They’ve generated quite the buzz lately, with many tokens selling for millions of dollars. Let’s take a minute to explore more about NFTs.
They’ve generated quite the buzz lately, with many tokens selling for millions of dollars. Let’s take a minute to explore more about NFTs.
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.
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.
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.
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 …
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%.
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.
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.
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.
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.
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.
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.
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.
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?
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.
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.
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 email@example.com (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.
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.
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.
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.
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
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.
Slipping up while in college is basically a rite of passage. I made so many mistakes at Indiana University – many of which I would never admit publicly – that reminiscing on my college years comes with a heavy dose of embarrassment.
Thankfully, most mistakes made while at university are temporary. They may have short-term consequences, but drinking tickets and dorm infractions don’t tend to follow you into adult life. Financial mistakes, on the other hand, can be a little stickier.
College may seem like a safe little bubble, but money is still money. The cash you blow on parties and takeout doesn’t magically get reimbursed once you earn a diploma. Beyond that, the bad habits you develop during these crucial years can haunt you for decades to come. Trust me – I’ve been there.
Here are some of the biggest mistakes I made in college, and how you can avoid them.
My forays into budgeting as a college student usually fizzled out. Like a New Year’s resolution, I’d make a firm commitment and then give up after a few weeks.
When I was a second-semester senior, I decided to finally buckle down and stick to a budget. Graduation was fast approaching and I knew I hadn’t been handling my money responsibly. It was time to get serious about budgeting before I entered the real world.
At first it was really hard. I wasn’t used to depriving myself, and seeing how much I was wasting on eating out and buying new clothes was a hard pill to swallow. It wasn’t until I started my first real job after college that I finally got the hang of budgeting – but it took a lot of trial and error.
If you’re interested in starting a budget, set up a Mint account and try tracking your expenses for a few weeks. Knowing where your money is going could be enough to change your behavior and establish better spending habits.
Did you know you can start paying off your student loans while you’re still in school? Yeah, I didn’t either.
When I was in college, I was certain I’d find a well-paying job after graduation. My loan balance was filed under the “worry about it later” category. It wasn’t until much later that I learned a hard truth – if I had paid just $50 a month, I could have saved hundreds in accrued interest.
Start paying back those loans as soon as possible, even if you can only afford ten bucks a month. You’ll still make a dent in the total balance, and the solid repayment habits you develop in college will pay dividends when life gets crazy after graduation.
I knew while applying to college that I’d have to subsidize my tuition with student loans. Before I made my decision, my parents told me to pick an affordable school where I wouldn’t need to borrow more money than I expected to earn in my first year out of school.
I wanted to be a journalist, and the average starting salary for a reporter was around $26,000 a year. I planned to take out $24,000 total, so I felt good borrowing slightly less than my future salary.
That was the only research I did into my student loans. I didn’t examine what my monthly payments would be or what it would be like to actually live on $30,000 a year while repaying my balance.
When I graduated, I got a job making $28,000 a year and was shocked when my first student loan payment came due. The minimum payment was $350 – or 20% of my take-home pay. After rent, utilities, groceries, gas and loans, I had little left over to save for retirement, travel or spend on hobbies.
If you’re not sure how much money you’ve borrowed, it’s time to take a closer look. I had so many friends in college who had no idea how much they were taking out. A few years ago, my alma mater, Indiana University, started sending out annual letters to current students showing them how much they’d pay every month. The result? Borrowing dropped 16%.
Talk to your financial aid office about your loans and see if you can take out less next year. If you’re using loans for living expenses, consider getting a part-time job to cover those instead. The less you borrow now, the less you’ll have to repay down the line.
When I was in high school, I heard a lot of lectures about peer pressure. Teachers told us not to do things just because the “cool kids” were doing it. They’d tell us to avoid alcohol and drugs and stick to our own values.
Unfortunately, no one explained how your peers could pressure you to spend more money. I can recount dozens of instances where I didn’t want to go out for dinner or go shopping, but gave in because my friends were doing it.
It’s so tempting to live the good life in college, putting off the stress of adult life until after graduation, but it’s also important to learn how to say no and think about long-term consequences. You can always strike a balance between having fun and staying on top of your responsibilities.
Students usually assume the only time to apply for scholarships is before they start college. The thing is, there are plenty of scholarships available for current students. While I applied for a couple scholarships during my time in school, I didn’t take the applications seriously.
I told myself applying for scholarships was a waste of time. “What’s the point,” I’d think. “I probably won’t get it.”
That line of thinking probably cost me thousands of dollars, and it wasn’t until I was repaying my loans that I realized how much money I’d left on the table. If it seems like a hassle to apply for a $500 scholarship, consider how long it would take you to earn that amount in the real world.
One of the biggest mistakes a college student can do is not track their credit history. A credit report is like a financial grade that lenders, landlords and sometimes even employers use to gauge your creditworthiness. If you have a low credit score or no credit, you probably won’t qualify for an apartment by yourself and will need a cosigner.
