The Dow Jones Industrial Average fell more than 1,000 points on Friday, caused apparently by Fed Chairman Jerome Powell’s attempt to use a brief speech to channel the ghost of Paul Volcker.  Obviously, this was part of the market’s worries, but the stage was set when the Biden Administration announced a student loan forgiveness program last week.  The more we learn about this, the worse it looks. 

The executive order would send an already very bad student loan system – a system designed more to create jobs for academics than to really help students – into overdrive, generating huge costs for taxpayers, soaring college prices, and a massive shift in resources toward the already bloated college sector, which already generates negative marginal value-added for both students and our country.

The Biden Administration says the changes would cost $240 billion in the next ten years.  The Committee for a Responsible Federal Budget says $440 - 600 billion.  A budget model from Wharton says $1 trillion.  But even that $1 trillion figure might be way too low.

The key is that, as bad as it is, the cancellation of some student debt that already exists is only a small part of the policy change.  The much bigger change, and the one that the market has finally begun to absorb, is limiting future payments on debts to 5% of income, but only after the borrower’s income rises above roughly $30,000 per year.  For example, if someone makes $70,000 per year, then no matter how much they borrow they’re limited to paying $2,000 per year (5% of the extra $40,000).  After twenty years, any remaining debt would simply disappear.

Think about the perverse incentives!  

For the vast majority of students, choosing this “income-based repayment” system would be a no-brainer. And once they pick it, they wouldn’t care at all whether their college charges $35,000 per year (tuition, room, board, and fees), $85,000, or even $150,000.  In fact, students would have an incentive to pick the priciest college with the best amenities they could find and pay for it all with federal loan money, because their repayments are capped.  If you always wanted Rodney Dangerfield’s dorm room from the movie Back to School, you’re in luck!

Meanwhile, students would have the incentive to take out loans greater than what they need because they can turn the excess into cash for “living expenses.”  Then they could use it to buy crypto, throw parties, or pretty much anything else.  Who cares?!?  The government would limit their future repayments.

And here’s what might be the worst part: colleges would have an incentive to enroll students even if they have horrible future job and earning prospects.  By enrolling people no matter how poorly prepared they are, a college can charge whatever they want and get huge checks from the federal government.  And the unprepared students won’t care because they really don’t have to pay it back.  In effect, colleges could create massive and perfectly legal money-laundering schemes.

We are not legal experts and do not know whether the new proposal will be implemented fully.  But, if it is, watch out: college costs are poised to skyrocket and academia is courting a political backlash of enormous proportions.  Meanwhile, the market is attempting to digest just how far from economic reality politicians have become.  The political allocation of capital is a recipe for economic disaster.

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Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 8/29/2022
This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security

​Fully funding a college education without debt is no simple task. It’s no secret that the cost of a four-year degree has soared. But do you realize how much it has risen?
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According to ​Education Data Initiative, the average cost of college tuition and fees at four-year public schools has risen 179% over the last 20 years. It’s an average annual increase of 9.0%.

The average cost of tuition and fees at private four-year schools has risen 124% over the same period for an average annual increase of 6.2%.

That is an increase from an annual cost of $3,349 to $9,349 for a public university and $14,616 to $32,769 for a private school.

The statistics are sobering, and students are piling up unmanageable debts to secure a degree.

But there are ways to reduce out-of-pocket expenses, and avoid or at least minimize the need to take on debt.

Be savvy about financial aid

First, let’s review financial aid. This can be an important way to reduce costs, depending on the school.

Complete the Free Application for Federal Student Aid now

The FAFSA application period for the 2022-23 school year began on October 1, 2021. The FAFSA deadline for this school year is June 30, 2023.

Yes, it seems counterintuitive, but the deadline is next year. Nonetheless, get the form in as soon as you can. Grants are awarded on a first-come first-served basis, and there isn’t an unlimited pot of money available.

If your child is a senior in high school this year and their first year in college begins next year, try to submit when the starting gate opens on October 1, 2022.

One other thing to keep in mind: Many colleges have individual deadlines. As with the federal deadline, earlier is better.

Apply for scholarships and consider focusing on local scholarships, as there is usually less competition than for national scholarships.

“The absolute first place to visit for local scholarships is your school counselor’s office or the school’s website, ”  ​says Jan Smith, a financial literacy expert at Educational Credit Management Corporation (ECMC), a nonprofit organization that aids student loan borrowers. “Many businesses want to help out students and will approach the school counselor for getting the word out about scholarships” available in their hometown.

Other places where your kids may uncover funds include community organizations, local businesses, your employer or union, city, county and state governments, and churches and religious organizations.

A family’s financial situation can change. Since FAFSA uses last year’s tax returns, you can request an appeal if your situation has greatly shifted. Speak with the financial aid office and ask them to ‘reconsider’ based on your unique situation.
 
Don’t rule out so-called ‘no-loan’ schools. A university that is a no-loan school aids students in a way that they can avoid student loans through scholarships, grants and work-study programs. Some colleges may assist all students, others look at family income and needs, or focus on in-state students. One or more schools on your child’s preferred list may be a no-loan college. Inquire about the type of support they offer. What you don’t know can and will hurt you, financially.

Saving for college

As with all saving, the sooner you start saving for your children’s college, the better off you’ll be. And there are several advantaged ways to save for education purposes. This isn’t an all-encompassing list, but we’ll touch on the ​high points.

