What You Need to Know about College 529 Savings Plans

When it comes to saving for college, the 529 plan remains extremely popular, with over $352 billion in assets, according to some estimates. In my previous article (When Choosing Funds for Your College 529 Plan, Don’t Make This Mistake) I reviewed how to maximize the growth in your 529. Many readers agreed with me that the age-based mutual fund options within 529 plans are often too conservative.

 Still, many parents had additional questions about how 529s work. Afterall, the plans are complicated and have very specific rules and regulations. In this article I will summarize answers to the most frequently asked questions on 529s.  However, this list is not all encompassing and if you would like to learn more, join me April 20 and 23 at 12 p.m. EST for a complimentary webinar on college saving strategies. 

Here’s a selection of what you need to know about 529 plans:

What is a 529 plan? The name 529 comes from a section in the IRS tax code. Section 529 Qualified Tuition Programs are investment accounts administered by each state and intended to be used for qualified education expenses.

What are the tax benefits? Generally speaking, the earnings on 529 plan contributions can grow free from federal income tax, and withdrawals used to pay for qualified education expenses are free from federal income tax as well. Contributions are with after-tax money; however, most states offer a state income tax deduction for contributions, but this varies for each state.

Do I have to use my state’s plan? No, you do not have to be a resident of that state to use another state’s plan. However, there may tax advantages to using your own state. It’s best to discuss with your accountant or financial adviser before opening an account.

What are “qualified” education expenses? Qualified education expenses include tuition, mandatory fees, textbooks, computers and software, supplies, required equipment and room and board if enrolled at least half-time. Room and board costs may not exceed certain amounts, either the actual invoiced cost of living on-campus or, if off-campus, the applicable rate determined by the qualified college or institution. Special needs services for a special needs beneficiary are also considered a qualified expense.

Does a 529 account have to be used for college? What about other schools, like a trade or vocation? 529 assets can be used at any eligible institution of higher learning. That includes four-year colleges, universities, qualifying two-year programs, trade schools and vocational schools. To qualify as an eligible institution, a school must be eligible to participate in student financial aid programs offered by the Department of Education.

Can 529 money be used for K-12 schools? A relatively new provision allows 529 account owners to withdraw up to $10,000 per year per student for private primary or secondary education. Unlike for college, this only applies to tuition, not to textbooks, computers or other fees or activities.

What if money is withdrawn for any other expense that isn’t considered “qualified”? Any earnings on a non-qualified withdraw are subject to a 10% federal tax penalty. In addition, the earnings are subject to federal and, if applicable, state income taxes.

Are there any exceptions to the 10% penalty? What if my child receives a scholarship? Withdrawals following a beneficiary’s death, disability or receipt of a scholarship (to the extent of the scholarship award) will not be subject to the 10% penalty. However, you will have to pay taxes on the earnings.

Who can open an account? Any individual who is of legal age to open an account and is a U.S. citizen or legal resident. In addition, U.S. trusts, corporations, partnerships and non-profit organizations may open an account.

Who is the owner? Typically, the parent is the owner. There can only be one owner, no joint ownership. However, there is an option for a successor owner if the account owner dies.

Who is the beneficiary? Usually the child, but it can be anyone — including yourself — and the beneficiary must be either a U.S. citizen or legal U.S. resident.

Who can contribute to the account? Any person or entity may make contributions to the account for the benefit of a beneficiary at any time.

What are the contribution limits? Contributions to 529 college savings plans are considered gifts for tax purposes. In 2021, gifts totaling up to $15,000 per individual qualify for the annual gift tax exclusion. This means if you and your spouse have three children you can gift $90,000 without gift-tax consequences, since each child can receive $15,000 in gifts from you and $15,000 in gifts from your spouse. Remember, this also includes non-529 gifts (such as gifts to a life insurance trust) so be sure to account for those.

Is there an overall limit to 529 plan accounts? Technically there are overall limits to 529 plan account balances. But limits can vary from state to state, generally from $235,000 to $529,000. Once the balance on a 529 plan reaches its limit, the plan will not accept new contributions. It’s worth mentioning some plans will consider balances in other 529 plans for an overall aggregate limit. For instance, if the owner has more than one 529 for the same beneficiary, the plan may aggregate all the plan’s balances to determine if the maximum limit has been reached.

What is the five-year election? You can “front-load” your gifts or contributions to a 529 plan and spread the gift over five years for gift tax purposes. For instance, if you contribute $75,000 in 2021, you can elect to use five years’ worth of gifts in one year ($75,000 divided by the $15,000 annual exclusion). This is important for larger estates. Any 529 contribution over the annual exclusion amount is deducted from the lifetime gift exemption, which is currently $11.7 million per individual in 2021 (Source: SavingforCollege.com). Staying under the annual exclusion of $15,000 or using the five-year election will help preserve your lifetime gift exemption for other gifts.

What are the estate tax implications of a contribution to a 529 plan? Except in special circumstances, contributions to a 529 plan are not considered part of the estate of the contributor for estate tax calculation purposes.

Can you roll money from other accounts into a 529? Tax-free rollovers from one 529 into another 529 with the same beneficiary are permissible once every 12 months.

Can you roll UGMA or UTMA assets into a 529? Yes, transfers from a UTMA/UGMA are permissible, but restrictions apply. To transfer UTMA/UGMA accounts to a 529 plan, you may be required to sell the UGMA/UTMA assets first. Generally speaking, UTMA/UGMA accounts do not allow for changing the beneficiary, and as such this restriction will carry over to UTMA/UGMA assets transferred to a 529. It’s best to consult with a financial or tax adviser before transferring UTMA/UGMA assets to a 529.

Can you change the beneficiary? A 529 account owner may change the beneficiary at any time. However, the new beneficiary must be a member of the family of the previous beneficiary to avoid being considered a withdrawal. If the account owner changes the beneficiary to a new beneficiary who is more than one generation younger than the previous beneficiary, the generation-skipping transfer tax may be triggered. For example, a parent changing the beneficiary from their child to their grandchild is considered a generation-skipping transfer.

Can you change the investments in a 529 account? Currently, the IRS allows an account owner to change the mutual fund or funds only twice a year. There are currently no “aggregation rules” with respect to investment changes, so the investment change limit of two per year is per account. For example, if an owner and beneficiary have other 529 accounts, each account will have their own two-change-per-year limit.