Thankfully, I didn’t have to worry too much about my credit while I was in college. My parents made me an authorized user on their credit cards, so while I was attending class and partying on the weekends my credit history was slowly growing.
If you don’t have a credit card right now, and you think your parents could be in a position to help, ask your parents if you can become an authorized user on their card or ask them to cosign on a student credit card.
Using a credit card to improve your credit history is simple if you have great self control. Pay a couple small bills with your card every month and then pay the balance in full once the monthly statement posts. Doing so regularly can give you a huge leg up after graduation.
But do remember a credit limit is not “free money” and should be looked at as a tool for your financial health. A credit card only has benefits if you pay it off in full every month, carrying over debt could be problematic for your financial future.
Before my husband and I got married, we had a conversation about merging our finances. I wasn’t too worried about his financial habits – he’s always lived a frugal lifestyle, but I wanted to know how compatible we were. I was more than a little surprised to find out he had no credit score.
As it turns out, he had avoided getting a credit card all through college because he was scared of falling into debt. The way he saw it, there was no reason to use credit if he only made purchases he could afford with cash. That may sound responsible, but it took us over six months of using a prepaid card to build his score enough for a traditional card. Years later, we were able to use our stellar credit scores to help qualify for our first mortgage.
Things worked out for us, but it would have been a lot easier if he had started using a credit card while in college. The student credit card is designed exactly for this purpose – here’s what you need to know about them.
Student credit cards are an option lenders extend to individuals 18 years or older who are currently enrolled in college classes. Student credit cards are designed to help first-time credit card users establish credit carefully and affordably. For this reason, student cards generally have a lower spending limit than traditional credit cards and some don’t even charge an annual fee, which can be appealing if you’re like many students operating on a tight monthly budget.
A student credit card is like a starter pack for your financial life. It’s not the shiniest, flashiest card with the best features, but if you know how to leverage credit appropriately, it can help build your credit score.
If your parents are covering most of your expenses and you already have a debit card, why do you need a credit card? After all, isn’t a credit card just an easy way to get into debt? That may be partially true – and a misused credit card is absolutely the quickest path to financial ruin – but it can also be the best way to build credit.
Even if you don’t believe in taking out loans, a healthy credit score is necessary for navigating life. Almost every landlord will run your credit and won’t approve your application if you don’t have a good score. If you eventually try to buy a house or take out a car loan, you’ll need a solid score for that too. Even the hiring process sometimes involves divulging your credit score.
When you have a student credit card, payments are reported to one or all three of the main credit bureaus: Experian, Equifax, and TransUnion. Every time you pay your bill, the card issuer notifies the credit bureau. Those transactions become a report card that adds up over time (a.k.a., your credit score).
It can take less than a year of on-time payments to build a successful credit score, so it’s not impossible to leave college with respectable credit. Having a good score before you graduate is a good start for a successful financial life post-college. Credit scores range from 300 to 850, with higher scores qualifying for the best rates and loan products. Once you reach a 700 score, you might decide to apply for a credit card with better features.
Remember, when a parent cosigns, it means they’ll ultimately be responsible if you default on the card with an outstanding balance.
If you get denied for a student credit card, look into a secured credit card that requires a deposit to act as collateral. A secured card is another stepping stone to building good credit. Another option could be to become an authorized user on the credit card of someone you trust (such as a parent), which allows you to piggyback off their responsible spending.
As mentioned, getting a student credit card can be a great way to build credit as a student, but it can also lead to serious financial dilemmas if not used responsibly. Before you make any financial decision, like applying for a college credit card, loan, etc., it’s a good idea to consider the fine print.
With that said, here are some important things for college students to know about credit cards.
A credit card is a tool, not a toy. A credit card is not an excuse to buy a new laptop, take a weekend trip, or go on a shopping spree. All the money you charge on a credit card will be your responsibility, whether you pay for it now or later.
When you look at your credit card statement, there are three figures you’ll want to take a look at (in addition to scanning the transactions):
Ideally, you should pay the statement balance or current balance every time the credit card bill is due. If you pay the minimum or less than the statement balance, you’ll be charged interest fees on the remaining sum (unless you received an initial 0% APR rate).
Interest on a credit card can add up quickly because of how the minimum amount is structured. The minimum amount is usually between 1-3% of the total bill. If your balance is $500, your minimum bill might be $15.
A credit card balance is a revolving debt, which means there’s no set deadline on when you need to repay the money in its entirety. If you only make the minimum payment every month and keep using the card, you could be in debt for years and pay hundreds (at a minimum) in interest.
It’s also recommended to keep your credit utilization under 30% of the total available credit, as higher utilization could result in a lower credit score. For example, if your credit limit is $1,000, to stay under 30%, you don’t want to charge more than $300 before paying it down. When you utilize more than 30% of your credit, credit bureaus might start to think you’re using a credit card to fund an unsustainable lifestyle.
