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Friday November 15th 2019

529 Plan Funds Won’t Pay Your Student Loans

One of the many expenses parents take into consideration when raising children is the future cost of sending that child to college. Various savings options allow families to begin a nest egg for that very endeavor. The government, in cooperation with investment firms, developed the high yielding 529-college savings plan. While the plan provides substantial growth and returns (5% or more annually), the option also contains many drawbacks…one of which is that 529 plan funds don’t pay for student loans.

Expenses Covered Under 529 Plans

Contributions and earnings from 529 plans are only tax exempt when used for qualified higher education expenses or QHEE. Specifically, these expenses include books, equipment, mandatory fees, supplies and tuition. The plans also cover room and board, as long as the child enrolls at a minimum of a ½-time student, and under certain circumstances, there may be a cap on housing allowances.

The money may also pay for the expenses of special needs students. The money cannot be used for paying off student loans or for any other purpose, including food, personal expenses or travel, otherwise plan owners must pay federal and state income tax in addition to a 10% penalty on earnings.

Non-covered 529 Plan Costs

While the monies from 529 plans are transferable from state to state, certain schools in states may be ineligible for these funds. Parents having a 529 plan in Wisconsin can use the money for college in Florida. Though most schools qualify, some do not.

In addition to possible taxation for improperly used money from 529 plans, the accounts are subject to application fees, management fees and annual maintenance fees, that in total, range from $300 to $2000. These charges vary with individual states and with the type of plan acquired.

One might argue that student loans are for money that paid for the expenses that 529 plans do cover. Unfortunately, the law does not see it that way. Student loan payments and the interest attached to them is not covered by a 529 plan. This means that parents need to carefully consider which costs they take loans for and which they pay for with 529 plan funds.

Parents considering a 529 plan must either begin the account early enough in the child’s life in order to pay for college from the start of enrollment, or have a backup plan to accommodate student loans and other non-school related expenses. The Coverdell Education Savings Account has similar restrictions, the difference being that until the end of 2010, individuals were also allowed to use the monies for K-12 educations.

How to Get the Most out of Both

The smartest thing to do is to create a list of college expenses that your child will incur. Then pull out those that will be covered under your 529 plan. If the plan has enough to cover all of these costs, great! You can simply pay the non-covered costs by loan, savings or other investments you have set aside for your child’s education. If not, the balance of education expenses should be lumped with the costs not covered by the 529 plan and addressed through whatever means you have set up for these costs. Just don’t get caught with a large 529 account and a school loan when you can’t use those funds to pay the loan. See what you can pay with the 529 account first and then dip into loans if you must.

Gap in Mortgage Rates – Cause of the Divide

As the recession continues to affect Americans, the gap between the wealthy and the poor is steadily increasing. Data recorded by the Census Bureau shows that there are more individuals living in poverty than ever recorded. The Great Recession has added 6 million people to the poverty ranks. As the gap continues to grow between the rich and poor, so does the ability to obtain a mortgage between individuals with low credit scores and those with high scores.

Harder to Qualify for a Mortgage

Obtaining a mortgage with a good rate has become increasingly difficult since the meltdown of the mortgage industry, a feat that is already difficult for those of limited means. According to a poll taken by Zillow Mortgage Market Place, nearly 33% of Americans are unlikely to qualify for a mortgage because of low credit scores. When using Zillow to search for loans, no results were yielded for individuals whose credit scores were 620 and below. According to Freddie Mac, lenders have returned to placing emphasis on a borrower’s credit history, capacity, and collateral.

There remain few options for individuals with low credit scores. In the unlikely case of getting their loan applications looked at thoroughly by a loan officer, individuals are simply told to improve their credit scores in order to qualify. However, many individuals are finding this to be a difficult task, and have to put their dreams of home ownership on hold. When you don’t have the cash flow to get the bills paid on time, your credit score suffers.

Higher Scores Only Help a Little

Even individuals with good credit scores are having a hard time securing mortgages with good rates. Banks and mortgage companies have become more selective in offering mortgages to consumers. Borrowers with credit scores of 720 and higher are receiving slightly better mortgage rates than individuals with scores ranging from 620 to 719.

According to Zillow, borrowers with mid-range credit scores (620 to 719) are receiving annual percentage rates of 4.73 to 4.44 percent. Borrowers with credit scores above 720 receive annual percentage rates of 4.3 percent. Borrowers with great credit scores were once able to get mortgages far better than those with average credit. This is no longer the case. Even those with credit scores of 780 and higher are seeing only slightly better rates than those with mid-range credit scores.

