Paying for College: Should Parents Take Out Loans or Tap Retirement Savings?

With higher education expenses galloping far ahead of inflation, parents at all income levels are finding it difficult to help out with their kids’ college education. If you’re one of many parents whose savings is coming up short, even with a 529 Savings Plan, a Coverdell, or other education-specific plan in place, you may be considering other options to cover the expense gap, including taking out a loan or dipping into retirement accounts.

Before going either route, be sure to fully explore the options available to your family, including potential grants, financial aid, work study programs and employer-provided education assistance programs. And if it’s too late to apply or your child won’t qualify for financial aid, your family may still qualify for one of the tax credits or deductions currently available. While these education-related tax credits won’t necessarily help every family due to limitations and income level phase-outs, they are worth exploring if you’re new to the education funding process.

If you want to explore using retirement savings or private loans to help close the funding gap, here is an overview of the available options in those areas.

401(k) Loan
Most employers will allow you to borrow money from your 401(k). If your employer has a policy in place that allows this, and you have enough retirement savings to support it, it may be worth considering. Here are some pros and cons:

Pros:

*The interest rate on a 401(k) loan may be lower than standard bank rates.
*These can be relatively easy to obtain. Often they don’t require a credit check and can be requested online.

Cons:

*Federal laws limit borrowing to 50% of the vested account balance, up to a maximum of $50,000, and require loans to be repaid within five years.
*When you remove money from your tax-deferred account, even temporarily, you’re missing out on valuable compounding and capital appreciation on those funds. You need to consider how these distributions will impact your retirement goals.
*401(k) loans are repaid with after-tax dollars, so not only do you miss out on investment returns, compounding and any employer match, you’ll actually pay taxes on the loan amount twice: when you earn the money and when you draw down the funds during retirement.
*Keep in mind that if you have to leave your job for health reasons, or you get fired or laid off during the loan term, you will need to repay the loan within 30 days to avoid the mandatory 10% IRS penalty and taxes on early withdrawals if you’re younger than 59 ½.

The biggest consideration with a 401(k) loan is that you have to be honest with yourself about whether your retirement savings can really afford to take that hit. Given the retirement crisis happening in the U.S. today, there are many nest eggs that can’t.

Retirement Account Withdrawal
If you choose to take a distribution from an individual retirement account (IRA) rather than a loan against your 401(k), you need to understand whether the distribution will be subject to income tax and /or is subject to a penalty. Normally, there is a penalty for withdrawals taken from retirement accounts prior to age 59 ½, however there can be an exception if the withdrawal goes towards higher education expenses. The amount distributed will generally be treated as taxable income.

It may be worth exploring this option if you’re over 59 ½ and have a qualified retirement account that is more than 5 years old, but you need to be sure that tapping this source won’t significantly impact your retirement goals. If it does, you may want to explore taking out a parent loan.

Parent Loans
The two main options for parents seeking an education loan are federal Parent PLUS loans and private parent loans.

Parent PLUS loans

Pros:

*You can borrow as much as your child needs up to the cost of their education, minus any additional aid they’re receiving.
*There are flexible repayment options like graduated and extended plans.
*There are options to put loans on hold due to hardship through deferment and forbearance.
*The financial history requirements are less strict than with private lenders.

Cons:

*Every borrower gets the same interest rate, regardless of creditworthiness – which means you could get a lower rate through a private lender. As of July 2015, the interest rate is 7.21%.
*Large origination fee (4.292%).
*Limited terms available (10 or 25 years).

Private loans

Pros:

*For borrowers with strong financial history, it’s possible to get a lower interest rate than a Parent PLUS loan.
*Private loans are typically more flexible in terms of offering shorter/longer terms and variable/fixed rate loans.
*May have enhanced customer service, including weekend hours.
*May offer other benefits (SoFi, for example, offers one-on-one career coaching for both the parent and the recipient child of the parent loan borrower).
*Some have no origination or other fees.

Cons:

*May have origination or other fees.
*Private lenders don’t typically offer deferment or flexible repayment plans, but may offer forbearance.
*Traditional banks may cap the amount you can borrow.

As you can see, not all loans are alike, so you’ll want to take the time upfront to choose the right option for you – after all, you may be stuck with this loan for a while.

Helping a child pay for college is a noble goal – one that most of us aspire to in some capacity. After all, workers with a college degree will typically earn 70% more than those with a high school diploma. Just be sure to make an informed decision about financing. Whether you’re faced with eroding your retirement savings or paying interest on a loan, the choice you make today can make a big impact in your – and your child’s – financial tomorrow.

