Education Tax Credits: Hope & Lifetime Learning Credits

Ecstatic GraduateWith the economic slowdown, a lot of people have been thinking about going back to school yet many of them, me and some of my friends included, aren’t aware of the available education tax credits. When I was in college, I was a dependent and my parents claimed the credits. Since graduating, I have been going to graduate school on my employer’s dime so I never had any qualified educational expenses to claim. But if I want to go back to school or take some special training, it definitely benefits me to brush up on the education tax credits.

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Chicago ‘Pay For Grades’ Pilot Program

ClassroomWhat do you think about paying your kids to get good grades? How’s fifty bones for an A sound? That’s right, fifty dollars seems to be the going rate for an A. B’s will cost you $35 and a C forces you to give up that portrait of Mr. Andrew Jackson in your wallet or purse.

Now, what do you think about the state or school district paying kids for good grades? A Chicago public schools pilot program is doing just that. And the pilot program has a clever name too – Green for Grade$:

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 Devil's Advocate 

Don’t Pay Your Children’s College Education

Devils Advocate Logo
This is a Devil's Advocate post.

You should not sacrifice your retirement, your savings, or your future financial stability in order for your children to attend college. They are fully capable of supporting themselves, just as generations have before them.

The average cost of a year at a private four-year college institution in 2007-2008 was $23,712. The cost of a year at a public four-year college institution was $6,185. Both were increases of over 6% from the prior year and don’t even include room and board! []

Bottom line (a surprise to no one): College is expensive.

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Revisiting Paying Off Student Loans

Student loans have been on my mind ever since I read about the latest legislation dropping Stafford rates earlier this month.

Here’s a brief recap of where my student loans are now. I consolidated my Stafford loans years ago, locking in a very comfortable rate of 3.25%, and the balance currently stands at a little over $22,000. The loan had been in deferment as I completed my MBA at Johns Hopkins, which has stopped the clock the last few years, but with my graduation the interest has started to accrue again. We earn too much to be eligible for the student loan interest tax deduction (certainly not a bad thing) and thus bear the full brunt of the 3.25% rate. Once again, I’m revisiting my student loan dilemma.

$22,000 in student loans at an effective tax rate of 3.25%. We also have a mortgage of around $220k at an effective tax rate of 4.3125% (the rate is 5.75% but it’s tax deductible, in the 25% tax bracket the effective rate is 4.3125%; we could consider only the deduction above the standard deduction for couples $10,900 but that begins to get overly complicated). Math says that if we were to pay down a debt, it would be my mortgage first because it’s at the higher tax rate. So I should never make more than the minimum payment on my student loan unless we have paid off the mortgage (which I envision is something that won’t happen for quite some time).

Proponents of Dave Ramsey’s Debt Snowball approach would say that you should pay off the student loan first because it’s the smaller amount (ahh, psychology). I personally don’t subscribe to that idea, I go by the Blueprint for Financial Prosperity Common Sense Payment Strategy (okay I just made that up, it’s how most people who understand interest rates and math would pay down their debt, I just added some color). While I anticipated this result, it’s always good to revisit things as situations change.

So, the student loan is here to stay for the foreseeable future.

 Education, Personal Finance 

Graduate Degrees Are Outdated

Penelope Trunk recently posted seven reasons why graduate degrees are outdated that I think every young professional needs to read. Each of the seven reasons are spot on but I wanted to discuss my own experiences with two of them specifically.

2. Graduate school is no longer a ticket to play. “It used to be that you couldn’t go into business without an MBA. But recently, the only reason you need an MBA is to climb a corporate ladder.” I have two graduate degrees – a technical one in software engineering and a vaunted MBA. In the case of the software engineering degree, I pursued it because job prospects for software developers following the dot-com burst were bleak and because it never hurts to get another technical degree. The MBA? I pursued it strictly because my employer paid for it and because it was seen as another item on your resume, a “requirement” to climb that corporate ladder.

I didn’t pursue an MBA because it would teach me the skills required to fulfill a job function, because it wouldn’t, I pursued it because I knew that at some level it would be required to even be considered for some management position (even if that management position would require none of the skills taught in an MBA course… how does marketing or analyzing internal rate of return help in management?).

What’s my point about MBAs? While some companies may require them for management, you don’t actually need one to succeed at your job. Results matter and companies should promote based on results, not degrees on a wall. If you are at a place that refuses to recognize results, go somewhere that does.

4. Graduate degrees shut doors rather than open them. Penelope focuses on the financial aspects of this – the loans you are saddled with preclude you from working at certain places because you can’t afford it. I believe graduate degrees have a pigeonholing effect. When I applied to become a software developer at my last company, I had been doing embedded software development for about six months. In the interviews, the interviewers focused on the fact that I had been working in the embedded development world for “so long” and how I might not want to or even be able to do application development. Luckily they called me in so I could resolve their concerns because, based on six months of work (it appeared longer than six months because I used the same language, C, for various applications, the last of which was truly embedded development), they had pigeonholed me as an embedded software developer who was disinterested in, or incapable of, application development.

