Financial Wellness @ Work

Just Say No

I am a child of the 80s. I grew up on Happy Days, Falcon Crest, and Family Ties. In between these shows, inevitably a commercial would come on with a child being pressured into using drugs, refusing and looking into camera and saying no.  Read more

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Which Colleges Make The Best Investments?

With the rising cost of college, more students and their parents are rightfully looking at their of college in financial terms. In that spirit, I saw this report on the best “value colleges” by “return on investment.” This can be a much more useful measurement than simply looking at a school’s general “ranking” but there are a few thing to keep in mind: Read more

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Un-Crushing Student Loan Debt

Very often, I talk to people who have financial concerns that are weighing on them. I’ve noticed a correlation between the age of the person and the concern. Lately, a lot of people who are within a few years of retirement have been concerned about the stock market and relatively new hires who are just establishing a career have been concerned about their level of debt impairing their ability to make progress toward their important life goals.  Those are two mini-trends I’ve been seeing lately.  Read more

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Would You Turn Down All 8 Ivy League Schools?

That’s what a high school senior named Ronald Nelson did to accept a free ride at the University of Alabama. While very few students will be in Nelson’s enviable position, many families will have to decide between a more expensive higher-ranked school and a lower-ranked but less expensive school. With both education and student loan debt increasingly important factors to many young people’s financial well-being, this is not always an easy decision to make. Here are some things to consider: Read more

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How to Choose the Best Student Loan Repayment Plan

I had a conversation with a young man in his early 20’s recently who had just started his first “real job” and was about 60 days from his student loans going out of deferral. He was panicking because there are a whole lot of options to repay student loans today that didn’t exist when I had student loans. (My son would like to add that they also didn’t have electricity or cars when I had student loans.)

Looking at the options in front of him, I could understand his dilemma.  I had 2 options when I graduated – a straight 10 year term loan and a “graduated” payment plan that started with small payments and increased every 2 years to a level well above the standard monthly payment. Both of those options still exist today, but there are also many other choices. It is a very tough decision, and it can impact the next 10-20 years of cash flow. This is one of the biggest financial decisions a new graduate will make.

The young man I talked to had about $80,000 in student loan debt and had no idea what to do. So he came in and we talked through some options and did some number crunching.  Here are a few of his options, along with some financial highlights:

  • As a starting point, the fixed payment over 10 years would be about $925/month. A graduated payment for him would start at a more manageable $530 and eventually rise to $1,593/month. The flat payment costs $111,000 over 10 years while the graduated would require $119,000 over that 10 year window.
  • He has the option to do extended term payments, either at a fixed payment or a graduated payment. By extending from 10 years to 25, his fixed payment drops to $555/month but the total payments over the life of the loan increases to $166,000. In the graduated plan, he starts at $453 and increases over time to $793, and the total payments are $180,000. Lesson learned:  Extending the payments can help reduce cash outflow for those at the start of their careers, but the total cost of the loan rises substantially!  If there’s any way to afford the higher payments by not extending, don’t extend.  It’s a very expensive extension.
  • A relatively new type of option is an income-based repayment (IBR) plan. These loans are popular because the payment is limited to 15% of the borrower’s “discretionary income.” Discretionary income is defined as the gap between adjusted gross income and 150% of the federal poverty guidelines. For this young man, his IBR payments based on his $50,000 salary would be $400-$900 over the 225 month term of his loan as his income rises. He would pay $155,000 in total, which is more than the 10 year loans but less than the extended term loans. Lesson learned:  IBR is the “hot option” right now, but it isn’t always better than a straight standard term loan. Know your numbers and you may see a better option. This could be a much better option for borrowers who hope to grow their income over time than the extended payment plans.
  • Another relatively new option is the “Pay as You Earn” repayment plan. It is similar to the IBR but with a few differences. It’s more difficult to qualify for PAYE than IBR but the payments are 10% of discretionary income rather than 15%. Looking at his numbers, his payments would start at $270 and eventually move to $825.  After 20 years, he would have paid $121,000 and would have $66,000 forgiven at the end of his term. Lesson learned: This is a tough loan repayment plan to qualify for, but it eases the cash flow and makes the risk of default quite low. Of all the options, this one made the most sense for him. He can qualify for the lower initial payments and he can increase his payments as his income rises. He can also, with a low initial payment, add principal to each payment with the hopes of paying off the loans well in advance of the full term.

When looking at student loan repayment options, know that the world has changed.  These options are available through the Department Of Education and there are other newer options out there like www.SoFi.com, where borrowers can refinance without a bank being involved through peer-to-peer lending. This can be a great way for borrowers to get out of high-interest student loans. What I learned during my conversation with him is that the right answer is going to be different for everyone.  There is no single “best option.” Factors like current income, expected future income, cash flow constraints and other goals (buying a house or car) should be considered as well as things like affordability today, total interest paid over the loan’s life and total lifetime payments. It’s a complex web of options, but if you understand which factors are most important to you, the right repayment option should become clear once you start analyzing your real numbers. This post was originally published on the Financial Finesse column on Forbes.com.

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Should You Sacrifice Retirement to Pay For College Expenses?

Should you focus your financial plans on funding your children’s college education out-of-pocket or through parent loans? This is a question on the minds of many parents that I speak with on a regular basis (and also a question that I personally have to deal with having a third grader and a kindergartener growing up too fast). The retirement vs. education question gets even more challenging when children reach high school and the time horizon to save gets shorter. Read more

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College is NOT a Right

Today I met a man who is taking a rather practical approach to teaching his kids about college planning. This gentleman has three kids, the oldest of which will be going to college in a few years. He said something rather profound that made me reconsider how I’ve been talking to my own kids about college. He said, “College is not a right.” Read more

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Doing the Math on College Planning

During the holidays, I had so much fun visiting family as did many of my colleagues. So as we all got back into the groove of working, we shared stories of those sometimes amusing family encounters. Tania, our Atlanta-based CFP, talked about how it was wonderful seeing her cousins, who only a few years ago she was bouncing off her knee, now that they are all taller than she is (which isn’t a stretch since she is barely above five feet tall).  Here’s her story: Read more

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Why Your Choice of School Matters

I read this article about parents shouldering a massive burden for student loan debts for their children.This is currently a huge problem in the middle class.  Lower income families receive significant financial aid. Higher income families can support the cost of college out of cash flow. It’s the middle class that is getting hammered with this and it’s creating some ripple effects into other areas of life. I have talked with countless couples who are delaying retirement for 5-10 years in order to pay down student loan debt. They all hope that their employers keep them around that long and that they don’t get caught up in a downsizing or have serious medical bills like the family in the article. Read more

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Financial Finesse’s unbiased financial planning blog wins Gold for "Blog of the Year" in the 2014 Best in Biz Awards!

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