How To Remain Prudent During Market Cycles

What goes up must come down! Whoever authored this statement of life events and business activities should receive the award for the Most Obvious Statement. However inane the statement, it does contain a little truth when applied to our current economic cycle in the United States.

Factors such as inflation, supply chain disruption, interest rate increases, U.S. Government fiscal policies and continued underemployment in our country have caused significant volatility in the markets. It has been a literal rollercoaster for the various market indices used to measure performance of the exchanges in the U.S.

At the start of 2022, the S&P 500 Index was at 4674.77 and closed on May 6, 2022, at 4175.48. This decline of 16.26% has caused investors to worry about the future of their retirement assets. To mitigate the emotional impact of such a decline, consider past market declines and learn from the period of time after the correction. For example, by remaining calm and investing in a well-diversified portfolio, you will recover your unrealized losses in the future. If you are planning to make a large purchase during a market downturn, it may be fiscally more responsible to consider bank loans which carry a much lower rate of interest. Once the markets recover and the value of your portfolio is an unrealized gain, sell a portion of the investments to liquidate your debt.

Another measure of thriving during market cycles is to utilize noncorrelated investments that respond better to inflationary pressure. For example, real estate is a sector of the economy that maintains cash flow and value during market declines. Think about this approach to your income needs during a period of market contraction. Real estate investors continue to collect rents on a monthly, or some other predictable period, basis no matter the state of the economy. 

Of course, no investment is immune to such historic market events as the Wall Street Crash of 1929 or Black Monday in 1987. The key to facing any market disruption is to not allow emotions to control your decision making. One of my favorite quotes of Warren Buffett, “Be fearful when others are greedy and greedy when others are fearful” comes to mind during times we are currently experiencing.

Lastly, remember that you most likely took several decades to amass your retirement assets. The intention of these assets is for them to last you several decades in the future. Unless the need for capital was immediate at retirement, your portfolio will grow and contract as market conditions change. By maintaining a long-term perspective, you will be better suited to investing in positions that are below their book value and allow for a growth opportunity in the future. There are positions that are available for you to make reasonable long-term returns while the overall economy is in contraction.

Keeping perspective and maintaining a well-diversified portfolio will help you weather the storms of the economy much better than attempting market timing. Predicting markets is not an approach that serves you well. If you wish to evaluate your portfolio, contact a CERTIFIED FINANCIAL PLANNERTM professional. Worry never solved a challenge.

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Staying Focused is the Key

Ask any all-star athlete the secret to their success and they will tell you – focus. This past weekend at The Masters in Augusta, Georgia, Tiger Woods initiated his triumphant return to professional golf. During his post-round interview after he finished the tournament, Woods used the word “focus” several times to describe to the interviewer what his secret was in returning to competitive golf after such a devastating automobile accident.

Life is similar to a sport, perhaps a marathon race. It is difficult for many of us to see the long-term impact of initiating and maintaining a savings plan from age 20 to age 67. As my dad often used the “stick and carrot” analogy, the younger investors can’t taste the carrot due to the overwhelming length of the stick. For those that can maintain the zeal for living a life prepared for unexpected instances that require substantial resources, success is often the outcome.

Younger people look at me with disbelief when I explain the power of compounding to them. To paint the picture in a manner that “shortens the stick and sweetens the carrot”, I ask them to look at their investment account every six months. One of the first statements they utter is “Wow! Look how much I saved and I didn’t miss the money.” Albert Einstein, the great physicist, was credited with a quote about compound interest: “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”

To create a system of focus pertaining to your finances, it is critical that you automate as much of the process as possible. For example, if you are participant in an employer-provided retirement plan, your investment funds will be automatically deferred from your paycheck and invested in the manner you direct your employer. This is a simple method of automating your savings and also receiving consistency in the process.

If you work in a company that does not provide an employer plan, you can accomplish the same automation with an ACH (automated clearing house) election. This process works very similarly to that of your employer election. By filing a form with your wealth advisor to transfer a certain amount of money at a fixed frequency, you will not be required to physically write a check, prepare an envelope or worry about finding a stamp to mail the deposit. Your life will be much simpler from an investment standpoint and you can worry about things such as fishing, golf or running.

