“In the cold northern wastes there is a mountain a thousand miles long, a thousand miles high. Once each thousand years a small bird flies north. This small bird flies north to sharpen his beak on the cold hard stone of the mountain. When the mountain is thusly worn down, one second of eternity shall have passed.” –Tibetan Poem

(For years, in this blog we have advocated the extraction of the maximum equity from your home and withdrawal from your qualified plan. Take these funds and place them in a tax free investment vehicle that is not a countable asset for college funding, Medicare or Social Security. Contact us for more information.)

Colleges that use the FAFSA will determine financial needs based on your expected family contribution. The formula looks like this: Cost of Attendance minus Expected Family Contribution equals Financial Need.

Do not be tricked into putting a lot of assets into a child’s name. If you do, colleges will demand:
• The child use 35% of their assets for college before any aid is given to the family. If the asset is held in the parent’s name, then only 5.6% of that asset must be used before aid is given.
• If the child does not go to college, they can spend that asset as they please. Remember: You gifted the asset to them. Let’s see…would the child choose a new red sports car, or, would the child use the money for college? DUH!

Many private schools use the institutional method which counts home equity as an asset. If you have, say, $300,000 of home equity, it will be assessed at 5.6%, which means a difference of $17,000 in expected family contribution you will pay before getting any aid.

Keep in mind, many private schools cost in excess of $53,000 per year (without taking into consideration personal expenses of the child; e.g., football game tickets, new clothes, special events, etc.). Add in your retirement plan assets as being assessed in the formula, and parents will have a huge amount of Expected Family Contribution.

Public schools are making it so students have to go five or six years to complete their degree which pushes up these costs, also.

The best time to start saving for college is before the newborn leaves the hospital to go home with you.

1.) The 529 plan:

Although the plan formats are fine, the overall performance has been less than stellar. Most fund companies, i.e., Vanguard, Fidelity, etc., will make a proposal to be a state’s custodian for the plan. Knowing they will be presenting to the state bureaucrats, the investment options presented by the custodians are usually the most conservative performing funds. If approved, then the bureaucrats usually choose the most conservative performing fund of the conservative performing alternatives. Consequently, the returns have been below what one could obtain in the other alternatives.

2.) Funding:

Some people have had a difficult time funding the 529 plan. Suggestions have been to use a UPromise program (www.upromise.com) or Little Grad (www.littlegrad.com). These programs allow for rebates on items purchased. Use the rebates to help fund the 529 plan. Call on family members or friends to help in the funding. Also,Freshman Fund (www. Freshmanfund.com) lets people contribute online to any 529 plan.

3.) …Here is an alternative:

If a parent has an incorporated business (part or full-time), pay a child’s wages into a Roth IRA. Those monies can be used tax-free for qualified education expenses.

With 4 years at a prestigious, private school, the costs will exceed $225,000, not counting all the miscellaneous expenses, it “pays” to plan ahead. In 10 years, these 4 years of college costs will easily exceed $500,000, according to FinAid.org, a nonprofit scholarship website. A person with 3 kids can expect to shell out $800,000 to $1 million, not counting graduate school.

To assist in getting financial aid, parents may have to do financial repositioning. This includes the way business assets are titled and restructuring so they are “off” the financial radar screen. Also, consider reducing the amount of money in a child’s name. Colleges expect “junior” to use 25% of their money to pay for school. So, if the child has $10,000…he or she is expected to pay $2,500 per year.

Financial aid officers are now looking at a family’s home equity and demanding that it be used before a penny of aid is given out. So, keep that mortgage high, and place those monies into an investment that is not considered a countable asset. (Hint-hint-we have spoken about it many times here. Go to my other blog site – http://www.wealthyfutureblog.com or call us for help).

Lastly, like any investments, consider the cost-benefit analysis: Let us say your child wants to go to a university today that costs $55,000 per year ($220,000 total) and declares a Psychology major. You will end up with college debt in excess of $100,000 or more, and your child can expect to earn $30,000 per year. Many studies show people with the same degree are making the same salaries, regardless of whether they went to a state university or an Ivy League school.