What is the treatment of 529s for financial aid? 529 assets may affect a beneficiary’s ability to qualify for federal need-based financial aid. A 529 is an asset of the student’s if the student is considered an independent student for tax purposes or an asset of the parent if the if the student is a dependent student. A student is considered independent if, among other criteria, he or she is at least 24 years of age, or is married, or a graduate or professional student. Generally, if a student is considered “dependent” and the 529 is a parent’s asset, the more favorable the treatment for financial aid. A 529 should not affect the eligibility for a merit-based scholarship.

As you can see, a 529 education savings plan has many rules. But if one follows the rules, the 529 is an unapparelled place to save for college and private school. There are several advantages, including the ability to defer taxes on earnings, withdraw earnings tax-free for qualified education expenses, plus the ability in some states to deduct — within limits — the contribution from state income taxes. Most accounts have several investment choices as well, from auto-pilot programs, such as age-based options, to the ability to pick individual funds, all of which could help contributions grow and keep pace with future college costs.

The 529 plan is very flexible too, with the ability to change beneficiaries without incurring a penalty (assuming to another qualified beneficiary). For new parents, the low minimum contributions and the ability to invest automatically are attractive features. In addition, there are advantages for high-income earners, such as no income limitations to set up an account, very high contribution rates, and a contribution is a completed gift for estate tax purposes if estate tax planning is important.

Higher education is a way to a better life for many people, and the 529 plan remains an excellent way to help get you there. To learn more, please join me April 20 & 23 12pm EST for a webinar on college planning strategies. Register here: College Planning Webinar.

The views and opinions expressed in this article are solely those of the author and should not be attributed to Summit Financial LLC. Investment advisory and financial planning services are offered through Summit Financial, LLC, an SEC Registered Investment Adviser, 4 Campus Drive, Parsippany, NJ 07054. Tel. 973-285-3600 Fax. 973-285-3666.
The attached materials, URLs, or referenced external websites are created and maintained by a third party, which is not affiliated with Summit Financial LLC or its affiliates. The information and opinions found within have not been verified by Summit, nor do we make any representations as to its accuracy and completeness. Summit Financial and affiliates are not endorsing these third-party services or their privacy and security policies, which may differ from ours. We recommend that you review this third party’s policies and terms. This material is for your information and guidance and is not intended as legal or tax advice. Legal and/or tax counsel should be consulted before any action is taken.

CFP®, Summit Financial, LLC

Michael Aloi is a CERTIFIED FINANCIAL PLANNER™ Practitioner and Accredited Wealth Management Advisor℠ with Summit Financial, LLC.  With 17 years of experience, Michael specializes in working with executives, professionals and retirees. Since he joined Summit Financial, LLC, Michael has built a process that emphasizes the integration of various facets of financial planning. Supported by a team of in-house estate and income tax specialists, Michael offers his clients coordinated solutions to scattered problems.

The views and opinions expressed in this article are solely those of the author and should not be attributed to Summit Financial LLC.  Investment advisory and financial planning services are offered through Summit Financial, LLC, an SEC Registered Investment Adviser, 4 Campus Drive, Parsippany, NJ 07054. Tel. 973-285-3600 Fax. 973-285-3666. This material is for your information and guidance and is not intended as legal or tax advice. Legal and/or tax counsel should be consulted before any action is taken.

Source: kiplinger.com

How to Pay Off $130,000 in Parent PLUS Loans for Just $33,000

Millennials are not the only ones saddled with the obligation to pay back massive amounts of student loans. Many parents take out loans in their names to help their children pay for college, and in many cases, these loans are getting in their way of achieving their goals, like retiring. 

Under the federal student loan system, parents can take out Parent PLUS loans for their dependent undergraduate students. One of the major differences between Parent PLUS loans and the loans that the students take out is that there are fewer repayment options available for Parent PLUS borrowers. Parent PLUS loans are only eligible for the Standard Repayment Plan, the Graduated Repayment Plan and the Extended Repayment Plan.

There are other strategies for managing Parent PLUS debt, however. When consolidated into a Direct Consolidation Loan, Parent PLUS loans can become eligible for the Income-Contingent Repayment (ICR) Plan, in which borrowers pay 20% of their discretionary income for up to 25 years.

Currently, ICR is the only income-driven repayment plan that consolidated loans repaying Parent PLUS loans are eligible for. However, when a parent borrower consolidates two Direct Consolidation Loans together, the parent can potentially qualify for an even better repayment plan and further reduce their monthly payments. 

Nate, the high school math teacher

Let’s take a look at Nate, age 55, as an example to see how a parent can manage Parent PLUS loans and still retire as hoped.

Nate is a public school teacher who makes $60,000 a year and just got remarried to Nancy, who is also a teacher. Nate took out $130,000 of Direct Parent PLUS loans with an average interest rate of 6% to help Jack and Jill, his two kids from a previous marriage, attend their dream colleges. Nate does not want Nancy to be responsible for these loans if anything happens to him, and he is also worried that he would not be able to retire in 10 years as he had planned!

If Nate tried to pay off his entire loan balance in 10 years under the federal standard repayment plan, his monthly payment would be $1,443. Even if he refinanced privately at today’s historically low rates, his payments would still be around $1,200, which is too much for Nate to handle every month. Also, since Nate’s federal loans are in his name only, they could be discharged if Nate dies or gets permanently disabled. Therefore, it is a good idea to keep these loans in the federal system so that Nancy would not be responsible for them. 

In a case like this, when it is difficult for a federal borrower to afford monthly payments on a standard repayment plan, it’s a good idea to see if loan forgiveness using one of the Income-Driven Repayment plans is an option. In Nate’s case, his Parent PLUS loans can become eligible for the Income-Contingent Repayment (ICR) plan if he consolidates them into one or more Direct Consolidation Loans. If Nate enrolls in ICR, he would be required to pay 20% of his discretionary income, or $709 a month. Compared to the standard 10-year plan, Nate can cut his monthly burden in half by consolidating and enrolling in ICR!

But that’s not all …

Double Consolidation

For Nate, there is another strategy worth pursuing called a double consolidation. This strategy takes at least three consolidations over several months and works in the following way:

Let’s say that Nate has 16 federal loans (one for each semester of Jack and Jill’s respective colleges). If Nate consolidates eight of his loans, he ends up with a Direct Consolidation Loan #1. If he consolidates his eight remaining loans, he ends up with Direct Consolidation Loan #2.  When he consolidates the Direct Consolidation Loans #1 and #2, he ends up with a single Direct Consolidation Loan #3. 