If you wish to automate your savings for retirement, it is critical that you have a plan in place to accomplish your goals. See the advice and create a plan for your future by visiting a CERTIFIED FINANCIAL PLANNERTM professional. Take control of your future and you will enjoy less stress in life. See you on the pickleball court!

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Know Where You Will Land Before You Jump

What if you purchased an investment that the insurance salesman informed you would give you annual payments for your lifetime? What if you were 83 years of age? The reasons for the preceding questions are due to the factual case of a client that came to our office.

One of our retiree clients began asking questions about an insurance product that paid annual lifetime payments and earned an unusually high rate of return the first two years. Puzzled by the initiation of the conversation on this topic, I asked her why she was interested in this product. What transpired was a conversation that both shocked and irritated me.

The client’s mother is a widow and 83 years of age. She began to regale me with a story of her mother and a friend attending a free luncheon where they were introduced with a story about “guarantees” and “lifetime income”. Of course, with no understanding of what she was buying, her mother was informed by the salesperson, or she understood him to state the fact, that her money was insured.

We asked the daughter to bring her mother to our office to personally discuss the matter and confirm the facts of the purchased investment. After a few minutes of her mother describing the event and “nice young man” that spoke, she provided a copy of the contract for our review. Quickly I noticed the product came with a 12-year surrender period. Keep in mind, the lady was 83 at date of issue. 

Complicating matters was that she had placed all her liquid cash except for $50,000 in this investment. After our discussion, she was quite upset and acknowledged that she and her friend had made a mistake buying the long-term, illiquid product.

The story doesn’t end with our conversation. Due to the recent purchase of the product, we informed her that she was in her 20-day Free Look Period and that she could cancel the product purchase with proper notice given the insurance company. We assisted her in the cancellation process, and she thanked us for helping her understand the investment more comprehensively.

These types of incidents occur too frequently to the elderly in our communities. Without knowledge of the products in which money may be invested, the elderly are prime targets for unscrupulous salespeople.

I should point out that the person selling the long-term investment to the elderly lady had a proper insurance license and wasn’t a CERTIFIED FINANCIAL PLANNERTM professional. 

The lesson learned is that nothing in life is free. This has been borne out from my father’s teachings when I was a little boy. There is always someone paying the bill for the service or product you supposedly receive for free.

Want to know how the story ended? The elderly lady received her sizeable amount of investment back and was provided a plan for her future that addressed cash flow, estate, and tax matters to empower her to make good decisions. She has a reasonable amount of reserve for potential emergencies and no longer eats free meals offered her by strangers. So, as the storybook always reports, all lived happily ever after.

Investing requires understanding, education, and awareness about the strategies you employ for your future. Don’t invest your money in sophisticated strategies that are incomprehensible. Consistent investing over a period of time in a fully diversified portfolio that is easily monitored and rebalanced gives you greater comfort and confidence in your future. Seek out the advice of a CERTIFIED FINANCIAL PLANNERTM professional to help you understand your investment portfolio. One of my favorite quotes of Abraham Lincoln applies in this situation: “The best way to predict your future is to create it.”

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How Geopolitical Risks Affect the Markets

Today, we live in a global economy. Although appearing insulated to the disagreements between countries on the other side of the globe, U.S. markets are negatively impacted nonetheless. How could a political conflict between Taiwan and China create market disruption in the U.S.? This type of risk to markets is called Geopolitical Risk.

One of the most critical factors of any economy is the ability to maintain a steady flow of capital through the production and sale of goods and services to respective markets. When this flow becomes interrupted by governmental policy, military action or social interaction, markets become concerned that buyers and sellers of these goods can continue to make profits, hire employees, obtain raw materials, etc. Recently, political relations deteriorated between China and the United States. Differences in economic goals and outcomes, fair treatment of workers and use of natural resources, or the lack thereof, can impact the flow of goods and services in a significant manner.