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How Business School Helped Two MBAs Follow Their Cold-Brew Coffee Bliss

When Matt Bachmann decided to get his MBA three years ago, he didn’t imagine it would lead to a startup fueled by his favorite beverage. “I was committed to using the time as a break from the corporate world, and I knew I wanted to explore entrepreneurship,” says Bachmann. “But I had no idea what the final outcome would be.”

Having such an open mind turned out to be a big win for Bachmann, who credits his time at Columbia Business School with not only inspiring his startup idea – New York City-based cold brew coffee company Wandering Bear – but also playing an integral role in its success.

Not many people think of business school as a precursor to entering the food and beverage industry, but what Bachmann and his cofounder Ben Gordon experienced at Columbia illustrates an increasingly common scenario – MBAs learning about entrepreneurship and following their passions to find startup success.

In fact, according to Bachmann, the business “never would’ve happened” without Columbia – and here’s why:

Happy accidents.

“What strikes me about our startup journey is the serendipity of it all,” says Bachmann, who met Gordon in class at Columbia, where they bonded over a mutual passion for cold brew coffee.  The serendipity part? The two actually attended the same college eight years prior and had many of the same friends. If it hadn’t been for business school, they might never have met – and Wandering Bear would never have happened.

Their shared interest was also serendipitous. Cold brew, a style of iced coffee made without heat, could only be found in a handful of cafes at the time. In order to enjoy cold brew at home, you had to make it yourself – a fact that Bachmann and Gordon spent a lot of time discussing. “It ultimately led to our problem statement – how do you make a high quality café style iced coffee product readily available to consumers at home and at work?”

Where the business begins.

After countless conversations about favorite formulations and the relatively few cold brew offerings on the market (at the time), the duo realized they might have a business on their hands. “We realized there was a huge underserved consumer base out there,” says Bachmann. “Keurig and its competitors had been meeting the demand for greater convenience in hot coffee, but the same thing wasn’t happening on the cold brew side.”

According to Bachmann, the supportive environment of business school was exactly what they needed to take Wandering Bear to the next level. At Columbia, the team was able to take advantage of critical research and entrepreneurial expertise. Concepts from class became relevant in the startup they were simultaneously building. “Our MBA experience from end-to-end was launching this business,” Bachmann recalls. “It’s hard to say where one thing ended and the other began.”

The student loan question.

Like most MBAs, Bachmann took on student loans to help pay for school – a fact that would deter some people from taking a risk on a startup. “It’s tough to tell someone who’s considering an MBA that it’s okay to take two years out of the workforce and incur six figures worth of debt – especially if their goal is to start or join a startup.” Bachmann stresses that it’s a question that needs to be assessed on an individual basis, but notes that in his situation, “There were too many intangible opportunities to list – I wouldn’t be doing this had I not taken the time to pursue an MBA.”

One of those opportunities materialized when Bachmann refinanced his student loans with SoFi this year and joined the SoFi Entrepreneur Program, which allowed him to put his loans on hold for six months as well as benefit from a deep network of entrepreneurial support. “The fact that SoFi spends its days minimizing risk by evaluating borrowers’ earning potential makes refinancing with them feel like a vote of confidence,” he says, adding that, as a successful startup itself, SoFi is a brand that he and Wandering Bear are happy to be associated with.

And the feeling is mutual. This month, SoFi is pleased to offer Wandering Bear cold brew coffee as a welcome gift for new student loan refinance members. Given the recent surge in popularity, it’s a safe bet that some have already become cold brew converts. For the rest of the world, Wandering Bear is on a mission to spread the word – and the convenience – of its signature drink.

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5 Signs it’s Time for a Mortgage Refinance

Average mortgage rates continue to hover near historic lows, but with all signs pointing to interest rates rising in the near future, you may be asking yourself, “Should I refinance my home?”

Here are 5 signs that locking in a lower mortgage rate now could be the right move.

1. You can break even quickly

To calculate the breakeven on a mortgage refinance, divide what it costs to refinance (e.g., origination fees, closing costs, etc.) by the amount you’ll be saving each month. For example, refinancing a 30-year $1 million loan from 7.5 to 4.5 percent would result in savings of $1,925 per month. If the cost of the refi is $20,000, the amount of time it would take to break even would be just over 10 months ($20,000 / $1,925 = 10.39).

A quick tip – origination fees are usually the single highest cost in a mortgage refinance. By working with a lender that doesn’t charge origination and other closing fees, you can reduce the cost of the refinance and the amount of time it takes to break even.

