SMI Visitor's Weblog

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Investing in a graduate-level education

Last fall, in an SMI cover story, we asked Is a College Education Still Worth the Investment? Now, Morningstar is taking the question to the next level (literally) in an article titled, "Is Graduate School a Good Investment?"

Excerpts:

Is graduate school worth the cost?... Tuition costs vary widely between programs, but can run from $20,000 to over $40,000 each year, especially for business, law, and medical schools....

However, looking at tuition cost in isolation under-represents the true cost of attending. It's not just a matter of paying tuition at face value — other costs of attending, including books and room and board, can tack on thousands of extra dollars. Going back to school also involves an opportunity cost: You're giving up years of income while you're in school....

Your return on your education investment depends on how much debt you take on, the salary you sacrifice to go to school, what job you come out with, and the trajectory of your upward-mobility after your first position.

The article offers seven steps aimed at helping people make a wise decision about grad school. Here are a few of them:

• Don't jump in. Think about your career goals before returning to school and figure out if more education is the only way to get where you want to be. It's a bad idea to take on debt without a clear goal of what you're trying to achieve.
• Analyze graduate school debt versus job prospects.... This calculator from Kiplinger can help you evaluate how debt plus a higher paying job compares to your existing salary.
• Minimize costs where possible.... Consider getting a roommate and living somewhere inexpensive for a few years.
• Check with your employer if you're in a career that aligns with your educational goals. Some employers with help you pay for part-time programs if you continue working full time, while others will pay for full-time programs if you agree to certain conditions, such as working for the company for a number of years after you graduate.

In a sense, the decision about whether or not to invest in a graduate level education (or even an undergraduate education) is like every other investing decision. Going to grad school involves giving up something now — namely time and immediate income potential — in hopes of having a payoff later in terms of career satisfaction and higher income.

If you're wrestling with a decision about graduate school, we suggest you follow SMI's four guidelines for determining the "right" thing to do when making investing decisions:

1. The right investing decision is one consistent with a specific, biblically sound long-term strategy you've adopted.
2. The right decision is one you have taken time to pray over and about which you have sought experienced Christian counsel.
3. The right investing decision is one where you understand what you're doing, why you're doing it, and how you expect it to improve matters.
4. The right investing decision is one that is prudent under the circumstances.

One more guideline: As you wrestle through your decision, trust God to work all things together for good.

Harmful rule changes ahead for Education Savings Accounts?

One irritating thing about taxes — and anything related to taxes — is that the rules change with annoying frequency.

Case in point: several changes are likely to be forthcoming at year's end for tax-favored Coverdell Education Savings Accounts (ESAs). Certain provisions enacted by a Republican-led Congress in 2001 are set to expire, and at this point the current Congress doesn't seem inclined to renew them.

Although Coverdells have been overshadowed by state-sponsored "529" plans, they actually offer more investment flexibility than 529s, giving parents greater choice in where their money is invested. In addition, ESAs (unlike 529s) can be used not only for college expenses, but also to help pay qualified education expenses at the elementary, middle school, and high school levels. That's a great benefit for parents with children in private schools, as well as for parents paying for academic tutoring or extended-day programs.

Unfortunately, the "pre-college" aspect of ESAs seems likely to be on the way out. Moreover, contribution ceilings for Coverdell accounts, already not very high, could be sharply reduced.

Details from the Wall Street Journal:

[F]amilies planning to use a Coverdell account to pay for pre-college education expenses should think twice about opening or contributing to an account this year. Starting next year, withdrawals from Coverdells to pay expenses from kindergarten through 12th grade will no longer be tax-free, unless Congress acts to extend that benefit, which is not a sure thing.

Another prospective rule change would lower the limit on annual contributions to $500 starting next year, making Coverdells less useful for college savings. Already, the $2,000 limit has made Coverdells much less popular than 529 college-savings plans, which offer similar tax benefits for college costs and [have no federally imposed contribution limit]....

[Right now, i]nvestors can claim a Hope or Lifetime Learning tax credit for education in the same year they use Coverdell funds, as long as the tax credit and Coverdell money aren't used for the same expense. For example, an investor can take a tax credit for tuition in the same year he is using Coverdell money for books.... This is another benefit that could expire at year's end; the two tax benefits could become mutually exclusive.

