College, Financial Planning, Kids, Saving, Students
February 06, 2020
Listen to Podcast Episode:
In this special podcast of Ask Suze Anything, Suze interviews the nationally recognized expert on student financial aid, scholarships and student loans, Mark Kantrowitz.
Suze Orman's Women and Money podcast is proudly sponsored by America's credit unions. The Perfect Home for Your Money. Suze Orman here and you are listening to the Women and Money podcast. So on today's podcast, I'm going to do something I have never done before. I'm going to interview somebody, and not only am I going to interview somebody, I'm going to interview a man. And the reason that I'm going to be interviewing this man is, without a shadow of a doubt when it comes to the topic of student loans, 529 plans, anything to do with that, which happens to be the number one concern, according to surveys on people's minds right now, there is only one person, one person in the entire world that you should be listening to. And it is Mark Kantrowitz, and I am sitting here with him right now. He is the publisher of www.SavingForCollege.com. Now, for how many years have I been telling you, you want information on 529 plans, go to SavingForCollege.com. Oh, you want to know about loans and things and how you shouldn't screw up your 529 plans? Go to SavingForCollege.com. So I thought, rather than sending you right now anyway, to SavingForCollege.com, I would bring the brains behind SavingForCollege.com to you.The other reason that I wanted to do this is because I get that the title of this podcast is Women and Money. But I want to be very clear about this because I know I kind of joke and I say "and the men smart enough to listen." Sometimes it is really important that we listen to men that are smart enough to teach us what we need to know, and Mark happens to be that man. So, Mark, how does it feel to be the only interview I've ever done on the Women and Money podcast?I'm extremely flattered.You should be, boyfriend, you should be. You know, we've known each other for years. This is the first time that we've met face to face, and I'm cuter in person, aren't I?Yes.Yes, I know. He's just saying that because he wants me to give him a good interview. If you were going to tell families, mothers, fathers, even the kids that are listening to this podcast one thing, the most important thing that you could possibly tell them about a student loan, what would it be?Minimize your debt. Savings is the antidote to student loan debt, so the sooner you start saving, the more money you'll have. Every dollar you save is a dollar less you're going to have to borrow.I have been known for saying that I personally believe student loan debt is the most dangerous debt one can accumulate, bar none. There is nothing more dangerous than student loan debt. Do you agree with that or disagree?I think that student loans if they're borrowed in moderation, are a reasonable way of investing in your future. But while some people characterize them as good debt, too much of a good thing can hurt you. So you should aim to have no more student loan debt at graduation than your annual income.And when do you figure out what your annual income would be? Most of these kids that are going to college today, they don't know what they want to be, they don't know how much money they're going to make. They have this fantasy that if they go to this school and the school has a reputation that it's going to place you, and it's going to get you a great job that therefore it is worth spending $200,000 to go to this school. What would you say to that person?Well, I'd say that you don't need to go to the most expensive school in your field. You can get a great quality education at an in-state public college for a quarter to a third of the cost. Be realistic about your ability to get a good job after graduation and see what current jobs are in that field. Go to www.salary.com, www.payscale.com, www.glassdoor.com, to see how much people are actually earning.What would you tell people? Because a lot of the people that are listening to the Women and Money podcast already have student loans, and they have parent plus loans at 7.08%, they have regular Stafford loans at 6%. They've never refinanced them, they're paying these loans. Would you be refinancing given interest rates are so low right now, would you refinance and when would you refinance? And who would you refinance with?Well, I'd be careful about trading a fixed-rate loan for a variable rate loan because the variable rates have nowhere to go but up. I would look for a fixed rate that is two percentage points or more below the fixed rate. As a fixed-rate, the current fixed rate that I'm paying, and I'd shop around.So if I have a loan right now for 6% you would have me go and look somewhere for another fixed-rate loan, you would have me refinance it for 4% or less, right? Where would you have me look for that?Correct. Well, unfortunately, a lot of these comparison sites are focused on selling you a refinance and not necessarily the best one. So there are a lot of lenders out there and you can shop around, look at