Archives for May 11, 2019

IN 2013 AND 2014, headlines heralded the rise of for-profit income share agreements binding young borrowers to private investors. Students who attracted financial support agreed to pay back their wealthy benefactors a percentage of their future incomes for a specified amount of time.

These contracts raised eyebrows. Critics noted the ISAs were structured to allow venture capitalists to profit directly from financially disadvantaged students.

But there was a subtler issue, too: These contracts rewarded students whose areas of study, credentials or business ideas made them most likely to garner the highest salaries.

“Investors were looking for pretty high returns,” says Casey Jennings, chief operating officer of 13th Avenue Funding, an ISA nonprofit. “They wanted the high performers.”

By 2019, several for-profit income share programs disappeared without fanfare. Newer models built directly into the financial aid systems at universities have elicited fewer predatory concerns.

Yet the uncomfortable truth remains that some students are safer bets than others.

Universities have long been loath to acknowledge the disparate career outcomes of their graduates. But with their own dollars invested in students, they’re not immune to the incentive to identify the likeliest winners, even if only to keep their books balanced.

After all, explains Miguel Palacios, assistant professor of finance at the University of Calgary: “They only get paid if the students do well.”

If college income share agreements only help students already primed to succeed, they could deepen economic disparities or discourage some fields of study. But proponents believe these contracts could benefit all students by forcing universities into more forthright conversations about the true value of the education options they offer.

“Income share agreements make institutions be honest about what they think students can do with their degrees,” says Terri Taylor, strategy director for postsecondary finance at the Lumina Foundation, which supports efforts to expand access to higher education.

Rethinking Tuition

Income share agreements inspire many analogies. From one vantage, they look like risk-management tools. From another, they resemble investments in early-stage human “startups.” A darker brush paints them as indentured servitude arrangements.

These metaphors miss the mark, says Tonio DeSorrento, CEO at Vemo Education, a company that runs income share agreement programs at dozens of universities and other education institutions.

“People talk about them as a better kind of student loan,” DeSorrento says. “That may be true, but it is not enough. Income share agreements are best used as a more fair, more transparent form of tuition.”

Rather than imposing a flat rate upfront, income share agreements allow colleges to charge a proportion of what graduates end up earning later, which makes the connection between tuition and wages more direct. Alumni only owe their alma maters to the extent that their degrees turn out to be valuable on the job market. If they can’t find work after graduating, they don’t have to make monthly payments.

This transactional model is catching on at coding boot camps, which use income share agreements and salary guarantees to persuade people that participating will pay off.

“We are highly motivated to make sure you get into a great-paying job,” says Adam Enbar, CEO of coding boot camp Flatiron School. “We like the idea that school is aligned with the outcome you’re looking for.”

Colleges that adopt the same mindset will stand out to consumers, DeSorrento believes, especially those who primarily view education as an investment in early-career success.

University leaders seem to think so, too. Small schools and major research universities alike have sought insight from Purdue University, an early adopter of income share agreements, according to president Mitchell Daniels Jr.: “The interest is building and building.”

Connecting Majors to the Job Market

The transparency income share agreements promise has the potential to distinguish not only universities from one another but also degree programs within each institution.

Colleges traditionally charge the same tuition rates across majors, which may shield the fact that graduates from different departments have divergent results on the entry-level job market. Data from the Georgetown Center on Education and the Workforce and the National Association of Colleges and Employers shows employers tend to pay a premium for workers with strong quantitative skills, and there’s a correlation between majoring in a topic that teaches those skills – such as engineering, computer science and finance – and later earning a high salary. Employers tend to pay less for caregiving, artistic and counseling skills; there’s a correlation between majoring in early childhood and elementary education, art and social work and later earning a lower wage.

Universities don’t typically advertise these stark salary contrasts, focusing instead on how their holistic curricula prepare students to be knowledgeable good citizens. For families looking for “upward economic mobility,” DeSorrento says, that may not cut it.

“These things have different outcomes. We think it’s unfair to hide that,” he says. “People deserve to make an informed decision.”

As universities adopt income share agreements to help students cover some tuition costs, that rhetoric may not prove persuasive to accountants either. To be sustainable, ISA programs need participants to pay back roughly equivalent sums of money, DeSorrento says. Using department outcome data, Vemo calculates each student’s probable income to set contract terms likely to yield adequate returns.

