• The cost of a four year college education has continued to soar vis-à-vis the rest of the economy, but the four year degree is also a myth for many who take five, six, and sometimes even more years to graduate from college.  While it is true that many people require more than four years to graduate because they are only able to take a limited number of credit hours due to working, the fact is that many more people take a limited number of credit hours because they “want” to.  After all, campus life can be a whole lot more fun than going out into the real world.  Yes, we admit that some programs take more than four years, some students go for double majors thinking it will improve their job prospects, and others because they just don’t know what they want to be when they grow up, and thus, switch majors.  The fact remains that students who don’t complete school in four years is a part of the reason that the average undergraduate has such significant debt when he/she leaves college.

Many schools are really pushing the undergraduate to finish school in four years and certainly in no more than five years.  It doesn’t come as any surprise that higher education is extremely important to every state, but the demands placed on state governments for services beyond higher education have generally made for a smaller commitment per student during the economic downturn.  It may be time for the student to take the initiative, or for parents to push, to make sure that the undergraduate is taking enough credit hours to graduate on time, and perhaps should even encourage the undergraduate to attend summer school to ensure that credit hours are taken care of in a timely fashion.

Thus, when you think about your child headed off to college and the expenses involved, you have to consider not only the yearly tuition, but also how many years you might potentially have to pay that annual tuition.  Who has the worst and best graduation rates?  The bottom ten state universities in reverse order are:  Alaska, New Mexico, Nevada, Hawaii, Montana, North Dakota, Wyoming, Utah, Idaho, and South Dakota, none of which graduates more than 25% of their students in a four year period of time.  However, the top ten state universities all graduate more than 60% in a four year period of time; Virginia, North Carolina, Michigan, California (Berkley), Illinois, Connecticut, Maryland, Penn State, Delaware, and Vermont.

It’s possible that universities may begin charging more per credit hour for students who don’t graduate within a specified period of time as a way to encourage students to complete their college educations in no more than five years.  Conversely, state legislatures might give less money to a university if it fails to reach certain graduation rates.  (Sources:  U.S. Department of Education, Chronicle of Higher Education, Washington Post)

• Last year if you were over age 70 ½ and you wanted to donate money to charity, you could withdraw up to $100,000 from your IRA and have it paid directly to the charities.  There would be no income tax on this withdrawal, and of course, you would not get a tax deduction either.  This benefit expired in 2011.  If you still have a charitable intent and don’t need the cash to cover living expenses, you can have your IRA custodian pay the money directly to a charity, just as you have in the past.  We expect Congress to reinstate this $100,000 benefit before the end of the year, but even if they don’t, you still get a charitable deduction although the income will be taxable.  Our concern is that Congress will wait until the last minute to give you a chance to take advantage of this, and your custodian may not be able to make it happen in time.  Be sure to visit with your tax advisor or financial planner before moving forward.

• If you have a Health Savings Account (HSA), there is some good and bad news coming in 2013.  First, the ceiling will increase to $6,450 for people with family coverage, and to $3,250 for single coverage.  As before, those born before 1959 can put in an additional $1,000.  Unfortunately, the out-of-pocket expenses will also rise, increasing to $6,250 for singles and $12,500 for those with family coverage.  Policy deductibles rise to $2,500 for families and $1,250 for singles. 

• Nearly $18 trillion of assets as of December 31, 2011 were tucked away in retirement plans.  Of this, $4.9 trillion was invested in IRAs, $4.5 trillion in Defined Contribution Plans, $2.4 trillion in Defined Benefit Plans, $4.5 trillion in government plans, and $1.6 trillion in annuity reserves.  $3.1 trillion of the money in Defined Contribution Plans was held in 401(k)s.  Only about 3.5% of the people were withdrawing money from their retirement plans, but of course this is expected to increase rapidly over the next few years.  (Source:  Investment Company Institute)

