Student Loan Considerations

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Student loans are becoming a more common planning topic that our clients want (and need) to address. This time of year seems to bring education back into focus. No one article can cover it all, but we’ve put together a few ideas that can help frame your decisions and options.

More Americans are attending college than ever before. According to the Georgetown Center on Education and the Workforce, 65% of jobs in America will require education beyond a high school diploma by 2020. But along with the increase in college graduates comes an increase in student loan debt. Student debt in America is almost $1.5 trillion which is greater than all outstanding revolving credit card debt. Over 44 million Americans hold this collective debt, which means about 1 in 4 adults are paying off student loans with the average borrower owing $37,172 with an average monthly payment of $351. Most would agree that a college education is still a good investment because of the earning potential over the course of a lifetime compared to the earning potential of someone without a degree or other certificate. However, the financial burden can be overwhelming and must be confronted head on.

So do we just not go to college? Well, it's not for everyone, and there is growing demand for trade and technical skills. Take time to evaluate all the available options for gaining skills, education, and experience!

If we do take the college route, do we just assume we (or our kids) will be stuck with this debt forever? No! There is life after student loans, and ways to minimize the burden.

Here are three recommendations concerning student loan debt.

1.    Avoid and/or limit debt on the front end as much as possible. In May of this year, the College Board reported the average cost of a public college at $25,290/year and $50,900/year for private college. Students and parents should research the costs of college including tuition, housing, meal plans, transportation, and books. Then, before applying for loans, exhaust every grant and scholarship that you could possibly qualify for. It takes a lot of time to research and apply to all the various ones that are available, but it is well worth the effort.

Students can apply for merit-based scholarships (awarded for achievement) and need-based scholarships (for students who need financial assistance). There are also numerous ones you can find through the financial aid office of the college, the U.S. Department of Labor’s Free scholarship search tool, and online that are geared towards particular groups of people, occupations, background, etc. In addition, you must fill out the Free Application for Federal Student Aid (or FAFSA) to apply for any federal aid. This is required by nearly all higher education institutions and must be updated yearly. Some schools may require the College Board’s CSS Profile. Please pay close attention to how the calculations differ! They don’t look at things quite the same way (parental support in a divorce situation, for example).

After finding all sources of income through scholarships, grants, 529 plans, and working and saving towards college, then and only then consider loans. Student loans are a combination of Federal and private loan programs. There are federal subsidized loans for undergraduate students, federal unsubsidized loans for undergraduate and graduate students, and PLUS loans for graduate/professional students and for parents of dependent undergraduate students. A subsidized loan is needs-based, and the federal government pays the interest while the student is in college. For unsubsidized loans, interest begins accruing as soon as the loan is taken out. If you do not qualify for a subsidized loan, your next option is to choose between a federal unsubsidized and a private loan. Sometimes private loans can be cheaper depending on credit and individual circumstances, so look in to both options.

2.    While in college, live frugally and if possible, begin to pay down the interest on student loans. College is a great time to learn to budget money. What better time to learn than when you are making possibly the lowest income you will ever earn? As a student, take advantage of free campus activities and free meals, using your student id for events and discounts from local providers. Think cost-effective when you consider housing choices, meal plans, entertainment and transportation.

 And try to pay down your school loan. Often the interest that accrues on your loans while you are in college is capitalized once you graduate; therefore, the interest is added to your loan principal and interest is accruing on interest. So at least try to pay down the interest while you are in school or during the 6-9-month grace period after graduation before repayment begins. It will save you money in the long run!

A part-time job can go along way towards reducing what you will owe when you have completed school. Save automatically through employer withdrawals from your paycheck and take advantage of new mobile apps that will round up purchases and save the difference. You will have peace of mind, and the freedom to choose the job you want instead of choosing the one necessary to pay down debt.

3.    After graduation, commit to paying off student loans systematically and not incurring additional debt. There are three scenarios you might want to compare to pay off the debt: prepayment, changing repayment plans, and loan consolidation. Loan consolidation can be a good strategy but not always. If you refinance Federal student loans into private loans, they can lose the advantages offered by the Federal Direct Consolidation Loan program which can include flexible payment plans and potential for forgiving the loans. This program combines multiple Federal student loans into one that is recalculated as the weighted average interest rate of all the student loans being consolidated, so it doesn’t really change the interest rate, but can change the repayment period. Through this program, a student loan borrower can qualify to use income-based repayment, pay as you earn, revised pay as you earn, and public student loan forgiveness, all of which have requirements. So even though you may be able to get a better rate through a private loan, you will permanently lose the availability of these programs.

Review your Federal loans to see if it would be wise to consolidate. The National Student Loan Data System shows the details of loans that are part of Federal programs. Review your private loans to see if it would be wise to refinance. Another good resource is StudentLoans.gov and you can find repayment estimator tools through the Department of Education.