Difficulties for the Self-Employed

Not only are borrowers with low credit scores having a hard time securing mortgages, but so are self-employed individuals. Even with good credit scores, individuals who are self-employed have to go through great lengths to prove they are credit worthy. Those who are self-employed should be prepared to present current bank statements and tax records. Lenders are also requesting 401 (k) records to prove that individuals have savings and investments that can be easily liquidated.

Refinancing Obstacles

It is also more difficult for borrowers to refinance existing loans, mainly because of reduced equity in their homes. This issue also affects individuals with great credit. The FHA has started a new program to assist borrowers who are “underwater” on their homes, but it is yet to be seen whether this will actually help those in need.

America is experiencing record low mortgage rates. The large amount of foreclosures in America has substantially driven homes prices down. The problem, however, is that most Americans are not able to qualify for mortgages. In the subprime mortgage era, many individuals with low credit scores were able to buy homes. However, this contributed to the housing bubble in America, and those lending practices were eliminated.

The meltdown in the housing industry and the recession has changed the way people get mortgages in America. Lenders are simply hesitant to lend out money. In the wake of the financial bailouts administered by the government, there has come increased pressure from Washington for lenders to lend out money. However, there has been little change in new lending practices. Lenders are taking every precaution they deem necessary before approving individuals for mortgages. With the socio-economic gap growing wider, it will remain hard for people with low credit scores and struggling wages to qualify for loans.

How the Recession Has Changed America

No matter where you go and what you do in America, there is a good chance someone is talking about the recession. Nearly everything you hear in the news is centered on the recession. Whatever the topic, it’s skewed to talk about how it has been affected by downturn. Not only has the conversation changed, but Americans are behaving differently as well.

Spending Less

If you were to visit a car dealership, you would probably see a huge inventory of SUVs for sale. People are becoming more conscious of the amount of money they spend. They are also becoming very creative in their methods to save money.

With most of America still feeling the effects of the recession, topped with high gas prices, few people see the value in purchasing a SUV with low gas mileage. Buyers are opting instead for fuel-efficient cars. The recession has subtly curbed the appetite for lavish, expensive luxuries for many of Americans.

Saving More

Since the beginning of the recession, Americans have become thriftier. Savings rates have increased substantially. More individuals are placing their money in savings accounts, hoping to save enough for a possible rainy day.

A large number of people polled by Pew Research admitted to now buying less expensive brands. Over half of the people polled stated that they have canceled vacations. In addition, 33% said that they have cut back on alcohol and tobacco products. Substantial portions (28%) of adults from the ages of 18 to 29 have moved back in with their parents. Individuals are using whatever feasible methods possible to cut back on spending.

Lower Wages

The recession has not only made individuals fearful of losing their jobs, but nearly 35% of Americans earn less than they once did. Many older individuals with decades of work experience have come to the realization that they will never earn the of amount wages they previously earned.

Back to Basics

The recession has created a desire to have a simpler life for many people. There is a change in how people define the American Dream. Fewer people are dreaming of big houses, multiple vehicles, and vacations every year. The recession has curbed the expectations of many people. Families and individuals are becoming more content with living in apartments, riding bicycles, and planning local festivities for their families.

Risk Aversion

Investors who once took on risks in the hopes of earning high returns are becoming more risk averse. Many investors were terrified as they watched their retirement plans and investment portfolios shrink to record lows. The volatility in the stock market has caused investors to put their money in safer investments.

Bond funds and money market accounts are now attracting the majority of new money. The Investment Company Institute reported that poll numbers showed that only 30% of investors were willing to take on substantial risks to earn higher possible returns.

Economists and financial experts say investors will remain risk averse for quite some time. A long-term bull market would need to occur for investors to have enough confidence to invest more money in stocks. The increase in bond investments is also due to Baby Boomers making a transition from stocks to bonds to protect their investment portfolio.

How Long Will it Last?

Some economists believe that the changes in Americans are only temporary. They believe consumers will start spending as that once did when the economy starts improving. Others believe that the recession has permanently changed the mindset of Americans, and spending habits will never return to what they were in the past.

Whether things will continue as is or return to what they once were, it is safe to say that the recession has drastically changed how Americans see the world, their own lives, and their money.