This explicitly links college majors with early-career financial success, making it easier for students to assess the likely results of their education decisions.

For example, Purdue’s income share tool clearly shows its formula. A computer science student of the class of 2021 who signs an agreement for $10,000 will pay back 2.81% over 88 months, while an elementary education student will have to pay back 4.97% over 116 months.

That’s because the future computer scientist can expect a starting salary of about $68,000, while the aspiring teacher can expect to earn only $30,000 a year, according to the tool. If the model proves accurate, both graduates will end up owing about $14,000 – which ultimately is a higher burden on the teacher.

“If this mechanism becomes more widespread, future students will see a very clear indication, in those rates, of what the market values,” Daniels says. “That will answer the question that so many of them have: which areas to study and concentrate in?”

Changing College Attitudes and Practices

Few would argue against helping students make informed choices about how to spend thousands of tuition dollars. Yet taken to an extreme, this kind of calculus has the potential to reduce the richness of a liberal arts education to dollars and cents, perhaps dissuading students from majors and career paths that could offer them personal fulfillment – and serve society at large.

“Income share agreements do not solve the problem, and in fact make it more clear: the fact that there are some fields that have high social value and little private value,” says Palacios, who helped found ISA company Lumni. “The concern that income share agreements would be onerous to teachers is a very valid concern.”

For professors in fields like history and English that have seen steady declines in enrollment, the emphasis ISAs place on future earnings may feel threatening. But leaders at the Lumina Foundation, which has given grants to help schools study the effects of their income share agreements, encourage college educators to “see this not as an advent of their extinction but really a challenge,” Taylor says.

Adding technology-skills training to liberal arts syllabi may improve the early-career outcomes of students who study those subjects, DeSorrento says, noting that liberal arts majors tend to outperform their peers at the mid-career mark, perhaps in part because they’ve built the interpersonal and communication skills employers expect of professionals.

“A school that has a strong classics department isn’t trying to get rid of it. They want to succeed with it,” DeSorrento says. “I think colleges will use what they learn from income share agreements to improve.”

Daniels doesn’t believe Purdue’s income share option sends a negative message about any department. Predictions that the ISA option would appeal only to students most likely to land first jobs with big paychecks proved false, he says: “We’ve had almost every major in the campus represented so far.”

And when Purdue’s income share system can rely on actual repayment data instead of predictions, rates will adjust.

“If liberal arts majors are finding employment and repaying at a pretty good rate, the market will lower the percentage required in the future,” Daniels says. “The early evidence is, no matter what their major, they’re going to be productively employed and honoring their contracts.”

Since its debut nearly 40 years ago, the 401(k) has emerged as one of the premier tools to save for retirement in America. In fact, when we poll 401(k) participants across the country, the majority of them consistently say it’s their largest — or only — source of retirement savings.*

One of the main reasons 401(k) accounts are so popular and effective is their tax treatment. A traditional 401(k) is funded from your pretax paycheck, so the money you put into your plan, and any potential gains on your investments, are not taxed until you ultimately withdraw the money. Importantly, contributions lower your taxable income, and contributing enough could even move you into a lower tax bracket in a given year.

The flip side is that when you eventually withdraw money from a traditional 401(k) in retirement, those withdrawals are subject to ordinary income tax. That’s why it’s referred to as a “tax-deferred” vehicle — taxes are deferred until you begin to take the cash out.

The good news: Americans are saving more than they ever have for retirement.

The bad news: They’ll probably need to save even more.

Employees contributed an average of $2,370 per account to their 401(k) plans in the first quarter of 2019, a record level and 15% more than one year prior, according to Fidelity Investments, the Boston-based financial services firm that also manages retirement accounts. Employers also hit a record high with their own contributions to employee plans, partly from company matches and profit sharing plans, at an average of $1,780.

The average employee contribution rate was 8.7% in the first quarter, and the average employer contribution rate was 4.7% during the same time.