Since Direct Consolidation Loan #3 repays Direct Consolidation Loans #1 and 2, it is no longer subject to the rule restricting consolidated loans repaying Parent PLUS loans to only be eligible for ICR. Direct Consolidation Loan #3 could be eligible for some other Income-Driven Repayment plans, including IBR, PAYE or REPAYE, in which Nate would pay 10% or 15% of his discretionary income, rather than 20%.

Reducing Nate’s monthly payments

For example, if Nate qualifies for PAYE and he and Nancy file their taxes using the Married Filing Separately (MFS) status, only Nate’s $60,000 income is used to calculate his monthly payment. His monthly payment now would be reduced to $282. If he had chosen REPAYE, he would have to include Nancy’s annual income of $60,000 for the monthly payment calculation after marriage — regardless of how they file their taxes — so his payment would have been $782.

Double consolidation can be quite an arduous process, but Nate decides to do it to reduce his monthly payment from $1,443 down to $282. 

How Parent PLUS borrowers can qualify for forgiveness

Since Nate is a public school teacher, he would qualify for Public Service Loan Forgiveness (PSLF), and after making 120 qualifying payments, he would get his remaining loan balance forgiven tax-free. 

Since Nate is pursuing forgiveness, there is one more important thing he can do to further reduce his monthly payments. Nate can contribute more to his employer’s retirement plan. If Nate contributed $500 a month into his 403(b) plan, the amount of taxable annual income used to calculate his monthly payment is reduced, which further reduces his monthly payments to $232. 

Summarizing Nate’s options in dollars and cents 

  1. With the standard 10-year repayment plan, Nate would have to pay $1,443.26 every month for 10 years, for a total of $173,191. 
  2. With a consolidation, enrolling in ICR, filing taxes using the Married Filing Separately status and Public Service Loan Forgiveness, he would start with $709 monthly payments and pay a total of around $99,000 in 10 years.*
  3. With double consolidation, enrolling in PAYE, filing taxes using the Married Filing Separately status and Public Service Loan Forgiveness, his monthly payment starts at $282, and his total for 10 years would be around $40,000.
  4. For maximum savings: With double consolidation, enrolling in PAYE, filing taxes using the Married Filing Separately status, Public Service Loan Forgiveness and making $500 monthly contributions to his employer retirement account for 10 years, Nate’s monthly payment starts at $232, and his total payment would be around $32,500.      He would have contributed $60,000 to his 403(b) account in 10 years, which could have grown to about $86,000 with a 7% annual return. Comparing this option with the first option, we can project that Nate pays about $140,000 less in total, plus he could potentially grow his retirement savings by about $86,000.

As you can see, there are options and strategies available for parent borrowers of federal student loans. Some of the concepts applied in these strategies may work for student loans held by the students themselves as well.

An important thing to remember if you are an older borrower of federal student loans is that paying back the entire loan balance might not be the only option you have. In particular, if you qualify for an Income-Driven Repayment plan and are close to retirement, you can kill two birds with one stone by contributing as much as you can to your retirement account. Also, since federal student loans are dischargeable at death, it can be a strategic move to minimize your payments as much as possible and get them discharged at your death.

Also, loan consolidation can be beneficial as it was in this example, but if you had made qualifying payments toward loan forgiveness prior to the consolidation, you would lose all of your progress you had made toward forgiveness!

As always, every situation is unique, so if you are not sure what to do with your student loans, contact a professional with expertise in student loans.

*Note: The projections in Options 2 through 4 assume that, among other factors such as Nate’s PSLF-qualifying employment status and family size staying the same, Nate’s income grows 3% annually, which increases his monthly payment amount each year. Individual circumstances can significantly change results.

Associate Planner, Insight Financial Strategists

Saki Kurose is a Certified Student Loan Professional (CSLP®) and a candidate for the CFP® certification.  As an associate planner at Insight Financial Strategists, she enjoys helping clients through their financial challenges. Saki is particularly passionate about working with clients with student loans to find the best repayment strategy that aligns with their goals.

Source: kiplinger.com

7 Things College Students Should Know About Credit

I opened up several credit cards within the first semester of college. Each time, I earned some sort of cool promotional item – a shot glass, a tee-shirt, a Penn State keychain. When the cards arrived in the mail a week later, I didn’t really bother to use them and when I did, I wasn’t aware of the fine print. When bills arrived in the mail, I just paid the minimum balance, thinking that was all well and good.

I had no idea what I’d really gotten myself into.

College can be a popular time to establish credit. According to a survey by credit reporting agency Experian, 58% of soon-to-be college graduates possess a credit card, making average monthly charges of over $500.

Opening a credit card when you’re young can be a helpful way to achieve a strong credit score in the future. The length of your credit history is equal to 15% of your FICO credit score. The earlier you establish credit, the longer your credit history becomes and credit score calculators consider this a plus.

But it can only work to your advantage if you commit to managing credit responsibly and educating yourself on the rules and best practices surrounding credit usage and credit health. This includes credit cards, student loans and other types of credit.

Specifically with credit cards, since 2009, the laws have changed whereby those under the age of 21 cannot open a credit card without a cosigner or proving they can afford to make the payments (i.e. have income). The CARD Act (aka The Credit Card Accountability, Responsibility and Disclosure Act), which implemented this rule, also bans banks and card issuers from marketing credit cards to college students.

Still, there are smart and responsible ways to establish credit when you’re young. Here’s the credit advice and education I would have given my 18-year-old self back in the day.

Student loans can help you established credit.

While a large part of your credit score relies on how well you manage revolving debt, like a credit card, student loans also play an influential role. Student loans and mortgages, which you pay back in equal installments every month, are what are known as installment loans.  Be sure to be current and on time with your student loans. While they’re often hailed as “good debt,” a missed payment or delinquency can make life miserable.

Credit cards are not free money.

It’s really, really easy to spend when using a credit card. In fact, it’s a lot less painful than using cash, research has found.

Resist temptation and if you’re prone to impulse purchases, avoid keeping the card in your wallet.

