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Back to School

Published on August 31, 2022

Peter Mallouk
President & CEO
Jonathan Clements Headshot

Jonathan Clements
Director of Financial Education

This month, Peter Mallouk and Jonathan Clements detail implications of student loan forgiveness, share their thoughts on how much parents should bequeath to their children and stress the importance of creating and maintaining a healthcare power of attorney.

Hosted by Creative Planning Director of Financial Education, Jonathan Clements, and President, Peter Mallouk, this podcast takes a closer look into topics that affect investors. Included are in-depth discussions on financial planning issues, the economy and the markets. Plus, you won’t want to miss each of their monthly tips!

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Jonathan Clements: Hi, this is Jonathan Clements, director of financial education for Creative Planning in Overland Park, Kansas. With me is Peter Mallouk present the firm and we are Down the Middle. Labor Day is here, which means it’s time to head back to school. That brings us to three timely questions. First up, Peter does the federal government’s move to forgive student loans change the calculus on college savings? If canceling student debt is now part of the federal government’s toolbox, doesn’t it make sense to have their kids take on at least some education debt?

Peter Mallouk: So I think this situation’s become very political. You can’t have any discussion without it being political in America now, unfortunately, and this is just an economic answer, right? It’s not unique to education, but let’s just take the way money works. When the federal government created loan programs to make it have very, very low interest and give very big loans to people to go to college, what happened is colleges raised their prices, right? This is kind of basic economics, right? You have a bigger supply of money at a lower curing cost. So universities can raise their prices. Just move over to the real estate market. If you have all the same homes out there, some are wonderful big homes. Some are wonderful, small homes. Some are middle homes and you lower interest rates from 6% to 2%. Guess what? All the people selling their homes can raise their prices.

Because the cost of entry is less. That’s what happened with education. It was the federal programs that encouraged education being more inflationary. The biggest rising costs in the United States in the last 20 years have been education and healthcare. Education is not a coincidence. It’s because of the government programs. Now I’m not saying there should not be government programs. In fact, I think the United States would be way better off if there was a free university in every state. I think the cost of the taxpayer would be less than what we’re spending on prisons and everything else. But saying we’re going to have all these universities charge and we’re going to lower the rate, it drove this problem. The same math applies when you forgive loans.

You also have this concept called moral hazard. Moral hazard’s the same thing we have with corporate bailouts. If you have a corporation take a bunch of risks and it goes well and they get to keep their reward. But if they take a bunch of risks and it goes poorly, like happened with the big banks in 2008 and nine and the government comes and bails them out, you change the math in their minds. Right. Like If you’re JP Morgan, Goldman Sachs, all these places that got in trouble, where’s the incentive to not take risks? If you do well, you keep the money. And if you do poorly, the government’s going to bail you out.

That’s the same thing that’s happening here. Obviously we’re talking about very different populations. We’re changing the math for the borrower. Why would you pay off your debt now when there’s a chance that more of it can be paid off? Why would you work three jobs to go through school? Why would your parents scrap together? Why would you go to the lower cost school instead of the more expensive school. So it’s created that issue. And again, it’s not political. It’s just math, right? The same math applies to when we fund wars, the same math applies to when we add a new benefit program, like say President Bush did with the prescription plan. It applies here with education too.

Jonathan: So you didn’t answer my question, Peter. Okay. We’ve created a moral hazard. Should the typical family be taking advantage of it? Should you be saying all right, I’m not going to put the full sum into 529 plan. I’m going to make sure that little Johnny graduates with 10 or $20,000 in debt so that maybe down the road, he too will be a beneficiary.

Peter: Right. So if I did not have debt, I would not be creating debt. Debt’s generally bad. Generally does not go well when people take on debt. If I had debt already, I was a student that graduated and I’ve got debt. I’m probably not in a hurry to pay off that less 10,000. Right. Maybe something else is going to happen. So depends on where you are in the cycle.

Jonathan: In terms of the effect on the economy, I mean, yeah this has the potential to drive up the price of college even more, but what about the effect in terms of short term inflation, is this concern for people?

