Target funds don't act their age: Retirement myths

Eric Rosenbaum | @erprose

 

Monday, 19 May 2014 | 7:00 AM ETCNBC.com

Age-based investing has become an efficient way for financial services companies to sell investments.
Take target-date funds and, more broadly, retirement planning—the prime example of the age-based investing approach in action. All you need to know is your current age and expected retirement year and—presto—you can buy into an asset allocation fund designed just for "you" and your shifting-with-age risk tolerance.
You might not know the difference between large-cap stocks and momentum investing or senior floating-rate bank-loan products designed to hedge interest rates, but who doesn't know their own age, right?

William King | Stone | Getty Images

 

The age-based investor rage does raise one big question: Is it going to be as good to investors in the long run as it has been lately for financial services companies?

According to many financial advisors, the answer to that question is no, with a few qualifications. Age-based investing is an important concept and has been extremely helpful in basic 401(k) planning—no small task—but advisors suggest it's woefully inadequate as a way for investors to frame their investing goals and won't result in goal attainment.
"The problem with age-based investing is, it takes the complex challenge of retirement investing and tries to make it overly broad," said Andrew Holland, managing director at Quantitative Investment Advisors & Co.



Wayne von Borstel, certified financial planner at von Borstel & Associates, was less subtle: "Age-based is terrible for investors and great for marketers, and it sells well because people think they fit into a category," he said. "People need to be looking for a plan, not an easy fix."
To that point, we have gathered a few of the biggest myths about age-based investing.

Myth #1: Your age is a good indicator of your risk tolerance.
Age-based investing takes as its premise that your age is a good proxy for your risk tolerance, and your portfolio can shift over time between equities, fixed-income and cash based on your age. Dead wrong, some advisors say.

Portfolio structure—based on an investor's risk tolerance—should factor in three main considerations: your ability, your willingness and your need to take risk, said certified financial planner Tim Maurer, director of personal finance for the BAM Alliance.


Ability is partially based on the time horizon, and that's the single factor taken into account with target-date funds. But part of ability is also, such as an investor's stability of earned income.
Willingness is otherwise known as "the stomach acid test," and need is based on the return required to achieve your goals. How much are you willing to lose is as important a question as how much you need by retirement age.

Myth #2: All individuals of the same age act in a similar way.

Like ages think alike? Not necessarily.
Holland said that if a 25-year-old who doesn't know much about investing gets into a target-date fund and the portfolio is 90 percent equity-weighted, then declines 10 percent in a three-month period, that could trigger the investor to sell at a loss.
Worse, they could "be afraid of the markets for the rest of [their] life just because they have a low-risk tolerance," he said. "If you are just a nervous person, no matter how old you are, you will sell at loss."

"Our job is to take fear away from people, but age-based takes it away in the wrong way." -Wayne von Borstel, CFP, von Borstel & Associates

Katherine Roy, chief retirement strategist at JPMorgan Asset Management, said it doesn't make much sense to automatically recommend to 30-year-olds that they be more aggressive at a time when studies suggest at least some of them have a risk profile more like 65-year-olds, due to the Great Recession.

How you perceive risk outside of a market context may tell you a lot about how you will perceive risk in the markets, Roy said, and she pointed to work done by FinaMetrica as an example of the risk-profiling approach that takes into account both innate risk tolerance and risk perception.
"Individuals have an innate risk tolerance," Roy said. "Do you think danger or thrill when you think of risk?" It's a question FinaMetrica asks in its risk-profiling work. An investor also has to determine his or her risk capacity—which includes but is not limited to time horizon—and also how risk perception may change over time.

Events like the Great Recession proved that perception is a critical component of investment planning based on risk. For example, the 30-year-old and 65-year-old may not have the same innate risk tolerance, but they can still arrive at the same place—the 30-year-old due to perception and the 65-year-old because of risk capacity (or, in other words, age).
Read MoreWhich to pay: Student loan or 401(k)?

Even among the huge subset of older investors, there is a big difference between a person who has retired at 65 and a 65-year-old who is planning to work until 75. For older investors, von Borstel said to forget age and, instead, break it down to the four things you need at retirement:

1. To live on at least 3 percent of your wealth
2. To have five years' worth of a total portfolio balance that you can live on (e.g., 60 months of a $3,000 monthly budget) in short-term bonds.
3. No debt.
4. A six-month emergency fund.

"I have clients 25 percent or 100 percent in equities in retirement," von Borstel said. "Our job is to take fear away from people, but age-based takes it away in the wrong way."

Buffett: Investing for the long haul

Legendary investor Warren Buffett discusses his buy-and-hold strategy for creating value.

 

Myth #3: Target-date funds complete a portfolio.

"Age-based investing is a starting place," Roy said. Why? Because the one piece of information that a 401(k) plan has on all participants is their age—and it's the only thing a plan sponsor can be really confident about knowing. "Target-date funds are effective because of the limited information. ... If investors won't engage, there is not a better alternative, but with greater wealth and changing circumstances, a more thoughtful approach is advised."
Another positive of age-based investing, according to von Borstel, is that dealing with investors means dealing with emotional beings, and their biggest enemy is what they, and not the market, do. "If investors put money in and ignore it, they might do better than people who watch it ... but it's still not the best alternative," von Borstel said.


A glaring example of where target-date funds typically fall short of the more "thoughtful approach" is with alternative asset classes.
Equities, bonds and cash aren't enough, according to many advisors. Yet with most target-date funds, that is all an investor is going to have access to over the decades that the portfolio is on autopilot.
Holland said real estate and commodities need to be core asset classes alongside equities and bonds, but most of these target funds don't include access to either.