Instead, leave it in a drawer at home and link a couple online bills to the card and charge routine expenses to it like a utility bill or gym membership fee. Only spend what you can pay back in full, reconciling the bill with an automatic transfer from your checking or savings account when the balance is due. This way you’re still “using” the card, but not making it all too convenient to swipe (or dip, as it now is). All the while, you’re establishing great credit.

Bad behavior can haunt you for years to come.

Just like with student loans, one missed payment on a credit card can stain your credit report for years. Later, when you’ve graduated and long forgotten about the incident, a future lender or landlord might take that into account as they review your credit report. They may think twice about lending you money or even offering you the keys to a lease. Steer clear of late payments by automatically scheduling payments to your credit card each month and use a free loan calculator to see how many payments you need to make until your debt is paid off.

Talk to a parent or older friend before opening a card.

As part of your due diligence, before opening a credit card, speak with someone older and more experienced. Speak with a parent or older friend for their advice. How did they establish credit? What credit card do they have and why?

Can’t qualify? Avoid cosigning with parents.

If you’re under the age of 21 and don’t have income to prove you can afford credit card payments, you may be tempted to ask a parent to co-sign the credit card offer with you. But realize that you are putting a parent equally on the hook for payments. If you can’t make a payment, the card issuer goes after the co-signer.

Instead, consider becoming an authorized user on one of your parent’s cards. Their good behavior with the card – paying on time and in full – is something that gets reported on your credit report and boosts your credit health. On the flip side, you may not want to go down this path if mom or dad is not financially responsible. Negative activity on the card also gets reported on your credit report.

As an authorized user you can receive your own copy of the credit card with your name on it. Make a plan with your parent to know how much is OK to spend on the card each month and how to pay back your portion.

Avoid applying for multiple cards.

Each time you apply for credit, the lender or card issuer reviews your credit profile by pulling your credit report. This is considered a “hard inquiry,” and multiple hard inquiries can injure your credit score by several points.

Hard inquiries usually lose their impact after a year, but better to do your research and be very selective, and apply for the one card you have a very strong sense for which you’ll qualify. Mint has a great tool to help you find the right credit card here.

Check your credit report. It’s free!

Did you know that you can review your credit report at no cost each year? And you can do so from each of the three major credit-reporting agencies? Yep, it’s your legal right. Visit annualcreditreport.com to download your credit report from Experian, Equifax and TransUnion.

Periodically it’s important to review your credit report to ensure that your credit usage is being reported accurately.  Take a close look all the types of credit listed on the report and the status of each credit card or loan. This is important because information recorded on a credit report directly impacts your credit score (which you can review for free on your mint dashboard.)

Have a question for Farnoosh? You can submit your questions via Twitter @Farnoosh, Facebook or email at farnoosh@farnoosh.tv (please note “Mint Blog” in the subject line).

Farnoosh Torabi is America’s leading personal finance authority hooked on helping Americans live their richest, happiest lives. From her early days reporting for Money Magazine to now hosting a primetime series on CNBC and writing monthly for O, The Oprah Magazine, she’s become our favorite go-to money expert and friend.

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MintFamily with Beth Kobliner: 3 Ways Your Kids Will Redefine the American Dream

A friend’s 20-something son shocked his parents with his post-graduation plans: He was moving to Southeast Asia to sell selfie sticks.

Millennials in a nutshell, #amiright?

But who can blame them for taking non-traditional paths, given the poor financial hand they’ve been dealt: record levels of college debt, uncertain job prospects, stagnant wages, and more. It’s why one in three Millennials is deeply dissatisfied with their financial situation, according to a much-quoted new study from George Washington University and PwC.

Findings from a recent Harvard survey cut even deeper: half of Millennials say the American Dream is dead. Yep, that cornerstone of post-war America—the house, the car, the upwardly mobile career track—is about as relevant to them as black & white TV. To parents raised on the mythology of the American Dream, that’s grim news.

But the situation may not be as dire as it appears.

As they’ve done with everything from communications to careers, Millennials are redefining what it means to lead a “better life” (something parents see as key to the American Dream, according to a 2015 60 Minutes/Vanity Fair poll). This new paradigm is rooted in the experiences of people who came of age after the financial crisis of 2008, and reflects how they see the world. It offers a flexible lifestyle (one that some might see as transient) and a reworking of the traditional measures of success.

Here are three ways that our kids will make their own American Dream—and thrive.

1.  They’ll rethink what college means—and how to pay for it.

Two-thirds of parents say the American Dream includes sending their kids to college, according to a September poll from the youth media company Fusion. These moms and dads are right to think this, as college grads earn about $1 million more over their lifetimes.

For Millennials, cost and career aspirations are informing this major life decision more than ever (call it pragmatism if you want). Gone are the days of selecting a school based on its bucolic campus or dominant football program. Kids (and parents) want more value—and less debt.

That’s why it’s so critical to start the college cost conversation early—like 9th grade-early. Want an incentive? A start-up called Raise.me allows high schoolers—as early as freshman year—to earn “micro-scholarships” from over 100 colleges. Got an A in chemistry? Won the lacrosse playoffs? Volunteered at your local animal shelter? Each awesome achievement can earn your kid $500 to over $1,000 from various colleges. Even “mayor” of Millennials Mark Zuckerberg backs it: Facebook is one of Raise.me’s main supporters.

Best way to avoid the college cost guessing game? Fill out the FAFSA (Free Application for Federal Student Aid)—the key to scholarships, grants, work-study, and low-rate federal loans. The form is notoriously long and complicated, but it’s getting better! Starting this year, you can access the FAFSA on October 1, 2016 (up from January 1, 2017). Why the new, early start? It means you’ll be able to auto-fill the form for the 2017-18 school year using your 2015 tax return data. (More details here.)

Parents of kids who excel in hands-on environments can encourage them to consider the growing trend of apprenticeships (a traditionally European idea that’s catching on here in the U.S.), particularly programs offered in tandem with a community college degree.

2.  They’ll understand that owning your own “home sweet home” is only sweet when you can afford it.

In 1986 (back when I was graduating from college!), 76% of young people saw owning a home as essential to the American Dream. Today that’s down to 59%, according to the Fusion poll.

That means your kid is more likely to bunk with you—or rent—than take on a mortgage she can’t afford (so don’t turn her bedroom into a home office just yet). If she does move in with you, make sure she uses this time as an opportunity to save! (And work out any financial details in advance with this helpful guide from eHow.com.)

