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Beware These Financial Pitfalls When Choosing a College

August 23, 2021 By MelissaB Leave a Comment

With more and more high school students deciding to attend college, the race to find the “perfect” college often begins as early as a high school student’s sophomore year, though more typically their junior year. Students may consider a school’s “vibe,” and its ranking when picking a college, but there are more important things to consider. As the parent, stepping into your child’s college search with a dose of reality is necessary. After all, attending college can cost tens of thousands of dollars. Advise your child to beware of these financial pitfalls when choosing a college.

Financial Pitfalls When Choosing a College

College is expensive! Even if your child attends a local university and lives on campus, the price tag could be $20,000 per year or more. For that kind of investment, you should carefully consider these factors, which will save you money and help you and your child choose the right college carefully.

The Retention Rate

How many students who come in as freshmen come back for their sophomore year? That is the college’s retention rate. Colleges with high retention rates are likely doing something right for their students. If the college your child is considering has a low retention rate, be concerned.

Transferring to a different college because your child is unhappy at the one she initially chose can be expensive. Not all of your child’s credits may transfer, which means she may have to pay more to complete her college degree, which happened to me. I left my initial college after one semester. It ultimately took me five years to graduate college, in part because of the college I initially chose and the fact that some credits didn’t transfer.

The average retention rate nationwide is 78%. If the college your child wants to attend is lower than that, make sure you understand why before sending your child.

The Graduation Rate

How likely are incoming freshmen to graduate in four years? That is the graduation rate. Unfortunately, the nationwide graduation rate is surprisingly low. “According to the National Center for Education Statistics, just 41% of first-time full-time college students earn a bachelor’s degree in four years, and only 59% earn a bachelor’s in six years” (CNBC).

What do those lower graduation rates represent?

First, some students drop out and never complete their degrees. My cousin dropped out of law school after one year, and he had tens of thousands of dollars of debt to show for it without the law degree. He did eventually get his Master’s in a different field, but paying off the law school loans took him years. This is the worst-case scenario.

Second, if your child does graduate but takes five or six years to do so, your child is in a better position—he has his degree. However, do you have the money to pay for an additional one or two years of college? Most families expect their child to graduate in four years and budget for that. When graduating takes longer, many families are left taking out additional loans they hadn’t planned on. Unfortunately, this scenario is surprisingly common as most schools have fairly low four-year graduation rates.

Some Scholarships Aren’t Renewable

If your child qualifies for financial aid, be forewarned that the college can usually manipulate the first-year financial-aid package to make attending the school possible. However, they often do that by finding scholarships the college offers. Yet, what you may not realize is that some of these scholarships aren’t renewable.

Perhaps for the first year of college, parents need to pay $7,000. However, for sophomore year, after some of these one-time scholarships end, you may be looking at a bill of $15,000 a year. Can you afford that if you were expecting to pay just $7,000 a year? That can be a shock to many parents.

Make sure when you sign your financial aid agreement that you know which scholarships are renewable and which are one-time scholarships so you’re not surprised next year.

Paying for College Can Increase Your Income

Some parents choose to pay for college by taking money out of their retirement accounts. However, when they do this, the money they withdraw counts as income in the next tax return that they file. Then, when the college sees this, they see that the parents’ income has gone up, and financial aid is further reduced.

Ideally, have a way to pay for college that won’t make your income increase and reduce the amount of financial aid for which you qualify. If you feel that taking money out of your retirement fund is the only way to pay, consider choosing another college. Or, choose to take out PLUS loans and either pay them back traditionally or pay them back with money from your retirement fund after your child graduates. Then, doing so won’t affect your financial aid offer.

