 billion in 2017.

To compound the issue, we’re living in a consumer-driven society in which spending, especially for immediate gratification, is far more emphasized than saving and investing. The proof: the U.S. household savings rate decreased to 2.90 percent last November, the lowest rate since just before the Great Recession and near the record low of 1.90 percent in July 2005.

 

At a time when the millennial generation, the largest demographic group in history, enters its prime years of spending, saving and investing, it’s critical for that generation, as well as all Americans, to improve their financial literacy, especially before the next recession arrives.

How can poor financial literacy, an Achillles’ heel, be turned into a personal and national strength?

‒ As with physical fitness, financial health begins with good habits, and good habits begin in the home. Surveys have clearly shown that students who talk to their parents about money matters were more financially literate than those who did not. Parents must serve as models for disciplined spending and savings, educating their children along the way about the long-term value of such habits. Instead of lavishing their young with holiday or birthday gifts, they could open a savings account for them and make the first contribution to them to spark a savings mentality. Parents lacking financial literacy can access many online programs, including one offered by the American Bankers Association via its “Teach Children to Save Day” every April.

‒ Making saving as automatic as possible is the best way to build wealth and remove much of the temptation to make impulse buys. Those with little margin for savings can invest spare change through micro-investing apps such as Acorns. Those belonging to 401(k) plans or who have Roth IRAs should have the largest contributions possible deducted from their paychecks after accounting for the payment of truly necessary monthly expenses.

‒ Just as making civics classes mandatory in the classroom can develop more-informed voters, so too can requiring students to master a class in personal finance enable financial literacy before adulthood. Online courses in financial literacy could be customized for different grade levels for secondary schools. Many financial institutions that sponsor and promote financial-literacy programs could collaborate with teachers, quasi-governmental bodies, Junior Achievement, and other organizations to design such courses. A good governmental resource to build such courses can be found at https://www.mymoney.gov, which focuses on “The Five Principles” of Earn, Save & Invest, Protect, Spend and Borrow.

‒ Financial institutions also can educate young investors by sponsoring and promoting social events featuring crowd-sharing tips. Nothing motivates young people more than peer recommendations, and informal, free events featuring financially savvy young adults as ambassadors for financial literacy could be an effective grassroots-based tool. A good opening topic for an informal discussion could be credit scores, which many millennials are extremely interested in building and protecting.

Not coincidentally, April is “Financial Literacy Month,” the time when tax filings are due, 401(k) plans for the previous year must be established and funded and when many Americans receive tax refunds. Given the impact of the tax-cut bill and the opportunity some have for increasing savings in 2018, we have an ideal opportunity to reverse the trend of financial illiteracy and strengthen our financial future.

Jim Simon, is a central Ohio resident and former chief communications off􏰀icer of several corporations.

Reference

Jim Simon: Financial literacy is America’s Achilles’ heel – Opinion ( – The Columbus Dispatch – Columbus, OH, Thursday, 2/1/2018.

Copyright © 2018 Jim Simon

Delinquent investors

Children have the gift of time for building their future.  Unfortunately, thousands of young people waste their early opportunity to start building an emergency fund, saving for adulthood, and investing for retirement.  Here are 3 examples:

A neighbor who finished the first year of college with a 3-point average (good grades!) decided to move to New York to find a job and live with her sister.  This was not surprising when considering that she used to sell stuff door-to-door to earn money.  What surprised me was that she asked if we had any advice?  “Yes”, I said, “invest in a Roth IRA”.  “What’s a Roth IRA?”, she asked. Neither she nor her college-graduate parents knew about IRAs.

Two grandmothers told me on separate occasions that they wished their young adult grandsons would invest in the stock market.

References 1 & 2 describe the problem and correction for delinqent investing. 

References

  1. Tanisha A. Sykes, This 30-something investor isn’t freaking out about her 401(k) — she’s catching up, 7/5/2017, https://www.usatoday.com/story/money/2017/07/05/young-investors-late-bloomer/103394004/
  2. Wayne Pinsent, 5 common mistakes young investors make (updated 5/21/18): https://www.investopedia.com/articles/younginvestors/09/common-mistakes-young-investors.asp

Copyright © 2018 Douglas R. Knight 

Childhood preparation for college (‘college prep’)

Today’s children [“generation Z”] have plenty of choices in careers and colleges.  There are pre-college and 2-year colleges as well the traditional 4-year colleges and graduate schools.  Trade schools are an option to liberal arts programs.  Online colleges offer courses taught in virtual classrooms.