Renting has traditionally gotten a bad rap, but it lets your kid explore—new towns, new jobs, new people!—without being stuck in one place. Take our selfie-stick seller: his Southeast Asia stint lasted less than a year before he was back in the states and settling into a new city and new gig. Like his fellow Millennials, he’ll probably rent for several years. Buying may not even cross his mind until his early 30s. A Zillow study shows the average first-time homebuyer is now 33, up from 29 in the 1970s. Of course, you’ll want to talk to your kid about the realities of owning a home, including how to sock away a chunk of money for a down payment once she’s ready.

3.  They’ll value happiness and independence over a huge paycheck.

The entrepreneurial goals of Millennials can sometimes seem a little, er, lofty (like the selfie stick plan that didn’t exactly take off), but thankfully, many are starting to pace themselves.

A study from Upwork, a company that helps businesses find freelance workers, showed that 62% (mostly Millennial) freelancers planned to work a full-time job and moonlight on the side for two years before quitting to follow their dreams. Two years may not be a magic number (a specific financial goal would be safer), but at least they’re earning—and learning—prior to taking the leap.

Today’s young people aren’t all work and no play, either. Millennials’ drive for success, salary, and even entrepreneurial goals pales in comparison to their desire to spend time with family and friends, which they rank as “one of the most important things” in their lives, according to the Harvard survey.

The takeaway? We’re raising a generation that demands independence, flexibility, and a true work/life balance. Perhaps that’s the new American Dream.

Sounds like something we can all believe in.

How do you define the American Dream for your kids? Tell me on Twitter using #NewAmericanDream.

© 2016 Beth Kobliner, All Rights Reserved

BethKobliner

Beth Kobliner is the author of the New York Times bestseller Get a Financial Life, and is currently writing a new book, Make Your Kid a Money Genius (Even If You’re Not), to be published by Simon & Schuster. Visit her at bethkobliner.com, follow her on Twitter, and like her on Facebook.

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Transitioning Your Finances to Life After College

Just graduated from college? Congratulations! You’ve made it to one of the major milestones in life, and you’re looking at a world of possibility.

So how do you make the most of starting this new, post-university phase of life? One of the most important things to understand as you transition from college student to real world, on-your-own adulting is how to start managing your money so you can not only pay all your expenses, but also start saving and build wealth.

Create Your Own Systems

Have you ever heard of engineering your environment to successfully build a new habit? Just like you might make a morning workout habit stick faster if you lay out your gym clothes the night before, you can take actions to set up systems that make building good financial habits easier.

In terms of your finances, engineering your environment means taking steps like:

  • Building and using a budget
  • Tracking your spending
  • Automating bills and other transactions, like monthly student loan payments
  • Automating transfers to savings

Using a budget creates a framework within which you can use your money. Tracking your spending makes you more aware of how you’re using your money within that budget. And automating transfers between your checking and savings accounts makes it easy

You can use a number of tools to help you develop and stick with a money management environment that works for you. For example, a tool like Mint provides a comprehensive overview of nearly every aspect of your finances — from your budget and spending to your credit score and investments — which makes it a great place to start.

Another app to consider is Digit, which makes small automated transfers from your checking into your savings. If you’d rather get a jumpstart on investing, try Acorns too. Acorns works in much the same way as Digit, but instead of putting small amounts of money into a savings account, the app invests the money for you.

Remember that there’s no right or wrong way to set up budgets, track spending, or create automated savings plan. What’s important is recognizing the need for a structure, and developing one that works for you.

Manage Your Money When You Make More

After graduation when you start your career in earnest, you’ll likely make more money than you did back in your college days. This is great for you, but it can also cause some financial problems if you don’t think ahead. In other words: mo’ money, mo’ problems

The biggest pitfall of earning more is succumbing to lifestyle inflation. This happens when you spend more as you earn more. Essentially, you build a spending habit — not a savings habit. And this is a problem because it’s extremely difficult to cut back your spending once you’ve adjusted to a certain level of luxury or lifestyle.

If you avoid lifestyle inflation from the very beginning and make saving at least 10% of your income a priority, you’ll always find it easier to save money no matter how much you make. You don’t have to start off saving 10% right away, but it’s a great goal to work toward as your income increases.

You should also take advantage of a full-time job with all the benefits it comes with as you start your career. Don’t wait to open a 401(k) or other employer-sponsored retirement plan if any are available to you. If your company offers to match your contributions, put in at least enough to get the full match. That’s free money!

If you don’t have access to an employer-sponsored retirement account, you can still save as soon as you start working. Open a Roth IRA and save what you can. And remember, as you earn more, contribute more to retirement (instead of getting caught up in spending more).

Continue Your (Financial) Education

You may have just graduated from college, but don’t let learning end here. The best way to set yourself up for financial success in life is to continually seek to learn more about your money. Ask questions and seek answers. Do research. Get multiple opinions and consider different perspectives.

There are more resources available to you than ever before. In addition to personal finance, money management, or investing books that you can buy, tons of information about these subjects is available for free on blogs and podcasts. While most bloggers are sharing from personal experience, there’s a lot that you can learn from what other people have tried — and if nothing else, tuning into the conversation can keep you inspired and motivated to reach your own financial goals.

Staying interested and involved in your finances will help you better manage your money on a day-to-day basis and for the long-term. No one will care more about your cash than you do, and continuing to learn is without a doubt a prerequisite for building wealth.

Kali Hawlk is a freelance writer and the co-founder of Off The Rails, a free mentorship platform for creative women. She’s passionate about helping others do more with their money, their work, and their lives. Get in touch by tweeting @KaliHawlk.

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Transitioning Your Finances to Life After College

Just graduated from college? Congratulations! You’ve made it to one of the major milestones in life, and you’re looking at a world of possibility.

So how do you make the most of starting this new, post-university phase of life? One of the most important things to understand as you transition from college student to real world, on-your-own adulting is how to start managing your money so you can not only pay all your expenses, but also start saving and build wealth.

Create Your Own Systems

Have you ever heard of engineering your environment to successfully build a new habit? Just like you might make a morning workout habit stick faster if you lay out your gym clothes the night before, you can take actions to set up systems that make building good financial habits easier.