If you have additional debt, start applying more towards the short-term, high-interest debts, such as credit cards, because these debts grow much more quickly than student loans with reasonable interest rates. Be diligent not to take on any more debt until all is paid off. Live for a while longer on a more frugal budget and it will pay dividends when you are debt free!

 

Seventy percent of graduates in 2016 carried student debt. You are not alone. You may want the help of a financial advisor to show you how to navigate all your options when it comes to balancing student debt, saving for a home, saving for retirement, and looking at a comprehensive plan to get you on track for your future!

 

An Advocate for Your Current and Future Self

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According to the dictionary, an advocate is “one who pleads the cause of another” or “one who defends or maintains a cause or proposal”. An advocate stands in the gap, fights for or on behalf of another, and supports or recommends a particular policy or plan.

This is exactly what your financial planner should be! And not only should your financial planner be an advocate for you today so that you can experience financial stability and freedom in the here and now, but they should also be the advocate for your future self! The “you” you want to be with the choices you want to have.

Let’s say you’re just getting started. You have your whole life in front of you. So why do you need an advocate? Because the choices you make today, even the seemingly small ones, can have a BIG impact on your future. It’s natural for your “NOW self” to want to spend more and save less! “NOW Self” wants to put off spending time going through all that boring paperwork of employee benefits, life insurance policies, loans, credit cards, tax returns, wills, and banking/investment statements with confusing fees, yields, transactions, and fine print. But today you’re in the best position to make educated decisions and implement strategies that will absolutely alter the course for your “FUTURE Self”.

Let’s say you are mid-career. You have more responsibilities than you have ever had: careers, growing children, aging parents. You need a vacation! You also need a financial advocate. “NOW Self” is extremely busy spinning many plates and has substantial expenses. You may not feel like there’s time or money for an advocate, but the need is pressing. “NOW Self” either has made some good decisions but needs an objective set of eyes and expertise to maximize the potential or has not been able to make such good decisions and needs to make major adjustments so that the journey is smoother, and the destination is where “FUTURE Self” wants to go.  

What if you're near or already in retirement? You have more to offer than ever – especially your wisdom and experience! You may be at the top of your game, thinking about retiring soon or maybe never, starting a second career, aspiring to work on the side for a cause that’s close to your heart, or simply relax! “NOW Self” may be in the best financial position of their life OR may regret not making financial decisions earlier and feel like they cannot make new changes. No matter your financial situation, you need an advocate to give you a vision of the possibilities you have with what you have worked hard to achieve. Planning is crucial at this point to take advantage of tax laws, retirement income and social security strategies, and investment portfolio allocation so that “FUTURE Self” can do and be all they ever desired.

 

A good financial planner will advocate for not only your “NOW Self”, but your “FUTURE Self” as well, challenging clients to take action toward their best lives.

 

One of our most important jobs is to LISTEN. We cannot effectively be your advocate if we do not know you, your unique situation, and what you truly need and want today and in the future. We want to know you and your family, your history and what your dreams and goals are. How else can we help you achieve your goals and get to where you want to go if we do not listen to your story?

Our initial consultation (no cost or obligation) is about listening to why you are looking for a financial planner in the first place, and then listening to hear what YOU want to tell us. Information is powerful. Wisdom to know what to do with that information is even more powerful!

After listening and understanding, we use our knowledge and technical skills to design plans and strategies for outcomes that are in line with what you want to achieve. Our goal is to educate and encourage clients to make the decisions and choices that will improve their financial lives. This includes providing advice and implementation support to make that happen. As your financial advocates we can encourage you to stay disciplined and make choices now and in the future that align with your vision of success.

We do this through evaluating topics like cash flow, investments, retirement, insurance and tax planning, and by providing ongoing professional support. By making you aware of the possible strategies and outcomes, we can guide you to a plan that is tailored to your needs and priorities, helping you be confident in the decisions you’re making now, for now and later!

We want to be the advocate for both your “NOW Self” and your “FUTURE Self”, intentionally helping you create a life you love, full of purpose and financial freedom that gives you choices. So that when you look back, you will have achieved your goals and are living life to the fullest.

 

 

 

Choose Your Retirement Accounts with Confidence!

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We all know and have been told that we need to save for retirement. The IRS recognizes the need to save for retirement so much that they have created several tax-advantaged accounts such as the 401(k) and individual retirement accounts (IRAs). There are a lot of choices when it comes to retirement saving. The number of choices can sometimes intimidate us so that we are not sure which is the better choice for ourselves or our family. But waiting until we “have more time” or until we get to that “dream career” or until we move to that “next stage of life” can cost us big-time in lost earning years and compound interest. Now is the time to take specific steps to plan and save for the future.