Roughly half of college students complete their studies and graduate.  Those who dropped out early were either unprepared for the classroom, overwhelmed by stress, or couldn’t pay the bills.  Maybe the drop-out rate can be reduced by childhood preparation for college [‘college prep’] (ref 1, 2).  

COLLEGE PREP

Parents have considerable influence on fostering their children’s dreams and attitudes toward college.  High school and college students can receive help from their own ‘college team’ of parents, counselors, and trusted adults.  Here are the important milestones. 

before high school :

Save money for college.  College is expensive.  It’s cheaper to pay the cost by saving money beforehand than to pay interest on a student loan afterwards.  Parents: consider starting a “529 Savings” plan for your newborn child (ref 3, 4).  Later on, your growing child and other family members can help with additional contributions.

Dream about the future.  Pre-schoolers dream about being a grown-up.  It’s the perfect time for parents to discuss the jobs, trades, and professional careers of friends and family members.  School children can benefit from attending career presentations and visiting job sites.  Encourage your middle schoolers to read My Future My Way (ref 5).

Learn, Learn, Learn.  Every child should learn to manage money wisely.  Their training can begin by age 3 and continue throughout life (ref 6, 7, 8).  Every child should also learn to read well and perform homework assignments.  Tutor them, if necessary, and help them form good study habits (ref 9).

Enrichment.  Help your child participate in summer programs, after-school activities, community service, travel, clubs, teams, fellowships, and other enrichment programs (ref 10).      

Go to college?  College is optional, not mandatory.  Ask your child what they want to do after high school.  If they are strongly opposed to college, do they want to get a job or start a business?  There are job fairs and entrepreneurial training programs available to teens.  If they are either undecided or interested in college, help them explore college opportunities with the aid of campus visits.  Also encourage them to read My Future My Way if they haven’t already done so (ref 5).

during high school :

Shop for colleges.  Every college has a unique set of characteristics and opportunities.  College fairs allow students to discuss those features with a large selection of college representatives (ref 11).  Virtual and actual campus tours of interesting colleges help students prepare for college.

Assemble a College Team.  High school students should place more effort into college prep than parttime jobs.  They need a ‘team’ of parents, school faculty members, and other trusted adults to help with college prep.  Parents can facilitate the college selection, application, and enrollment processes.  For one reason, the required Free Application for Student Financial Aid (FASFA) requires timely parental input (ref 12).  Furthermore, parents can monitor their student’s adjustment to the transition year of college (ref 13).  School guidance counselors have valuable experience and information to share with the student.  Teachers and community leaders are wonderful sources of information and recommendation letters.  Grandparents can lend help, funds, and wisdom to the college prep process.

Use a checklist.  Here are some suggestions:

  • develop good study habits
  • decide what kind of college you want to attend and what you want to study
  • during the freshman year of high school, consult your school teacher and guidance counselor about; 
    • earning college credits in high school (ref 14)
    • taking college placement tests
    • applying for scholarships (ref 15)
    • choosing colleges
    • preparing for FAFSA (ref 12)
  • seek frequent advice and take early action!
  • select your preferred colleges
  • take care of financial matters
    • choose an affordable safety school 
    • compare college acceptance letters
    • re-visit acceptable schools and negotiate their offers of financial aid
    • minimize college expenses (ref 16).

during college :

Survive the transition year.  The first year of college [“transition year”] will likely be academically and emotionally stressful; that’s when dropping out of college is most likely to occur (ref 13).  Emotional issues may prevent graduation unless college students learn to manage the stress or parents intervene for signs of unusual behavior (ref 17).   

CONCLUSIONS

Parents have considerable influence on fostering children’s dreams and attitudes toward college.  Those with K-12 children might benefit from consulting a comprehensive checklist published by the U.S. Department of Education (ref 18). 

Middle school students can find helpful information in the pamphlet My Future, My Way by downloading it from the U.S. Department of Education (ref 5).  High school students must take charge of their college prep to have the best chance of success.  There is much to gain by an aggressive pursuit of scholarships, advanced placement courses, campus visits, and timely submission of the applications recommended by guidance counselors.  Students and parents may also benefit from consulting the “right fit” worksheet published by the Jed Foundation (ref 13).  

REFERENCES

1. Improving college graduation rates: a closer look at California State University. Jacob Jackson and Kevin Cook, Public Policy Institute of California, 2018. http://www.ppic.org/publication/improving-college-graduation-rates-a-closer-look-at-california-state-university/ . 

2. 10 ideas for improving community college completion rates.  Grace Chen, 2/14/2018, Community College Review.  https://www.communitycollegereview.com/blog/10-ideas-for-improving-community-college-completion-rates .