2. You can reduce the rate on your home by at least .5 percent

Historically, the rule of thumb was that home refinance rates had to be a minimum of two percent lower than the existing mortgage. However, the combination of larger mortgages and lower closing costs has changed all that. For a jumbo mortgage, even a change of .5 percent can result in significant savings and a short time to break even, especially if you can avoid lender fees.    

3. You can afford to refinance to a 15-year mortgage

Shortening the term of your mortgage from 30 years to 15 years will likely cost more on a monthly basis, but it can save thousands of dollars (or more) over the life of the loan. For example, a 30-year $1 million loan at a 7.5 interest rate would carry a monthly payment of $6,992 and a total cost of $2,517,120 over the life of the loan. Refinancing to a 15-year mortgage with a 5.5 percent rate would result in a higher monthly payment of $8,171, but the shorter maturity results in a total payoff of $1,470,780 – a savings of over a million dollars versus the 30-year loan.

4. The interest on your adjustable rate mortgage (ARM) is headed higher

ARMs have saved borrowers money with lower interest rates versus fixed loans since 2008. However, for almost a year now, the Fed has been hinting that it is prepared to start increasing its benchmark interest rate. Refinancing to a fixed mortgage in this environment can protect you against rate increases and provide the security of knowing how much you’ll be paying on your mortgage each month – no matter what rates do next.

5. You can do a “cash-out” refinance and use the money to pay off other debts

Tapping the equity in your home can become problematic if not used responsibly, so you have to be careful with this one. But this move makes a lot of sense if you can pay off debts carrying higher percentage rates, since lower interest rates will allow for faster repayment of consolidated debt balances and also gets you that mortgage interest deduction.

The Takeaway

A mortgage refinance can be a great move that saves money on a monthly basis and/or over the life of the loan. More than just saving money, however, locking in a lower rate now can help you achieve your long-term goals. Once you’ve decided that refinancing your home is the right move, look for a lender that’s offering competitive rates and low or no fees – then let the refinance do the money-saving work for you.

Thinking about refinancing? Skip the headaches by refinancing with SoFi. See your rates and monthly savings in two minutes. Get started today.

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5 Millennial Money Habits (& How They’re Changing the World

Are you in your 20s or 30s? Do you cringe when people call you a Millennial and make sweeping proclamations about your generation as if you were from some new planet? The stereotypes have become so prevalent that one person took matters into his own hands with a hilarious Chrome extension that replaces the “m-word” with the term “snake people” (feel free to use it on this article).

It may be tough to live with all the attention, but bear with the rest of us.  After all, people born in the 1980s and ‘90s,count for more than a quarter of America’s population and are shaping the world for everyone in new ways. Other folks are naturally going to be curious about the preferences and habits of this new generation of young adults.

One area where Millennial behaviors are making a big impact? The financial industry, where “business as usual” is quickly evolving to meet the needs of Gen Y’ers and their $2.45 trillion in global spending power. Here’s a look at five money habits of Millennials that are disrupting the status quo for the better.


1. Money talks.

Millennials are known to be more upfront than other generations about sharing their financial status with others, whether it’s student loan debt, credit scores or salaries. This straight talk is reflected in social media as well as in relationships. Case in point, a recent Nerdwallet study revealed that 98% percent of respondents age 25-29 say they’ve discussed finances with their partner at some point – the highest of any age group surveyed. Millennials lead the way in opening up long closed discussions.

When you consider that money issues are a leading cause of anxiety, depression, problems at work and marital strife, this trend toward transparency is refreshing– after all, you can’t get support for your problems if you don’t share them with others. There’s even evidence to suggest that sharing your income level – a once uber-taboo subject – can help reduce the gender pay gap, giving underpaid women the confidence they need to negotiate for a higher salary.

2.  Buh-bye banks.

It’s hardly shocking that young adults are skeptical of most institutions, but they really don’t like banks. A three-year study from Scratch found that of the 10 brands Millennials hate most, four were banks. The study also showed that a third of Millennials believe they’ll be able to live a bank-free existence in the future. 

In fact, many already do, thanks to the multitude of new options for spending, borrowing and saving money. Placing a premium on convenience, a number of young people use alternative financial sources such as prepaid cards, payday loans and PayPal, and look to non-traditional lenders for modern money strategies like student loan refinancing and low-down payment mortgage loans.

