When I was younger (starting around 2nd grade), my mom said that for every 100% I got on a weekly spelling test, I’d get a dollar as my reward. The spelling tests started all the way back in the first grade but really got going in second and third grades, but I’d routinely get a hundred in part because I was brilliant and in part because they told us the set of words ahead of time (my mom knew this). There would be maybe fifty words and then ten or twenty would appear on the test, it was a cinch to get a hundred and anyone who didn’t simply didn’t try or didn’t care. Anyway, as I grew older, the 100s were harder and the prize was made larger until I was in high school when it would be $10 per 100. By high school, though, I didn’t get 100s unless it was something trivial like a health test or something meaningless, so I never went to collect. Anyway, I ended up being a decent student, in part because of the incentive my mom provided, but this is a issue that’s a hot button topic for many parents. Should they “bribe” (or “reward,” as the proponents would say) their children for performance?

My opinion is that you can and should bribe or reward them for performance because that’s how the world works. You get a good SAT score, you are rewarded with admittance into a good college or university. If you get good grades in college, you’re rewarded with a good job. If you perform well at your job, you’re rewarded with more money (maybe!). Giving children incentives for strong academic performance isn’t going to ruin them for the world because the world rewards strong performance with money as well.

What prompted this Your Take post was an article from the New York Times where students were being paid to perform well academically.

What’s your take on this?

Education is a good thing right? So why is student loan interest deductibility phased out when your modified adjusted gross income reaches $65,000? Why are the Hope Credit and the Lifetime Learning Credit phased out if you make more than $57,000? And if your MAGI is greater than $80,000, you can’t deduct tuition and fees from your income. I think there’s a conspiracy by the government to keep rich people as ignorant as possible! Okay okay, I’m being facetious of course with the outlandish conclusion but I think it’s unfair that the phaseouts exist and I’ll explain.

I think higher income workers should be taxed more even though they don’t use more services. While “unfair,” I also think it’s totally acceptable, and preferable, that the government does a little income redistribution through income taxes. There’s no reason why people should go cold, hungry, or sick because they can’t afford heat, food, or medicine while other people are living in million dollar homes and driving hundred thousand dollar cars. We, as a society, should strive for better. While some wealthy people scoff at the thought of their hard work subsidizing someone else, I think there are fewer of those types of people than you would think. At some point in the last 200+ years, the vast majority of families showed up in the United States with nothing and needed a hand from someone.

That being said, I think that many of the income related phase outs make sense because they restrict a high income earner’s ability to take advantage of accounts designed to improve their financial situation. A single filer with a MAGI greater than $116,000 cannot contribute to a Roth IRA, which seems fair (unless you live in Manhattan, then $116k feels like it should qualify you for welfare!), and they are less affected by the loss of this great retirement savings vehicle.

What doesn’t make sense is that education is and should be different. I can understand not extending tax advantaged accounts to the wealthy because they don’t need any additional financial advantage, but why remove the incentive to educate? College is expensive! The Princeton Review estimates that the annual cost of a year’s tuition, room and board, and fees at a private school will be $33,303 in 2008 and at a public school it will be $12,514 in 2008. These aren’t $4,000 Roth IRA accounts here, we’re talking practically a minimum of $50,000 to send your child to an institution of higher learning.

If you see your life as a business, which is a good way of managing it, education is an expense and should be deductible against your income for everyone. If a company can deduct education expenses from its income, why can’t every single person?

Can someone explain why these phaseouts exist?

(For more information about the Tax Benefits for Education, refer to IRS Publication 970)

If your employer offers any tuition reimbursement and you’re not taking advantage of it, you’re leaving a tremendous amount of value on the table each year. In the two jobs I’ve had since graduating college in 2003, I’ve been lucky enough to be offered the opportunity to pursue higher education in return for sacrificing some of my time. At my first job, every educational dollar I spent was fully reimbursed (you were only allowed to take two classes a semester, or six a year) with no requirements afterwards. In my second job, I was afforded $5,000 a year with some continuation of work requirements. Through both programs I was able to get a majority of my MBA paid for (ooooh, an MBA!). In both cases, I took advantage of them to the fullest extent possible and if you have this opportunity, you should too.

Time on the Side of Youth

I can understand if you don’t take advantage of it because you have children to care for and a family to attend to, those are perfectly acceptable demands on your time. If you’re young and have an abundance of time and a limited amount of responsibility, you’re doing yourself a tremendous disservice by not taking advantage of this. After work each day, how do you spend your time? Do you spend it lounging in front of the television? Do you spend it drinking at the bar? Unless it’s volunteering or working towards a higher purpose, I would recommend swapping at least one night of drinking and lounging with a night of classes. After a couple years, you’ll have a degree instead of nothing (or a beer belly!). One night is not too much to ask in return for shifting your path.