3.  Saving Early = Saving Smart!  Federal Student Aid, February 2018.  https://studentaid.ed.gov/sa/sites/default/files/saving-early.pdf  

4.  FAMILY GUIDE TO COLLEGE SAVINGS. Joseph F. Hurley and Brian Boswell.  www.savingforcollege.com .  2016.

5. MY FUTURE, MY WAY.  FIRST STEPS TOWARD COLLEGE; A Workbook for Middle and Junior High School Students. Federal Student Aid, U.S. Department of Education.  StudentAid.gov. July, 2017. 

6. How to teach kids money smarts from as young as three.  SBS com/au, 7/15/16.  https://www.sbs.com.au/topics/life/culture/article/2016/07/13/how-teach-kids-money-smarts-young-three 

7. The Money Tree Myth: A Parents’ Guide to Helping Kids Unravel The Mysteries of Money.  Gail Vaz-Oxlade, Stoddart Publishing, Toronto, 1996.

8.  Teaching Kids about money.  ASIC’s MoneySmart Financial Guidance You Can Trust. 5/29/18.  https://www.moneysmart.gov.au/life-events-and-you/families/teaching-kids-about-money 

9.  Helping Your Child. U.S. Department of Education, 9/17/2008.  www.ed.gov/parents/academic/help/hyc.html

10.   The value of out-of-school time programs.  Jennifer Mcombs, Anamarie Whitaker, and Paul Yoo.  2017, Rand Corporation.  http://www.wallacefoundation.org/knowledge-center/Documents/The-Value-of-Out-of-School-Time-Programs.pdf 

11.  NACAC national college fairs.  https://www.nacacfairs.org 

12.  Overview of the Financial Aid Process. www.YouTube.com/FederalStudentAid  

13.  EMOTIONAL HEALTH & YOUR COLLEGE STUDENT.  A GUIDE FOR PARENTS.  Alan A. Axelson and Donna Satow, Jed Foundation, www.TransitionYear.org .

14.  AP Students. https://apstudent.collegeboard.org/home 

15.  Finding and applying for scholarships.  StudentAid.gov/scholarships 

16.  Managing college costs. https://www.mycollegeoptions.org/Core/SiteContent/Students/Advice/College-Resource-Center/For-Parents/Paying-For-College/Managing-College-Costs.aspx 

17. 3 Attending College in Transition Year, Student Edition. 2012, The Jed Foundation.  http://www.transitionyear.org/student/intro.php

18. COLLEGE PREPARATION CHECKLIST.  Federal Student Aid, U.S. Department of Education.  July, 2016.  https://studentaid.ed.gov/sa/sites/default/files/college-prep-checklist.pdf

Copyright © 2018 Douglas R. Knight 

College is optional, not mandatory

College graduation is part of the American Dream, but not for everyone (ref 1)!  Marketing, peer pressure, and well-meaning adults may push young students into the wrong college for the wrong reason (ref 2). So let’s consider the pros and cons of attending college under the topics of cost, readiness, careers, health, and miscellaneous factors.

COST 

College is expensive; its rising costs surpass the inflation rate of consumer prices and the growth of household earnings (ref 1, 3).

  • PROS:  
    • Financially secure families can pay college expenses.
    • Student aid might pay college expenses for qualified students who need assistance (ref 4).
    • The return-on-investment (ROI) is a ratio of net return for every dollar paid for college.  A positive value means that the investment is profitable (ref 1, 5).  Example: for American community college students in year 2012, the ROI of 3.8 inferred that students could receive $3.80 for every $1.00 paid for college (ref 5).
  • CONS:  
    • Unfortunately, college may be too expensive for low-income families (ref 1)
    • It’s a waste of money for college students to drop out after one year (ref 1-3)
    • The total cost of college includes any missed income from not having a job (“opportunity cost”).  Delaying employment during college impedes retirement savings plans, buying a house, and other big-cost projects after graduation (ref 1, 5).
    • The payback period is the time needed to recoup college costs.  For American community college students in year 2012, the average payback period was 7.8 years (ref 5). 
    • Can’t afford it?  Beware that a ‘crippling’ debt of large student-loan balances could cause financial distress for many college graduates.  Unpaid balances prevent financial independence and student loans cannot be erased by bankruptcy (ref 1-3)

READINESS

Some high school students aren’t ready to attend college and might benefit from gaining more experience before applying to college (ref 2, 4).

  • PROS: Preparation for college (“college prep”) is essential for success.  Families and school counselors can facilitate the process (ref 4). 
  • CONS: Students with low motivation, poor study habits, and low test scores are less likely to succeed in college. 