For most people, especially those who are young in the workforce, the best place to start is with the 401(k) retirement plan at work. This is particularly enticing if your employer matches a portion of your contribution. For all practical purposes, the match is essentially free money. Contribute at least enough to achieve the match, and then try to increase the amount contributed over time. Currently, the 2018 annual participant contribution limit is $18,500 or $24,500 for those 50 or over. The money is withheld through payroll deduction and you can save up to the contribution limit of your pretax income, in a Traditional 401(k), or after tax in a Roth IRA. If you leave your job, you can typically keep it in the plan, roll the account over into a new employer’s 401(k) (if allowable), or rollover to your own IRA. This type of retirement plan is more typical, employees of nonprofits may be offered a 403(b) instead. They have similar rules.

Anyone can contribute to an Individual Retirement Account (IRA). The 2018 annual limit is $5,500 and $6,500 if you are 50 or over. The money grows tax-free. You can contribute to both an IRA and a 401(k), but if you are covered by a plan at work, you cannot deduct your IRA contributions from your taxable income if you earn more than $73,000 for individuals (phase out from $63,000-$73,000) and $121,000 for married couples filing jointly (phase out from $101,000-$121,000). If you are not covered by a retirement plan at work, you get the full deduction no matter your income, unless you file jointly with a spouse who has a retirement plan at work.

With a Roth IRA, you are contributing with after-tax dollars and there is no tax deduction for your contribution. The money you earn grows tax-free, but unlike Traditional IRAs, you pay no tax on withdrawals after you reach 59 ½ and there is no mandatory withdrawal at age 70 ½. You can also withdraw the amount you contributed (not earnings, though) at any time with no penalty or no taxes due. The contribution amounts are the same as a Traditional IRA, but to contribute to a Roth IRA, you must make less than $135,000 for singles and $199,000 for married filers. If your income is more than or equal to $120,000 (single) or $189,000 (married filing jointly), your allowed contribution is reduced. You can contribute to both a Roth IRA and a traditional IRAs, but the limits apply to your total contribution.

Another less known way to save where you can also minimize taxes and prepare for health care costs is with a Health Savings Account. You can use the money for medications and doctor visits not covered by insurance, but you can also pay those expenses out of pocket and leave the money in your HSA to grow. If you need the money later, you can be reimbursed for past expenses. The annual HSA contribution limit is $3,450 for singles and $6,850 for families covered under qualifying family medical plans, with an additional $1,000 contribution if you’re 55 or older. If you leave the money in the account, it can stay in the account, unlike FSA accounts that must be used by the end of each year.  Once you are 65, you can withdraw money for any reason without penalty, but you must pay income taxes on the money you withdraw if it’s not for qualified medical expenses. Or, you can use it for qualified medical expenses tax-free. If you withdraw the money before you are 65 for any reason other than qualified medical expenses, you will have to pay taxes plus a 20 percent penalty, thus the need to save medical receipts!

If you are a sole proprietor, you can set up an individual 401(k) or solo 401(k) and make contributions as both the employee and employer. The business owner can contribute elective deferrals up to 100% of compensation up to the annual contribution limit of $18,500 ($24,500 if age 50 or over) plus employer nonelective contributions up to 25% of compensation as defined by the plan. Total contributions cannot exceed the 2018 limit of $55,000 (not counting catch-up contributions for those 50 and over). Self-employed individuals must make a special computation using the rate table in Chapter 5 of IRS Publication 560 to figure out the maximum amount of elective deferrals and nonelective contributions.

A SEP IRA is used primarily by the self-employed or small business owner. SEP stands for simplified employee pension and is usually easier to set up than a solo 401(k). Contributions are made to an Individual Retirement Account established for each plan participant and it follows the same investment, distribution, and rollover rules as traditional IRAs. The contributions you can make to each employee’s SEP-IRA cannot exceed the lesser of 25% of compensation or the 2018 limit of $55,000. The same percentage the employer contributes to the owner’s plan must be given to employees too. Again, if you are self-employed, you must use special rules to calculate contributions for yourself.

Simple IRAs allow employers with fewer than 100 employees to set up IRAs with less paperwork. Employers must either match employee contributions or make unmatched contributions. Employees can contribute/defer up to $12,500 annually with catch-up contributions of $3,000 for those 50+.

 So many good choices! Which plan, or combination of plans is right for you? If you have limited funds to start with, what to do first? If you have contributed the max to one, which is next? As financial planners our job is to walk you through your particular situation, needs and goals to determine the better choice(s) for you and your family. It is not only about dollar amounts, though that is a significant factor. Retirement is also about quality of life, expectations, and what is truly important to you.  Is it family? Health? Travel? Giving? What is important to you now and in the future needs to match where and how you spend and invest those dollars. No more putting it off. Start today.