the various lenders and see what they're going to offer you. There's no upfront pricing for a lot of these lenders, so you have to apply, see what the rate is, and if the rate isn't that much better, don't refinance.But most of these people say to me, Mark, they don't even know where to go to look to begin. You know, they write to me and they say, Suze, what do you think of College Avenue (College Ave)? Suze, what do you think of Discover? Suze, what do you think of SoFi? Suze, what do you think of Sallie Mae? What do you think of any of those names that I just said?So I do have a website, www.PrivateStudentLoans.guru that lists all of the private student loans, and I don't get paid by them. It's a free site, I just did it to tell people.How come I never knew about that?You never asked me the question before.Oh, geez, OK, fine. So PrivateStudentLoans.guru. Can you believe it? Do you know how many people I could have been telling about this? What is wrong with you? See, anyway? All right, if they go to PrivateStudentLoans.guru they will see a list of all these private student loan companies that they could possibly refinance with. Could they finance with them, to begin with?Some of them will originate new loans, some of them will refinance and some of them do parent loans. Not all of them do every single type.Do you have a favorite among them all?Not really, and I tend to like the ones that provide discounts. So when Discover does a discount or College Avenue, it gives a more flexible loan.What does that mean when you say a discount?Well, they'll reduce the interest rate if you sign up for auto-debit. Discover, I think, I don't know if they still do, they had a graduation discount. So when you graduate, you get a reduction in your interest rate or some other financial benefit. So I like it when the interests of the lender are aligned with your own best interest.And do they base these interest rates on somebody's FICO score?Yes, all of these are credit underwritten. The better your FICO score, the lower the interest rate you're going to get, the more likely you are to be approved.And when you say the better your FICO score. Somebody came up to me yesterday and said, Suze, I have a FICO score of 680, do you think I can get a reduction in my interest rate if I refinance my student loans? I said I don't think so, 680 is not a good enough FICO score. Do you find that to be true? What do you think that they need as a FICO score to be able to refinance?I think the average FICO score among those who refinance is somewhere around 780, 790. And, that's often people have degrees that are worth more in the marketplace. So these are people who are "HENRY's," high earners not rich yet. And so they're very low risk for the lender. The lender can give him a better rate and on the lender makes a lot of money off of them.And what do these kids do? Like, I spoke a CUNY yesterday in New York, and my heart broke. This woman raised her hand and she said to me, Suze, I have $250,000 in student loans. Before she even went on Mark, I said, and I know, you went back to school to get other degrees because you didn't know what you wanted to be. So, you kept going back to school, accumulating more student loans just to see if you could figure it out, and now here you are stuck with $250,000 in student loans. And she still doesn't know what she wants to be, she's not earning money, she doesn't know how to pay it back. What do you tell somebody like that?Well, if these loans are federal loans she should look into an income-driven repayment plan that will base the monthly payment on a percentage of her income as opposed to the amount she owes.And when she does that, so here's an example, you have $250,000 of student loans. On a standard repayment method, which is over 10 years, which is what, hopefully, all of you are able to repay your loans on, a standard repayment method. Your payments would be about, let's just say, $2500 month. She gets a job and she's making X amount of money, and she's paying $100 a month towards her student loans. Let's just say that's true. Is it not true then that $2400 a month, the difference between what she should be paying on the standard repayment method and what she's paying on the income-based repayment method, the difference, in this case, it would be $2400 a month. It then gets added to the back end of the loan plus interest. And 20 or 25 years from now, when it's forgiven, she's going to owe ordinary income tax on that money.So she's substituting a tax debt for a student loan debt. Now, at some point, Congress may decide to allow that forgiveness to be tax-free. In the interim, if she's insolvent, if her total debts exceed her assets, the IRS in some cases will forgive a tax debt.Now, this is really important what Mark just said because many of you don't know this out there, and I'll let Mark say it once again. But this is about when you owe more than what you make, there is a law that allows the IRS to forgive it without you having to claim bankruptcy. So say it one more time, so they get it, Mark.So if your total debts exceed your total assets…So, you owe $250,000 in student loans in 20 years from now and that's what they're forgiving because you're on the income-based repayment method, and your total assets, meaning the equity in your house, the equity in your car, the bank accounts… Now, do your retirement accounts count towards that?No.Thank you. So your retirement accounts do not count, which is why I'm just going to say this now. It's better to get as much money as you can in retirement accounts because when you claim bankruptcy, retirement accounts aren't touched in most cases. And in this particular case, if you have a lot of money in a retirement account and now you're in a situation where your income, where your student loan has been forgiven but you owe income tax on $250,000, or whatever amount it is, the amount of money in your retirement account isn't going to be calculated. So, it's the equity in your home, the equity in your house, what you have in a savings account. What else?Um, bank accounts, brokerage accounts, and any money that is essentially available to you. So they compare your debts after the forgiveness with your assets, if your debts exceed your assets, you may be able to get that forgiveness tax free.What happens though, to somebody, they owe $30,000 at the end, $50,000, $100,000 and now their assets actually exceed what they owe? They're going to owe ordinary income tax on that money, and it will be due and payable in one year. Or can they spread that tax liability over a number of years?Well, you can make an offer in compromise with the IRS. Otherwise, you can negotiate a payment plan with the IRS.At what interest rate? If it were right now, do you know what the interest rate would be?I don't have that off the top of my head.Oh, my God, I finally just asked this man a question he didn't know the answer to. In all the years I've been asking him questions, he's always had the answer. Don't feel bad. Somebody asked me a question the other day and I go, I have no idea what you're talking about. So anyway, it happens to the best of us. So what Mark just told you is something you all need to write down and you need to remember because a lot of you are forced to go on the income-based repayment programs that are offered by student loans and down the road, if you find yourself in a situation where, when it's forgiven, you owe tax on that money, you now possibly have one out. If your debts exceed your assets, you could negotiate with the IRS, that's possible. Or, maybe the tax laws will change if the right people are voted into office.You need to apply pressure on your senators and representatives to get them to do the right thing.What else do you want them to know? Here you are, and you could tell all these people listening right now anything you want. What would you want to tell them?Time is your greatest asset. So the sooner you start saving, the better off you'll be.And what would you tell a parent that doesn't have any money saved for retirement, they have no emergency fund, they have no home that they bought, they have nothing, but yet they want to save for their kid's college education? The kid was just born, and that's where they want to put their money. What would you say to them?Well, the first thing they need is an emergency fund with half a year's salary. That way, if they lose their job, it will tide them over until they get back up on their feet. Then, you need to maximize the employer match on contributions to your retirement plan. Because that's free money, and nothing beats that. Then you can start saving for your children's college education. When you have a baby shower, ask for contributions, ask them to give the gift of college. When your baby no longer needs diapers, that's a few $1000 a year, put that money towards their college education. And no matter how much or how little you can afford to save, get started because it's easier to increase the amount you save once you're already saving, then to go from nothing to a large amount.And the number one question I am asked is, where should they save and where should they not save?Well, I recommend saving in a 529 college savings plan.Why?Because they are tax-advantaged and financial aid advantaged. It's after-tax money, just like a Roth IRA. The earnings are tax-deferred, and if you use them for qualifying higher education expenses, they're entirely tax-free. An additional benefit is there are more than 30 states where you can get a state income tax deduction or tax credit on your contribution to the state's 529.And is that only true if you're a resident of the state that you contribute to? So if I'm a resident of X, do I have to contribute to X's 529 plan?In most cases. There are seven states have tax parody where you can contribute to any state's plan.Do you have a favorite 529 plan? Like if… Do you have kids?I have kids.Which 529 plan do you use?Well, I have two. I started off in Pennsylvania's because I was living in Pennsylvania at the time, and now I'm contributing to Illinois'. They're both good plans, they both have state tax breaks and they have a good mix of investment options. I particularly like age-based asset