Financial Aid for College: A Few Tips
Key to understanding financial aid eligibility is learning how financial aid formulas work. They're rather complex and vary from school to school, but they basically use answers to questions about family income, assets, and size to help arrive at a special number known as the expected family contribution, or EFC. The EFC represents the amount of tuition, fees, and other college costs the family is expected to cover based on its financial situation and other factors. Not all assets are counted when calculating the EFC (for example, assets held in retirement accounts don't count).
However, income plays a far greater role than assets in determining EFC. As much as 47% of income may be used in calculating a family's EFC, whereas parental assets are assessed at a maximum of 5.64%, and student-owned assets at a maximum of 20%. Financial-aid awards are based on the previous calendar year's income, so some families use strategies to reduce income the year before applying. For example, if one parent is considering retiring or going back to school, doing so will likely reduce the family's income, thus increasing aid eligibility. A parent also may ask that a work bonus be postponed to reduce income that counts against aid.
One common mistake families make is selling securities the year before the student enrolls as a way to cover college costs. But any capital gains from the sale count as income in the following year's financial aid calculation, so it may be best to sell securities the year before the base year (in other words, two years before the student enrolls), when the proceeds won't be counted as income.
This should not be considered tax or financial planning advice. Please consult a tax and/or financial professional for advice specific to your individual circumstances.
Investing in Real Estate
Investors can gain access to commercial property through real estate investment trusts, or REITs. These trusts have attained attractive returns over the past 30-plus years, providing investors with the income earning potential of bonds and the price appreciation of stocks. With REITs, you may get the best of both worlds.
There are three types of REITs: equity, mortgage, or a hybrid of the two. Equity REITs invest in, or own, commercial real estate and use property rents as revenue. Mortgage REITs invest in loans secured by real estate, earning income through mortgage interest and fees. This article will concentrate on equity REITs, which make up a great majority of listed REITs, according to the National Association of Real Estate Investment Trusts (NAREIT). In fact, if you are interested in learning more about REITs, NAREIT can provide a lot of useful information.
A company must satisfy certain criteria before it can be classified as a REIT. First of all, the company has to be in the real estate business, and at least 75% of its assets must be real property. At lest 75% of the company’s revenue must come from real estate, and (this is rather important for investors) at least 90% of taxable income must be distributed annually to shareholders. For this reason, REITs can be considered good income-producing investments.
A portfolio of stocks, bonds and cash improves through the addition of REITs, due to the power of diversification. Because each type of asset does not react identically to the same economic or market events, combining them can often produce a higher return with less risk.
Take the example below. Portfolio A consists of stocks, bonds and cash. The portfolio’s total return from 1972 to 2013 was 10.1% with a risk of 10.3%. Now look at Portfolio B, which had a 20% allocation to REITs over the same time period. Not only was its return higher at 10.4%, but its risk was also lower, 9.5%.
Nowadays, REIT investing does not have to be limited to the United States anymore. It’s true that the U.S. still holds the largest percentage of the global real estate market capitalization, but more and more countries are introducing REITs, especially in Europe and Asia, creating more investment opportunities. Hong Kong, Japan, and Singapore are growing real estate markets in Asia, while the United Kingdom, France, and the Netherlands are developing in Europe.
Do keep in mind that diversification does not eliminate the risk of investment losses, and that REIT investments are not suitable for all investors
Large Stock Dividend Yield Versus 10-Year Treasury Yield
In the recent context of likely-to-rise-at-any-time interest rates, it may be interesting to take a look at the historical relationship between stock and bond yields. As illustrated in the image, stock dividend yields were much higher than 10-year government-bond yields before 1957, with dividend payouts a form of compensation for the additional risk of investing in stocks.
In the more modern period, this relationship has changed. As capital appreciation became a bigger driver of stock performance, bonds became the main engine for potentially steady income generation. After 10-year Treasury rates significantly declined following the 2008 financial crisis, stocks yielded more than 10-year Treasury bonds for the first time since 1957. Recent rising interest rates, however, have pushed government yields above stock dividends once again.
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