Imagine if you spent a year or two pursuing a degree in a very specific area within your field? Employers would naturally assume you have a singular focus and would only consider you for positions directly related to that field. You might have only gone after that degree because you thought it could broaden your horizons, not make it more narrow.

Lastly, I submit another reason, the eighth reason, graduate school can be outdated.
8. In many graduate programs, the bulk of the teaching is done by textbook. While in some fields this is acceptable, I found that the textbooks used in our business classes were woefully inadequate. We had marketing textbooks that appeared to have last been refreshed in the early nineties, discussing case studies of companies that no longer existing, and really teaching us little that could be applied in the real world anymore. You can learn more reading the nuggets from Seth Godin’s blog, for free, than you can get out of most marketing textbooks.

Finally, and this is unrelated to graduate degrees being outdated, is the fact that there are two things of value when it comes to graduate school and neither involves the knowledge. First, you will, hopefully, increase your network and, second, you’ll get a piece of paper. If graduate school was about the knowledge, you wouldn’t be able to take classes for free from resources like MIT OpenCourseWare and BusinessWeek Small Biz.

I hope you don’t leave here thinking I’m cynical about graduate school or an MBA, I’m not (that cynical), but it’s like what Brian Flanagan (Tom Cruise) said in Cocktail to his professor after a bad grade: “Those that can, do. Those that can’t, teach.” 🙂

 Frugal Living, Personal Finance 

How To Cut College Costs by 13%-25%

Carnegie Mellon UniversityWant to know how I was able to shave nearly 13% off my college costs?

Advanced Placement classes.

I was able to graduate college a semester early in part because I loaded up on Advanced Placement (AP) classes while I was in high school. Someone got it into my head that I could take these AP classes for free (not counting the nominal fee for the exam) and get college credit for getting high marks on the AP tests. At the time, my brain wasn’t thinking “oh, I can save money on college,” but rather “I can spend time now and have it count twice – once in high school and once in college,” so it was in part the bit of hustle inside of me that spurred me to action.

I took your standard science and math ones (Chemistry, Physics, Calculus, Computer Science) as well as a few “useless” (from a college credit perspective, not from a learning perspective) classes like Comparative Government, English, Art History, US and World History. The net result was approximately one semester’s worth of electives (and most notably skipping out on an calculus class offered at 8:30am only, you have no idea how happy I was to hear that).

For those of you looking to do this, my advice is that you do your research about colleges ahead of time to ensure that your time is spent most effectively. Also, consider taking classes that you may never get credit for but would ultimately enjoy (I was never getting any credit for Art History, but I learned a lot in that class).

Here are some tips:

  • Check to see if your potential colleges give credit for high scores and in which subjects, then see what those scores are. I didn’t know this but I was never getting credit for Comparative Government or Art History.
  • If they do not but you are still interested, take the class but skip the exam. You only need the exam if you want credit, if you can’t get credit even with a score of 5, just skip the exam.
  • The SAT/ACT and SAT II exams are more important. Given a choice, focus on the standardized tests over the AP exams (that’s not to say you can’t focus on both) because those tests get you into college, AP scores just get you farther along once you get admitted.
  • To take full advantage, you may need to load up on non-elective classes to finish early. My credits were about 50% optional electives and 50% required electives but none applied to my core or foundation-type classes (CMU accepted my AP CS marks but the class was taught in Pascal and I didn’t know C/C++, which was the language CMU used at the time, so I had to take 15-127) so I had to load up on those in the vacuum left by fulfilled electives.
  • Don’t burn yourself out. If you take too many AP’s, you might overload yourself and perform poorly on the exams. Most colleges will only award credit for 4’s and 5’s, so keep that in mind.
  • Enjoy yourself. The point of these AP classes is to expand your mind beyond the typical topics covered in high school. Art History isn’t something most high school students have the opportunity to take, so enjoy the classes and broaden your horizons. Without that one art history class, I would know absolutely nothing about art, I’ve never regretted taking that class (even if I got no credit!).

There you have it, AP classes are your way of shaving 13%-25% (you can get, at most, a year of credit according to the College Board) your college costs.

(photo by steven n maher)

 Personal Finance 

2008 Best Paying Jobs for Graduates

Graduation CakeEvery year, around this time of college graduation, various media outlets report the average salaries various college graduates and this year is no different. CNN and Careerbuilder are reporting, based on National Association of Colleges and Employers data, that salaries are up 4% this year compared to last year and hiring is expected to increase 8%. Take that recession! (cynics will say that employers are hiring cheaper graduates and dumping the more expensive seasoned employees!)

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 Your Take 

Your Take: Pay for Academic Performance for Children

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?

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