allocations because they start off aggressive and as a child gets closer to college, they become more conservative. About 2/3 of families are in an age-based investment path, and I like it because you can set it up automatically so you don't have to think to save. Once a month, they just take the money out of my bank account.And so here you are and you're saving in a 529 plan for your kid's college education, and now the markets start to crash. Let's just pretend we're back in 2006, 2007 again, and our kid is going to school that next year in 2008. What would you have advised them to do at that point?Well, don't panic and stay the course. Just continue investing because after enough time passes, the investment will regain its value.So if it's my kid, I have all this money in a 529 plan and my kid needs it starting next year when you're in an age-based plan, a lot of it will be in cash for them to go, so they'll be OK no matter what?Correct.And is that why you like an age-based plan?Right, because when the child's young, you have more time to recover from any downturns, and you haven't saved us much. So if you have a big loss, the stock market drops in half, you haven't lost that much money. And as college approaches, it shifts to a more conservative mix of investments, more cash, more short term funds, bond funds. And so it's protecting the investment. So, if the stock market goes down by 50% you might lose a little, but you'll still have most of the money.And when choosing a 529 plan, does a state just have one plan? Or can you do an Illinois plan with Vanguard, an Illinois plan with such and such? Are there different plans in a state?Some plans have multiple plans. Some also have both a direct-sold plan and an advisor-sold plan. The direct-sold plans tend to have lower fees.So a direct-sold plan is one directly sold to you by the company itself. So it's not hiring advisors, it's not paying salespeople. So those are the type I'm telling you I would be looking at. I doubt highly I personally would ever buy a 529 plan through an advisor. Why pay an advisor to sell you wonder when you could buy the exact same thing directly? Would you tell them that, the same thing?Yeah, I'd basically recommend the same thing. Sometimes people like the extra hand-holding that they get from a financial advisor or they're already using a financial advisor.But the financial advisor, Mark, has absolutely nothing to do with the investments within the 529 plan. So it's like a car salesman, you know. A car salesman, I always say, has nothing to do with the performance of the car. The mechanic is the one that you really want to get to be friends with.Well, I think that when the market goes down, they can provide you with the reassurance to not pull out all your money and lock in the losses. So there is some value to having a financial advisor.Or, you can just listen to the Women and Money podcast with Mark Kantrowitz from SavingForCollege.com here, and he just said, when the market goes down and if you're in an age-based plan, you don't need reinsurance, just know you're going to be OK. And in fact, if you have years to go before your kid goes to college, they're not going to college let's say for another 10 or 15 years, you should want the market to go down. Because the more the mark goes down, the more shares you buy, the more shares that you get to buy within the plan, eventually it comes back, and the more money you'll have.Or, you could do what I do, which is when the market goes down, I increase my investment.You see everybody, that's how you do it.Tell people the difference between a 529 college savings plan and a prepaid plan. Do all states have prepaid plans?No, 13 states have prepaid plans, most are only available to state residents. A prepaid plan is providing peace of mind that a year's tuition is always going to be worth a year's tuition. But usually, you're paying a premium on top of that year's tuition to make up for the shortfall in investments. And so, from a financial point of view, the 529 college savings plans usually have a much better return on investment.So now what was just interesting, did you all hear what Mark just said? A prepaid plan is simply you're pre-paying for a college that you're kid is going to go at some time in the future, and it's guaranteed that they're going to go for that amount of money. However, they charge you a premium to do so. And if I heard you right, Mark, you said you prefer 529 college savings plans because they have a better return in the long run. Did I hear that correct?Yes, you get more money in the end from a college savings plan, especially if you manage the risk appropriately.So you have people that are always saying to me anyway, Suze, what if my kid doesn't go to college? I have all this money in a 529 plan. What if he or she doesn't use it? Tell them the things they could do with it if the kid doesn't go or they don't use all the money that's in the 529 plan.So if there's leftover money in a 529 plan you can change the beneficiary to a sibling or to their children, to your grandchildren. You can just keep the money, and there's