Peter: So this is also a topic that’s become very politicized. Like if you’re for the student loan forgiveness, you say it’s not inflationary. And if you’re against it, you say it is inflationary. And it really applies to everything. Corporate bailouts, forgivable loans, when we borrow money to go to war or when we forgive student loans. 100% of these things are inflationary. There’s no economic debate about it. Anybody that says it’s not inflationary, does not understand basic concepts of economics. So it’s just quite simple. You have a certain amount of stuff out there and you have a certain amount of money. And when the government gives people more money, doesn’t matter how they give it to them and they pay for their healthcare, they pay for their education, or they pay for a corporate bailout, or they pay for a forgivable loan or whatever, right, left, whatever both parties have no problem giving away money.

It’s just who they’re giving it to. 100% of the time when you do that it’s inflationary, right? So just common sense, right? Let’s say I have 10,000 of debt. I have a little bit of assets. The government forgives my debt. Can I go spend more money? Of course, I can. Right. Because the money I was doing to make payments is now gone. Same thing with every other example, right or left. Anytime the government throws money into the system, people focus on where it’s going and develop their opinion from there. But from an economic perspective, you can almost pretend the government is just taking helicopters and dropping the money from the sky. Right. Just you put more money in there in the system, you’re going to have some inflationary pressure.

Jonathan: So we’ve created this system where we’re driving up the cost of college and you see this most clearly in the price of these big private colleges, talking about price tags of $70,000 a year and up to go to some of the most prestigious colleges in country. I know you Peter have got a kid in college. I mean, is it worth paying this sort of tab for a college education? I mean, now we’re talking about close to $300,000 to send your kids to one of these top colleges.

Peter: Yeah. So I separate how I feel about it and is it worth it? So how I feel about it is it actually borderline disgusts me the way the university system in the United States works out because we’re treating these universities like their Gucci and Fendi and Versace. I mean they’re really, they’re ranking in US news and world report and how they perceive how good they are is how many people they can exclude. Imagine really caring about teaching people and saying, I want to teach the least people possible, right? There should be some different type of incentive to encourage these universities to not be that way. Right. But that’s a separate story. Is it worth it? The answer is a lot of the times, yes. If your kid goes to Harvard or Yale, it doesn’t matter what they’re studying, it doesn’t matter what grades they get. They’re developing a network and they’re developing connections and their getting in there is a big deal. It’s hard to do. So either have to have some kind of legacy connection or really great grades and oftentimes both, good test scores.

So there is no doubt that in the marketplace that is highly marketable. Now there’s this huge second tier of very expensive schools where it is completely not worth it. And that’s where I think the danger happens, right, is in that group, I’m not going to name them, but a lot of them, dozens and dozens of these schools that have very high price tags, the purchasing power, the earnings power of that degree afterwards doesn’t pay off and there’s also majors, right? You can go to a certain school and get the wrong major and have it not pay off. I think this is a very critical decision for every family thinking about sending their kid to school, is you can’t just say, is it expensive, is it worth it? It’s where am I going? What degree am I getting? What am I going to do afterwards? What connections do I have? And you can quickly work your way to, is this going to be worth it or not?

Jonathan: Well to tie together what we’ve talked about so far, of course it’s a completely different calculus, depending on who’s going to pay for it. I mean, if mom and dad could afford to pay the whole price tag, it doesn’t really matter where you go. And I’d imagine that some of these institutions that you are referring to, but not naming are wonderful places to go. People will have a great college experience and it will be a wonderful thing if mom and dad are paying and it will be a disastrous decision if you go in there and have to take out a whole bunch of student loans, because you won’t come out with a degree, that’s going to allow you to service those loans. And that’s sort of why we’ve ended up in the situation that we have.

And I would just, if you don’t mind me editorializing for a minute, Peter, give you a break. One of the reasons that we’re in this mess is because parents don’t guide their children properly. They don’t guide their children when it comes to taking on these student loans. They relinquish their responsibilities. The kids go off to college, they take on tens of thousands of debt. They don’t really understand what it’s going to involve to service them. And lo and behold, that turns out to be a financial problem. It’s not a good situation that we’re in.