Folks, don’t fool yourself, simply because the kids are staying at home instead of at a dorm, does NOT lower your expenses. Heat and air conditioning are going to explode as well as your grocery bill. At home, actual room and board expenses are usually higher than at college.

The fatal statement I hear from parents is that these college expenses can NOT keep up like this in the future. Oh No? Costs for college are tied in to what average incomes are. Back when I went to college (yes, there were colleges back then), my undergraduate costs were $3,500/year when average incomes were $5,000/year; about 70% of incomes. Today, my alma mater states that the total student costs run about $35,000/year when average household incomes are at $50,000/year. So, it is the same 70%. I choose not to discuss the costs at Harvard, Yale, MIT or Stanford, etc.!

The College Board just issued a report that “A child born in 2010 that begins kindergarten in the fall of 2015 would attend college between the years of 2028 and 2032. If that child attended an average private 4-year college and if the annual price increases for private colleges experienced over the last 30 years continued into the future, the aggregate 4-year cost of the child’s college education (including tuition, fees, room & board) will total $506,423 or nearly $127,000 per year.”

So, when do you begin to save for the kid’s college….when you hear 2 sounds…”slap” and “waaah”. Just think, for the first year of college, $127,000, 18 years from now in an 8% return investment requires a $283/mo. to be set aside immediately after hearing those two sounds. Remember, that is for year 1 only. Multiply that times 4 years and times 3 kids…and the kids say… what have you done for me lately, mom and dad”.

May I suggest you have the kids borrow from your Family Empowered Bank and not just give them the money. Make them repay the loan with interest. Since the U.S. Government recently took over control of all student loans, your child probably won’t qualify for a student loan because they do not meet the agenda (quota) of the Government. Also, too many parents think their kids will get all their money from scholarships. Fat chance! Why not interview 10 parents in your local community or church and find out how much their kids actually got in scholarships. I asked one man who said his son got a full football scholarship. So, I asked, you mean you pay for nothing for him to go to college. He confessed he pays $18,000 per year. So, it depends on what the word “is” – is!

Funny, isn’t it, once you graduate, your college calls yearly for more money from you for the annual fund raising. Hmmmm…these colleges are starting to act like the IRS – They want money every year from you.

I remember, many years ago, when Ross Perot was running for President of the United States. He uttered one line that stuck with me …”Give me an immigrant (legal); I’ll back him financially, and, we will both become millionaires.” In my own lifetime personal studies, I have found the further away (number of generations) Americans are from their immigrant ancestors….the fatter and happier they are (I do not mean waist measurement). So, take a look at being a banker via Microfinance.

There are about 4,000 registered microfinance banks that make small loans to entrepreneurs in developing nations (many times, comprised of women in small villages who cannot get money from traditional banks). The purpose of the loan is so they can start up a new business or expand an existing one. The business may be as simple as sewing clothes, raising chickens or selling food in a local market.

The interest rates charged by microbanks may be in the range of 30% to 40% because of the high costs to service the small loans. Although these rates seem high by our standards…they are much less than black market “loan shark” rates.

As the loans are repaid …and… they are…the microbanks put the money back to work and pay out a reasonable return to you, the investor. There is about a 5% default rate, so, 95% of the loans are repaid. The interest paid out to investors is in the mid to high single digits.

Here are some examples:

• A 5-year note by MicroVest paying 6%.
• A senior tranche by FINCA was paying 7.5%.
• Those with, say, only $1,000, can take advantage of Community Investment notes offered by the Calvert Foundation.
• You may want to look at the Global Impact Investing Network (GINN).

Do your research online. There are a host of avenues in which your money can help another person, in a remote place in the world, and have a chance to improve their lives.

Instead of you being a borrower, think of investing and being a lender. (Remember, when you put your money in a bank you are actually lending money to the bank.)

Look at Prosper (www.prosper.com) which is a loan auction site, or Lending Club (www.lendingclub.com.) There you will find daily new borrower requests. There is a 1% loan servicing fee that is charged and an average 1% lost to defaults (people who do not pay.)

There are good credit risk borrowers that are in need of money since the spigots have dried up with the banks.

