Do Your Taxes (FAFSA Edition)

This tax post is for FAFSA filers old and new; includes parents of this year’s college seniors and parents of students in college now.

It’s a good day to…”Do Your Taxes”. Or at least generate a decent estimate.

Tax Forms 1040

Who should do an estimate by January 1st?

1. Parents of high school seniors off to college next year
2. Parents of current college students
3. Self employed people
4. Taxpayers with a change in income, plus or minus 20%+ over last year.

This post focuses on FAFSA filers…
Experienced FAFSA (Free Application for Federal Student Aid) filers know the joy of spending a part of the upcoming holiday weekend on personal finance and disclosing your finances to another government agency. I invite you to include your high school senior/college student for part of this exercise so that they understand that they aren’t the only ones who have to fill out forms so that they can go to a post-secondary educational opportunity. Some reasons to do so:

Funding college can feel like this!

1. If the family won’t be eligible for college aid due to the family income or assets, they need to see why.
2. If the only way they can go to college is due to a lack of resources, they need to understand the forms and their importance.
3. This is a good time to remind them to seek scholarship applications-many open up January 1st of each year.
4. Review your in-house rules for having “skin-in-the-game”. For instance, We expect you to earn/contribute $5000/yr towards this cost. Or you need to apply for X number of scholarships.

Note 1: The FAFSA asks for many pieces of financial information and despite the requests for early completion, most people have not even thought about their tax filings on New Year’s Day of any year. For divorced parents, it is good to communicate in advance about the required information.

Note 2: It is always recommended to complete the FAFSA, even if you think your family will not be eligible for any aid. In the coming year, there might be some program that requires the FAFSA, despite no financial aid award now.

Deadlines

Complete the FAFSA as soon as possible-your place in line matters for aid awards. This applies to federal and private sources of funding. A list of deadlines are here.

You can order a PIN to sign the FAFSA now at https://pin.ed.gov/PINWebApp/pinindex.jsp .

Print some tax forms. (for notes and listmaking) Choose an online tax calculator such as http://www.ownersmanualdownload.net/moneychimp-tax-calculator-2014 or http://www.bankrate.com/calculators/tax-planning/1040-form-tax-calculator.aspx. Please note, these are for illustrative purposes only. The idea is to choose one that is easy for you to work with. Please use your favorite search engine to select one for yourself.

 

Get ‘er done!

 

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I have Six Figures of Income…and Debt

The question below on how to handle six figures ($354,000) of debt with an incoming check for $500,000 was answered by me on October 30th at Nerdwallet.com. Since last spring, I’ve been answering questions from real people at Nerdwallet’s Ask An Advisor platform. Those of us on the platform answer real questions from real people without knowing all the relevant information, only what they tell us. Other answers as well as mine can be found here.

Q: I will soon get a check for $500,000. I have $354,000 in student loans. Should I pay those off first?

A: (Dana Twight) Great that you are asking about how to handle this windfall. This is exactly the situation that financial planning is made for – balancing competing priorities and improving your short and longer term financial situation.

5 Points to Consider

1.Other debts: Do you have any other non-mortgage debts? If you do, they may very well have higher interest rates than your student loans. Consider paying those balances down first.

2. Emergency funds: Do you have an emergency fund-are you employed? In addition to the fund portfolio suggested by my colleague, I would consider setting aside a fund with six months income or expenses in it from this check. Or you could set aside the amount of one year’s health insurance premiums and deductibles. This could be the base of that fund-keep it in insured CD’s or accounts.

3. Insurance: This is also a great time to build an umbrella liability insurance policy into your annual budget. This type of policy covers you above other liability limits (say on a residence or a vehicle). Investopedia has a definition which mentions that it also includes libel, slander and invasion of privacy.

4. Tricks: Be careful about how you share this news with others. Resist the opportunity to open new credit accounts. Visit the opt-out website to opt out of new credit card offers https://www.optoutprescreen.com/?rf=t so that you don’t get oceans of new email or regular mail offers. Your financial institution may see your funds deposited and offer to help you invest them-stick to a fee-only planner and get hourly advice instead.