Watch Out for Capital Recovery and Private Recovery Fees

Amidst the debacle of mortgage financing that led to a financial meltdown, the recovering market in the US has brought its own controversies in this period. The resale market, valued in excess of USD 100 billion every year has paved way for a silent and smooth movement of money to builders and other construction corporations across the US.

The Purpose of the Fees

Imagine this – Every time a real-estate property is being sold, the original builders (not the landowners mind you) will be paid a fee proportional to the transacted amount involved in the sale. Even though it sounds like an intelligent way for maximizing the revenue for the construction conglomerates, a second look at the policy reveals the harm that it can cause to the entire market and the consumers involved in thousands of real estate transactions every year.

Every time a consumer invests in buying a home, they look at the appreciation value of the enterprise so that they are left with something that has grown in monetary value along with them. The builders these days are attempting to include a clause – a transfer fee that has to be paid to them, every time a real estate property that they developed is being sold, allowing them to capitalize on property sales, regardless of profit or loss on the part of the consumer. This transfer fee is regardless of the appreciation or depreciation of the value of the real estate being sold.

Almost 100 Years of Fees

If you are buying a $100,000 house and selling it for 105,000 to another party then you will end up paying $1050 to the developer of the project. If the party who buys from you sells it for $110,000 then he will end up paying $1100 to the same developer and the cycle continues for all resale transactions for a period of 99 years.

Who Gets the Money

This money needs to be paid to the investors who backed the real estate developers during the initial development of the project. Failure to pay the amount will make the reselling a legally invalid contract. The reasoning being given by the principal advocate of the transfer fee scheme – Freehold Capital partners of New York is that “private transfer fees represent an adaptation in how to pay for development costs” incurred by builders “at a time when funding is not available” to them on “reasonable terms.”

With a contract for 99 years on every piece of real estate that is being sold the developers stand to reap the benefits for decades to come.

The people looking to move their families for career changes will be hit the hardest – people working for the defense forces in particular. Every time they sell a property, not only do they have to pay a transfer fee but the buyer of the property has the right to claim a certain reduction in cost pricing to negate the amount that he will have to pay to the developers when he intends to sell the property a few years down the line.

The FHA’s Involvement

The FHA – Federal Housing Administration has raised their voice against this fee that is against the rules. If Fannie May and Freddie Mac also join the fray then it will effectively stop this scheme from being implemented. Similar transfer fee programs had been implemented in different areas at different times only to be met with opposition from the consumers leading to the scheme being removed by the developer.
With such a big segment of consumers being affected many coalitions have taken up arms against this scheme and to prevent it from being implemented.

The Myth of “Easy” Payments

Advertisers make easy payments sound like a great deal. You get to buy the high-priced items you want or need right away without having to pay the full price. All you have to do is sign a contract that gives you the option to make smaller payments over a longer period of time. The problem with those long term contracts is that they require you to pay almost as much on interest as you would have paid for the item if you had bought it outright. Those payments are anything but “easy,” in fact, they’re downright hard on your bank account.

Years of Payments

Easy payment plans tie you into making payments for several years. Most of these plans can double or even triple the cost of the items because of the interest that accrues on your loan during the years that it takes to pay the loan off. Even if the payments fit comfortably into your monthly budget, you will have to keep paying for your items for several years before they will finally be paid off. What sounds like a good deal the day you bring your new items home may seem much less attractive during your second or third year of payments.

Actual Costs are Hidden

When you purchase something through an easy payment system, the real cost of the item is hidden. The sale price of the item is obvious, of course, but the amount of money you will eventually pay for the item depends entirely on the amount of interest you will have to pay on your loan. Longer loans have smaller payments, but they have higher interest. Your item could end up costing you two to three times as much as the sale price after you figure in all of the interest you will pay on the loan.

Easier to Purchase More Expensive Items

There is a real danger of getting into more debt than you can handle when you buy items on an easy payment plan. Since the monthly payments seem so small compared to the price of the item, you may find that you purchase something that is more expensive just because you can afford the monthly payment. It is very easy to upgrade your purchase to the most expensive option because the actual price of the item is not what you are thinking about anymore. The problem is that you are really spending more on the item than you would have. Spending more than you can afford on an item is dangerous for your budget, regardless of the payment plan.

Long Term Problems

Many people who buy items on easy payment plans find that they are making so many monthly payments that they do not have any income left over for savings. When an emergency happens, these people do not have any reserve funds to handle it. When you do not have the funds available for savings, you usually do not have any funds available to put toward your retirement, either. Easy payment plans can lure you into making purchases today that leave you buried in debt tomorrow.