Consider It Compensation

Give yourself a raise by taking these classes. In fact, when you’re done, you can take your more competitive resume out into the marketplace and give yourself a second raise. I took twelve classes at my first employer over the course of two years. Each class cost approximately $1,500, so I gave myself a $9,000 a raise onto my base pay each year. In my three years of working for that company, my salary when I left wasn’t even $9,000 higher than when I started! After you are awarded your degree, shop yourself around. Your job isn’t your girlfriend, you can date other jobs.

If your current employer has an attendance requirement, as in you have to stay in your job for a period of time or repay the tuition reimbursement, you can stay on until that’s fulfilled or you can ask prospective employers to give you a bonus for that amount. Good talent is extremely difficult to find, paying a few dollars more to get someone into the door is worth it for a business that’s seriously considering you.

Take Electives to Expand Your Horizons

Don’t want to commit yourself to a full blown degree? Not a problem, signing up for a full menu of classes may be too much for you right now. Consider taking a few electives in your spare time, electives that will expand your horizons and give you more breadth of understanding in your field. Oftentimes the full menu of classes for a degree contain classes that are too basic and broad. This is especially common in programs designed to generate revenue for a college (think part-time MBA!). Does an MBA student really need a remedial statistics class or a basic economics class? Taking electives should give you a laser-focused area of study that you will find immediately applicable.

Networking, Networking, Networking

While education is important, networking is more important. I had a friend whose brother went to an excellent school. It’s a top notch university that has an extensive history of extremely famous and accomplished alumni. My friend’s brother’s roommates were All-American athletes, the children of officers in the armed services or politicians, or ridiculously brilliant. Sure, the school was “tough” but there was a fair amount of grade inflation and a fair amount of intellectual and athletic competition. That institution is a little school in Boston, MA known as Harvard University. (true story, at least as told by my friend)

There are many reasons why you should take advantage of tuition reimbursement plans, I listed only a few. Many people don’t have the benefit of these programs and would give up a lot to be able to have their education partially paid for, please don’t squander the opportunity unless you have a very good reason.

(Photo of Wean Hall at Carnegie Mellon University, my alma mater, by carbon451)

As I wrote this morning, I opted for the Maryland 529 College Investment Plan (CIP) over the Maryland 529 Prepaid College Trust (PCT) when I enrolled and I did so for a variety of reasons. First off, the Prepaid College Trust is like prepaying and locking in the rates of a Maryland educational institution today but for use sometime in the future (at least three years in the future).

Can Only Enroll Beneficiary After Birth

This made the PCT impossible for me because we don’t have any children yet. The CIP lets me name myself as the beneficiary and then roll that over to my child when he or she is born.

However, let’s say I have a child and the PCT was an option, would I still do the CIP? Yes, here’s why.

1. PCT’s “Legislative Guarantee”

With the CIP, my after-tax assets are put into various funds that grow tax-deferred (tax-free if spent on educational expenses). The PCT, it’s like Social Security, I pay into a system that will put it in a group of investments that will guarantee I can get a payout when my child enters college. If there is a shortfall, then the Legislative Guarantee says:

… the Governor to submit a request for the Prepaid College Trust in his/her annual budget if the Prepaid College Trust experiences a shortfall in any given year. As with the entire State budget, this request would require General Assembly approval.

What happens if they don’t approve it? What if there is a huge shortfall and no way to fund it? Those are questions that I don’t see answers for and one of the fundamental problems I have with these sorts of guarantees (like Social Security). I’d much rather prefer to have an account with funds in it that I know is there and isn’t spent elsewhere.

2. CIP: Potentially Higher Returns

With the CIP, I’m banking on market returns on my funds that may be outpaced by the increasing costs in education. According to their math, the University of Maryland’s tuition and mandatory fees increased 90% in 10 years, or 6.6% each year. Johns Hopkins University increased 63% in 10 years, or 5.0% each year. Now, if your think the market will return 11% on average, you’ll want the CIP.

3. Flexibility Over Price

If you’re certain that a Maryland college is where your child will be going (and the Legislative Guarantee placates your concerns over future fundability), then the PCT is probably your best bet because it guarantees the cost. If you’re not so sure, the PCT’s value for a college outside of Maryland is limited to the “Weighted Average Tuitions” of four year colleges. The increase in how much they’d pay per year for a public college outside of Maryland was a paltry 1.6%; that isn’t that impressive considering they spent the first half of the PCT FAQ telling us about the 90% in ten year increase in UMD’s prices.

Ultimately, the guarantee part was what concerned me but the Flexibility over Price issue was a close number 2. The potentially higher returns part wasn’t as big a factor as the other two but I felt is deserved some mention because ROI should always be on your mind when making investment decisions. Talk to a professional because you make any decisions, these are my opinions and I have little experience in this arena.

For those Marylanders (or outside Marylanders who are enrolled in either program) in 529 programs, how did you pick which plan to go with? For those who are thinking about it, what are the issues on your mind?