Here are some other sites to investigate….Loanio (www.loanio.com,) Pertuity Direct (www.pertuitydirect.com,) Virgin Money USA (www.virginmoneyus.com.)

Overall loans can be as small as $50 with the average about $5000.

Some helpful hints from people who “play” the loan market:

• Do not lend to borrowers that have a primary desire to just pay off a single high interest rate card
• Look at those that want to clear all debt
• Do not lend for new cars….maybe a used one
• (See Barron’s August 17, 2009, “A Booming Loan Market”)

Some have done well by financing students….see Fynanz (www.fynanz.com) and Greenmute (www.greenmute.com.) Also check out Prosper’s site to figure out the risk involved.

If your flavor is in international micro-business lending….check out kiva.org or MicroPlace (www.microplace.com.)

Figure you must spend at least 1 hour per week managing the portfolio….but you may be able to “bank” on some global returns.

HOW MUCH SHOULD I SAVE?

The size of the fund depends upon the number of children, their ages, educational plans, school selection, scholarships and student loans that may be available to them, student earnings and the amount of family income.

It also depends upon the attitudes of the family toward education. Some people feel they should provide their children with all the education they can profit from and want. Others, however, feel that children should earn at least part of their educational expenses themselves. If costs are substantial, it may even be necessary for a major portion to be financed by student loans.

HOW TO FINANCE A COLLEGE EDUCATION

Since loans must be repaid, many parents would like to avoid having their children start out heavily in debt. The payment burden can be substantial for a young couple, especially if both have education loans. There is also the idea that older children should help send their younger brothers and sisters through school after their parents have helped them. However, this is not a reliable source of funds because the siblings may not have the ability or willingness to provide this support.

The types of schools and graduate schools the children plan to attend also have a considerable bearing on the costs involved. An investment fund for educational needs is a relatively long-term objective, and it should be set up so the fund, hopefully, will not be needed in the meantime. Therefore, a less conservative investment vehicle seems justified in order to secure a more attractive investment yield. However, it would be unwise to speculate too aggressively with more than a small percentage of the fund.

A two-parent, middle income family (with income from $56,870 to $98,470) can expect to spend $221,190 ($291,570 inflated) to raise a child born in 2008 for the next 17 years. This amounts to $11,610 to $13,380 per year based on the child’s age.

The USDA states that a family with income over $98,470 can expect to spend $366,660 raising a child for 17 years. This does not include any private school or college costs.

You can see the full report and online calculator at www.cnpp.usda.gov.

And don’t you love it when your children say to you … “what have you done for me?”

It is not a new concept but many people do not know about it. The current Social Security system allows individuals to claim reduced, early retirement benefits beginning at age 62. Individuals who wait until their full retirement age to collect and receive about 30% more in monthly benefits. If they wait until age 70 to collect, their benefits will be about 60% larger than at age 62. So what should you suggest your clients do?

Assuming a normal life expectancy and using the interest rate on government bonds, the actuarial present value of lifetime benefits are the same for those taking early retirement as for those waiting to take benefits at a later age. Of course, if one’s life expectancy is not normal (due to illness or bad luck or particularly good genes or good luck) one retirement age will look more attractive than another.

Look at going for the best of both worlds: retire at age 62, then pay back and reapply for Social Security benefits at age 70 if you come to regret your early decision.

A couple claimed their Social Security benefits at age 62 and now they each receive reduced benefit of $13,250 annually (in 2008 dollars). If they had waited until their normal retirement age (65) to collect benefits, the couple would each receive $18,928 a year. If they waited until 70 (this year) to apply, their benefit in 2008 would have been $20,693, thanks to the delayed benefit credit. If they choose to pay back the Social Security benefits they have received over the past eight years, they will each receive the much higher benefit for the rest of their lives. If they take this option, each would repay $94,556 to Social Security. They would then each begin receiving $20,693 a year (the same as if they had waited until age 70 to begin receiving benefits); and as a result, they would have approximately 56% more in real Social Security benefits every year for the rest of their lives. “Essentially, the government has given them an interest-free loan.”