Blog

How Is Your Financial Health? An Interview with the Nurse Practitioner Journal

Student Loan Rate Changes & the 10 Year US Treasury – What You Need to Know

A new student loan bill has passed Congress and is set to be signed into law by President Obama. Under the new rules, future student loan rates will be linked to the cost of government borrowing as measured by the 10 Year US Treasury Note. This is a dramatic yet not unrealistic departure from the way student loan interest rates were historically set (ie. an arbitrary borrowing rate set by Congress).

For current year borrowers with loans issued after July 1^st, student loan rates will be lower than rates previously available:

• Undergraduate Stafford Loans will have an interest rate of 3.86%
• Graduate Stafford Loans will have an interest rate of 5.4%
• PLUS loans will have an interest rate of 6.4%

Under the new rules, rates will be fixed over the life of the loan with the rates varying each year for new loan issues. Most importantly, the new methodology for setting future student loan rates will be calculated as outlined below:

• Undergraduate Stafford Loans Rate = 10 Year Treasury + 2.05%; CAP of 8.25%
• Graduate Stafford Loans Rate = 10 Year Treasury + 3.6%; CAP of 9.5%
• PLUS Loans Rate = 10 Year Treasury + 4.6%; CAP of 10.5%

The new methodology is designed to reduce the level of subsidized interest paid by taxpayers. However, given the low level of interest rates today and the expectation that rates will rise in the future, these changes may represent a significant challenge for student and parent borrowers in the future. For example, an Undergraduate Stafford Loan issued based on today’s 10 Year Treasury would charge 4.74% annually, almost +1% higher than only 3 months ago. Further interest rate increases and a subsequent rise in the 10 Year Treasury yield will likely mean an increase in monthly student loan payments of potentially hundreds of dollars.

With persistently high levels of unemployment and a three year student loan default rate of 13%, a further increase in rates may put a larger percentage of future graduates at risk. Parents and students need to assess these risks in the context of a longer term financial plan and prepare for the inevitable rise in rates and the associated higher monthly loan payments at graduation.

Changing Jobs? Don’t Forget Your Old 401k!

Why Career & Job Changes Should Prompt Changes in How You Invest for Retirement

Job loss and career change are becoming an increasingly common fact of everyday life. Though these important life changes can be a source of anxiety, they also represent a unique opportunity for us to reconsider our investment options. For many Americans, investments in company-sponsored retirement plans like 401(k)s comprise a large percentage of our total retirement savings. When leaving a company, we often fail to consider both the opportunity and financial costs associated with leaving retirement assets in legacy company retirement accounts. Company retirement plans offer many benefits which investors, particularly those with minimal investment experience, find attractive. Limited investment offerings and access to institutional level pricing on mutual funds helps to reduce confusion for the average employee, while providing access to investments that might not be obtainable otherwise. Additionally, assets held in 401k plans are often protected from lawsuits and bankruptcy proceedings, unlike assets held in IRA's.

However, leaving assets in former company sponsored plans, or rolling assets over into new employer plans, comes with drawbacks that many of us fail to recognize. First and foremost, investors are limited to the investment options available within the plan. If the mutual funds selected by the Plan Sponsor are less attractive than alternative options in the marketplace, investors often have minimal recourse and are forced to invest in sub-par offerings. In addition, many 401k plans are limited to major geographic areas and asset classes, preventing individuals from investing outside these pre-determined categories. Many of us also face the challenge of trying to determine the true cost of being a plan participant, which often includes plan management fees in addition to the underlying mutual fund fees. When you add in the increasingly common investment offerings like Target Date and Lifecycle funds which are "fund of funds," investors are faced with a third layer of fees. In essence, all of these fees create a higher hurdle rate for individuals to overcome when attempting to achieve a reasonable rate of return.

Due to these drawbacks, rolling retirement assets into a Rollover IRA can often make sense. Rollover IRA's offer the latitude to invest across all asset classes and enable investors to use a variety of investment vehicles including mutual funds, individual stocks and bonds as well as ETF's. A Rollover IRA account can be opened at any of the major brokerage firms, and unlike 401k plans typically has no annual fee associated with it. For novice investors that don't feel comfortable with the wide selection of investment offerings, utilizing the services of an investment advisor may make sense in order to ensure you build a portfolio which is in-line with your risk tolerance and investment horizon.

So, if you are considering a career change or have lost your job, take advantage of the opportunity you have been afforded to reassess your investment situation. If the mutual fund offerings in your current or legacy company 401(k) are inadequate, consider expanding your investment options by utilizing a Rollover IRA. The process of rolling retirement assets into a Rollover IRA is a simple one, and may just be one of the best investment moves you make!

If you would like additional information, please contact Timmons Wealth Management at Liam.Timmons@TWealthManagement.com or via phone at (774) 331-2172.