CHOICES

College is not the only pathway to lifetime success.

  • PROS: 
    • A bachelor’s degree is usually required for enrollment in graduate- or professional school.  
    • There are many opportunities for personal and career development offered by trade schools, 2-year colleges, and 4-year colleges (ref 1, 4) 
  • CONS:  
    • Waste of time?  Don’t apply to college if you have something better to do such as pursuing self education and building a business (ref 2, 3).

CAREERS

Most colleges support career development with a wide selection of courses and career internships, but young people can still develop a career without going to college (ref 1, 3, 4). 

  • PROS:  
    • Many jobs require college degrees.  A lower percentage of American jobs require high school diplomas today than in the 1970s.  Most of America’s job growth after year 2010 went to holders of a college degree, and this trend will likely continue (ref 1, 6). 
    • College degrees represent the potential for earning a higher salary.  Between years 1965 and 2013, young adults ages 25-32 who worked full time earned higher annual incomes with at least a bachelor’s degree than young adults with lesser amounts of education (ref 1, 4, 5-7). 
    • College graduates enjoy greater job security compared to workers without an associate’s degree or higher.  Graduates have lower unemployment rates (ref 1, 4) and higher employment rates (ref 7, 8)
    • There’s a shortage of skilled workers for trades taught in trade schools and community colleges (ref 1).
    • Millennial graduates (ages 25-32) with bachelor’s degrees are more satisfied with their choice of careers than other employed Millennials (ref 6).  
  • CONS:  
    • A college degree is not necessary for a successful career.  Some of America’s fastest growing jobs don’t require college degrees (ref 1)
    • Don’t apply to college if you seek the fast-track to earnings (e.g., military enlistment with on-the-job training; unskilled labor; ref 1).  
    • A large supply of college graduates dilutes the employment value of a bachelor’s degree (ref 8).  About 10% of recent-graduates are unemployed and about 40% have part-time jobs.  College graduates encounter greater competition to be hired and may have to settle for jobs that don’t require a college education (ref 1).
    • Many college graduates are unprepared for jobs that require reasoning skills  (ref 1, 3). 
    • A college degree does not guarantee workplace benefits (ref 1)

HEALTH

The college experience can favorably or unfavorably affect a student’s health.

  • PROS:  
    • College graduates tend to live healthier, longer lives (ref 1, 5) 
    • College graduates raise healthier children (ref 1) 
  • CONS:  
    • Overwhelming academic and social stress can cause health problems (ref 1, 9)

MISCELLANEOUS FACTORS

There are many opinions about the benefits of attending college.

  • PROS: 
    • Better living conditions: the poverty rate of Mellennials, Gen Xers, and Boomers was lower among college graduates with bachelor’s degrees compared to graduates with associate’s or high school degrees (ref 1, 4, 6). 
    • College graduates are more likely to have employer sponsored health insurance and retirement plans compared to workers who didn’t attend college (ref 1).
    • A liberal arts education promotes personal and professional growth (ref 1, 10)
    • Social mobility:  Young adults with a bachelor’s degree are more likely to achieve higher levels of income and less likely to rely on public assistance programs compared to high school graduates (ref 1, 7). 
    • Data suggest that college alumni donate more time, effort, and money to charity than people without a college education (ref 1, 7). 
    • Social savings:  Fewer graduates with bachelor’s degrees are incarcerated in prisons compared to high school dropouts (ref 1, 5).  
    • College students are exposed to diversified social and professional networks (ref 1, 4, 10).  
    • College students develop skills in collaboration, time management, and project discipline (ref 10).
    • Children of college graduates tend to enroll and finish college compared to children of families without college degrees (ref 1, 4). 
    •  
  • CONS:  
    • A college degree is no guarantee of adequate learning (ref 1).  
    • College teachers may abuse their authority by imposing personal values and beliefs on students (ref 1).
    • College classroom instruction tends to be irrelevant to everyday life, outdated and obsolete (ref 3).  While a majority of college graduates believe that college studies are useful in their job, a minority are dissatisfied (ref 6).
    • In reconsidering their undergraduate college experience, many students wished they gained more work experience, studied harder, sought work sooner, or chose different studies (ref 6).  