5. Treats: It’s ok to let yourself do something fun with a small part of the money, if you have waited for a vacation or a newer vehicle, or a really cool bike. Also treat yourself to fully funding your 2014 and 2015 retirement plan contributions, if you are still under retirement age.

Last but not least: Do you have your estate documents in order? A will, a durable power of attorney and health care directives as required for your state are a must. Take the time and the nominal percentage of this windfall to make sure that your documents match your intentions, now that you have more assets.

 

Best wishes for your success in your chosen field!

Walden on Wheels # 2: Van Dwelling Grad Student

To save money, Ken Ilgunas lived in his van ( “an upholstered hermitage” ) while he attended Duke to get a Masters in Liberal Studies…and kept it a secret. Ken Ilgunas is the author of Walden on Wheels. My earlier post addressed the first half of Ilgunas’s story-how he got rid of his undergraduate loan debt.

“The Creepy Red Van”

He made several pledges to himself:

• First: “In order to live debt free in my van, I’d have to lie”. The first rule of van dwelling-is don’t mention the van dwelling.
• Second, he vowed not to accept any gifts, even though his mom offered to pay his rent so he didn’t have to live in the van.

“I didn’t think of a gift merely as a gift but as a debt with bow wrapped around it.”  “When we accept a gift, I thought, sometimes we don’t just acquire a debt but an identity.”

• Third, he continued his life as an ascetic by giving up meat, dairy and beer; and joining the campus gym (for exercise and showers) . [I say ascetic for his purposes-not everyone who gives up meat is an ascetic].

The burden of lying by omission to fellow students about where he lived and being worried about whether the campus police would kick him out of his permitted parking space took a distinct toll on Ilgunas’s social life. After two months like this, he had a  “surfeit of solitude”. When you read the book, you can see how he solved that problem.

In addition, he was living on $103/week, not counting tuition and other school fees. According to charts in the book, he spent $4.34/day average on food. For reference, the dollar amount for a person using SNAP (food stamps) is $31.50 per week or $4.50/day.

(Photo credit: Wikipedia)

As listed in the book, his monthly expenses consisted of: car insurance $46, entertainment $33, vehicle costs/repairs $73, gas $23, misc. $65, food $132, cell phone $37.

Notice: no utility expenses, nothing on clothes, no long commute.

You might take a moment to jot down your own expenses and see if there is any place to cut without being as Spartan as Ilgunas. What I learned from the book is that many of us with  “first world problems”, live a relatively easy life. For those of us with larger debts, Ilgunas demonstrates the value of being absolutely focused on one’s priorities and ultimately learns another lesson as well:

“If I wanted to stay close to nature and my true needs, I would have to continue to live a bare-bones, simple uncluttered lifestyle.”

Without adopting a ‘bare-bones’ lifestyle, there is value in seeing how others accomplished their goals. J. D. Roth, the founder of the finance blog Get Rich Slowly wrote about getting rid of his $35,000 in debt in 2007. Whether you choose to stop using credit;  adopt a lite beer vs. microbrew budget; sell most  of your possessions ; leave the country; or live on only one income (if your family has more than one revenue stream), there are other people who have vanquished their debt. It is very hard, but you are not alone (unless you want to live in your own van).

Related articles

• Dorm, Shmorm: Meet the Guy Who Lived in a Van for Two Years During Grad School (business.time.com)
• Walden Pond in Concord, Massachusetts (atlasobscura.com)

Walden on Wheels #1 : Vanquishing the Debt

Wipe our Debt (Photo credit: Images_of_Money)

$32,000 in debt after 5 years of college. For a certain age group among us, that probably sounds laughable. Not that any debt is a laughing matter; but it could be so much worse. Why – I haven’t met anyone with a “Craftsman house-sized student loan debt” since this morning.

One year’s tuition, room and board borrowing can easily run between $26-$52,000 in the 21st century. The average student is graduating with $35,200 in debt in 2013.