Diversification of a portfolio requires far more than simply allocating your assets among different styles of investments such as large capitalization and small capitalization companies. To properly diversify your portfolio, it is critical you analyze the inherent risk in foreign markets including developed and emerging countries. An investor would be required to understand and accept greater risk involved with investing in an emerging market country where transparency and lack of efficient trading occurs more so than a sophisticated and developed efficient trading country.

Based on the World Economic Forum’s Global Risks Report 2020, economic confrontation between major powers is the most concerning risk for 2020. Most recently, the invasion of Ukraine by the Russian Federation presents significant attributes of market disruption. The markets for fertilizers and other natural resources located in Ukraine, in substantial quantities, have been disrupted in the past month. Fertilizer prices rose due to continued high demand and supplies were lowered by the political disruption caused by war.

The pandemic caused by Covid-19 continues to disrupt the free flow of goods from manufacturers in China and the Far East destined for the United States. How does the pandemic affect the flow of goods and materials? In China, a zero-tolerance policy exists in the manufacturing sector. This simply means that the discovery of one case of Covid-19 diagnosed in a worker requires the entire closure of the facility. Let’s assume a plant in China manufactures automobile replacement parts. Demand for these parts remains very high in the U.S. economy. By closing the plant for a period of a week (or for a month as done during the Chinese New Year) will generate less supply for consumers and greater demand for the parts. The result of this imbalance between demand and supply is inflation.

Investing requires an understanding of the functions of foreign and domestic markets, taxation of international imported goods and the impact of geopolitical risks. Most individuals feel ill equipped to make such investing decisions or where to research the matter. Seek out the advice of a CERTIFIED FINANCIAL PLANNERTM professional to help you analyze the risk in your portfolio and provide you opportunities and guidance to reach your lifetime goals. Matt Haig said it best, “Never underestimate the big importance of small things.”

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Prudent Steps to a Secure Future

Our world is experiencing disruption on a global basis. War in Ukraine, inflation at a 40 year high, gasoline prices reflect the 70s, and continued impact of a rampant virus. Have you had enough? Yes, me too. However, my father taught me that words are cheap and action is riches. This was his statement to, “quit griping and start working” to achieve better results.

The people of Ukraine are suffering in ways that U.S. citizens cannot relate. All of us can sleep tonight in a warm bed, eat a nice dinner and drink water that is potable. Medical care is available and jobs are plentiful. Why I am stating the obvious? To provide you some perspective. Life is good in the United States even in the midst of all this disruption.

When experiencing moments of potential recession, it is critical that you review your future plans to determine if small adjustments are needed. It is important that we understand the current economic environment will pass (no, I don’t know when) and life as we know it will return for us. The resilience of our republic continues to amaze me.

The following steps should be considered to provide your family a more secure future. First, review your cash flow spending and determine the priority of these items. Do you actually need a new laptop or is it a want? Is a new car needed or do you simply want one? Also, remember it is better policy to make sound financial decisions based on your current cash flow, savings and needs rather than surrendering to the fancy marketing of the gadgets that make us more comfortable.

Next, reduce debt balance to zero as quickly as possible. The purpose of this is to relieve the pressure on your family’s budget. Any credit card balances should be paid monthly to eliminate the potential cost of credit through high interest rates. Federal Reserve Chairman Jerome Powell is recommending, next week, a 0.25% increases in the discount rate to be implemented for purposes of slowing the rampant inflation rate in the U.S. Additional rate increases are anticipated through 2022.

Another step is to review your portfolio to determine your true risk inherent in the underlying positions you own. In the past 12 years, the U.S. markets have rewarded equity investors. In the current market contraction, it would be advisable to review your positions for possible gains to protect the overall balance in the account. I am not suggesting market timing. However, I am recommending that you determine a price you would wish to reach before selling your investment positions. For example, lets assume we buy AstroWorld common stock, a fictitious company, for $35.00 per share and set a price of $70.00 at which we would sell the position. One of the greatest investors in history was a man named Peter Lynch. As the manager of the Magellan Fund of Fidelity Investments, his fundamental approach to investing was to perform the same process on each position he bought in the fund. If it was a good approach for him and the fund he managed, perhaps it may be good for your family.