• High School and College graduations are now all behind us and for those graduating from college it’s on to trying to find a job during a very difficult economic time.  Career Builder and Apartments.com have, for the fifth time, put together a list of the cities which are most open to hiring recent college grads.  They looked at the top 100 market areas based on entry level jobs available between January and April.  Of course, salary had something to do with it as well, along with the quality of life and expenses involved to live in a particular area.  You are going to be surprised with some of the cities that made it into the top 15.  Ranked first was Oklahoma City, followed by Seattle, San Francisco (how is that only in 13^th place?), Salt Lake City, and Denver (in number 11).  Interestingly they are all in the West, with the exception of Oklahoma City.  Coming in at number 10 was Baltimore, followed by Philadelphia, Houston, Chicago, and Atlanta.  Now for the top five:  Dallas held down the fifth spot, with Minneapolis in fourth.  Boston and New York City came in at numbers three and two, respectively, and the best city for job prospects?  Surprise!  Washington, DC.  We guess government really is getting bigger.  The unemployment rate in Washington, DC is only 5.5% and the average starting professional salary is $39,000.  Rent for a one bedroom apartment is a little high at $1,700 per month.  Contrast that with Oklahoma City in the 15^th position, where unemployment is only 4.4%, the average rent for a one bedroom apartment is around $700 per month, and the average starting salary was $35,000.  In other words, you are going to make $4,000 per year less in Oklahoma City, but your rent would be about $12,000 per year less than in Washington, DC.  Oklahoma City leaves you with more money.  A job is a job, but it isn’t always about what the salary is – it’s also about what it costs to live in any given area.

• Over the past couple of years, investors have continued to seek the “safety” of U.S. Treasury securities, especially the 10-year note.  The presumption is that it is the “safest currency in the world and that you won’t lose your money.”  It’s probably true you won’t lose your money if you hold it to maturity, but the question is how much will you earn – not in absolute terms – but in real terms?  Investors seem to have forgotten about this question.

Today, the 10-year Treasury is yielding approximately 1.6% and of course, this is taxable.  Assuming you are only in the 15% tax bracket, it means that your after-tax return is 1.36%.  If you are in the 35% tax bracket, it means that you after-tax return is a little over 1%.  But wait.  There’s more.  What about inflation?  Currently, inflation is running a little over 2% according to the government, which means that every year a $10,000 investment is losing $100 in purchasing power, or creating a negative real return after tax and inflation.  How safe is a guaranteed loss?  Wait.  There’s more.  Early this year when the 10-year Treasury’s interest rate increased from about 1.9% to 2.4%, the underlying value of the bond declined by 7% and that was with only a half a percent move.  Any investor looking to sell the bond for whatever reason was only going to get back around $9,300 on a $10,000 investment.

When interest rates go down the price of a bond goes up and in some cases can actually create a negative yield.  This has happened several times with U.S. Government TIPS over the past couple of years and recently happened with some German bonds.  In other words, there is a huge bubble in the price of government bonds, and when interest rates begin to rise many investors will be very disappointed, especially with their U.S. Government Bonds, those so-called “safe” investments. 

Let’s put this into the category of unintended consequences.  Much has been said and written about the expiration of the Bush tax cuts at the end of 2012.  The assumption is that capital gain rates will go back to 20% and that dividends will rise to 39.6% without consideration of the Obama Care surtaxes.  But that may not be true for the treatment of all capital gains.  Since tax law would revert to what it was before the Bush tax cuts, we would revert to a special provision in the Taxpayer Relief Act of 1997 that established a preferential 18% capital gains rate.  How do you qualify for this special provision?  It applies to all property purchased after December 31, 2000 which is held for more than five years.  That meant that the first time anyone could sell the property and pay the 18% rate instead of 20%, would have been after 2005.  But, since the Bush tax cuts went into effect in 2003 and made the top rate only 15%, no one took advantage of this provision.  Thus, if you have property you purchased after December 31, 2000 and you have held the property for five years or longer, and the Bush tax cuts expire, you will only be subject to an 18% capital gains rate.  The only exception to this is for taxpayers who owned property purchased prior to 2001 and wanted to take advantage of the 18% rate.  Does anyone wonder why our tax code is so complicated?  In the final analysis, it is possible you might pay capital gains tax next year at 15%, 18%, 20%, 18.8%, 21.8%, or 23.8%.  Fun, isn’t it?  And Congress wonders why people can’t do any financial planning.  (Source:  Twenty-First Securities Corp.)  

©6/29/12 ProVise Management Group, LLC

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