no age limit that says you have to take the money out by a particular age. Um, it's a great estate planning tool.Why?Because it's removed from your estate.So if I die with money in a 529 plan, it goes to my beneficiary's tax-free?Yes.Did you all hear that? Did you hear that, everyone? Because that's a really important thing. So I could open up a 529 college savings plan, and the maximum is what to put in one?Well, the 529 plans themselves don't have limits, other than an aggregate limit for each state, of anywhere from $235,000 $529,000. But there is the annual gift tax exclusion of $15,000.Currently, yes.Right, so each parent can contribute $15,000 to each child or grandparent to each grandchild. So that's $30,000 that you can give as a couple. In addition, 529 plans have five-year gift tax averaging, which lets you give five times as much and then treat it as though it occurred over a five-year period.But if you do it that way, you can't put in money in the next year, and the next year, and the next year. So it's possible that I could with my spouse put at least $150,000 into a 529 plan, all at once. Name a beneficiary, a child for that or whatever it may be, with possibly no intention of using it for that kid's college education, letting it grow and grow, and grow, and grow, and never touch it. And upon my death name a beneficiary of that plan. Would it have to be the child?No, it could be the child, a grandchild.Could it be a trust?That gets a little bit more complicated, but it can be any person, and you can change the beneficiary to any relative of that beneficiary.So, I could leave it to my niece and as the beneficiary, even though she isn't going to go to school or use it for that, and upon my death, it's out of my estate taxes, and it goes directly to my niece, as state and income tax-free. Did you all hear that? So for those of you who have a lot of money, that's a brilliant estate tax planning tool.And it's a great way of leaving a legacy for your children, grandchildren, nieces, and nephews because even if they don't go to college, they may have children or grandchildren who go to college. And so that money can grow, and grow, and grow, and maybe even cover the complete college costs for those distant relatives.And, if they don't want to use it for a college fund after my death, they're not paying a penalty tax on it, they get to just take it out.Well, if they take a nonqualified distribution, the earnings portion of that distribution…The earnings portion, but the part that I put in is fine.Yes.All right, so there are so many things. What else do you think that the women and men smart enough to be listening should know? They're so afraid of making a mistake. Should it be in the parents' name? Should it be in the Grandparents' name? Should it be in the child's name, especially if the kid's going to want to qualify for financial aid? Any rules you want to give them there?Well if it's typically a parent-owned 529 plan with the child as the beneficiary, that is treated most favorably from a financial aid perspective. Or, if it's in a custodial 529 plan account where the child is both the beneficiary and the account owner. Those are treated as though there are parent assets on the free application for federal student aid, the FAFSA form, and that has a minimal impact on eligibility for need-based aid.But for the child, for that to be true for the child, it has to be both the beneficiary and the owner?Or, the beneficiary and the parent as the owner.Yes, but if it's just the kid, if you're going to give it to the kid, make sure that it's a custodial 529 where the kid is the owner and the beneficiary because otherwise, you could find them paying 20% against it, right?Right. And it's actually popular among grandparents who are concerned about a spendthrift parent. So if they're worried that the parent might take the money out of the 529 plan to buy a Porsche or big screen TV, they could set it up as a custodial 529 plan account. And since that child, that grandchild, is underage they need a custodian who could be the grandparents. So the grandparent can retain control over the account until the grandchild reaches the age of majority.And then when the child reaches, which normally is 18 years of age, then the kid gets to decide. But the kid could also then take that money and do anything they want with it, including not go to college. They could then take it out themselves and buy a Porsche or do anything they want.Right. So what some grandparents do is they become the account owner, but then you have negative impact on financial aid. Explain that to them.So if a 529 point account is owned by anybody other than the student or that student's parent, then distributions count as untaxed income to that student on the FAFSA, which will reduce aid ability by as much as 50%. That's a really big impact.So somebody has $10,000 that they're withdrawing from a 529 plan that's owned by Grandma, and the kid is applying for financial aid, it's going to reduce the financial aid by $5000. Right?Yes, but there are workarounds. So, if you're in such a situation, one possibility