Citibank and Bank of America Merrill Lynch Make Earning No Interest Sexy, If You Also Hold Their Travel Credit Cards

Citibank and Bank of America Merrill Lynch Make Earning No Interest Sexy, If You Also Hold Their Travel Credit Cards

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In this low interest environment, the major money center banks have been offering next to nothing in interest for years. Citibank and Merrill now give you a reason to keep your cash with them.

It is tough to earn next to nothing in a savings account and be excited about it.  Provided you keep $100,000 in total assets with Merrill Lynch or $50,000 in cash with Citibank, you can now make up a lot of lost interest in the form of travel rewards by pairing your account with credit cards that extend certain benefits for preferred customers.

The Bank of America Travel Rewards card offers 1.50% cash back in the form of a direct credit on travel expenses for each dollar spent on the card.   While this offer does not compare favorably to other travel and rewards cards on its face (see the best cards for spend here), the cash back amount is augmented by 75% for those holding balances over $100,000 at Bank of America, Merrill Lynch or Merrill Edge accounts (whom the bank designates as Platinum Honors for credit card purposes).  The 75% augmentation takes the cash back percentage to 2.65%.  While BestCashCow’s own rankings indicate that other travel and rewards credit cards offer value on spend in excess of 3%, the 2.65% return on spend is well in excess of what is offered through any cash back program.  It is also highly desirable for those seeking maximum flexibility in how they redeem spending credits that they have earned through their credit cards as it does not require membership in an air miles or hotel point program, or trying to find those rewards through the program that maximize redemption value.   You’ll also get 10,000 points – worth $100 – just for signing up for the card.

While qualifying for Bank of America’s Platinum Honors status does not make sense if you are holding $100,000 in cash at virtually no interest, it can make a lot of sense to hold and use this card if you qualify through holding equities, debt instruments or other securities in a Merrill or Merrill Edge account.

Full details on the Bank of America program and what is required to qualify for Platinum Honors status are available here.

Citibank offers the Prestige Card that delivers 3 points for travel (including gas), 2x for restaurants and entertainment and 1x for everything else.  BestCashCow.com rates this card and the Citi ThankYou Premier card, its first year no fee sibling, as outstanding travel and rewards cards for recurring spend and for their 50,000 point sign up bonuses.   In particular, BestCashCow.com sees at least 3 cents per point in value on Singapore Airlines Krisflyer, but points can also be worth 1.6 cents each when redeemed against charges from American Airlines.

For a $450 annual fee, the Prestige Card offers an array of benefits including a $250 annual air travel credit (which over two years more than covers the fee), entry to American Admirals club, global entry reimbursement, a fourth night free on consecutive hotel stays and four rounds of golf that the regular ThankYou Premier Card does not offer (read more on the difference between the two cards here).  For those with CitiGold status (ordinarily $50,000 in account balances), the points earned through the Prestige Card are augmented by 15% so that travel earns 3.45 points, restaurants earn 2.30 points and everything else earns 1.15 points.  Moreover, the annual fee is reduced to $350 and the signup bonus increased to 60,000 points (although it should be noted many non-Citibank account holders have reported getting these benefits simply by applying for the card in a branch).  The reduced fee and the increase in points make an already outstanding travel and rewards card still better for Citigold members.

Full details on qualifying for CitiGold are available here.

The augmented credit card rewards that Bank of America and Citibank are offering to their cardholders who maintain qualifying accounts are interesting.  However, before account holders at these banks rush into these cards, it makes sense to run the numbers, comparing these cards with the rewards that you might accumulate through other credit cards.  If you are qualifying by holding cash, you should also factor in the loss of interest you would otherwise be earning.  Leading online banks pay over 1% more in interest in the savings accounts (see the best rates here). 

Compare travel and reward credit card sign up bonuses.

Image: Stuart Miles at FreeDigitalPhotos.net

Greek Default, Puerto Rico Debt Service Problems to Have Little Effect on US Rates

Greek Default, Puerto Rico Debt Service Problems to Have Little Effect on US Rates

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Greece lies on the brink of collapse. Puerto Rico debt obligations are all going to be restructured. Even if the worst case were to materialize (both default), US interest rates are not headed for a dramatic decline or even a retest of recent lows. They are headed up.

The news is pretty bleak, but I still don’t believe that Greece will default.  I certainly do not believe that Puerto Rico will default.  In Greece, the institutions that hold these bonds (now German banks and US hedge funds) are too sophisticated to force a situation where they receive nothing, than to allow a situation where they recover a restructured bond.   The voting electorate is also too smart to vote for a continuation of the utter chaos they will see this week.  Same will be true in Puerto Rico.  Everybody will back away from the brink. These places are simply not analogous to Russia or Thailand in 1997, or Argentina more recently.

If we were to see a Greek default, there will be increased dislocation and volatility in the equity and debt markets.  The reality however remains that Greece is such a small part of the European economy, it will not have a major impact on anything.  Austerity in Europe will probably continue, but the US will continue its path towards pulling out of the low interest rate environment that we have been in.  In short, Greece is just to small and inconsequential and events there are not going to cause the rush to safety in the US that would drive long term bond yields back down.

I predict that interest rates will continue to rise towards a more normalized level with Janet Yellen and the Fed still on track to raise interest rates in September or October.   The 10 year Treasury will end the year closer to 3% than to 2% and savings rates will continue to move up gradually.  The bond bubble will begin to burst and this is a good time to favor cash over bonds.

Find the best savings rates here.

Image: sscreations at FreeDigitalPhotos.net

Seven Ways to Pay for College

Seven Ways to Pay for College

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Learn about the seven ways to pay that hefty tuition bill and strengths and weaknesses of each.