529 plans are popular and offer tax benefits when funds are used for qualified education expenses. Earnings and withdrawals are tax-free when you use the money for college. 
Be aware that withdrawals from accounts owned by someone other than the student or their parent must be added back to the student’s income on the following year’s FAFSA and can reduce aid eligibility by as much as 50% of the amount of the distribution.

The Coverdell ESA allows for tax-free earnings and withdrawals for qualified educational expenses; however, only married couples earning less than $220,000 or individuals earning less than $110,000 can contribute.
The maximum limit to contribute is $2,000 per year. The value of a Coverdell is counted as a parent asset on the FAFSA. Assets of parents are assessed at a lower rate than student’s assets, so the reduction in financial aid is reduced.

Custodial accounts (UGMA/UTMA) are another option. Funds deposited into these accounts are not limited to college and become the property of the child when he or she reaches 18 or 21 (most states), depending on the state. Will your child have the maturity to manage a windfall at a young age?

There are additional drawbacks, including the potential for tax liabilities on earnings and capital gains. Also, custodial accounts are counted as student assets on the FAFSA, which may reduce a student’s aid package.

I know that college saving can seem daunting. But develop a plan. Break it into smaller steps. Tackle each step and stay disciplined. If you have any questions or want assistance with resources, I'm here to help.

Age and poor health can quickly impair a person’s ability to deal with life’s many issues, including money.  There are many avenues you may decide to take for a loved one (or you may recognize that you desire some assistance yourself). Below I cover a variety of arrangements for help at various levels of need and formality.

Also note that laws vary from state to state, but here we'll look at some general guidelines. As with any legal issue, please consider consulting with an attorney that specializes in such matters if and when you are making these decisions.

Informal financial caregiving

If you have an elderly relative who is need of help, yet is still highly functioning, one option is to appoint a conversation partner. This allows a trusted friend or relative to oversee someone’s finances. He or she could receive duplicate bank and brokerage statements and join the elder person when they visit their financial advisor.

You could also consider appointing a trusted contact person that someone’s advisor or bank can reach out to in the event of certain circumstances, such as suspected fraud.

Another option at this level is to establish a convenience account.  This is not a joint account, but it lets an assistant help an individual deposit funds, withdraw money, and write checks. At the account owner’s death, the helper will not receive the funds in the account. But there are pitfalls to these accounts, as we’ll discuss below.

Formal financial caregiving

You may formally establish a joint account for someone who needs assistance with their financial affairs, but there are downsides this. Yes, the helper can quickly pay bills and manage financial affairs, but they could also steal from the account. Creditors of either person could access the account, too.

Joint tenants with rights of survivorship allows the survivor to take ownership of the account. This could quickly cause conflicts with heirs and thwart the wishes of the deceased.

Can you set up the account as tenants in common? That is a possible solution, as the assets then would pass to the estate of the deceased and not the financial caregiver named on the joint account.

A power of attorney gives someone the legal authority to make decisions about an individual’s finances and/or property.

Might an older or infirm person need a guardian? If a person doesn’t have a power of attorney, a court can name a guardian or conservator to manage their finances and health care decisions, if the court decides they are unable to manage decisions by themselves.

A trustee is given authority only over assets that are in a trust, such as a revocable living trust. Like a will, the trust will stipulate who receives the assets in the trust when the owner dies.

You might find yourself in the role of court-appointed guardian over someone in your family. Such guardians, conservators and trustees are considered fiduciaries. It’s a high standard. It means the financial caregiver must manage a person’s finances for that person’s benefit. They promise to will be acting on the other person’s behalf and always must put that person’s interests first.

The fiduciary standard includes:

• Carefully managing the person’s finances
• Keeping their finances and property separate from the caregiver’s own finances
• Always maintaining good records, including recording the reason for any payment in the memo field of the check

In addition:

• You cannot borrow from the account.
• Are you being paid? Do not pay yourself by withdrawing from the account. Have another person write the check for payment.

If you fail to meet the high standards of a fiduciary, you could be removed, sued, forced to repay money, or even have criminal charges brought against you.

Financial exploitation and elder abuse

Unfortunately, sometimes those appointed to care for the elderly will take advantage of them. Here are some of the signs to watch out for with the older people among your family and friends.

• An outside party, friend, or close relative notices or believes that some money or property is missing.
• Excessive gift giving suddenly takes place.
• The person whose finances are being managed says that some money or property is missing. 
• There is a sudden change in spending or savings. This might include heavy ATM usage, large unexplained wire transfers, purchases of items that don’t seem necessary, bills that go unpaid, names are added to bank and brokerage accounts, or changes in beneficiaries are made without explanation.
• A relative, caregiver, friend, or someone else blocks visitors or phone calls, or seems to be controlling decisions.

Questions you might ask before naming a caregiver

As you think through persons who might fit the role of financial caregiver, ask yourself or the person who is going to be assisted:  Am I comfortable sharing my wishes with them? Will they carry out my wishes? Do I trust this person? Will they act in my best interest? Will they manage my affairs correctly? Will they keep proper records and keep their money separate from mine?

Appointing a financial caregiver is not a responsibility that should be taken lightly. Choose the right person. If you answered “Maybe” or “No” to some of these questions, consider asking someone else. (Sources: Consumer Financial Protection Bureau, AARP)

If you have additional questions, I'd be happy to speak with you. That’s what I'm here for.

I trust you’ve found this review to be educational and insightful. If you have any questions or would like to discuss any matters, please feel free to give me a call.

As always, thank you for the trust, confidence, and the opportunity to serve as your financial advisor