Five Steps to a Better Credit Score

No it’s not a game. Although a credit score may seem like an abstract number with little relevance to your every day life, a low credit score may eventually have very negative ramifications. A credit score can be the determining factor of whether or not someone can afford a new home. A credit score is even used by some employers as part of the hiring process.

Consumer Beware: Refund Anticipation Loans

A Refund Anticipation Loans (RAL) is short-term debt that a taxpayer may take on when expecting a refund on federal taxes. Although RAL lenders charge what seems like a small fee, consider that a $60 fee on a $1,000 refund amounts to 6% monthly or a 72 percent Annual Percentage Rate (APR)!

FHA Loan Changes are Coming

In the last few years, private mortgage lenders have been reluctant to approve new loans. As a result, the government-backed FHA has substantially increased its loans. Today, according to the CMPS Institute, FHA mortgages comprise nearly 30% of all existing loans compared to only 3% in 2006. FHA loans require only a 3.5% down payment compared to traditional mortgages which require 20%.

Unfortunately, this rapid growth has created increased risks and led to higher loan losses. According to the Department of Housing and Urban Development, 21.1% of FHA mortgages that originated in 2007 are now in either foreclosure, bankruptcy or delinquent over 90 days. This compares to 14.2% just a year ago. Of the loans originated in 2008, 17.3% are in this category compared to only 8.4% the year before.

The FHA’s loan loss reserve has fallen dramatically. As of September 30, 2008, the loan loss reserve stood at $19.3 billion. Now, as of June 30, the reserve is only $3.5 billion. The financing account of the FHA, which uses reserve funds to pay for loan losses, has risen from $9 billion at September 30, 2008, to the present level of $29.6 billion.

The FHA is concerned that the reserve fund and the financing accounts could be depleted if housing prices continue to decline. The FHA has implemented changes to strengthen the reserve accounts and to lessen future risks of loan defaults.

Increased Annual Insurance Premiums

The agency plans to increase the annual premium to a range of 0.85%-0.90% from the present range of 0.50%-0.55%. This premium, or PMI, is included in the monthly mortgage payment. However, the FHA will probably lower the mandatory upfront premium to 1.00% from the present 2.25%.

The FHA expects these changes to produce a net increase in premium income, which will provide more funds to cover future loan losses and reduce the decline in the loan loss reserve account.

Reduction in Seller Closing Cost Contributions

Previously, sellers could contribute up to 6% of mortgage closing costs. This will be reduced to 3%, which will increase the buyer’s financial commitment towards the purchase of his house.

Higher Credit Score Requirements

In the past, the FHA did not have an official minimum required credit score. That determination was left to the individual loan underwriters. Now, the agency has proposed a minimum required credit of 500 with a down payment of at least 10%. In order to qualify for a 3.5% down payment, the credit score will have to be at least 580. Nevertheless, these credit score minimums are still below the requirements of a conventional mortgage, which are 660 to 720 with a 10% down payment.

The FHA is also asking lenders to tighten underwriting criteria by more closely examining a borrower’s cash reserves, debt-to-income ratio and credit history. The effects are already apparent. As of April 2010, only 2.4% of FHA loans had credit scores less than 620 compared to 37.5% in January 2008.

While FHA requirements are still generous compared to traditional mortgage loans, they are becoming more stringent and qualifying will become much more difficult in the future.

How Loan Modifications Work

The government’s mortgage modification plan, Making Home Affordable, had a weak first year, but that doesn’t mean homeowners shouldn’t try to take advantage of it. The plan consists of several programs that aim to make mortgages more affordable, including the Home Affordable Refinance Program (HARP) and the Home Affordable Modification Program (HAMP).

Here’s how the modification programs Work:


Should You Take Control of Your Escrow?

Gain Control of EscrowManaging your own escrow used to be a popular technique among homeowners. But like all things, it has gone in and out of fashion. There was a time when taking control of escrow saved time and hassles. When the bank managed the fund, homeowners had to forward all of the insurance and tax bills to the escrow account, wait for it to get lost in the mail so they could send it again and wait to get threatening letters from the tax man or the insurance agent. Then there was the inevitable one-hour call to the bank or servicing agent, getting transfered to five representatives until you could find one who was willing to help you get things straightened out. But these days, letting the bank manage your escrow is nearly hassle free. But there are still good reasons to manage your own escrow.