Consider Living Expenses

When people think of the price of college, they most often consider tuition and room and board. However, your child will have many more expenses than that. Consider the following additional costs students may incur:

travel home for vacations,
clothing if the climate at school is different from the climate at home,
entertainment,
food when the college cafeteria is closed,
fraternity or sorority fees if they are pledging,
laundry,
parking fees,
summer storage for their college furniture and other goods when they are home on summer break

Final Thoughts

Choosing a college can be exciting, but make sure your child isn’t swayed by the college’s slick advertising. More importantly, consider the many financial pitfalls when choosing a college. Investigate the college’s retention and graduation rates. Understand your financial aid package, especially if the scholarships that your child receives are renewable or one-time scholarships. Don’t forget to also account for living expenses. If you consider all of these variables, you will be more financially prepared for what is to come in the next four (or six!) years your child is a college student.

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Using Escrow Accounts and Financial Planning With Your Spouse

August 10, 2021 By Justin Weinger Leave a Comment

An escrow account can sound foreign and complicated, especially when you’re trying to purchase a home. Some homebuyers have never even heard of an escrow account until they read through their closing documents. Dealing with it doesn’t have to be a headache, however.

This guide will not only detail what an escrow account is, how to use it, and when you can close it, but it will also go in depth about the pros and cons of having an escrow account and how to make financial goals using one with your spouse.

Finances can be a source of contention in the home, but it’s important to talk about and make sure you’re on the same page with your loved one. Doing so has a way of bringing you closer to your spouse and gives you a safe space to discuss sensitive topics.

Everything You Need to Know About Escrow Accounts

Escrow accounts are very useful for financial planning with your spouse. Below, we’ll define what an escrow account is, how to use it, when you can close it, and we’ll look at the pros and cons of this account.

What is an escrow account?

Whenever you and your spouse look to purchase a home or compare home insurance policies, keep in mind that you may be required to use an escrow account. It depends on the lender and insurance company that you work with.

What exactly is an escrow account? To put it simply, an escrow account is an account that is run by a third party and is used to complete transactions between you and another person. It is normally used for large settlements, but it can be used for small business deals as well.

How to Use Escrow Accounts

A prime example of how to use an escrow account is using it to buy a home. You can use the funds in the account to show the seller you’re serious about purchasing the home. Using this will encourage the seller to take the house off the market and help them be more inclined to make an agreement with you.

You can also use an escrow account to pay for property taxes and home insurance. A portion of the mortgage payment goes into this account and is used to pay for taxes and insurance at the end of the year.

These kinds of accounts, as stated above, can also be used for small business transactions like purchasing tires or even something as simple as grocery shopping.

When can I close my escrow account?

There’s really no good reason to close your escrow account unless it is a mortgage escrow account. If that’s the case, the only way to close that account is to make sure you have sufficient home equity. Having enough home equity means making sure you have been paying your property taxes and home insurance.

For other escrow accounts you would like to close, the process is as simple as calling the bank and having them close it for you. It’s a simple process because the account is more like a savings account in this instance.

The Pros and Cons of an Escrow Account

There are several pros and cons to having an escrow account. One pro is that this account provides a secure transaction between parties. Another is that you can pay for property taxes and home insurance monthly as opposed to annually.

This account greatly benefits the seller and the buyer with large settlements like purchasing a home. The seller has guaranteed funding and the buyer doesn’t have to pay out of pocket.

For every pro, there is a con. One disadvantage of having an escrow account is that you have to deal with higher monthly payments for your mortgage. Another is that you might end up paying more on taxes because the estimations are a little off. Escrow fees might also be higher than other services.

Whether purchasing something big or small, escrow accounts are perfect tools. You can use them for virtually anything. They’re also great for financial planning with your spouse.

Financial Planning With Your Spouse

Money can bring up a lot of emotions, especially in marriages. It’s good to talk about these things with your spouse and make sure you’re both on the same page. It’s even better to make financial goals together using your escrow account.

Talk about money in a private setting for both you and your spouse’s safety. Be open and honest about your spending habits, and don’t be judgemental or critical of yourself or your spouse.

Saving Responsibly

The first thing that should be discussed is saving responsibly. It can be easy to comfort spend and not think about spending your money wisely. In these unpredictable times, it makes sense that you would not want to save and put back.