The book Walden on Wheels, is one man’s story of debt freedom. I will divide the story into two posts-how he discharges his undergraduate debt and how the author pays for graduate school. I am not sure most of us could do what he did, as it involves three difficult accomplishments:

1. Delayed gratification
2. 99% less spending and embracing isolation to do it
3. Severe behavior modification

The hero of this story (author Ken Ilgunas), begins in a Puritanical place:

“I didn’t see work-at least my line of work as a virtuous undertaking. Rather I saw it as nothing but a penance for my sins, for the profligate decisions I had made as a clueless eighteen year old…To make the best out of a bad situation seemed like an act of resignation. Instead I embraced my bitterness and hatred and ungratefulness.”

In order to direct his dollars from a new job in Alaska (in Coldfoot), Ken adopts the idea that his debt is “a villain that needed to be vanquished”.

“I bought nothing and kept nothing in the bank. I squealed with pleasure when I tortured it [the debt] with payments, like  a sadist plucking legs from a captured mosquito.”

The Happiness Project, this book is not. Or is it? You tell me.

In various, low wage, isolated jobs, Ken goes about reducing his debt-the book chronicles his success job by job, while contrasting his situation with his good friend Josh, also in debt for his undergraduate education. Josh’s nut is $66,000 however.

Would you give up salon haircuts, all your “electronic gizmos”, new or ‘new to you’ clothes, shopping, the gym and isolate yourself at a minimum wage job in the middle of nowhere to meet your goals? PS he had free ‘room and board’. I think many of us wouldn’t be able to do this, but it is a mesmerizing tale. There might be a technique, or a mind-set, or a tale in this book that will inspire you!

Related articles

• Duke Grad Student Secretly Lived In A Van To Escape Loan Debt [PHOTOS] (businessinsider.com)
• Walden on Wheels (rebelwithoutadime.wordpress.com)
• Saving Money, Even When the ….Hits the Fan

Student Loan Debt … Debt Sentence?

In the Wisconsin public university system, the average student graduated with 5 times the student loan debt in 2011 than they had in 1982.

The amount went from $5,000 to $27,000 in just under 20 years. Let’s check that number against inflation. Between 1982 and 2011, the buying power of $5000 more than doubled to $11,654.87. Let’s review:

• Wages increased 2.4x
• Consumer Price Index: increased 2.3x
• College Costs: increased 5x

We all have heard that higher education inflation is higher than “regular inflation”. For example, in 2009, the price of higher [public] education increased by an average 6.5%, despite a 2.1% decline in the Consumer Price Index (CPI) during the same time.

In 1981, I graduated from a different UW (University of Washington in Seattle) with that same amount of debt-$5000. At the UW today, the average student debt load is $23,000, $4000 under the other UW.

University of Washington Campus & Vicinity (Photo credit: AvgeekJoe)

What happens after the end of the “formal education”? You might have a job, you might be a boomerang child and move back home with your family, or you might get an “internship” that pays $10 an hour for a job that used to be given to a college graduate. That graduate may have made $20,000 in 1982. Last year, a college graduate or a worker of any age needed to make $46,619 to equal that 1982 buying power.

I know people who have $15,000, $25,000 and $50,000 in student loans. Even if they have “good jobs”, as opposed to a paid internship [formerly a permanent a job with benefits], it is hard to pay your bills.

Here’s a website for everyone to check out as their kids graduate from college this spring.  http://www.thecalculator.org/ This one is for Washington State only and illustrates how much they need to make to cover expenses in every Washington county. For information on other state self-sufficiency calculators, please click here.

For an interactive graph on student debt in the entire US, check out this chart at truthdig.org.

Please be careful as you check the cost of higher education for yourself and family members. Bankruptcy is not an option for student loan debt (or medical expenses).  Trick question:

1. Who will loan you money to retire?

I’m not saying don’t do it, but really dig into the post-graduate numbers to see how much your graduate will need to earn to cover their debts. Ideally, they are by your side as you engage in this process!

Related articles

• Student Loan Bankruptcy Fears Drive Congress to Rethink Law – WSJ.com (policyabcs.wordpress.com)
• Class Notes: Law School, Student Loans and More Education News (newsfeed.time.com)