The WSJ reports that Sen. Charles Grassley (R-Iowa) has introduced legislation that to preserve the pre-college benefit of Coverdell ESAs and keep the annual contribution cap from falling. But Joe Hurley, founder of SavingForCollege.com, is skeptical that Sen. Grassley's legislation will see the light of day — in part because many lawmakers don't like the idea of Coverdell accounts being used to pay for private school at the elementary and secondary level.

Mr. Hurley suggests either spending Coverdell accounts on K-12 expenses before the end of the year, or just accepting that the funds will have to go to college expenses later. He also points out that investors can move funds in Coverdell accounts to 529 accounts without triggering tax penalties.

That might make sense if the rules expire that currently allow people to use Coverdell funds and claim Hope or Lifetime Learning credits in the same year. Investors in 529 accounts have that same right, and [right now at least] it isn't at risk of changing.

Re-thinking higher education

"Is a college education still worth the investment?" That was the question we asked in an SMI cover story five months ago. Here's a quick summary:

In recent decades, going off to college has become the de facto expectation for students graduating from high school. A college degree is often seen as the key to launching a successful career.

But the exploding costs (and related debt) associated with getting a Bachelor's degree, along with relatively fewer attractive new jobs for college grads, should prompt parents and students to reconsider whether four (or more) years of college is the best approach to post high-school education.

If you haven't read the full piece, I'd encourage you to do so (or at least listen to the interview posted below). The article will give you plenty of questions to ask yourself and your student, and some of the financial statistics might shock you. For instance, did you know that it takes 14 years of work before the typical B.A. recipient reaches net-pay parity with a high-school-only graduate?

So given our view that it's healthy to at least question the true value of a college education, we were interested to see an article on the same topic in today's USA Today. The piece — What If a College Education Just Isn't For Everyone? — looks at some of the same pros, cons, and concerns.

One sentence in particular that caught my attention, "[W]hat's still getting lost, some argue, is that too many students are going to college not because they want to, but because they think they have to" (emphasis added).

All of this hits especially close to home for me. My wife and I recently discussed these same topics with our 18-year-old college freshman. He wasn't motivated, had no real direction, and was amassing debt (he's responsible for paying for his own college education). So he was paying for a degree he didn't care that much about because on some level — be it peer pressure, perceived family pressure, societal norms, whatever — he felt he had to go to college.

But it wasn't working. What did interest him, however, was an internship that recently opened up at a church plant in our area.

College will always be there, but this internship (and the doors it may open) won't be. So we all felt that it would be better right now for him to withdraw from the local university, expand his part-time Chick-fil-A job to full-time, and go to work part-time for this church.

Don't get me wrong. I know that college can be an incredibly useful tool, an essential one for many professions. But so can working full-time out in the "real" world while exploring options of particular interest.

It remains to be seen if our son will go back to college. Our primary concern isn't that he finishes, but that he is obedient to what God puts on his heart. After all, higher education isn't confined to a classroom.

Not long ago, SMI assistant editor Joseph Slife, author of our October cover story, talked about these issues with host Chuck Bentley on Crown Financial Ministries' MoneyLife program. To listen, use the audio player below — or use this link to download (right click/save as).

For-profit colleges: Market-driven education

Two days ago, we made note of a Wall Street Journal report that served as an interesting follow-up to our October 2009 cover article, Is a College Education Still Worth the Investment? The Journal found that the earnings gap between high-school grads and college-grads has long been overstated.

This story, from Fast Company magazine, touches on a different aspect of that same October '09 cover article: for-profit colleges. It begins with a very interesting angle.

Michael Clifford never went to college. He was a trumpet player "strung out on sex, drugs, and rock and roll," he says, until he started a new life as a born-again Christian and successful tech investor. Then Bill Bright, founder of Campus Crusade for Christ, gave him a life-changing piece of advice: "He knew I loved business and did a lot of charity work," says Clifford. "He told me education is the one business where you can help people live better lives and make a lot of money for your investors."