In terms of your finances, engineering your environment means taking steps like:

  • Building and using a budget
  • Tracking your spending
  • Automating bills and other transactions, like monthly student loan payments
  • Automating transfers to savings

Using a budget creates a framework within which you can use your money. Tracking your spending makes you more aware of how you’re using your money within that budget. And automating transfers between your checking and savings accounts makes it easy

You can use a number of tools to help you develop and stick with a money management environment that works for you. For example, a tool like Mint provides a comprehensive overview of nearly every aspect of your finances — from your budget and spending to your credit score and investments — which makes it a great place to start.

Another app to consider is Digit, which makes small automated transfers from your checking into your savings. If you’d rather get a jumpstart on investing, try Acorns too. Acorns works in much the same way as Digit, but instead of putting small amounts of money into a savings account, the app invests the money for you.

Remember that there’s no right or wrong way to set up budgets, track spending, or create automated savings plan. What’s important is recognizing the need for a structure, and developing one that works for you.

Manage Your Money When You Make More

After graduation when you start your career in earnest, you’ll likely make more money than you did back in your college days. This is great for you, but it can also cause some financial problems if you don’t think ahead. In other words: mo’ money, mo’ problems

The biggest pitfall of earning more is succumbing to lifestyle inflation. This happens when you spend more as you earn more. Essentially, you build a spending habit — not a savings habit. And this is a problem because it’s extremely difficult to cut back your spending once you’ve adjusted to a certain level of luxury or lifestyle.

If you avoid lifestyle inflation from the very beginning and make saving at least 10% of your income a priority, you’ll always find it easier to save money no matter how much you make. You don’t have to start off saving 10% right away, but it’s a great goal to work toward as your income increases.

You should also take advantage of a full-time job with all the benefits it comes with as you start your career. Don’t wait to open a 401(k) or other employer-sponsored retirement plan if any are available to you. If your company offers to match your contributions, put in at least enough to get the full match. That’s free money!

If you don’t have access to an employer-sponsored retirement account, you can still save as soon as you start working. Open a Roth IRA and save what you can. And remember, as you earn more, contribute more to retirement (instead of getting caught up in spending more).

Continue Your (Financial) Education

You may have just graduated from college, but don’t let learning end here. The best way to set yourself up for financial success in life is to continually seek to learn more about your money. Ask questions and seek answers. Do research. Get multiple opinions and consider different perspectives.

There are more resources available to you than ever before. In addition to personal finance, money management, or investing books that you can buy, tons of information about these subjects is available for free on blogs and podcasts. While most bloggers are sharing from personal experience, there’s a lot that you can learn from what other people have tried — and if nothing else, tuning into the conversation can keep you inspired and motivated to reach your own financial goals.

Staying interested and involved in your finances will help you better manage your money on a day-to-day basis and for the long-term. No one will care more about your cash than you do, and continuing to learn is without a doubt a prerequisite for building wealth.

Kali Hawlk is a freelance writer and the co-founder of Off The Rails, a free mentorship platform for creative women. She’s passionate about helping others do more with their money, their work, and their lives. Get in touch by tweeting @KaliHawlk.

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5 Tips on How to Negotiate an Entry-Level Salary

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Now that you’ve crushed it with your cover letter, blown everyone away with your resume, and aced your interview, it’s time to do what half of all new hires never even attempt: negotiate your salary.

If you’re a recent graduate hunting for work or a twentysomething switching careers, the thought of telling a potential employer how much you want to be paid probably makes you feel a little uncomfortable. But negotiating your entry-level salary could be one of the most important conversations of your professional life, and it can actually be a lot less intimidating if you’re prepared.

Start a new entry-level job earning the paycheck you deserve with these five salary negotiation tips.

 1. Identify your ask.

Before entering into any negotiation, you’ve got to know what you want. Ask for a salary that’s too high, and you won’t be taken seriously. Too low, and you’re leaving money on the table. To find the sweet spot, get advice from friends in the industry or any job recruiters you might know.

Also check out sites like Salary.com and PayScale.com to learn what pros in your area are actually earning. You’ll end up with a range of results, and, if you’re confident in your abilities, assume you’re worth an amount on the higher end. Just be realistic about the number you land on, because if you don’t believe you’re worth what you’re asking for, neither will the person you’re negotiating with.

 2. Be prepared to brag.

Before talking about your salary, make a bulleted list of your qualifications and previous accomplishments. Highlight anything that increased sales, reduced costs, or streamlined processes for former employers, and include any unique skills that could give you an edge compared to other candidates.

If you’ve never actually held a full-time job before, jot down any notable internship projects or relevant experience you’ve acquired from extracurricular activities. The idea is to impress your potential employer by letting her know everything you’ve done that makes you qualified to fill the position.

Stand in front of a mirror (or with some patient friends) and rehearse your spiel until it’s perfect. When you’re finally sitting down with the decision maker, hand her a copy of your list and draw attention to whichever items are most relevant to the position you hope to fill.

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 3. Act like you’ve been there before.

If this is your first time negotiating, keep that under wraps. It’s normal to feel nervous, but stay confident by remembering you’ve made it this far for a reason. Give the impression that you’re an experienced negotiator by acting like one. You don’t need to be some Don Corleone, making offers your would-be boss can’t refuse, but it helps to maintain good eye contact, a positive attitude and a firm tone of voice.

If you’re sending a salary negotiation email, be sure to express your enthusiasm for the company and the position. In either case, it’s a good idea to fire away with any insightful questions you might have—just be sure not to over-communicate. If you find yourself talking too much, shut the front door and wait for your interviewer to make the next move.

4. Don’t be first to mention money.

When it comes to talking numbers, don’t be the one who brings up the topic, and never mention the salary you’d settle for. If you’re repeatedly asked to state the figure you had in mind, ask for 10 percent more than the number you settled on. This provides a solid buffer if and when your hopeful boss tries to talk you down. It’s also a good rule of thumb to request for a precise figure, rather than a nice round number. This is merely a psychological tactic, but it seems to work. In the case that your interviewer suggests an initial salary along the lines of what you had in mind, calmly restate the number then bite your tongue. More often than not, this approach results in increased offers.

5. Stand your ground.

If the amount your interviewer offers isn’t quite what you had in mind, don’t get ruffled. Keep your emotions in check, don’t take anything personally and repeat the reasons why you’re the best candidate for the job.