You or your child are getting ready to go to college or perhaps is even in college. Depending on the institution, you might be on the hook for one of the biggest bills of your lifetime. According to the College Board, the average price for a private college for the 2013-2014 school year was $31,231; the cost for state residents are public colleges $9,139; the cost for out-of-state students at public colleges $22,958. Multiply that by four years to get a real ouch!

How to Calculate Your Price Tab

The first step in paying for college is understanding the price tab. While colleges have a list price, this isn't the price that many students pay. The net price, the actual price you pay is the list price minus any gift aid (grants, awards, scholarships). Net price does not include loans or money earned through work-study. Most colleges have a net aid calculator which can give you a general idea of what this cost will be. A student who digs out scholarships or grant opportunities though can get a net price below what these calculators estimate. Annually, colleges and different organizations provide billions in scholarships and grants.   

Once you have a net price, there are several different ways to pay the bill. A family might have saved enough cash to cover the cost, or might have a rich grandparent who can gift the tuition, or might need to take out loans.

If you think you need to take out loans, then you will need to wait until you have been accepted to a college to get the full picture. Along with the acceptance, colleges send a financial aid offer that explains the different types of loans you qualify for. There are three distinct loan types:

Direct Subsidized Loans - Available to four year undergraduate students in need, these government-backed loans offer slightly better terms than their unsubsidized variety.

Direct Unsubsidized Loans - Available to four year undergraduate and graduate students, these loans are not based on need. Each college determines how much of this loan type the student should receive.

Private Loans - These types of loans make up the difference. They are not government backed and as long as the student or parent qualified, there is no limit on borrowing.

Just because you qualify for a certain type of loan doesn't mean it's the best option.

The chart below explains the different methods of paying for college and the strengths and weaknesses of each one.

Common Ways to Pay College Tuition

The chart below shows seven different ways that a student or parent can help pay tuition.

 

Description

Advantage

Disadvantage

Who Should Use This?

Savings

Parents save up for child's education in savings accounts, CDs, 529 plans or other investment or bank vehicle.

The cash is there and ready to be used. No need to apply for loans or pay them back. Child graduates debt-free.

The actual price of tuition (listed tuition rate minus grants) penalizes those who have saved for tuition via these types of vehicles. Those who have saved and planned ahead actually pay more.

Those with high incomes who can afford to put money away to pay for their child's education.

 

For a guide on the most popular ways to save for college, click here.

Gifts

Grandparent or rich Uncle pays some or part of tuition.

This is great way to transfer wealth because the direct payment of tuition to the educational institution does not trigger gifts taxes or count against the unified credit.

Not everyone has grandparents or a  rich uncle in the position to help pay tuition or living expenses.

Those with wealthy relatives. Good generational wealth transfer mechanism.

Grants

Money towards tuition based on financial need. They do not need to be repaid. The Free Application for Federal Student Aid (FAFSA) is the main way that students apply for both Federal and private grants. 

Grants do not need to be repaid and  are not loans.

Grants are difficult to get, especially for students who do not need financial aid. But students and parents can haggle with schools to increase the amount of grant aid provided.

 

Note that this is the area where having saved for college is unhelpful. Colleges will look a prospective student's savings and lower grant money if they have put money away for college.

Those who are struggling to pay education and are willing to spend the time to find appropriate grant opportunities.

Scholarships

Money towards tuition based on merit. They do not need to be repaid.

Scholarships do not need to be repaid and are not loans.

Getting a scholarship can be difficult. Scholarships are usually merit based.

Those who are high achieving high school students who have the time to apply for scholarships.

Federal College Loans

Loans backed by the government. Colleges let students know how much Federal student loan they qualify for.

 

 There are three principal types:

  • Direct subsidized loans
  • Direct unsubsidized loans
  • Direct PLUS loans

Federal Loans have the following advantages:

  • Payment deferred until you leave school or graduate.
  • No credit check required (except for PLUS loans)
  • No cosigner needed.
  • Potential deferment if you have trouble repaying.
  • Loan forgiveness for some graduates entering certain fields.

The interest rate on Federal College loans for those with good credit can often be higher than private loans, especially Direct PLUS loans.

 

Subsidized loans are available on a need-basis. Not everyone will qualify.

 

 

Those who do not have the money to pay for college after grants and scholarships.

Private College Loans

Loans from private banks or institutions made with the intent of  helping pay for college.

For those with good credit or with good income after school, private loans may offer lower interest rates.

  • No deferment. You may have to start paying while in college.
  • Not as flexible as Federal Loans when it comes to forgiveness or deferment in case of financial problems.

Those who need money for tuition after grants and scholarships and savings and who have a steady income. Private loans may have a lower interest rate than publicly backed loans.

Home Equity Loans

Loans from a bank against the value of a house or real estate property.

Home Equity Loans offer the lowest rates available for credit-worthy borrowers.

 

The interest on home equity loans can be tax deductible.

  • The house of the parent becomes collateral for the repayment of college loans.
  • Parents need to take equity out of their house that might serve as a retirement fund in the future.

Those whose parents have significant equity in their home and are willing to borrow against it.

 

Borrowing Options

If you need to borrow money, determining the best mechanism for doing so depends on your personal situation. If your family has a lot of equity in their home, then this might be the best option. If you are planning on teaching in a low income neighborhood after graduation, then Federal Loans might be best, as they offer loan forgiveness for various types of public services.

Because of the large sums of money involved in paying for college, it makes sense to spend the time to understand the intricacies of paying for college.