I’ve talked in the past about the Maryland 529 plan and today I pulled the trigger and enrolled. In Maryland, you get up to a $2,500 deduction each year on your state income taxes (if you contribute $2,500 to the plan) if you are a Maryland resident. It’s not a tremendous amount of money back in our pocket considering it’s a 4.75% tax ($118.75 rebate) but since I’ll be spending money on education in the future anyway, $118.75 for something I should be doing anyway makes it just icing on the cake. Plus ultimately it’s a hundred bucks and that’s not trivial, it’s just seems small percentage-wise.

In Maryland there are two programs, the Maryland Prepaid College Trust and the Maryland College Investment Plan, the latter of which is managed by T. Rowe Price. I’m doing the Maryland College Investment Plan because it gives you more flexibility in terms of where the money can be spent and I figure my kids are all going to be little geniuses and going to the most expensive private school that’s located the farthest away from where we’re living at the time. Whether or not they’re going to be geniuses probably has nothing to do with the expense or distance factor, but I can still dream and Murphy’s Law says the second half of that statement is an absolute certainty.

Signing up for the plan was trivial and took a maximum of ten minutes. I went to College Savings Plan of Maryland, located the Enrollment form for the Maryland College Investment Plan, and was signed up in about five minutes. You simply need to decide on a username, pick a six digit pin, then open up an account. I’ll be naming myself as both the Account Holder and the Beneficiary, as I don’t actually have any kids yet. You can always rollover the account to another beneficiary without tax penalty if the recipient and the original beneficiary are in the same family. If they aren’t, there are some tax penalties.

After setting up an account comes the time to fund it. Simply mail a check or money order of at least $250 and the account is up in a jiffy. You’ll have to specify which funds to put it in but that was pretty simple.

Fee-wise, Maryland was pretty good and they’re getting close to the next tier of assets, $2B, when the fees fall even farther. I was pretty surprised to learn that the fees are related to the assets in its control, something you never see with mutual funds or things like that. In fact, because they had so many accounts and over $1B in assets that they took away the application fee ($75) and lowered a few other fees.

If you’re thinking about a Maryland 529, I’d read over this Disclosure Statement and FAQ. It’s pretty comprehensive and written in easy to understand language so you won’t have to wade through lawyer-speak.

Caitlin Pickavance’s parents have spent approximately $12,825 on their daughter to make her a more competitive applicant when she applies for colleges and universities this year. The twelve grand have gone to things such as a private college coach, tutors, prep classes, and two trips abroad: a good-will mission to Belize and summer classes at the University of Salamanca in Spain ($7,000, the bulk of the spending). Now, most people would say that spending close to $13k just to make your child more competitive is ridiculous (that’s why it’s a story on CNN Money), but I say why not?

When it comes down to it, what’s the reason why you earn money in the first place right? You go to work so that you can provide for you and your family. Whether that’s a fancy new car or summer classes at the University of Salamanca in Spain, ultimately you’re doing something for someone that you love. In this particular case, I’d argue that spending the $7k for classes is better than a lot of things you could do with that money.

As for preparation, we’re a competitive society (every society is a competitive society, socialism is dead and hippies smell) and any leg up you can give someone in your family on the competition (everyone else) is one that you try to get. One could easily argue that you don’t need to spend thousands in order to do well (the only SAT prep I had was a $25 Real SATs book, but don’t ask what my score was, I turned out alright ) but some people do need that course to help turn on the light bulb, and it’s okay to spend that money.

According to the SEC, 529 plans are tax advantaged education plans, legally called “qualified tuition plans,” designed to spur people into saving for future education costs, i.e. kids (don’t read anymore into that!). Sponsored by government agencies, they’re authorized by Section 529 of the Internal Revenue Code, hence their name. The 529 plans come in two varieties - a pre-paid tuition plan and a college savings plan. Prepaid tuition plans are exactly what they sound like, they let you prepay tuition or credits at participant colleges. The college savings plans are a little broader and are essentially plans where the saver can save and invest money for a future student beneficiary, independent of which school they go to. The trade off is of school choice and the ability to lock in tuition in today’s rates, with the savings plan you get choice but not rate lock and with the prepaid plan you get rate lock but limited choices.

The tax benefits of participating in a 529 plan are decent but not incredible. Earnings are not federally taxed and usually not state taxed if you use it for education purposes; if you don’t, they are taxed at your marginal rate plus a 10% penalty (the standard penalty for these types of things). The states themselves may also add in a financial incentive to participate such as grants or matching funds but many of them only do that if you use their state’s 529 plan.

In Maryland, the two different plans are called the The Maryland Prepaid College Trust and the Maryland College Investment Plan. The Prepaid College Trust is the pre-paid tuition plan and the College Investment Plan is the college savings plan, each are managed by T. Rowe Price, more on those two plans in a later article.

No one read anything into this… just looking ahead.