Escrow accounts are perfect for saving responsibly because they can be used as designated savings accounts.

This pandemic has taught us that tomorrow isn’t promised. But that’s all the more reason to have self-control and save. If something happened to you, you need to be prepared and think about those you are leaving behind.

Set Financial Goals

Discuss financial goals with your spouse as well. You could talk about using your escrow account to put back and plan how much money you want to have at a certain date and time. Keeping goals specific, measurable, attainable, relevant, and time-based is a very effective way to reach them.

A perfect S.M.A.R.T. goal would be something like this: I am going to save $500 by August 30, 2021, and use my escrow account to save that money.

Create a Budget

Budgeting goes hand-in-hand with saving and setting financial goals, so it’s important to talk about. You want to set financial boundaries for yourself at the beginning of the month and keep track of where all your money is going.

It may seem tedious, but it’s a great team-building tool to do with your spouse. You can put aside money into your escrow account on the first of each month as well.

When you are educating yourself about finances and financial planning, you are placing yourself ahead of the curve. Many don’t take the time to learn and expand their knowledge, so kudos to you. Take what you’ve learned from this guide and share it with others.

Peyton Leonard writes and researches for the insurance comparison site, ExpertInsuranceReviews.com. Peyton is dedicated to helping others save money and be free from financial burdens.

Reasons Not to Buy Long-Term Care Insurance

July 19, 2021 By MelissaB Leave a Comment

My uncle and aunt, who are in their 80s, recently moved to a long-term care facility. The cost for two people is expensive, but they’re paying a reasonable $3,000 a month thanks to a long-term care policy my uncle bought years ago. My husband and I aren’t yet at the age where we need to buy such a policy, but we did start to research them. However, there are several reasons why we’ve decided not to buy long-term care insurance.

Why We’re Not Going to Buy Long-Term Care Insurance

We’re not buying long-term care insurance because of these drawbacks:

Premium Prices Aren’t Fixed

Rising premium costs are one of the biggest issues for us. You may buy a long-term care policy with an affordable monthly payment when you’re in your 50s. However, that payment is not fixed; over time the monthly payment will continue to increase, eventually outpricing some people’s budgets. If you can no longer afford your monthly premium before you need the care, you have lost all of the money you previously invested into long-term care insurance.

Insurance Companies Sometimes Won’t Pay

Long-term care insurance policies often have many hoops you must jump through before they will pay. Others don’t pay for the first 90 days. Or they will only cover one to three years in a long-term care facility. If you need care for a longer duration, your policy won’t cover that time.

May Never Need the Policy

After paying decade after decade for a long-term care policy, you may never need it. You may remain in good health and able to take care of yourself, or you may die suddenly in a car accident or from a heart attack. Think of the many other ways that money could have been used.

I know, I know, not needing the policy is a risk for any insurance coverage, and we still purchase them. However, consider the tens of thousands of dollars that you’ll pay for a policy you may not need. Buying such a policy often doesn’t make financial sense.

What We’re Doing Instead

Reasons Not to Get Long-Term Care Insurance — Photo by Olga Kononenko on Unsplash

We used a calculator to determine how much long-term care insurance would cost for us to purchase in our early 50s. Instead of investing in long-term care insurance, we’re investing that money in our retirement accounts (in addition to what we’re already regularly investing for retirement) so it can grow thanks to compound interest. The plan is to make our retirement fund as large as possible so we won’t need long-term care insurance. We’ll also be able to sell our house and have it for equity.

In this sense, we’re planning to self-insure so we can get quality care if needed without paying for a long-term care insurance policy for years.

Final Thoughts

Some people swear by long-term care insurance. The policy is doing its job for my aunt and uncle. However, after my husband and I looked at the price and compared it with all of the potential policy exclusions, we’ve decided there are several reasons not to buy long-term care insurance. Instead, we will be working to save and invest enough money to self-insure.

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