REFERENCES

1.  Is a College Education Worth It?  ProCon org. https://college-education.procon.org 

2.  3 Reasons Not to Go to College. Tim Patterson, 10/26/2017, Sterling College. https://sterlingcollege.edu/blog/3-reasons-not-go-college/ 

3.  7 Reasons Why You Shouldn’t Go to College and 4 Things to Do Instead. Michael Price, 9/6/2017, HuffPost.  https://www.huffingtonpost.com/michaelprice/7-reasons-why-you-shouldn_1_b_5501111.html

4.  8 Reasons Why College is Important.  6/24/2014, CollegeAtlas org.  https://www.collegeatlas.org/why-go-to-college.html

5.  Where Value Meets Values: The Economic Impact of Community Colleges.  Analysis of the Economic Impact and Return on Investment of Education. February 2014.  Economic Modeling Specialistis Intl.  https://www.empowererie.org/uploads/resources/796450_usa_agg_mainreport_final_021114.pdf 

6.  The rising cost of not going to college.  Pew Research Center, Social and Demographic trends. 2/11/14.  http://www.pewsocialtrends.org/2014/02/11/the-rising-cost-of-not-going-to-college/ 

7. Return on Investment in College Education. Association of Governing Boards of Universities and Colleges. 2017.  https://www.agb.org/sites/default/files/report_2017_guardians_roi.pdf 

8.  College Education. Background of the Issue, 8/11/2016, ProCon org.  https://college-education.procon.org/view.resource.php?resourceID=006578 

9.  Emotional Health & Your College Student. A Guide for Parents.  The Jed Foundation  http://www.transitionyear.org/_downloads/parent_pdf_guide.pdf 

10.  Why go to college?  https://www.psychologytoday.com/us/blog/darwins-subterranean-world/201801/why-go-college 

Copyright © 2018 Douglas R. Knight 

What is College and Why Invest in It?

WHAT?

“College” is a training program designed for high school graduates to receive more education (“higher education”) with a certificate (“degree”) for successful completion of studies.  The available degrees are a trade school degree, 2-year associates degree, 4-year bachelors degree, masters degree, doctoral degree, and professional degree.  Students may apply for federal student aid to earn any of these degrees (ref 1).  

WHY?

Children need a good education in order to manage their adult lives.  Graduation from high school signifies an educational achievement that offers opportunities for immediate employment or enrollment in college.  Furthermore, graduation from college generally results in a higher income, healthier lifestyle, and greater contribution to society compared to the completion of high school (ref 1, 2).  

A WORLD OF OPPORTUNITY

Students who graduate from college (rather than dropping out early) earn the most value for their type of higher education (ref 2).  College offers the opportunity to expand knowledge, improve thinking, launch a career, and build new relationships [my opinion: college also increases the student’s capacity for making financial decisions]. Although other organizations offer a similar opportunity through on-the-job training (e.g., armed forces, businesses), colleges offer opportunities that can’t be obtained elsewhere.  For example, many professions require a college degree.  

RETURN AND RISK

College is not free and can be quite expensive; it’s a risky investment in your child’s future (ref 3).  Is it worth the investment?  Yes, if your student graduates with reasonable financial and emotional health.  College graduation improves students’ chances for financial success as measured by the return-on-investment (ROI).   Here are several measures of the ROI in college (ref 2):

  • graduation from college increases the employment rate
  • college graduates have more job security
  • college graduates earn more money than those with less education

The payback period for a college degree is the number of years needed to recoup the cost of college.  The length of the payback period depends on the annual salary of the college graduate and total cost of college (ref 3).  The choice of school and total time of enrollment are prime determinants of total cost.

Nearly all parents want their child to attend college, yet only one third of college students earn a bachelors degree or higher (ref 2).  The high dropout rate may be due to academic or emotional stress, especially during the transition from high school to college.  The student and family may not be prepared for the academic and social life of college (ref 4).    

NEXT?

The process of college preparation (“College Prep”) can help motivate children to attend college and graduate with a degree (ref 5).  College Prep should start at home as early as possible and continue through high school. 

REFERENCES

  1. Federal Student Aid.  U.S. Department of Education. https://studentaid.ed.gov/sa/ 
  2. Return on Investment in College Education. Association of Governing Boards of Universities and Colleges. 2017.  https://www.agb.org/sites/default/files/report_2017_guardians_roi.pdf 
  3. Jonathan F. Foster. The risks of investing in a college education. Fortune, March 25, 2015.  http://fortune.com/2015/03/25/the-risks-of-investing-in-a-college-education/ 
  4. Emotional Health & Your College Student. A Guide for Parents.  The Jed Foundation  http://www.transitionyear.org/_downloads/parent_pdf_guide.pdf 
  5. College preparation checklist. Federal Student Aid, U.S. Department of Education.  https://studentaid.ed.gov/sa/sites/default/files/college-prep-checklist.pdf 

 Copyright © 2018 Douglas R. Knight