Lastly, keep calm during market correction periods. Panicking only increases the probability that you will make poor decisions that could harm your family’s future for many years. By thinking about your financial decisions with a cool head, the likelihood of taking advantage of market declines allows you to “buy low and sell high”. 

Of course, these steps will not ensure great returns or eliminate risk of loss. However, you will give your family and you the best chance to attain your retirement goals and security for the future.

One of the best methods of gaining confidence that your family’s finances are on the right track is to seek a complimentary “financial checkup” from a CERTIFIED FINANCIAL PLANNERTM professional. Your investments, like your body, may suffer if proper attention is not given. See you on the jogging trail!

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The Millennial Perspective: Planning Ahead

Disruption can arise at any moment and oftentimes there is nothing we can do to avoid it from happening. There has been a lot of disruption in the last two years and it has left countless people jobless, on unemployment, or sent home for a few weeks to recover from COVID-19. With the most recent COVID-19 spike I have heard stories of several people who feel that they cannot miss work because of the money they would lose despite being ill. It now seems that more and more people are finding themselves between a rock and a hard place, money or the safety of others. I am certain that the majority would prefer the latter. However, having a plan in place can make the decision easier.

Looking back at the start of the pandemic, employers were afforded the ability via tax credits to pay for an absence due to COVID-19. This allowed employees to stay home without having to worry about missing out on wages while even those who lost their jobs were able to draw unemployment at a higher rate than usual. With most businesses no longer offering “COVID pay,” employees have felt obligated to make the tough decision between going to work and being extra careful around others. This can easily become a liability for the company because of safety protocols and spiraling COVID quarantines which can force companies to temporarily close their doors because of staffing issues or to ensure the quelling of outbreaks. Thus, leaving all the employees to miss out on wages while forcing the company to miss out on profits.

Many who are sick are not able to know that they have COVID-19 because some may have simply thought it was the common cold or just allergies. Regardless of the cause of their symptoms, no one should be put in the position of having to determine if their symptoms are due to a relatively benign issue such as allergies or a contagious disease without being able to consult a medical professional or have diagnostic testing performed, especially now when the stakes are seemingly high. It is therefore important to have a plan for when life happens. Building a plan to save for a rainy day can be very intimidating for some. Working with a CERTIFIED FINANCIAL PLANNER® (CFP®) can help make the task feel less daunting. A CFP® can often help you build a budget that is customized to your needs and can help you set aside money without stretching your account too thin.

Building these savings will not happen overnight. Some people may have to decrease their debts before they can save. Paying down debt with higher interest rates (avalanche method) or smaller balances (snowball method) is always a good place to start. By lowering the amount you have to pay each month you free up funds that can be set aside to start saving or even pay off more debt. Some people may prefer to pay all of their debts off before saving, but this doesn’t help out much when disruption arises and may indeed decrease their available cash for emergencies

My dad (the smartest man I know) frequently uses the phrase, “Hope for the best, but plan for the worst.” That philosophy has really stuck with me these last two years with all the disruptions we have had in our day to day lives. It doesn’t sound very optimistic to always plan for the worst, but you never know what kind of disruption life will throw at you. It is never a bad idea to be prepared. No one has ever wished they were less prepared for when an emergency arises. No one ever wishes that they had planned and managed their finances without proper considerations. A CFP® has been trained specifically to look at each person as an individual and set them along the right path to plan for these disruptions while still living a lifestyle that is enjoyable.

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Concerned About Your Future?

Happy New Year! Another year of opportunities and dangers will present themselves periodically as we progress through 2022. This is called “life”. 

Don’t be like everyone else and fall for the old adage of “life happens”. A better philosophy of life is “life planned”. Many people simply create resolutions for the new year and hope for the best. This is not planning, this is wishful thinking and relying on fate, which may not render the desired results.

President Abraham Lincoln is credited with one of my favorite quotes about the future: “The best way to predict the future is to create it.” A powerful statement by a great leader such as President Lincoln should be given proper deference and thought. Under the stress of the Civil War, and the loss of a son, Lincoln continued to rely on his personal philosophies to keep him focused on the future of our country.

