529 Plans: The Best and the Worst

A recent Morningstar article outlined the Best and Worst 529 College Saving Plans. States are regularly altering their plans to improve them (hopefully) so the rankings change every year. Another excellent 529 plan resource is the SavingForCollege website.

It is best to not take any plan offered through a broker, but always go direct to the state to set-up a 529 savings plan. This helps the investor to avoid the pile of fees that many brokerages add on top of base plans. "Broker sold" is bad news in 529 plans.

Another issue to keep in mind is the pending legislation in some states that improve the tax benefits if you select the plan of the state you live in. Some states are also proposing additional savings benefits for selection the home-grown plan. Pay attention to any pending 529 proposals in your state legislature when determining which plan may be best for you.

Funds still flowing for student loans

The lock-up of the auction rate market has only impacted some student loans, a wide variety of government-backed and private-sector student loans are still available. One recent article outlines the Best Federal Loans for Graduate Students. Much of the content of the article is also applicable to undergraduates. Fixed rate federally backed student loans have many advantages over private loans. Eight key advantages are outlined in the article followed by a description of the best federal loan programs.

Anya Kamenetz outlines why There is No Student Credit Crunch. Despite several states having to cut back FFELP programs; there are still plenty of resources for low-cost federal student loans in the upcoming academic year.

It is best for students to focus on federally backed loans and stay away from private student loans with expensive variable interest rates and borrowing terms that make most people cringe.

Both of these articles are worthwhile reads for college students and their parents. Before applying for financial aid, it is important to have a sound understanding of the available programs.

Student Loan Consolidation

The majority of personal finance articles are either light-weight “press fluffs“ or hidden pitches from companies for their financial products packaged by a reporter. Once in a while a very solid personal finance article makes an appearance.

Many consumers carry college loans as a portion of their debt. A recent article from SmartMoney.com outlines some important thoughts regarding the consolidation of student loans.

One of the key points made in the article is that it will be best to hold off on consolidating loans until July 1st. Interest rates have been dropping over the past year with the Fed rate cuts. If you consolidate before July 1st, you will be paying the higher rates from last year. Those who consolidate after this date can take advantage of the new lower interest rates.

Another important point is that it is not advisable to consolidate existing fixed-rate student loans. Only variable rate loans should be consolidated.

There are also issues regarding standard repayment periods and extended repayment that consumers should consider for these loans. Many financial institutions market student loan consolidation as a product to generate fees. It is important that consumers recognize what is in their best interest when contemplating consolidation as an option.

The article provides some solid detail about the various considerations consumers encounter with student loan consolidation.

Consolidating Student Loans Not Always Best Option

Quick Takes: Student Loan Auction Rate, CDS, and Condo Market

Auction Rate

The most immediate fall-out of the Auction Rate seize up this past week (see More Credit Turmoil: The Muni Auction Rate market freezes) was the student loan market. The failure left North Carolina and many other states scrambling to find new financing. More than two-thirds of our state’s $3.3 billion in student loans were financed using the auctions. It comes as a shock to many parents that the failure of this structured market may mean that no funding will be available to send junior to college this year. This is another example of the poor risk modeling and greed on Wall Street impacting Main Street.

The News and Observer article “Lenders need new financing: Student-loan providers scramble as key credit market fails” provided some very pertinent observations about the situation.

"The whole notion of a failed auction when I started 10 or 11 years ago was unthinkable," Brooks said. "The same could be said three weeks ago. I'm not sure when -- or if -- they are coming back."

The failure has nothing to do with the authority's credit rating or the value of its assets. Both are strong.

"But it speaks directly to people's confidence and trust in the credit markets," said UNC-Charlotte finance professor Tony Plath.

The failed auction stung some agencies harder than others.

The Michigan Higher Education Student Loan Authority announced Tuesday that it would suspend one of its lending programs after the auctions failed.

The auction rate market situation is not likely to improve in the upcoming months. The obvious result is the suspension of many student loan programs across the majority of states as government entities scramble to obtain new funding sources – the crucial problem being that most of these alternative sources will be at higher cost. This will immediately reduce the amount of available loan money and raise the costs for the students.

Credit Default Swaps

A new word for 2007 was subprime, for 2008 is will be Credit Default Swaps as this market implodes in a manner that makes subprime appear to be minor league. At least this is the growing opinion of many economists and media articles. The latest addition was the Arcane Market Is Next to Face Big Credit Test overview from the New York Times on Sunday. The article points out that the unregulated CDS market is enormous at $45.5 trillion in size, double the size of the stock market.

Worst of all the market is crumbling as participants are finding that many of the players will have trouble paying their obligations. As the default rate rises in the bond market, the CDS market will come under increasing pressure. Similar to subprime, a higher level of risk was never really priced into these structured CDS products. This likely sets the table for another credit market fiasco.

Downtown Condo Market

A mere few months ago, the media was hyping the downtown Condo market as resilient in a down real estate market. Outlining the high prices and large numbers of pre-sold units, the industry extrapolated that this trend would continue leading to more projects being planned. Fast forward to today’s business headline “Condo market goes sour: Demand for downtown units falls victim to troubles in home-sales market”

Developers are busy reducing the number of proposed units, cancelling projects, offering incentives, and trying to assist buyers with financing in a tightening credit market. It is starting look like the market for these over-priced units in downtown Raleigh have gone from gold mine to dust bowl.

529: Where age-based plans make sense

529 age-based plans have dominated this saving for college market. This is one of the few segments where time-based plans make sense for most investors, which is why more then 70% of funds in some plans are held in age-based 529 funds. The automatic adjustment as the child approaches college age help parents from regularly having to re-balance and monitor these funds.

The regulatory oversight from the states for their 529 plans have helped avoid the time-based college saving plans from becoming a pyramid of fees; a problem common in retirement fund-of-funds offerings.

The well-defined timeframes associated with saving for college are also beneficial to making these age-based plans successful; when a youngster is in 8th grade it is pretty clear how many more years until they go to school.

The lack of multi-level fund fees in many age-based 529 programs does not mean that parents should ignore the other fees found in many state plans such as yearly maintenance fees. Many plans are still charging $15 to $50 maintenance fees. It is very easy for a small 529 savings plan of $500 to lose money each and every year after fees are considered. It is very easy to land up with a balance of well under $400 in some plans after years of savings and “gains”, once the fees are subtracted. Take a close look at the fee structure in any 529 offering that you are considering; whether the plan is age-based or not.

Age-based funds dominate 529 plans
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