Daily Aid 45: Saving vs. investing, 2009 student crunch
Daily Aid 45: Saving vs. investing, 2009 student crunch
Student Financial Aid News
From NASFAA and the Wall Street Journal:
Florida’s state universities, squeezed early by the slumping economy’s effect on tax revenues, instituted a three-year cap on freshman enrollment last year. The mammoth California State University system — with 450,000 students — has announced plans to reduce its head count by up to 10,000 students for the next school year. Absent a boost in state funding, the smaller, more-selective University of California system has warned of a similar reduction. Enrollment limits are also under consideration in Tennessee and Washington.
“As public colleges grapple with reductions in state funding, the prospect of reduced access to higher education is looking more likely,” The Wall Street Journal reports. “[T]he pressures are threatening to restrict access to higher education at a time when the economic crisis is driving more Americans to seek new degrees or additional training, a common reaction in a downturn. College enrollment typically increases during a recession, but some observers wonder whether a continuing slump will actually keep enrollment numbers down next fall.”
Commentary
This will be an interesting challenge - will the largest incoming class in history face fewer seats than ever? If so, combined with already slated tuition increases will make competition and therefore pricing for college higher than ever. This is yet another wrinkle in the coming financial aid crisis, and an unwelcome one.
Start planning out your financial aid now for 2009. Chances are you’re going to need more than ever, from scholarships to grants to federal student loans and possibly private student loans.
From the New York Times:
The rising cost of college — even before the recession — threatens to put higher education out of reach for most Americans, according to the annual report from the National Center for Public Policy and Higher Education.
Over all, the report found, published college tuition and fees increased 439 percent from 1982 to 2007, adjusted for inflation, while median family income rose 147 percent. Student borrowing has more than doubled in the last decade, and students from lower-income families, on average, get smaller grants from the colleges they attend than students from more affluent families.
“If we go on this way for another 25 years, we won’t have an affordable system of higher education,” said Patrick M. Callan, president of the center, a nonpartisan organization that promotes access to higher education.
Commentary
We don’t have an affordable system of higher education now, compared to other first world countries. A look across the ocean at Europe shows that while some nations are moving towards a for-profit model, many nations still subsidize the higher education of their citizens, understanding full well that a dollar (or euro or krona) invested today in a citizen is likely to yield many more in both GDP and tax revenue down the road.
Scholarship Update
MPI Scholarship Program. College Education Funding is money designated for college work towards undergraduate or graduate degrees and requires acceptance in a program of study. The application deadline for the next major funding for the academic year is March 31, 2009. However, additional money could be available in the fund, so applications are accepted throughout the year. Application for these scholarships must be made a minimum of three (3) months early so as to meet your needed deadline. For example: If you are attending a winter semester, you must submit your application three (3) months minimum before you need to know if you received an award. Please see the following for specific qualifications for our current Category I scholarship fund.
Details at our free college scholarship search site.
Eye on the Economy: Investing is not saving
A bit of a rant as I hear more questions from families about 529 savings plans and other investment vehicles for putting money aside.
Investing is not saving. Investing is a form of gambling.
Saving is setting money aside with a goal - preservation of capital. Whatever you put into savings, you expect there to be that much when you go to find it later. Put $20 under a mattress, and when you come back, there should still be $20 there. Put $20 into a savings account (disclosure: paid link) and there should always be $20 available to you.
We’ve gotten confused. We’ve confused saving and investing, believing that saving should provide yield or pay interest. While savings accounts have paid interest in the past (and still do today), typically the interest paid doesn’t even keep up with inflation, so we’ve looked for more and more ways to improve the interest we’re paid on our savings.
Here’s where we get into trouble. There are investment vehicles masquerading as savings vehicles, and they’re not. A 401K is not a savings account. A 529 college investment plan is not a savings account. Why? The definition I use for an investment vs. savings is that in an investment, there is a non-trivial chance of you losing the principal. That is, put $100 into an investment and when you come back, you may have $96 or $125 or $0.
Saving: a very small chance of losing your principal, or original money.
Investing: a greater chance of losing your principal.
What a lot of families are realizing today, with the market and economy the way they are, is that 529 college plans and 401k retirement plans are very much investments, and they’re losing value rapidly.
If you’re in this situation, what should you be doing? Three things. First, talk to your financial planner about reallocating your investments or cashing them out if you need the money soon, within a year or two. If you don’t have a financial planner, get one. Many community banks and credit unions have one on staff that’s free or has a nominal fee for customers.
Second, looking towards the future, be very careful about what you do with your money. Saving money is important, absolutely. Consider how you want to save it, and whether preservation of capital is more important than growth of an investment. Know the difference between saving and gambling so that you can make smart financial decisions no matter where you are in life.
Third, start saving. Even if it’s just a dollar a week, start putting money aside as you can. The more you save, the more room you have in tough times. Just as the current recession can’t last forever, neither can the best of times. Save in tough times as you can, and save aggressively during good times.
Full disclosure: I am not a certified financial planner, CPA, or hold any form of certification or qualification for financial advising. As with all financial advice you find on the Internet, take it with a grain of salt and understand that you are solely responsible for the choices you make.
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