If a country can be run with such an approach, surely, we can manage our personal lives with the same principle. One of my yearend tasks is to spend time alone, thinking about the current status of my life and where I wish to be at the end of the next year. It has been said that people will spend more time planning a vacation than planning their life. You can change this rote approach to life and start today by planning your future using a methodology that has served me well.

First, find a quiet place to simply think. This would ideally be a location that doesn’t allow phones, discourages talking and has resources to help you find answers to questions that may arise. Sounds like your local library, doesn’t it? Yes, this is where I spend my time thinking about the future for my future goals. There is no better place than a library to offer you the solitude required to bring out your best thoughts and allow a space for creative planning.

Second, think with ink. I know, we are in the 21st century and everybody has a smartphone, laptop or some other gadget to electronically record their thoughts. However, the brain functions, and remembers, differently when you use your hand for writing on paper rather than typing on a keyboard. Start with a strategic review of the past year. Did I accomplish my goals as intended? Is there work still to required to achieve an important goal? These are important results that give rise to your brain contemplating your future.

Record your thoughts on paper and simply read what you wrote. Are you proud of your progress? If so, celebrate in some form that you truly enjoy. If not, ask yourself if the goal was clear enough, empowering enough and challenging enough to require your greatest time, talent and treasure to achieve. Perhaps you will carry over an unfinished goal to 2022? This would not be the recognition of defeat but a reframing of the goal in a new light with additional information learned in 2021. Don’t listen to defeatist talk but rather give yourself the right to be positive in thinking and your outcomes will improve.

Lastly, write your completed goals for 2022 in your planner, on a piece of paper or wherever you can see them on a daily basis. The importance of referencing your goals often is to keep them top of mind. Everyday your mind goes to work on the matters you deem important by evaluating and analyzing what you feed it. If you are focusing on your big, hairy, audacious goals for a bigger, better, bolder you, that is what your brain will work to bring in to existence.

This is a new year, a new you and new opportunities for growth. Be the 1% of people who develop measurable, challenging goals that cause you to grow to achieve the objective by writing them down in a manner that can be reviewed frequently during the year. As an added bonus, why not listen to positive, powerful podcasts during the year to keep you on track? I recommend our podcast, “Live a Life by Design”, which is available wherever you listen to podcasts.

There are few concerns for your future when you are actively creating it. This is your year to realize greatness within you. Invest in yourself. Become who you wish to be – a bigger, better and bolder YOU!

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Change — The Most difficult Task To Accomplish

Life happens with – or without – our consent! One of the most problematic areas of life is managing the fast-paced world of ever-changing financial, tax and estate information. In the past two weeks, the United States Congress has proposed more than ten bills, between the Senate and the House of Representatives, to increase tax revenue for the United States of America. Some of these proposed bills would impact your family. Others will impact families with greater wealth. Too often elected officials feel that they must act, whether it is a good outcome or bad one, to give the appearance of working for their electorate. Change is one outcome of working in our government and the impact is real.

As a CERTIFIED FINANACIAL PLANNERTM professional, one of the areas of control we bring to our clients is change. Of course, life is going to change almost daily. However, when you have a plan of action, with an expert in the field of planning guiding you through the maze of change, your probability of achieving your intended outcomes is much higher. Our role is to help you understand the impact of the changes on your personal life and finances. Frequently, you are subjected to changes without your knowledge. Consider inflationary impact on your investments.

One need only watch a few minutes of network television news daily to know her life is being impacted in positive and negative ways. Inflation has risen to 5.4% in 2021, according to the U.S. Bureau of Labor and Statistics, and may not have reached its peak. How does this affect your life? Think about the different consumer goods you purchase in a typical week. How much has gasoline, milk, bread and medications increased in the past year? Has your income maintained the pace of this increased cost of living? In most instances, the answer to this question is “no”.

What you need is to formulate a plan that considers inflation as a pressure on your family’s budget. One of the economic factors that is pertinacious is inflation. This challenge to the value of a dollar is always a factor in planning. The bigger question is how much will inflation be in 2022, 2023 and 2024? If I knew the answer to this quandary, well, I would be on an island in the Caribbean sipping on an iced tea while watching the sun set. Oh, back to reality.