If your potential boss simply won’t budge, find out if there’s flexibility as far as benefits are concerned. If you can’t afford to pass up this opportunity, ask what you can do to increase your compensation in the near future. Set a date to revisit the topic and ask your new employer to put it on her calendar. And if, in the end, you’re just not feeling the offer, don’t be afraid to turn it down. It’s better to hold out for the pay you want than accept an amount you’re not able to live on.

You owe it to yourself to negotiate for every penny you’re worth. This is especially true considering that many companies calculate raises and pensions based on an employee’s initial salary.  So start your career with confidence and earn what you deserve.  Good luck in your negotiation.

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How to Compare Two Job Offers

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Weighing two separate job offers can seem like an embarrassment of riches. In today’s job-starved economy, the prospect of having your choice between two positions is a rare and enviable position.

But there’s also an element of anxiety with choosing between two offers. One could be the job of your dreams, and the other could be a short-lived stint in hell. So how can you tell the difference between the two?

Compensation and Benefits

It’s easy to look at two salaries and decide to take the job with the highest one. But that’s not giving you the full picture. Compensation can include bonuses, profit sharing, stock options, pension and other monetary benefits. Add these up to get a real idea of the total salaries.

After you’ve compared the salaries, the second step is to examine the benefits packages. These can include vacation days and holidays, sick days, healthcare, retirement plan, tuition reimbursement and other perks.

Health insurance is one of the most important to compare, since costs can vary wildly. Check out the premiums and deductibles first and then see if either plan offers dental or vision coverage (these could make a big difference in how much you pay). Depending on your health, those could be major factors in how much money you take home.

Paid time off is also a deciding factor for many. Earning more money is great, but not if you only get 10 vacation days a year (compared to 21 days at another job). Does the company have a policy of increasing your vacation time over the years? How long do you hope to be at this company? These are all important questions to consider in how you value the vacation policy offered.

Commute

Driving to and from work is ranked as one of the worst parts of anyone’s day. No matter how great a job is, a long commute can kill the joy of a new position. Plus, being far away from home can make it difficult to run errands during lunch, make it to your morning workout and get home in time to let the dog out. Be realistic with yourself about how much time you can spend on the road and still be able to walk through your front door at the end of the work day with some energy to spare.

Not only does a long commute expend your own energy, driving a long way will also cost more money and put more wear and tear on your car. You can use GasBuddy’s trip calculator to compare how much you’d spend in fuel costs between each job and see if the amount is significant.

Company Culture

Finding out the company culture before you start working is much harder than figuring out what the bonus structure is, but it could end up being more important.

Talk to other employees and ask them the following questions:

Even a job with great benefits and a high salary could become your worst nightmare if you’re supposed to sleep with your phone on and respond to urgent texts on weekends.

Other Things to Take into Account

Once you’ve done the research for the factors listed above, here are some other questions to consider:

Job Offers

The last step – and probably the most important –  is to choose confidently. No matter which offer you decide on, it’s crucial to remove as much doubt as possible from the process.

Once you’ve made your choice, your happiness and satisfaction is going to have more to do with your attitude than the job itself. If you’re constantly asking “what if,” you’ll find yourself fantasizing about an alternate reality that doesn’t exist. Even if your new job isn’t everything you expected, it’s important to remember that the other job could have been even worse.

Zina Kumok is a freelance writer specializing in personal finance. A former reporter, she has covered murder trials, the Final Four and everything in between. She has been featured in Lifehacker, DailyWorth and Time. Read about how she paid off $28,000 worth of student loans in three years at Debt Free After Three.

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4 Reasons Paying for College With a Credit Card Is a Terrible Idea

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Credit card offers and promotions are everywhere. All those rewards are tempting and can get you thinking of ways to get the most out of your credit card.

With the high cost of college tuition, you might be wondering if you can use a credit card to pay for school and get rewards. But before handing over your card, you should know there are significant risks involved.

4 Issues to Consider Before Using a Credit Card to Pay for College

It seems like a great idea: If you earn 1% cash back on all purchases and use your card to pay a $10,000 tuition bill, you’ll get $100 in rewards. However, the reality isn’t that simple.

Dr. Robert Johnson, president and CEO of the American College of Financial Services, believes there’s few, if any, advantages to using a credit card for your education.

“I think it’s dangerous for students to use credit cards for routine expenses,” he said.

That’s because credit cards are significantly different from other forms of debt, such as student loans. Relying on a credit card to pay for your tuition and fees can cause problems later on. Watch out for these four issues.

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1. Sky-High Interest Rates

Some student loans have an interest rate as low as 4.45%. In late 2017, credit cards had an average interest rate of 13.16%, according to the Federal Reserve. If you have poor credit or don’t have an established credit history, you could face interest rates as high as 25.00% for a credit card. That difference in interest rate is significant.

“Credit cards are riskier because the interest rates are substantially higher and because they’re so easy to use,” said Dr. Johnson. “One must make a deliberate and purposeful decision to take out a student loan. It’s so easy for someone to simply take out a credit card and incur high-interest-rate debt without thinking through the ramifications.”

Over time, your credit-card balance can balloon. You could end up paying far more than you originally borrowed.

“Credit-card debt is the highest-interest-rate debt and is very difficult to extinguish if the balances get large,” said Dr. Johnson.

If you think you can avoid paying high interest fees by paying off the debt quickly, make sure you have a concrete repayment plan. The average cardholder has a balance of over $4,000. With college costs added on top of that, you could end up paying thousands more. Once you get into credit-card debt, it can be tough digging yourself out.

2. Fees Might Negate the Rewards

You might be able to earn rewards for charging your tuition, but you could end up paying more than the reward is worth in fees.

Schools charge an average 2.62% processing fee, according to a 2016 CreditCards.com survey. That means a $10,000 charge to pay for school would add $262 to your bill. That’s more than double what you’d earn in cash-back rewards and would make college even more expensive.

3. Fewer Repayment Options

Beyond high interest rates, credit cards have more limited repayment options compared to federal and private student loans.

With student loans, you typically have a grace period. You don’t have to make payments on your loans until six months after graduation. If you experience financial hardship and have federal student loans, you can postpone payments or even qualify for a reduced payment with an income-driven repayment plan. With a credit card, you don’t have those benefits.

If you use a credit card to pay for college, you’ll have to start making payments right away, even while you’re still in school. If you lose your job or face an unexpected emergency, you still have to keep up with your payments or risk wrecking your credit history. You can quickly end up over your head.