Today, Clifford chairs Significant Federation, a private equity firm that is a principal investor in a half-dozen higher-education companies, including the most successful IPO of 2008 (Grand Canyon University) and one of the most successful of 2009 (Bridgepoint Education). His six colleges have almost 100,000 students — 90% of them studying online.

The article notes for-profit colleges now enroll almost a tenth of all students, many of them in online programs. The biggest players are Kaplan (part of The Washington Post Co.), DeVry, and the University of Phoenix, now the largest university in North America (42,000 students).

While private colleges have taken huge hits to their endowments, and public universities weather historic cutbacks, for-profits like Clifford's keep costs down with innovative use of technology, publish metrics like job placements, and are open to any high-school graduate. They target under-served markets like first-generation students and working adults with convenience and a customer-service ethic....

"I don't even use the term 'for-profit' anymore," Clifford says. "I say schools are 'market-driven' or 'publicly funded.' Everyone has to put their guns away and focus on providing the best experience for the student. Market-driven can learn a lot from traditionals, and the traditionals have a tremendous amount to learn from market-driven best practices."

You can read an interview with Michael Clifford here.

Earnings gap between college grads, high-school grads overstated

Here's an addendum to our October 2009 cover article, Is a College Education Still Worth the Investment?: The long-touted lifetime-earnings gap between college graduates and high-school graduates isn't as wide as commonly reported.

The Wall Street Journal has details in a story that bears out some of the analysis in our cover article.

In recent years, the nonprofit College Board touted the difference in lifetime earnings of college grads over high-school graduates at $800,000, a widely circulated figure. Other estimates topped $1 million.

But now...some researchers are questioning the methodology behind the high projections....

The problem stems from the common source of the estimates, a 2002 Census Bureau report titled "The Big Payoff" (PDF). The report said the average high-school graduate earns $25,900 a year, and the average college graduate earns $45,400, based on 1999 data. The difference between the two figures is $19,500; multiply it by 40 years, as the Census Bureau did, and the result is $780,000.

There at least two significant problems here: 1) An average is just that — it isn't predictive of actual personal experience; 2) The earnings estimates from the College Board don't take into account any debt incurred in earning a degree. In other words, the estimates show only the revenue side of the picture, but ignores the ongoing liability incurred in an effort to produce that future income.

The WSJ notes that some researchers have been disputing the $800,000 for years, yet the College Board has continued to overstate the earnings gap.

[The Board] recently said on its Web site: "Over a lifetime, the gap in earning potential between a high-school diploma and a bachelor of arts is more than $800,000...."

The $800,000 number, it turns out, was pulled from a footnote of the College Board's 2007 "Education Pays" report (PDF) that explained lifetime earnings. The report's author, Sandy Baum — an emeritus Skidmore College economics professor who didn't write the promotional text on the Web site — says that $450,000 is actually a more reasonable estimate of the difference in lifetime earnings.

A College Board spokeswoman told the WSJ that the person writing the website copy apparently "misinterpreted the data." No doubt. But that same misinterpretation has been going on for about eight years now. Perhaps now that the Wall Street Journal has blown the whistle, the misinformation will be corrected.

Free Online Education

Interested in taking some college-level courses but not concerned about earning college credits? Sure you could sneak into Econ 101 and hope the professor doesn't do a role call. But there's a much easier way. Let me introduce you to the OpenCourseWare Consortium.

According to their site, The OpenCourseWare Consortium:

... is a collaboration of more than 200 higher education institutions and associated organizations from around the world creating a broad and deep body of open educational content using a shared model. The mission of the OpenCourseWare Consortium is to advance education and empower people worldwide through opencourseware.

The site goes on to say, "An OpenCourseWare is a free and open digital publication of high quality educational materials, organized as courses." So essentially, it's free online learning supported by major colleges and universities.

As Internet delivery has become a more accepted source of higher education, it's not surprising that attendance has been gradually increasing. The recent recession has caused more people to consider this option as well. According to this piece from the WSJ, some classes have seen as much as a 30% increase.

I've had one experience with online learning and it was quite good. In 2004, I took a basic accounting class from an accredited institution. I felt the content was good, as was the attention I received from the teacher. I'm not sure how the paid class I took compares with OCW, but since it's free, your time is all you have to lose if you're inclined to try it.