One mitigating approach to combatting the negative impact of inflation is to invest in assets that are inflation resistant. For example, you wouldn’t wish to buy a 30-year U.S. Treasury Bond while inflation is rising. The impact of inflation on the value of the security is considerably negative. However, you may wish to analyze your portfolio for investments in stocks that are more growth oriented to overcome the inflationary pressure you are experiencing.

Another area of change for which we have no control is the loss of a spouse or other family member. This type of change, we refer to as familial change, is difficult for most families to navigate, particularly when the person was a breadwinner for the family. What do you do now? It is critical that you seek the appropriate counseling from a licensed therapist or group to deal with grief. The next step would be to regain control of your finances. Seek out a CERTIFIED FINANCIAL PLANNER™ professional to help gain clarity of focus and to manage the change to your best outcomes. When you meet with someone to discuss your personal finances, it takes a tremendous amount of trust. The good news is that you will gain significant optimism from the assistance that will empower you with confidence that life is back to your design.

Change will be present in our lives forever. However, you have the power to determine if the changes control you or you control the effects of the changes. One powerful tool in maintaining your control is to have a plan. Contact a CERTIFIED FINANCIAL PLANNERTM professional to help you gain control of your financial life. See you on the jogging trail! 

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Your Future Depends on It

Life consists of many different, and small, actions that create outcomes in a desired manner. This is a double-edged sword for many of us. Should we wish to purchase a new car or save for the future education of our children? Can we live in the current home or should be buy a much larger one?

The biggest challenge that American citizens face is one of priorities. Our country offers so much in potential personal and financial growth opportunities it becomes overwhelming for many people causing difficulties. Do I wish we had a different system than the current capitalistic markets? No way! However, I do wish to help people make more sound decisions with their hard-earned money.

An analysis of the savings rate, defined as the ration of money saved by individuals or families to their disposable income (income after taxes), reflects periods of time in which savings diminishes far below the required level to sustain the futures of the savers. Based on a review of the personal savings rate in the United States for the years 1960 – 2020, savings ranges were a low of 3.6% in 2007 and a high of 13.7% in 2020. 

The explanations for the differences in savings rates could be many different reasons – concern for the future due to the pandemic as in 2020 or loss of a job due to economic downturn effects. One obvious impact for savings is the need for short-term may be the purchase of large, durable goods such as cars, appliances for the home, etc. Savings for long-term needs may be for the purchase of a home, college education for the children, retirement funding needs as well as many other purposes.

According to research performed by Jack Caporal of The Motley Fool, 40% of Americans are afraid they won’t be able to retire because of setbacks caused by the pandemic. One method of mitigating the impact of economic emergencies beyond your control is save more money. I know, this is simply said and difficult to accomplish.

To reach your goal of saving more for the future, you must be honest with yourself and know exactly where you are today. If you are saving 3% of your after-tax income and wish to be saving 10% of after-tax income, this is quite a large difference in your lifestyle. One of the best means of saving for the future is the pre-tax contributions to your employer’s retirement plan. If you don’t receive the money in hand, the likelihood that your lifestyle will not conflate to a higher level is remote. My mother’s old adage of, “Out of sight, out of mind,” bears out this truth about money.

Second, record and analyze every penny of after-tax dollars that you spend over a two-week period. Earnestly think about the future and how you might be able to limit your spending in areas that aren’t positive in your life such as smoking or tobacco use. By saving the money he would have spent on cigarettes, my older brother informed me that he had an additional $3,118 in his savings and, as a bonus, felt better about himself. If that isn’t a win-win situation, I don’t know that I could think of one!

Cash flow management is the foundation to financial success. All things spring from the flow of cash and assets in our lives. Live your life as you wish; however, if you want to live longer, quit worrying about the daily costs of life and truly enjoy your senior years, you must start today. One of the best actions to start saving and stay focused on the long-term perspectives you wish to achieve is to seek out a coach or someone that can give you honest advice for your best interest. A CERTIFIED FINANCIAL PLANNER™ professional can help you plan for the best outcomes in your life. What you do today is critical for your life. Your future depends on it.

