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

Rate information contained on this page may have changed. Please find latest savings rates.

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

Rate information contained on this page may have changed. Please find latest savings rates.

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.


Guide to the Most Popular Ways to Save for College

Guide to the Most Popular Ways to Save for College

Rate information contained on this page may have changed. Please find latest savings rates.

The information below shows the most common savings techniques used by those saving for college according to a survey done by Fannie Mae and some helpful information about each of them.

Setting money aside for your child's education can be an effective way to pay for sizable tuition, room and board, and other miscellaneous education expenses. 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.

Because of the compounding value of money, the earlier you start saving for your child's education, the more of a chance the money has to grow.  It's important to keep in mind that in almost all cases, if the child or parent wants to maximize financial aid, any money saved should be done in the parents' or grandparents' names.

The information below shows the most common savings techniques used by those savings for college according to a survey done by Fannie Mae and some helpful information about each of them.

Savings Accounts

Used by 45% of those saving.

FDIC Insured accounts offered by banks and credit unions.

Pros:

  • Easy to open
  • Money is FDIC insured.
  • Some modest interest on high yield accounts.
  • Money very liquid and easy to withdraw.

Cons:

  • Interest is relatively low right now.
  • Money does not grow that quickly.
  • Income is taxable.

Who Is this For:

Students who are two or three years away from college and cannot afford to lose money in the stock market but want to earn some  interest on their savings.

How to Open

You can open a savings account at a bank or credit union. BestCashCow can help you find the best rate from a local bank or an online bank.

 

529 College Savings Plans

(Used by 29% of those saving)

Education savings plan set up by state or educational institution that grow Federal tax-free and can be distributed tax-free.  The plan may also offer some state tax benefits. Generally, each state has its own 529 plan.

Pros:

  • Income grows Federal tax-free.
  • No taxes on distribution as long as used for qualifying educational purpose.
  • Donor retains control of funds.
  • Low maintenance as the plan takes care of managing the portfolio.
  • Up to $300,000 per beneficiary allowed in most state plans.

Cons:

  • You must use the money for college or there is a 10% penalty on withdrawal.
  • Fees can be higher than no-load mutual funds.
  • 529 performance is not guaranteed.
  • The funds can and have lost money.

Who this is for:

529 Plans are good for parents of younger children who have 5+ years to go before they attend college. This allows them to ride out any downturn in the market. The plans are also good for parents who want to take advantage of the tax advantaged nature of the plans.

How to Open:

You can open a 529 Plan through a brokerage.

 

Checking Accounts

(Used by 24% of those saving.)

A deposit account at a bank or credit union that allows the user to withdraw money using checks, debit cards, ATMs, or other electronic means. Usually does not pay high interest.

Pros:

  • Easy to open
  • Money is FDIC insured.
  • Some modest interest on high yield checking accounts or online checking accounts.
  • Money very liquid and easy to withdraw.

Cons:

  • Interest is relatively low right now. Money does not grow that quickly.
  • Income is taxable.

Who This is For:

Students who are two or three years away from college and cannot afford to lose money in the stock market but want to earn some  interest on their savings.

How to Open:

You can open a checking account at a bank or credit union.

Find the best checking account rate.

 

Investments

(Used by 20% of those saving)

Stocks, bonds, and mutual funds not included 529 Plans or 401K plans.

Pros:

  • Total flexibility in choosing  investment options.
  • May have higher return than bank-based investment accounts.
  • Money can be withdrawn and used for any purpose.

Cons:

  • Money is taxable.
  • Investments can lose value.

Who this is for:

For students and parents who want a higher rate of return than what is provided by a bank account but might also use the money for purposes other than college expenses.

How to Open:

A brokerage account allows you to deposit money and invest. View our list of brokerage accounts.

 

Retirement Accounts

(Used by 18% of those saving)

Retirement plans such as Roth IRAs, 401K plans, and regular IRAs.

Pros:

  • Roth IRA plans allow the money to be withdrawn penalty and tax free after the age of 59 1/2.
  • Other IRA plans allow penalty free withdrawal if the money is used for education, but taxes must be paid on the earnings.
  • If you borrow from a 401K, the money is not counted on the FAFSA.

Cons:

  • Money is taxable.
  • Investments can lose value.

Who this is for:

For students and parents who want a higher rate of return than what is provided by a bank account but might also use the money for purposes other than college expenses.

How to Open:

Employee sponsored plans can be opened at work. Non-employee plans can be opened and funded via a brokerage company or financial company.

 

Certificates of Deposit

(Used by 16% of those saving)

FDIC insured instruments in which the depositor agrees to leave the money in the bank for a set period  of time in return for a set rate of interest over that period.

Pros:

  • Safe. Certificates of Deposit from FDIC insured banks are considered to be a very safe investment.
  • Generally higher interest than a savings or checking account.

Cons:

  • The money is not very liquid during the term of the CD ( a user can break the CD and withdraw money by incurring a penalty.)
  • Current interest rates are low by historical standards.
  • Income from CDs is taxed.

Who this is for:

Students who are two or three years away from college and cannot afford to lose money in the stock market but want to earn some  interest on their savings. Or, parents who do not want to take the risk of investing education money in the stock market.

How to Open:

You can open a CD at a bank or credit union. Find the best rate from a local bank or an online bank.

 

US Savings Bonds

(Used by 15% of those saving)

Bonds issues by the Federal government that pay interest.

Pros:

  • Savings bonds are extremely safe, backed  by the full credit of the U.S. government.
  • Income from savings bonds can be excluded if used to pay for college (note this is not available to higher earners. Read more).
  • If bonds are in the parent's name, it will have a low impact on financial aid eligibility.

Cons:

  • Interest on savings bonds is low, even compared to CDs and savings accounts.
  • For higher-income families, savings bond  income is Federal, but not state taxable.
  • Savings bonds must be held for at least 5 years or a penalty of the last three months of interest.

Who this is for:

With current interest rates, there is no reason for anyone to use Savings Bonds as a college savings vehicle.

How to Open:

Savings Bonds can be purchased directly from the US Treasury website.

 

Coverdell Accounts

(Used by 13% of those saving)

Tax-advantaged accounts similar to 529 plans that help saver for education expenses. The money can be used for K-8, high school, or college.

Pros:

  • Money can be used for elementary, high school, or college expenses.
  • Money grows tax-free.
  • Investments are self-directed allowing more flexibility in choosing options.
  • Money in the child's
  • If funds are in the parent's name, funds will have a low financial aid impact.

Cons:

  • There is a maximum contribution limit of $2,000 per student per year.
  • Income  limit of $95-$110,000 for single tax-payer and $190,000 - $220,000 for married couple filing jointly.
  • If the account is in the child's name, fund in the account will have a high impact on financial aid treatment.

Who is this for:

The Coverdell plan is for parents who might want to use the funds for private elementary, high school, or college, who like to control what the money is invested in, and who earn below the max-income guidelines.

How to Open:

Many financial services companies offer Coverdell Accounts.