Update: To compound the savings of this idea, be sure to try the various discount text book options online. Bookswim has a text book rental program that looks intriguing (though we haven't used it).

Student-loan changes now in effect

Interest rates and other terms for student loans change each year on the first of July.

What's new this year? Income-Based Repayment is now available for the first time, Pell grants have gotten bigger, and interest rates on new Subsidized Stafford loans and existing variable-rate loans have gone down.

Details here from the Project on Student Debt.

Also, this article from the Washington Post notes that "people working in public service jobs — all levels of government work, teachers in public schools and universities, employees of public hospitals, and anyone working for a 501(c)(3) nonprofit would all qualify" for the new Income-Based Repayment.

Kiplinger picks best "529" college-savings plans

Kiplinger.com, the personal finance site, has combed through the data and selected what it considers to be the top choices for parents shopping for a "529 plan."

Such state-sponsored plans are good tools for saving for college because earnings are tax-free — if they're used to pay for qualified college expenses (tuition, books, school fees, room and board). And if you invest in the plan sponsored by the state where you live, you might also get a tax deduction or credit based on your contributions. (You can invest in any state plan no matter where you reside, but there's no deduction/credit if you invest out of state.)

Here are Kiplinger's choices:

Best for low fees. The Vanguard index-fund portfolios available in the direct-sold version of the Illinois Bright Start College Savings Program.

Best for overall investment mix. Alaska's T. Rowe Price College Savings Plan — prefab portfolios, but based on a strong mix of Price funds.

Best for conservative investors. The Michigan Education Savings Program, run by TIAA-CREF, has a savings option that guarantees principal and a minimum annual interest rate. The plan also offers portfolios tilted more toward bond funds than most other 529-plan offerings.

Best for fund choices. The College Savings Plan of Nebraska offers a selection of 20 funds from American Century, Fidelity, Pimco and Vanguard.

Best adviser-sold plan. The Virginia CollegeAmerica plan, with adviser-recommended portfolios based on 22 funds from American Funds.

Combining Kiplinger's data with our own bias (namely, we like you to be in the driver's seat as much as possible), we'd say the Nebraska plan is worth a closer look — unless your own state's plan offers a significant tax break.

Do your own research. Kiplinger (with help from SavingForCollege.com) has a state-by-state breakdown that can get you started.

Exploding 529 plans

Last month, we wrote about how many target-date mutual funds failed to protect those with short investing time frames last year. For those assuming they were invested conservatively based on the fact that their target date was only a year or two away, it was a cruel realization indeed to find losses of 20%, 30%, or even more.

In a similar vein, it turns out that some college saving 529 plans posted awful returns last year, even for those investors who were very close to college age. Most 529 plans allow investors to select an age-based investment track that is supposed to automatically get more conservative as the student approaches college age. Sadly, there's significant variation between plans as to how these allocation percentages shift, as well as the underlying funds they are invested in.

Thankfully, it appears that most of those who followed SMI's advice on selecting a good 529 plan would have steered clear of the worst disasters. Those most at risk would likely have been those who were enticed by generous matching provisions or other offers by their home state plan (if that plan turned out to be one of the offenders). Beyond that, a focus on the plan asset allocation options would have been healthy, and I suspect that those who went with plans featuring low-cost index funds avoided the worst of the damage.

Both the 529 and Target-date fund issues are a good reminder of a crucial investing fact: Nobody cares about your money as much as you do — so make sure you understand what you're investing in.

"The million dollar misunderstanding"

Forbes offers a sobering look at the current college lending situation, and I have to warn you, it's not a pretty picture. One key change in recent years has been the rise in private lending (now 23% of the college lending market, up from 7% a decade ago), and while it may be necessary, it is resulting in some pretty unsavory behavior at the expense of a large swath of young kids.

That said, the article title is "The Great College Hoax," and the underlying theme seems to be that, because college costs - including financing debt - are rising faster than the income gap between degreed and non-degreed workers, college is becoming a bad deal. I'm not sure I'm on board with that idea. (I encourage you to read the article and discuss this below.)