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College Loan Confusion

College students have steep learning curves. In high school, they were tasked with doing well academically, participating in extracurricular activities, complying with the rules of their parents’ homes and, possibly, having a job. At college, they must decide what to study, how many credits to take, and other important decisions, while adapting to a new environment and learning to manage time, communicate with professors and administrators, network with peers, and manage finances.

A key aspect of finances for many college students is student loans. When scholarships, grants, income, and savings are not enough to cover the cost, students often borrow to pay for college. In fact, student loan debt just became the second highest consumer debt category, passing credit cards but still lagging mortgages. In 2020, student debt passed over $1.56 trillion. As part of the Covid-19, relief the government passed numerous student relief programs, but student loan debt continues to grow as the average student loan debt of the 2018 graduating class was roughly $29,200. On average, student loan debt in the us tops out at $32,731, with roughly 10.8 percent in delinquency or default. 

At graduation, accumulated debt may include:

  • Direct subsidized loans (the government pays interest while students are in school)
  • Direct unsubsidized loans (students owe interest while in school)
  • Direct PLUS loans (for parents and graduate students)
  • Perkins loans
  • State and private loans (usually co-signed with an adult) 

Different types of loans offer different interest rates and repayment schedules. The federal government finances some loans. Private lenders finance others. Some loans are need-based, while others are not. One option available now is to consolidate student loans on the private market. Companies have emerged offering lower rates to borrowers, but this comes with tradeoffs like giving up certain federal protections. 

There are a lot of details to understand and track when students borrow. That’s one reason many colleges and universities require student borrowers to attend loan counseling sessions before receiving loans. Unfortunately, the survey found few students retain much of the information presented:

  • 94 percent of students did not know their repayment terms
  • 93 percent were uncertain what type of loan they held
  • 92 percent did not know their current loan interest rates
  • 75 percent understood how interest rates work

A Brookings Institute study found about one-half of students underestimate the amount of debt they have and one-third cannot provide an accurate estimate of their debt. The survey concluded:

“It is clear from the analysis presented here that enrolled college students do not have a firm grasp on their financial positions, including both the price they are paying for matriculation and the debt they are accruing. Without this information, it’s unlikely that students will be able to make savvy decisions regarding enrollment, major selection, persistence, and employment. Without knowledge of their financial circumstances, a student with a large sum of debt might be unprepared to compete for the jobs that would pay generously enough to allow them to repay their debt without having to enter an income-based repayment program.”

Unfortunately, student loan confusion doesn’t end with college. In large part, that’s because there a multitude of repayment options for college graduates. The Department of Education’s Federal Student Aid website offers an overview of the eight repayment options for Direct Loans and Federal Family Education Loans. These include:

  • Standard repayment plan (fixed payments)
  • Graduated repayment plan (increasing payments)
  • Extended repayment plan (fixed payments over 25 years)
  • Income-based Repayment Plan (income-based repayment)
  • Income Contingent Repayment (income-based repayment)
  • Income Sensitive Repayment Plan (income-based repayment)
  • Pay As You Earn Repayment Plan (income-based repayment)
  • Revised Pay As You Earn Repayment Plan (revised income-based repayment)

Of course, the choices available for repaying private student loans are different and vary by lender. In addition, marketplace and peer-to-peer lending platforms make it possible to refinance and consolidate student loan debt, sometimes at lower interest rates.

Tax implications may also play a role into loan repayment decisions. Interest paid on student loan debt may be tax deductible. Earlier this year, Forbes suggested it could reduce taxable income by as much as $2,500 for some Americans. However, this article cautioned monthly loan payments could limit the ability of many young Americans to save for financial goals like starting a business, buying a home, or retiring from work at a reasonable age.

A college degree is almost a necessity today. Pew Research Center has reported, “On virtually every measure of economic well-being and career attainment – from personal earnings to job satisfaction…young college graduates are outperforming their peers with less education.”

When a degree confers so many benefits, borrowing to pay for college appears to be a reasonable choice as long as students make sound repayment choices. In a world where so many repayment options are available, graduates may want to work with financial professionals to accurately determine which repayment programs may be the most beneficial. 

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