3. Thanks for sharing.  

Coming of age (and entering the job market) during a recession has been a tough break for this generation, to say the least. Exorbitant student loan debt, a spotty job market and slow wage growth have combined to keep many Millennials from realizing financial goals like getting married and buying a home. But that hasn’t stopped them from finding creative ways to financially thrive.

A perfect example of this is the growth of the sharing economy, which can turn your car or spare bedroom into a lucrative side-hustle. While awareness of these options is up, usage is still somewhat low – but primarily driven by younger demographics. With benefits ranging from $19/hour for the average Uber driver to covering 81% of one’s rent by listing one room in a two-bedroom apartment on Airbnb, it’s likely those numbers will continue to climb.

4. Can’t buy me happiness.

Millennials tend to be driven by a desire for meaningful experiences vs. a penchant for material things. A study released earlier this year by Eventbrite found that 78% of those surveyed would choose to spend money on a desirable experience or event over buying a desirable thing, while 72% say they would like to increase their spending on experiences rather than physical things in the next year.

The good news is that science backs this strategy as a better path to happiness – recent psychological studies show that money can actually buy happiness, but only up to a point. Over time, people’s satisfaction with the things they bought went down, whereas their satisfaction with experiences they spent money on went up. Save your pennies and travel the world.

5.  Saving the world.

One of the most intriguing Millennial money behaviors – and something we’ve seen quite often among our own 20- and 30-something borrowers – is a heavy focus on altruism (a trait that’s earned them the nickname Generation Nice). According to Rackspace, nearly 40 percent of Millennials prefer to spend money on a good cause, even if it means paying more for a product. And many seek to work for companies that share their values and support causes that are important to them. This demand for socially conscious capitalism is becoming apparent in both established companies as well as startups seeking to attract talent and customers from the Millennial base.

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How to Negotiate Salary Like a Pro (Contrary to Popular Wisdom)

We build and manage our careers one conversation at a time.  Some of those conversations are easy, some hard, but few cause more stress than negotiating an offer.

In fact, salary negotiations can be so stressful that many people avoid them altogether.  According to a recent PayScale study, 57 percent of those surveyed have never asked for a raise in their current field.

What’s stopping you?

There are a few reasons why people avoid or fail at salary negotiations. Perhaps you’re asking yourself things like, Should I just tell them what I want, or wait until they make an offer? Is the offer fair? Should I ask for more, and how much is too much? There are no easy answers.  And then there’s the “am I worth it?” psychological barrier to break through.  

You can find a lot of advice about salary negotiations, and some of it is valuable (you can check out ours here). Yet, the conversation is complex and there isn’t a silver bullet list of tips that will make this conversation easy. Your situation is yours – this stuff is hard because it’s subjective.

When we advise SoFi members on career strategy, we provide them with “frameworks” rather than tell them what to say or not to say.  Given the complexity of the negotiation process, we’ve developed frameworks for all the related issues, such as how to evaluate an offer, when to ask, when to counter and timing it right.  A good example is our framework around one simple but tricky issue:

In a salary negotiation, who goes first?

In short, it depends on your particular situation.

You’ll commonly hear that “best practice” is whomever goes first will negotiate the best offer. This strategy is supported by the anchoring bias – once the anchor is set, there is a bias towards that value. By this logic, if you state your salary requirements first, you increase the likelihood of getting the offer you want.  If the employer thinks your number is too high, you’ve saved time in pursuing a job that doesn’t pay.  No harm, no foul – right?  Not exactly.  

Before you name your price, ask yourself:

   -Do you have alternatives or another offer?

   -How urgent is your situation – are you unemployed, underemployed, employed but want out ASAP?

   -Does the opportunity have significant upside, or give you that long awaited chance to switch careers?

   -Would you take this job at a discount (because money doesn’t buy everything)?

Depending on your answers, there may be a lot of harm in going first – especially if you’re asked about salary requirements early on in the process.  At this point, employers already know what they want to pay someone for a particular role, and they’re only asking to screen candidates in or out.  So while the “best practice” may be to go first and go high, you could be self-selecting out of the process before they’ve had a chance to fall in love with you – based on a number that doesn’t necessarily represent your bottom line.

To solve for this conundrum, it’s usually best to try to put off talking real numbers until you get to the offer phase. Tell the employer you’re looking to get paid “market rate” and leave it at that. If they press, consider your answers to the above questions before providing a number, and use benchmarking resources like our latest Return on Education analysis – focused on salary trajectory by degree type – to help determine what “market rate” means for you.

Whether you’re still at the pre-offer stage or you’ve made it to the final round, there’s another reason that going first can hurt you. Go too high, and risk getting eliminated.  Go too low, and limit your ability to negotiate later.  