The unfortunate reality is that most of the jobs that Americans find appealing today require a college degree (at least). Concluding that college is no longer a great deal, so we should all skip it and learn a trade instead, obviously doesn't work as a comprehensive solution.

That said, there are some serious flaws in the system that need to be addressed. One big flaw is actually related to the paragraph above, namely the idea that everyone should go to college. It has become popular to encourage kids from their earliest moments that they "can do anything they want to do" and such. It feels heartless to say that really isn't true, but is it actually more compassionate to let them find that out for themselves two years into a 4-year college degree, when they're already $20,000 in debt (compounding at 12%) and about to start a job paying the same amount per year as their accumulated debt ? It seems some better screening at the high school level would save a lot of debt-induced misery down the road. It seems we need to rediscover that some kids are better suited to move from high school to vocational school/training rather than college.

Again, just to be clear, this isn't me wanting to crush anyone's dream. This is me reading that "half of students entering college never earn a degree" and "Six in ten African-Americans depart without one." Given the costs involved, those statistics can't be allowed to continue as the status quo.

Another serious issue, and the most sickening part of the article from my perspective, deals with the role of private lending to college students. I'm not against that. I do think the following is insane, however:

Education lenders, unlike other consumer financiers, are not required to provide Truth in Lending disclosures before reeling in borrowers. A law passed last year requires advanced disclosure, but not until 2010.

I won't even start on the role of the universities themselves in foisting some of these particularly ugly loans on their students. Shameful.

There's lots more in this article to unpack. Give it a read and post your thoughts below.

2008 exposes 529 Plan risk

Many parents saving for college utilize Section 529 Plans as a primary savings vehicle. One of the features many people like about these plans is the ability to get set up on an "age track" that shifts the account into more conservative investments as the college date approaches.

While that sounds great in theory, the huge losses of 2008 have exposed that not all 529 plans are created equal when it comes to what that shift to safety actually means. As this study shows, some states move to very conservative fare in the years immediately preceding college, while others leave a decent amount invested in stocks right to the end.

This New York Times article explores the pros and cons of the various state allocation approaches. If you're thinking through the options available to you as a college saver, this article is a worthwhile read.

Prepaid tuition plans gain in popularity

MarketWatch reports that prepaid tuition plans, a lesser-used option offered by many state-run 529 college-savings programs, are regaining some of their earlier popularity.

For years, families have preferred the savings type of 529 plan - named for the relevant section of the tax code - salting away after-tax dollars, investing them in mutual funds and other investments, and then taking the money out, tax-free, when the time comes to pay for school.

But as many of these accounts have been savaged by the market's plunge this year, families are now turning to the prepaid variety of 529....

Prepaid plans allow families to lock in current tuition rates by making an upfront cash payment in exchange for tuition contracts or credits tied to current rates. They can prepay either the full tuition bill or a portion of it, typically based on the average tuition costs in the state. States usually manage the money, and when a student finally enrolls, he won't have to pay more - no matter how much tuition costs have risen.

If investors buy only a portion, that same amount is credited toward future tuition bills. In general, the tuition guarantee applies only to state schools within that state, though you can use the money to pay for out-of-state schools. If a beneficiary elects not to attend a college covered by the plan, the investor can withdraw his contributions, usually with interest....

In most cases, the account holder or beneficiary must live in a state in order to invest in its prepaid plan. Two states - Massachusetts and Alabama - allow anyone to invest in their plans.

There is also one private-school plan...that is open to anyone: the Independent 529 Plan. It allows investors to lock in tuition at nearly 280 colleges, ranging from small liberal-arts schools such as Grinnell and Oberlin to larger universities such as Stanford, Princeton and Duke....

Now looks to be a particularly good time to lock in current prepaid rates, as most programs will likely boost prices for next year's enrollment, given state budget shortfalls, sagging endowments and a drop in charitable giving. While average tuition and fees at four-year public universities increased 6.4% for the 2008-2009 academic year, according to the College Board's latest annual report, some experts predict double-digit tuition increases at major public universities.

Not all states have prepaid plans. To find out if your state does, check here and here.

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