Overall balances also jumped in the first quarter, with 401(k) balances seeing an 8% increase to $103,700 between the fourth quarter of 2018 and first quarter of this year — but up only 1% year-over-year during the first quarter of 2018. Individual retirement account balances rose to $107,100 in the first quarter of 2019, 2% higher than during the same time last year. For 403(b) plans, the average balance increased to $85,800, also up 2% since the first quarter of 2018.

There are more 401(k) and IRA millionaires as well, Fidelity said — 180,000 account holders had $1 million or more in their 401(k) plans, up from 133,800 at the end of last year’s fourth quarter. The number of IRA millionaires jumped from 138,800 last quarter to 168,100 at the end of the first quarter. Fidelity’s data reflects only their own customers.

There’s no doubt about it — Americans are on the right track by saving more, said Meghan Murphy, vice president of Fidelity. In the 12-month period ending at the end of this year’s first quarter, Americans had contributed $6,940 to a 401(k) plan, up from the average $6,260 they contributed in the 12 months of 2018 alone. Not a huge portion of the population is hitting the maximum 401(k) limit, which is $19,000 for individuals under 50 years old (and $25,000 for those 50 and older), but they’re inching upward, and employer contributions help. The average combined total for employee and employer contributions was more than $11,300 in 2018. “In general it’s a positive trend,” she said. “Over time, it does add up.”

But some will need to save more annually so that they can retire comfortably. Financial advisers typically suggest workers save 15-20% of their salary toward retirement, although it is difficult for many Americans who are struggling to balance spending on everyday expenses, paying down student loans, saving for retirement and also having a fulfilling lifestyle with the occasional trips, nights out and entertainment.

Overall, Americans are undersaved for retirement (even if more data could help determine by how much). Not everyone saves in an employer-sponsored retirement plan when they have access, or when they do, they don’t save as much as the company match (which advisers urge workers do since it’s essentially “free money”).

The issue runs deeper than employee activity — many companies don’t offer a 401(k) or similar plan, and those that do are mostly larger employers. Companies that offer employer matches are typically larger businesses as well, Murphy said.

More companies are beginning to automatically enroll new hires into a 401(k) plan. Auto-enrollment is a good start, as it gets past the initiation and paperwork processes, but even that won’t be enough to get people ready for retirement. Default contribution rates are usually low, and employees may take them as a suggestion for how much to save. Murphy suggests workers increase their contributions 1-2% every year, if the company doesn’t do it for them. “The more they’re able to save, the better,” she said. “The earliest dollars are the ones that will be worth the most.”

IF YOU’RE NEWLY divorced and you have children, odds are you’re probably just getting acquainted with the concept of child support. After all, child support law and regulation can be complex and confusing.

“I have never met a parent who felt like he or she was receiving sufficient child support. Likewise, most parents who pay child support feel that he or she is paying too much,” says Nicole Sodoma, a family law attorney, founder and managing principal of Sodoma Law, based in Charlotte, North Carolina.

What Is Child Support?

As a parent, you are required to support your child financially. If you do not have custody of your child, in most cases, you are required by law to provide money to the other parent with custody of your son or daughter until your child becomes an adult. If you have custody of your child and you’re a single parent receiving child support, you may be concerned that payments are delinquent or the amount of money you receive is insufficient. On the other hand, if you’re making child support payments, it can be challenging to meet your child support commitments and juggle your own finances, even if the amount of money you shell out each month seems reasonable. With that in mind, if you’re a single parent, here’s a basic primer on child support law and what you can expect.

How Does Child Support Work and How Is It Calculated?

“In most states, the calculation is provided for them and based on the parents’ gross incomes, after application of certain deductions such as health care premiums and work-related child care,” Sodoma says. In addition to a salary or expected self-employment earnings, a court may take into account tips that a parent receives, commissions, bonuses, disability payments, Social Security benefits and annuities, among other factors.

Generally, if both parents are working, and even if parents have joint custody, the parent who earns more will be paying some child support to the other parent. That said, every state is different in how they approach child support law. “The federal government has passed legislation that requires states to come up with formulas for setting child support. Each state will adhere to their formula and not deviate unless a party is of an extraordinary means or has a lot of extra children or health problems or something of the sort,” says John DeVore Compton, a family law attorney who has offices in Greenwood and Greenville, South Carolina.