“Credit-card debt limits their flexibility once they graduate, as their earnings go toward trying to extinguish debt,” said Dr. Johnson.

4. Effect on Your Credit Score

Your credit history can have a significant impact on your life. A poor credit score can impact you in many ways, from applying for an apartment to job hunting.

Your FICO credit score is determined by a range of factors. One of the most important is your credit utilization. Accounting for 30% of your score, your credit utilization is how much of your available credit you use. The more you use, the more it hurts your credit report. For example, if you have a $10,000 limit, charging $2,000 will leave you with a better score than charging $9,000.

The problem with using a credit card to pay for college is that it raises your credit utilization. A single semester can cost thousands, eating up a huge chunk of your available credit. If you can’t afford to pay off the card right away and carry a balance, it can take years to get rid of it, lowering your credit score.

If you need to buy a car or want to purchase a home, a poor credit score can cause you to pay higher interest rates or not be approved at all.

Be Smart About Paying for School

If you’re going to school but don’t qualify for federal loans, or if you’ve exhausted all of the financial aid the government offers, there are safer options than using a credit card to pay for tuition.

Private student loans are more expensive than federal loans. But both have much lower rates than credit cards. Many loan servicers also offer important benefits, such as a grace period after graduation and alternative payment options. Student loans can be a much better tool for paying for school compared to your Visa.

If you’re concerned about your credit, you can check your three credit reports for free once a year. To track your credit more regularly, Credit.com’s free Credit Report Card is an easy-to-understand breakdown of your credit report information that uses letter grades—plus you get a free credit score updated every 14 days.

You can also carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

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Investing in a College Town Rental Market: Ann Arbor, Michigan

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College towns are attractive markets for investors in rental properties for several reasons. Students and faculty create large and dependable markets of tenants. Local economies dominated by academic institutions are remarkably stable compared to those based on manufacturing or agriculture. Larger universities create hundreds of non-academic jobs in research centers, medical facilities, and new companies spun off by technologies developed locally.

Ann Arbor, Michigan, home to the main campus of the University of Michigan, is an excellent example of a campus-based economy that is much larger than its facility and student body. One out of three local jobs are in educational service, and an additional one out of ten are in technical, professional and scientific services. At $39,235, Ann Arbor’s average per capita income and its median family income of $102,615 are 20% to 30% higher than national averages.

WalletHub ranked Ann Arbor, the nation’s fifth-best college town and the best small city college town in 2020 based on academic, social, and economic opportunities for students. It also ranked Ann Arbor, the nation’s “most educated city in 2020,” outranking San Jose, California, and Washington, D.C. It also placed first in educational attainment and quality of education and attainment gap.

Read: 5 Reasons Why You Should Still Buy an Investment Property

college university student leaving librarycollege university student leaving library

Affordability is Under Fire

Popularity can have a downside, and Ann Arbor is experiencing the price of success in rising housing costs and decreasing affordability, especially in Washtenaw County as a whole.

As of February 2020, the average monthly rent in Ann Arbor was $1,580 for an 882-square-foot apartment, a 3% increase over 2019, higher than the national median for a comparable apartment ($1,468) and considerably higher than nearby Detroit ($1,069) or East Lansing ($1,294), home of Michigan State University. Half of Ann Arbor tenants spend 30% or more of their household income on rent. HUD defines cost-burdened families as those “who pay more than 30% of their income for housing” and “may have difficulty affording necessities such as food, clothing, transportation, and medical care.”

“Ann Arbor – and its central driver, the University of Michigan – is a magnet for highly educated households with upward mobility and significant disposable income. With some exceptions, Ypsilanti (City and Township) and their challenge of being overloaded by a disproportionate number of at-risk households and homes with negative equity – is where the most affordable options exist,” stated a 2015 Washtenaw County housing study.

“Ann Arbor will become more costly, and less affordable, especially to non-student renters in the short run and eventually, to aspiring buyers as well. The driver for higher costs is a combination of high livability and quality of life, great public schools, resulting in sustained demand by households with discretionary income, and resulting expectations of stable and continually rising property values,” the study concluded.

Read: Investing in a College Town Rental Property: Charlottesville, VA

The Ann Arbor Rental Market is Vast and Profitable

In many ways, Ann Arbor is a great rental market. The massive student body drives demand. About 70% of the University of Michigan’s 46,000 students live off-campus and the current cap rate for Washtenaw County apartment buildings is a respectable 7.6%. (The capitalization rate is the ratio of rentals’ net operating income to property value. Low cap rates imply lower risk, and higher CAP rates indicate higher risk.)

Living off-campus is so popular; the university maintains web pages listing rentals and providing advice and information for off-campus renters. This summer initiated a “virtual housing fair” to help students find rentals for the 2020-2021 school year.

group of young college students hanging out at homegroup of young college students hanging out at home

Homes.com lists 1,235 properties in Ann Arbor, with a median home value of $355,600, about 17% above the national median of $304,100 in July. Of the total homes in Ann Arbor listed on Homes.com, 60% are for sale, and 34% are rentals.

Read: What to Know Before You Rent to College Students

Though several new high-rise apartment buildings recently opened and more are under construction, single-family rentals still dominate the market. Homes.com lists more than 200 single family homes for rent in Ann Arbor. Smaller rental households are a result of the above-average presence of single-family rentals relative to apartments. The average household size for Ann Arbor rentals is 2.2 people, compared to 2.3 for Michigan and 2.5 for the nation as a whole.

COVID-19 and Ann Arbor, Michigan

COVID-19 delayed the University of Michigan’s plans for the fall semester but did not cancel fall apartment rentals. The university’s plans include both in-person and remote classes, a new academic calendar, and the elimination of breaks and changes centered around preventing the spread of the coronavirus.

Despite the pandemic, Ann Arbor is still one of the best college town markets in the nation. As in most markets, acquisition is a challenge. Property prices in Ann Arbor are rising, and the smaller, less expensive homes that make ideal single-family rentals are few and far between.  Otherwise, conditions are good for single-family rental owners and will improve as the nation returns to health.


Steve Cook is the editor of the Down Payment Report and provides public relations consulting services to leading companies and non-profits in residential real estate and housing finance. He has been vice president of public affairs for the National Association of Realtors, senior vice president of Edelman Worldwide and press secretary to two members of Congress.

Source: homes.com