A great way to use a student credit card responsibly is to put one small recurring bill on the card, like your cell phone or internet bill. Then, you can set up automatic payments to the credit card from your bank account. This way, you won’t ever miss a bill or spend more than 30% of your available credit.
Student credit cards are a great option for young people with no credit, but they don’t offer the same range of rewards that other cards do. You’re unlikely to earn a free trip to Miami with a student card, for example. Ideally, a student card would be used just long enough to improve your score and qualify for a better credit card.
Student cards also carry the same inherent risk as other forms of credit, in that they can be a gateway to debt. Swiping a credit card is easy and mindless, especially if you don’t check the balance until the statement comes. Additionally, some student credit cards have higher interest rates, which means any revolving debt will accumulate more debt at a higher rate. That’s why it’s important to transition to a traditional card as soon as possible.
According to Forbes.com, here are some of the best student credit cards for 2020:
Not every student credit card is the same. Each has their own set of fees, benefits, and drawbacks. Here are the best ways to compare student cards before finding the best one for you.
The APR is the card’s annual interest rate. Credit cards only charge interest if you don’t pay the balance in full, which means you don’t have to worry about the APR unless you won’t be able to pay the full bill every month.
Some cards offer 0% APR for a certain amount of time, usually around six months. During that period, you can only pay the minimum amount and not be charged interest. Be familiar with the details of your introductory rate, for example, if you pay a bill late, the 0% offer may be revoked and you’ll be charged back interest for previous billing cycles.
Some card issuers charge an annual fee, between $25 and $99. Avoid getting a card with an annual fee if possible.
Credit cards often have rewards, such as cash-back on certain categories or points you can redeem for merchandise, travel, and more. Pick the rewards system that works best for you. If you travel a lot, cash-back on travel purchases makes more sense than 5% cash-back at grocery stores.
Be sure to understand the cash-back or rewards policy thoroughly. Some require you to manually sign up or activate the cash-back beforehand in order to get credit for your purchases.
Some credit cards provide sign-up bonuses, like a $100 bonus when you spend $500 in three months. This is a one-time benefit and only available for new customers. Be cautious of spending the required amount unless you know you can pay it off. Rewards and bonuses are canceled out when you carry a balance and pay interest.
Most student credit cards have low credit limits, often around $500. A credit limit is how much money you’re allowed to charge on the card. The higher the limit, the more money you have access to.
Some student credit cards come with free perks, such as free credit score notifications or identity theft monitoring. Each of these benefits varies based on the card.
Use Mint to glean insight into your spending habits, manage your budget, set financial goals, and monitor your credit score.
Want to know a little secret? Less than 10% of Americans are “in the know”……
it’s a financial tool that could more than double your money for college over your child’s lifetime, and it’s called a 529 College Savings Plan.
A 529 College Savings Plan is widely considered the best way to save for college. It is a tax-advantaged investment account designed to help you pay for college. It works like a Roth IRA – you put in post-tax dollars, and then the gains and qualified withdrawals are tax-free.
These accounts are more flexible than you might think. Eligible institutions include any higher ed institution that qualifies for federal financial student aid, including state universities, out-of-state colleges, private colleges, and many institutions abroad.
And it goes beyond tuition – you can also spend the money on school fees, room and board, books, computers & related equipment, and special education expenses.
Lastly, you can always withdraw the principal (i.e., your original, post-tax contribution) without paying any taxes or penalties. However, if you do spend on any nonqualified expenses, you’ll pay taxes plus a 10% penalty on the gain.
Want to know an even bigger secret? Anyone can contribute to any child’s 529. So even if you’re a little constrained on your finances (you just had a baby, after all!), you can still get ahead.
Your friends and family are probably asking how they can help. Once you’ve got enough diapers, just ask for contributions to your child’s 529. Baby showers, early birthdays, and other milestones can be great moments to kickstart that college savings plan.
Here’s where it pays to do a little research. Each state has its own 529 College Savings Plan, but you are not required to sign up for your state’s plan. Check if your state offers a generous tax-deduction for using your state plan, but otherwise, you’re free to choose any plan in the country. If that’s the case, look for a plan with low fees, reputable management, and tools to allow other people to contribute. When choosing your investment portfolio, consider keeping it simple with a passively invested, age-adjusting portfolio.
If you’re overwhelmed by the options, don’t go back to using a regular savings account! You’d give up thousands of dollars in lost investment gains and tax benefits. We built CollegeBacker to make it easy to find the right plan, choose the right investment portfolio, and get your friends & family involved.
CollegeBacker is an SEC-registered investment adviser dedicated to helping families save for college. With CollegeBacker, parents can find the right tax-advantaged 529 College Savings Plan, determine a personalized savings goal, and invite family & friends to contribute. Plus, anyone can use CollegeBacker to kickstart another child’s college savings plan.
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.
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:
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.
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).
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.
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.
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.
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.
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.
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.
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.