In other words, if you need to get child support raised or lowered due to your financial circumstances, you may be able to change the amount. Whatever the courts decide, however, keep in mind that this is designed to help your child or children, says Dori Shwirtz, a divorce attorney who owns a company called Divorce Harmony, specializes in mediation and is based out of Miami Beach. She says that when you’re in the middle of divorce mediation, you can negotiate just about anything – except for child support.

“The state has specific guidelines on how much should be paid. They do this for the best interest of the child, so the child is protected and cared for,” Shwirtz says. “The two major factors that determine the amount are income and time-sharing, how much time each party spends with the child.” Shwirtz also stresses that these child support payments aren’t designed to punish or reward either parent. “Child support should be viewed solely through the lens of this is for your child. It’s there to serve your child’s needs. It’s not about the parents and their wants or needs,” she says.

The Amount of Child Support You Receive or Pay Can Fluctuate

As kids get older, their financial needs may change, and you or your ex-partner’s financial situation may have improved or worsened. “In North Carolina, the statutory calculation is reviewed every four years by the court to determine whether the amount of the child support guidelines is appropriate,” Sodoma says.

If you lose your job in between the court evaluating your child support payments, or there are extenuating circumstances, every state has different laws, but you’ll want to consult your attorney in case anything can be done.

That said, in his 30 years of experience, Compton says that once the guidelines are set, they can be hard to change. It’s best to make timely payments of course, not only for the good of your child, but also to avoid payments from piling up and possibly having to pay legal expenses if you’re dragged to court. In a worst-case scenario, you could have your wages garnished or go to jail.

Child Support Payments Include More Than Basics

“Child support is not to be used only for necessities like food, clothing, medical needs and so on,” Sodoma says. “Instead, child support is actually based on the reasonable needs of the child, a calculation which may include many expenses.”

For instance, if your child goes to a public or private school when he or she lives with your ex, you may be paying money toward their education. The court may include some money for basic entertainment expenses for the child. Ultimately, the goal is to make sure your children are thriving in both homes and not just one parent’s home. But how the parent receiving the child support spends the money is generally up to that parent. There are other factors the court will evaluate to determine how much should go toward child support, including whether the child lives with one parent in a city with a higher cost of living. If the child has special needs and requires expensive health care coverage, the court will also take that into consideration.

“Unfortunately, or fortunately – depending on the obligor or obligee – the use of child support is not monitored. The parent receiving the support is not required to report how he or she uses the funds,” Sodoma says.

It’s a smart idea to factor in implications beyond how much you’re giving or receiving in child support. For example, you won’t have to pay income taxes on child support that you receive, and if you’re making those payments, you can’t deduct it from your income. As for who can claim the child as a dependent, it’s typically the parent who has the child living with him or her for more than half the year. Remember: Both parents can’t claim the child as an independent. It’s a wise idea to consult with a tax accountant or lawyer for guidance. For instance, you can transfer the exemption to the noncustodial parent by signing Form 8332.

What to Do If You Aren’t Receiving Child Support Payments

Sodoma suggests keeping track of the financial support you give or receive, especially, she says, if you are not receiving child support. You want documentation of what’s being paid if the other parent suddenly disagrees with your records or has delinquent payments.

“Do consider apps like Venmo, Zelle, Cash App, PayPal and co-parenting apps for requesting reimbursements,” Sodoma says. Some of the co-parenting apps out there include Coparently ($99 per year, per parent), Our Family Wizard ($99 per year, per parent) and Talking Parents, which is free, but requires a $4.99 fee per month to download records. These apps are designed to help divorced parents communicate with each other and track parenting expenses.

So, what if one parent won’t pay child support? “Unfortunately, if one parent isn’t fulfilling his or her obligations with child support it can be a long road for the non-receiving parent. There is only so much of a remedy a court can provide,” Shwirtz says.

That doesn’t mean you shouldn’t try. However, you may be in for a long court battle. And keep in mind, federal law requires state agencies to help you track down late child support payments, and many states have Office of Recovery Services that can help you collect payments.

Compton points out that if one parent doesn’t pay child support, he or she does not lose the right to visit the child. That’s a misconception, he says.

“The one piece of advice I have for clients though is to not let your – justified – anger and resentment seep into your child’s psyche. Don’t put your child in the middle of a child support battle,” Shwirtz says.