Free Family Finance

Did you know that $14,000 could pay for a $100,000 college education?

It’s true. If you invested $14k the day a child was born, assuming 11% return, it would be work over $100k by the time the child enters college. Unfortunately, a young couple with a new baby (and subsequent hospital bills) is rarely ready to chunk all that money toward college.

A recent study found that two-thirds of American grandparents provided financial support to their grandchildren during the past 5 years.

The average amount given over that time period was $8,661, and 25 percent increased giving as the economic downturn unfolded.

A recent bankrate.com article provides us with 4 options for Mimi & Pop-Pop to cover school:

Section 529 college savings plan. This 14-year-old educational investment vehicle, named after the Internal Revenue Code that created it, is administered at the state level, although a student may use the funds anywhere in the country. The popular plan enables investors to choose from a menu of mutual funds, much like an IRA or 401(k) plan. The parent retains full control of the fund, which is revocable. Anyone may contribute and there is no age restriction on a 529 plan.

I would give this plan as an A- plan.

Section 529 prepaid plan. Many states and public colleges and universities offer the option to prepay all or part of the cost of an in-state public college education. An Independent 529 Plan offers a similar program for private colleges. The return on investment will usually decrease should the recipient attend school out of state or choose a different college.

The return on these plans do not measure up to the market. Thus, I would give these plans a D.

Coverdell education savings account. Think of Coverdell as an educational Roth IRA, although its annual limit of $2,000 per child and parental income limits make it an awkward fit for some families. The parent typically acts as custodian for this irrevocable fund; investment options may include mutual funds and/or individual stocks and bonds. On the plus side, the fund can be tapped for certain K-12 expenses. On the minus side, K-12 flexibility will expire — and contribution limits will drop to $500 annually — in 2010 unless Congress extends them. Coverdell contributions end when the recipient turns 18 and must be withdrawn by age 30 to avoid fees and penalties.

ESA’s are fairly new products, but are the best option for college savings. If it were not for their contribution limits, they would be an A+ option.

UGMA/UTMA. This supercharged, modern-day equivalent of a grandchild’s savings account was made possible by the Uniform Gifts to Minors Act, or UGMA, of 1956 and the Uniform Transfer to Minors Act, or UTMA, of 1986. It essentially allows donors to give or transfer assets into a custodial account for a minor without creating a trust.

The UTMA is a great choice if the grandparents can just write a check for college. If circumstances permit, the UTMA route is an A choice.

In the end, any college savings plan outweighs not saving for college. But choosing the proper plan can mean thousands of dollars in tax savings and inversely increased savings.

Article | College savings options for grandparents.
Photo | Beverly & Pack

You Are Here is a fantastic site, sponsored by the FTC, designed to train your kids to be savy consumers. The site discusses general marketing concepts, identity theft, and various advertising scams. By understanding how they are being marketed to, kids can remove themselves from the emotion of the moment, allowing parents to provide teachable moments for their children.

The game revolves around situations you encounter while walking around the mall. As I was just playing, I was walking through the digital mall when I encountered a cell phone kiosk. While I was there, the kiosk worker explained how they advertise certain cell phones outside certain stores in the mall, to target the people who shop at that store. The kiosk worker then walked me through a matching game, where I matched the phones with the appropriate stores.

The site is designed for kids in 5th – 8th grade.

Article | Consumer Reports Money & Shopping Blog: Training kids to spot scams, ID theft and ad gimmicks
Photo | Pink Sherbet Photography

| Testimonial Tuesday is a semi-regular series. Here is our hope for these posts. If you would like to participate, contact us. |

In this rendition of Testimonial Tuesday, we look at a personal experience with graduate school, specifically law school. Many people would blindly argue that a post graduate degree from a top-tier program is almost always a no-brain-er. They argue that despite the cost, the degree holder will be certain to obtain a top notch job that will enable them to tackle their student loan debt. I believe this week’s contributor would disagree with that thought process.

Don’t get caught up in the post-graduate education hype.¹

It wasn’t that long ago that I was 100% completely debt free. Both my wife and I had been through college without incurring any debt. We owned both our vehicles. We lived in an apartment, so we did not have a mortgage. I was making $55,000 per year in a field with plenty of room for advancement. We had $10,000 in a bank account for a rainy day. In short, things were good from a financial standpoint.

Then I decided to go to law school.² My primary motivation for going to law school was not money, but I did not think that going to law school was a bad decision financially. All of the law schools I looked at touted what a good investment law school was and how quickly you could pay off the, admittedly, substantial cost of their fine institutions. So I thought that going to law school was, at least, a financially responsible decision.

When I graduated in 2008, I had $150,000 in student loans, about half of which were private loans at exorbitant rates. I did not incur that much debt through frivolous spending. We lived very humbly, and my wife had a job that met most of our basic needs. The 150k is almost entirely school-related expenses and interest.

I understood when I went to law school that I would be racking up that much debt, but, because of what the admissions departments told me, I thought that I would be able to find a job that would make it fairly easy to pay off my debt in a reasonable time. The school I went to advertised an average salary after graduation of $100,000. Like most people, I considered myself better than average, so I thought I’d be able to bring in $110,000 to $120,000 per year pretty easily. So I thought, if we continued to live humbly, I could pay off my debt in 3 to 5 years. Well, that’s not what happened.

Why? There were a few key things that none of the law schools I applied to mentioned. First, while some first-year attorneys make up to $180,000, that is only in the largest markets (New York, L.A., etc.), where the cost of living negates a large portion of that impressive number. Second, the only firms that pay that kind of money demand that you work ridiculous hours. 3500 hours per year requirements are not uncommon. Third, attorneys who take those kinds of jobs develop very few marketable skills during the first five years of their practice because they are stuck at their desks doing research most days. Fourth, the vast majority of attorneys who take those kinds of jobs leave for more reasonable, and less-paying, jobs within 2 years. Last, the schools don’t tell you what kind of interest rates your loans are going to be at. In my experience, it is not uncommon to have loans up to 8%.

In other words, what the schools don’t tell you when you’re applying is, that to make a reasonable return on your investment, you have to take a job that you’re probably going to hate.

So here I am, after 3 years of grueling school, with more debt than I ever thought I would have, making not that much more than I would have had I continued in my prior career. You might be thinking, “well, you must have gone to a crappy school, or you must not have done very well.” Admittedly, I did not go to Harvard, and I did not graduate magna cum laude. But I did go to a well-respected school that has consistently ranked in the top 20 in the country (out of more than 200 law schools nationwide). And I graduated in the top 1/3 of my class with several accomplishments and honors.

What’s the lesson here, from a financial perspective? Don’t get caught up in the numbers the schools publish. Do your own research, and ask hard questions of the admissions folks to see what “lies behind” the numbers. Ask if you can contact some recent graduates that are making what the school says you can make. Call those folks, and see what they had to give up to make that kind of money. If you don’t want to work in a city like New York then contact some graduates who are working in the area you want to live in and see what kind of money they’re making. In short, don’t get caught up in the hype.

¹ This article is entirely one-dimensional, in that it addresses only the financial aspect of post-graduate education. Whether to pursue post-graduate education is, of course, a very complex decision that involves social, family, religious, and other considerations along with financial considerations.

² While I speak entirely from my experience in law school, I think my point applies to many types of post-graduate education. For example see, this article.

~D. Adams