Peter: I agree. We definitely, they need somebody to talk to them. Not everybody is kind of lucky enough to have the parent that should be talking to them and isn’t. And I think we spend so much time. How many thousands of hours do these kids go to school? Maybe we could have one hour with a counselor that was mandatory, Hey, plug in where you want to go, how much it costs, what’s your degree. Here’s your ability to pay it off. I mean, this could be a very simple thing. No one’s got that. Right. And not that I’m aware of. And I think that that’s a big part of the problem is that you’re right on point, that frontline decision. Systemically, we have a huge problem. And I think the way universities approach things and the way the government approaches universities is a complete disaster. But if you’ve got a good mentor to your point, whether it’s a parent or someone else or someone in the school, you can navigate this, but you’ve got to have that mentor.

Jonathan: Though we should also probably add, I mean, the biggest problem with student loans is among those people who actually never manage to graduate. So they never get the degree that allows them to have the higher income that allows them to service the debt that they’ve taken on. Clearly we do have people who end up graduating with degrees that don’t allow them to earn high incomes, but it’s those who never graduate, that’s where the student loan problem is most pressing. So while we’re on the family finance theme, Peter one final question for you. Is there a limit to how much wealthy parents should bequeathed to their kids?

Peter: Well, that’s a big left turn from the education conversation, but it’s interesting because obviously we see clients take very different positions on this and I’ve learned way more from my clients than I ever read in books or seminars or school. I mean that’s for sure. And watching things play out in real life. And I think this is very, very personal. I see some families who they want to make every single dollar they have grow and pass on to the next generation possible. And they spend a lot of time training their kids on their values and what they focus on, whether it’s family or philanthropy or some combination of things. What I have personally found is most affluent families they don’t do that. They have some kind of limit on what they want their kids to have.

Warren Buffett’s famous for saying a lot of things, but one of the things he said was I want to give my kids so much, they can do anything, but not so much that they do nothing. Right. I think a lot of people have that philosophy. We do find that the typical multimillionaire next door it’s a little bit to charity and everything else is going to the kids. But once you get beyond that, I think people give a lot more thought about the obligation responsibility that comes with wealth. And I generally have found that to be an admirable way and a smart way to approach things and those kids, at least in my observation, and it’s an extensive one to be, I think have a little healthier relationship with money.

Jonathan: All right, Peter. So we’re at the end of the podcast. So as per usual, it’s time for your tip of the month. What do you got for me?

Peter: All right. So my tip of the month is to update your healthcare power of attorney. This is a document that basically says, if you can’t make a healthcare decision for yourself, who’s going to make it for you. If you have instead, a living will, which just says, Hey, if I can’t make a decision for myself, pull the plug, you might want to revisit that. There’s a lot of situations where you can’t make a decision for yourself and pulling the plugs not a great idea. I’ve experienced that in my own family and I’ve seen clients experience that. So I like the healthcare power of attorney where you name somebody to make the decision for you, but they’re outdated after about seven or eight years, sometimes they won’t even be honored. So make sure it’s current. How about you, Jonathan?

Jonathan: Well, so actually Peter, before we leave your healthcare power of attorney, this is something I’ve learned from you from actually doing these podcasts with you, which is that once your kid reaches the age of 18, if I have this correct, as a parent, you may not be able to have any involvement in the medical decisions or even get medical information about what’s happening to them if they’re involved in an accident. So one thing you want your child age 18 or older to have, maybe if they’re heading off to college this month is to have that healthcare power of attorney naming you as the person who can receive information, make decisions on their behalf. I got that right, Peter?

Peter: You got it right. Very important.

Jonathan: And so my tip of the month, and we’re four months from the end of the year, and one of the major financial goals for everybody who has access to a 401k plan or 403B plan is try to max out that plan during the course of the calendar year, if they have the necessary money. In 2022, you can put up to $20,500 into a 401k or 403B. If your age 50 or older, which some of us are, you can put in 27,000, you have that $6,500 catch up contribution. So here we are, we’re approaching the end of the year. You got four months. If you are not on track to max out that 401k and you’ve got the extra money, look into having the amount of paycheck contributions up so that you hit that target by the end of the year. Because as I said, the most people maxing out that plan should be one of their top priorities in any given year.

Peter: Good, very good advice. And I actually just tweeted about that a week ago at that very topic. So I couldn’t agree more.

Jonathan: All right. So Peter that’s it for this month. This is Jonathan Clements, director of financial education with Creative Planning. I’ve been talking to Peter Mallouk, president of firm, and we are Down the Middle.

Disclosure: This commentary is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable, but is not guaranteed.

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