is to roll the money over into a parent-owned 529 plan. It's got to be in the same state because some states have recapture provisions. Another alternative is the FAFSA now looks at two-year-old income information, the prior-prior year. So, what that means is that if the child's going to graduate from college in four years, any distributions from a 529 plan on or after January 1st of their sophomore year in college will not affect their aid eligibility. Because the FAFSA is looking two years ago. So when they're a senior it's income from before January 1st of the sophomore year. Now, if they take five years, then it needs to be January 1st of the junior year.But the easiest way to do it is really, grandparents shouldn't own 529 plans for their grandkids.That is always the simplest solution.That's just the simplest thing. So remember that grandparents that are out there. All right, we're almost out of time. What else, is there anything else you want to tell them before we end?Free money first, so search for scholarships.Where's the best place to search for scholarships?There are about a dozen websites that are free, that's the most important thing that you're not paying to search a database. I think www.FastWeb.com is a good one. The College Board has its BigFuture website, that's another good one. So you search for the scholarships, if you have to pay money to get money, it's probably a scam. So avoid anybody who charges you money to search for scholarships or to apply for a scholarship. And apply to every scholarship for which you're eligible because the odds of your winning any one scholarship are relatively small. But the more scholarships you apply to, then gradually, your chances are of winning.Are you a firm believer that the school you go to doesn't make you, but that you make the school?Absolutely.If you had a child and you didn't have money and anything, would you have a problem with them going to a trade school or to a community college or to anything? But as long as they go to school to learn, right?Absolutely, and learning is an investment in your own future, and community colleges and trade schools are less expensive but can teach you a good skill. Um, and your in-state public college is usually your least expensive option for a four-year degree. So I also recommend looking at that. And I also recommend that instead of getting a heart settled on a single dream college, that you follow a pick-three approach. That you pick three dream colleges. That way, if you do, you're more likely to get in. And if you do get in, you're more likely to be able to afford one of them. There's an annual survey called The American Freshman that's run out of U.C.L.A. where they ask current American freshmen, which school did you end up at? Was it your first choice, your second choice, your third choice and so on? 94% ended up at one of their first three choices. So if you pick three, there's a good chance you'll be able to afford the college that, ultimately, is your dream school.So these kids that apply to 28 colleges, they're just nuts, right?The $1,000,000 scholar thing, I think, should be school counseling malpractice. Because then you have to choose which college after the fact, and you're spending $50-$100 on the application fees. That's wasting money that could go to paying for your college education.All right, everybody. So again, today was a first for the Women and Money podcast. I've done my first interview with Mark Kantrowitz who is the publisher of SavingForCollege.com. So you listen to me. You want information on 529 plans, you need your questions answered, you want information, you don't know what to do. Do not make a move when it comes to investing in a 529 plan, choosing a 529 plan, anything until you go to SavingForCollege.com. It will save you a lot of money in the long run, and really, it is now becoming your biggest expense, bar none, to send your kid to college. So can you at least do a little research with it and for your own future? Because, you know, the goal of this podcast is I want you all to be strong, smart and secure. And if you can't pay back student loans, you are not going to be any of those three. In providing answers neither Suze Orman Media nor Suze Orman is acting as a Certified Financial Planner, advisor, a Certified Financial Analyst, an economist, CPA, accountant, or lawyer. Neither Suze Orman Media nor Suze Orman makes any recommendations as to any specific securities or investments. All content is for informational and general purposes only and does not constitute financial, accounting or legal advice. You should consult your own tax, legal and financial advisors regarding your particular situation. Neither Suze Orman Media nor Suze Orman accepts any responsibility for any loss, which may arise from accessing or reliance on the information in this podcast and to the fullest extent permitted by law, we exclude all liability for loss or damages, direct or indirect, arising from use of the information. To find the right Credit Union for you, visit https://www.mycreditunion.gov/.
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