Midland Asset Management

There appears to be a perfect storm, of sorts, with those considering a college education: 1) college costs have risen dramatically; 2) job opportunities are declining ; and 3) student debt levels are at historical highs.

Data from the College Board suggests that $100 billion was taken out last year in student loans and that debt is to hit $1 trillion for the first time ever this year.  According to Mark Kantrowitz, publisher of FinAid.org, 40 percent of college graduates can’t afford to make their student loan payments and are delinquent, deffering or in default.  He says that the real issue for borrowers is the lack of jobs available after graduation, and those who have jobs are underemployed.  Today students are borrowing twice the amount in student loans than they did just ten years ago with tuition costs rising faster than inflation.   The College Board reports that the cost of in-state tuition at a four-year public university has jumped 8.3 percent in the past year.  Universities have unfairly raised education prices greater than what students could earn after graduation.   Many students leaving college today have degrees without a clear application to the workforce.   In the current environment with lower GDP growth than in the past, students and/or parents should consider  how much to spend on a college education and for what purpose.   Some parents can afford $220,000 for a philosophy degree from Princeton (true story) but most cannot. 

Obama’s loans initiative attempts to alleviate the student loan debt crisis by forgiving student debt after 20 years as compared with 25 years under current law.  In addition, the cap on student loan payments will be lowered to 10% of disposable income, decreasing it from the current cap of 15% of disposable income.  Critics say that this plan is simply a new version of the old plan and some accuse Obama of passing this bill in order to regain the dwindling support from young people, who were instrumental in his 2008 presidential election. 

Before a parent or student decides on whether a college education is worth the expense and effort perhaps everyone should consider some version of this question: How does the college education machine work and how am I am going to profit and/or be happy from it after graduation?  Egos should be set aside.  Biases should be set aside.  Just an analysis of the facts, the current/future economic environment, student’s goals and student’s/family budget constraints.

Bottom line: A college education can be worthwhile if the decisions are made looking forward while accepting responsibility for your actions.

Always Asking, Never Assuming™

Christopher Holtby

Investing in a qualified tuition plan created under the IRS tax code (section 529) has one main challenge – changes to the investment allocation can be made only once per calendar year.  529s are still a good wealth transfer strategy.  However, as the global stock and bond markets shift, the ability to increase or decrease risk exposure by shifting asset class is limited to just once a year.  There are several options to deal with this limitation:

1) Take a conservative bond allocation, plan for a lower expected rate of return and review the allocation decision once a year.  Utah’s 529 plan allows FDIC-insured CDs in their 529 plan.

2) Shift the underwater 529 plan (asset value lower than the contributed value) to another state’s 529 plan, and the investment loss could potentially be claimed as a miscellaneous itemized deduction.  There are several challenges with this plan of action: 1) if you have more than one 529 account for a beneficiary, all accounts need to be liquidated for that beneficiary to claim the loss, 2) if you took a state income tax deduction, you may have to pay that back, which requires amending tax returns, 3) if you invest in a similar investment within 30 days, your loss maybe disallowed under the wash sale rules, 4) if you take the loss, and put the money back into another 529 plan, this could cause gift tax problems, and 5) miscellaneous itemized deductions don’t benefit you if you have to pay AMT.

Bottom line:  Investing in 529 plans has three variables: time, return and future dollar value.  Decide for which of these variables, if any, you can withstand a great degree of uncertainty.       

Always Asking, Never Assuming™

Christopher Holtby

Right now, there are a whole lotta families waiting for the 9/30/08 college investment statements.   There are two types of investors – those who make monthly contributions and those who’ve contributed a lump sum. 

The lump sum investor situation depends on a few factors: 1) Did they contribute the 5 year limit of $60,000, 2) How did they invest the money – age or risk basis, 3) How old is the child, 4) How many other people can or have contributed to the plan, 4) How much is the child expected to contribute towards college expenses, 5) What are the return and college inflation costs used in the college planning, etc.    The key here would be for parents/grandparents/guardians etc. to review all the assumptions upon receipt of the 9/30/08 statements.   Deficits can be made up either through more contributions (following the rule of law), accepting that junior will be working in college, junior will have a loan to deal with, junior will not be attending a high priced university, etc.   You had assumptions for the future; review them as well as your timeline and move forward accordingly.  If the news is bad, the worst financial decision you can make is just hope it gets better, rather take a logical approach as discussed above.

The monthly contribution investor situation is better.  They have purchased college funding assets all the way down.   They need to go through the same review as above, but they have not blown their options as the above.  

Review your assumptions and act accordingly. 

Christopher Holtby