 

Better by Design

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Chances are, you have just finished or are finishing up filing your taxes for 2017.

Whew! It’s over!

Until next year!!

This time of year is stressful:                                                                                                                                          

Waiting on your W-2s, 1099s, and other documentation that only shows up once a year. Realizing how much of your annual salary that you worked so hard to achieve was paid out in taxes last year. Dreading the amount of paperwork. Looking the whole house over for receipts and statements.  Ensuring every possible deductible business expense and mile driven was recorded. Making last minute contributions, medical appointments, and use of childcare services to avoid missing out on any qualified deductions and credits. Nervously completing forms in hopes that you are doing everything correctly. And then the kicker – am I getting a refund or do I owe Uncle Sam.

And now the rules are changing?!

It all adds up to a feverish frenzy in the months of March and April!!

What if we make a plan now that will avoid some of the stress in 2019, so we will actually get to stop and smell the roses when they begin blooming next spring.

We all know we could be more organized. Let’s start there. For many, the standard deduction will be so high next year that you might not itemize, but keep everything anyway just in case. This will require a system of record-keeping, but a simple set of folders will do. Some common deductions that you may qualify for and therefore should keep records of include:

  • Medical, Dental, Vision Expenses
  • Health Savings Account Contributions
  • Childcare and Dependent Care Expenses
  • Educational Expenses
  • Home Expenses
  • Contributions to Charities
  • Self-Employment Expenses
  • Job-Related Expenses
  • Taxes Paid

Just make a place to categorize them as they occur, store them there, and forget about them. Fifteen minutes of assembling will save hours of searching after the new year.

But let’s dig deeper. Get a real plan together, one that is better by design. Decide now what our goals are for the coming year. After all, do we know what we want to contribute to our HSA next year? What medical costs can we expect? How much would we like to give to church and charities? Would we like to renovate a room in our home? Is this the year to start our own business? What are our options for childcare and support with dependent family members? Which preschool/grade school/college is the best choice for our child?

These are great questions and the answers can inform us as we consider our comprehensive financial picture. We can make filing taxes simpler, but we can do so much more! We can endeavor to make all of our financial decisions less stressful by determining today what our goals are and have a strategy in place to best achieve them. In so doing, we will be more efficient in our tax planning.

As fiduciary financial planners, our job is to examine your finances in an all-encompassing manner so that we help you define your goals, analyze and evaluate your current status, and develop recommendations to help you reach those goals.

If your dream is to pay off your debt and save for a home of your own, the time to start paying it off is today. It takes planning. If your desire is to send your children to college or to retire by a certain age, the time to start saving is today. To determine amounts and timings of contributions and do it tax efficiently takes planning. Did you know that you might be able to make enough charitable contributions to deduct and itemize them by batching your charitable giving? It takes planning. We can accomplish more of our financial goals faster when we keep more of our paycheck and don’t give Uncle Sam a loan. This, too, takes planning. In the end, it is all about making wise choices with what we have been given.

And we have been given much. When I find myself complaining about taxes, I must remember where much of our tax money is spent: education, public assistance, technology, state and national defense, Social Security to include Medicare and Medicaid, unemployment services, and so much more. My life would not be the same if there were no taxes. I would not be able to use some of the transportation that I use. I would not have had the same education I was provided. I would live more fearful for my ongoing safety.

So, I am going to prepare ahead of time so that next year is not as stressful. And I am going to count my blessings.

 

Stay Focused. Stay Calm.

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In times of market volatility.

To Our Clients:

First of all, thank you for the opportunity to be a trusted advisor for your financial planning & investment needs. We take our responsibility very seriously and know it's important to you to be informed about the status of your financial plan and investment accounts.

After several years of very low volatility and new market highs, the last few months have reacquainted us with market volatility. 

It is our goal to have done a good job of assessing your risk tolerance and time horizon to build a portfolio that will meet your long term investment needs. We hope to have achieved this during the conversations we've had at our review meetings about market cycles and the inevitable return of market volatility and potential losses during those cycles.

None of us know what the future will hold, but we do know that the path to long term success in the market is comprised of a few key principles:

  1. Develop a sound strategy, and stick with it unless something significant has fundamentally changed.
  2. Keep fees in check. We use investment options that keep fees much lower than industry average!
  3. Stay consistent. Choosing to 'change horse mid-race' introduces additional risk to the portfolio at exactly the wrong time. 
  4. For those that are still in the accumulation phase, a market downturn represents an opportunity to buy the same assets at a reduced price, as hard as it may be to see it that way at the time.
  5. Stay focused on your long term goals. Stay calm even when it seems tough.

If you do have any questions or concerns, we are available. We want you to feel confident in your financial future!


Thank you,
Bridge Financial Planning