So does that mean you should always let the employer go first? Not at all. Deciding whether to anchor or not depends on your particular situation. Here are two ways to help make your decision:

   -Anchor if… you have alternatives and/or the job doesn’t offer any difference in upside (personally or financially)

   -Let the employer anchor if…you are unemployed, don’t have alternatives or the job offers non-monetary upside (or other things that money cannot buy). Once the offer is made, try to negotiate a better deal.  If it’s too low and you can’t improve it, walk away and chalk it up to interview practice (and a confidence booster that you can get an offer).  

Using these guidelines can help give you some power in a situation where people often feel powerless. Hopefully, it can also mean landing the job – and the salary – you want.

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5 Reasons to Refinance Credit Card Debt with a Personal Loan

Ever feel like you’re the only one with credit card debt?
Actually, you’re in good company.
The average American household has , $15,000 in credit card debt, but you sure wouldn’t know it. People may talk all day long about their Paleo diet, their love life, even their student loans, but bring up the subject of money, especially (cue horror-movie soundtrack) credit card debt, and suddenly everyone clams up.
One in five people consider money a taboo subject, according to a recent Harris poll. It’s also the No. 1 cause of stress, according to the survey, ahead of work, family and health concerns. So unless you’re expecting a windfall from a long-lost relative (not that you’d know, odds are that relative didn’t talk about money either), it’s up to you to come up with a game plan to manage your finances.
The obvious solution is to hurry up and pay off the debt, but in the meantime, there’s another way to save money, an especially helpful one if you are in the “post-grad plateau,” at the early stage of your career with higher income potential just around the corner.
With the average annual percentage rate for fixed-rate credit cards at 13.02% and variable-rate credit cards at 15.82%, you can easily save thousands of dollars by refinancing credit card debt with a personal loan.
Need the hard numbers? Here’s an example:
Let’s say you have $15,000 on a fixed rate credit card with a 15% APR, and your goal is to pay it off within three years. Your monthly payment would be about $520, while your total interest cost would be about $3,700 – and that’s if you don’t continue to charge new debt on the card.
Now let’s say you qualify for a 7.5% APR personal loan with a 3-year term, and use it to refinance your credit card debt – your monthly payment would go down by $53 and you’d save almost $2,000 on total interest over the life of the loan.[i]
THE COST OF PAYING OFF $15,000 OVER THREE YEARS

Of course, everyone’s situation varies, but you can use a loan payment calculator to do the math on your own loans.
Need another reason to refinance credit card debt? How about five?
Here’s how a SoFi personal loan can help you slash your credit card debt and bolster your bottom line:
1.  Borrow from $5k-$100k at fixed rates that start at 5.95% APR (with AutoPay) and variable rates that start at 4.73% (with AutoPay).[ii]
2.  No origination fees or prepayment penalties.
3.  Easy online application and access to live customer support seven days a week.
4.  If you lose your job, SoFi will temporarily pause your payments and help you find a new job. (Note that interest accrues during the forbearance period and is added to principal when you resume repayment.)
5.  End the vicious cycle of credit card debt, rather than transferring the balance to yet another credit card that you can continue to charge up.
So with new information, education and a game plan, the next time the subject of money—credit cards, perhaps?–comes up, odds are you’ll have plenty to talk about.


[i] Click here to see personal loan examples that depict APR, monthly payment and total finance charges.
[ii] SoFi rate ranges are current as of May 1, 2015 and are subject to change without notice. Learn more about SoFi personal loan rates and eligibility here.

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SoFi Statement: Treasury's Inquiry into Marketplace Lenders

Today, the Treasury announced a public inquiry into marketplace lenders. As the nation’s second largest marketplace lender, we welcome the Treasury’s inquiry. At SoFi, fairness and transparency are critical factors in our partnership with our borrowers, and we strive to have an equally strong partnership with the Treasury. To that end, we’ve been forthcoming with the Treasury and have enjoyed regular, positive communications and meetings with officials for the past several years.

We appreciate the Treasury’s interest in areas of importance to SoFi and the marketplace lending industry — from SoFi’s differentiated business model (given that we originate our own loans) to the market’s overall growth potential.  In fact, members of our executive team just recently met with Treasury officials and the National Economic Council at the White House Office to discuss many of these topics.  We recently surpassed $3 billion in funded loans. As we grow, we look forward to continuing these conversations and creating opportunities to bring the benefits of marketplace lending to a greater number of members throughout the US.

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