Von Borstel also said that including real estate and commodities is key and any target-date fund that shifts a retiree to a 90 percent weighting in bonds is "leading lambs to the slaughter." He also recommends, on average, between 40 percent and 50 percent in equities in retirement. (Some of the largest financial services companies have upped their own recommendations and now advise similar stock exposure for those in retirement.)
It's important to know if this more aggressive tilt later in life might be in your best interest—and if your target-date fund has made the move, too.

Roy explained that the old "equity, fixed-income and cash" three-asset-class pie chart can be enhanced within the confines of target-date funds—though alternative asset classes as stand-alone investments in most 401(k) plans would not be a change she supported.

"There is lots of debate today on whether there should be more alternatives in target-date funds, and we are seeing a move that way more so than historically," Roy said.

Eric RosenbaumCNBC.com

US household debt jumps for third straight quarter: Survey

Wednesday, 14 May 2014 | 10:05 AM ET

Reuters

CNBC's Steve Liesman reports on household debt in the United States

Americans racked up more debt in the first quarter, the third straight quarterly increase, thanks in large part to heftier mortgages, a survey by the Federal Reserve Bank of New York showed on Tuesday.
The report on household debt and credit showed however that mortgage originations dropped to their lowest level since the third quarter of last year, which could buck the overall trend of growing confidence among U.S. consumers.

Outstanding household debt rose by $129 billion from the previous quarter, boosted by a $116 billion jump in mortgage debt and smaller rises in student and auto loans, the report said. Total household indebtedness was $11.65 trillion, which is still 8.1 percent below the peak in the third quarter of 2008.

Adam Gault | OJO Images | Getty Images

 

Since then, the U.S. economy has been plunged into a deep recession that for years caused Americans to tighten their belts. That trend has started to reverse in recent quarters, according to the New York Fed survey that draws from a nationally representative consumer credit sample.

Read MoreWhy millennials rent: What do you think?


"We've observed household debt increase three quarters in a row and delinquency rates at their lowest levels since 2008," Andy Haughwout, a New York Fed economist, said in the report, noting that "the direction of future mortgage originations will have an important implication on the household financial outlook."
Mortgage originations slipped by $120 billion to $332 billion.

7 things to know about the 'new retirement'

By Dana Dratch • Bankrate.com

The new rules for retirement

This isn't your daddy's retirement. And it's not for the faint of heart.
Do-it-yourself 401(k)s, IRAs and multiple-choice Medicare supplement plans have taken the place of the company pension plan, retiree health benefits and a gold watch.
And working into retirement -- in the form of a second (or third) career or part-time job -- is becoming the norm.
"It's a changing landscape," says Sara Rix, a senior strategic policy adviser with AARP.
But this evolution hasn't happened overnight, she says. "Some of the changes we're seeing began 20 to 25 years ago."
One major adjustment: People are working longer. In 1985, there was fewer than 1 in 5 65- to 69-year-olds in the workforce, Rix says. Today, it's almost 1 in 3 -- a 74 percent increase.
Some would-be retirees need the money, says Rix. Others enjoy their jobs and want to keep at it. And, for some, it can be a combination of the two.
Whether you're 25 or 75, you should know these seven things about retirement in the new millennium.

You're on your own

It's like one of those high school math brain-twisters: The amount you save times your compounded earnings, minus any investment losses and factoring for inflation, equals what standard of living at some (movable) future date?
Try solving for that "X."
But one thing is true: Save nothing now, and that's exactly how much you'll have when you retire.
"People have to be much more proactive," says Tony Webb, research economist with the Center for Retirement Research at Boston College.
A study by the Economic Policy Institute using the Federal Reserve's 2010 Survey of Consumer Finances showed that half the people on the cusp of retirement (ages 56 to 61) had a retirement account balance of less than $91,000. At a typical drawdown rate of about 4 percent per year, that equals about $3,640 annually, or about $303 a month in retirement income, Webb says.
One big problem with everything financial is that you pick up skills as you move along -- and make plenty of mistakes along the way, says Webb.
And, unlike a lot of situations, the people retiring now can't look to past generations as a model because the game has changed, he adds.

 

Start planning early

It doesn't take a rocket scientist to calculate that saving for 50 years will yield more than saving for 20 years.
But what 20-year-old wants to forgo critical funds for a day that's so far off into the future?
That's why a Stanford University study has gotten so much attention, says Ruth Hayden, financial consultant and author of "Start Where You Are: Retirement Planning in a Changing World."
Researchers found out that when they showed young workers digitally aged photos of themselves at retirement age, workers were more willing to put money aside for their future selves.
"It changes their perception," Hayden says. And when it comes to planning for retirement, "that intellectual and emotional ownership is critical."
One big rule for the new retirement: Financial literacy needs to be a lifelong pursuit, says Rix.
Do it right, and money planning will be downright boring, Hayden says. "Plain-vanilla" strategies -- such as regular contributions, slow-and-steady growth and diversification -- are often most effective over the long haul, she says. It's also important to get advice from trusted, neutral advisers when you can afford it, she says.
Two of the biggest mistakes employees make are cashing out the 401(k) after a job change and leaving an employer's matching dollars on the table, says Hayden.

 1 

Money can be accessible

It used to be that when you put away money for retirement, you couldn't touch it until retirement -- except in some very limited circumstances.
That's not always true anymore.
With a Roth IRA, you can withdraw any money you contribute at any time without taxes or penalties, says Ed Slott, CPA and author of "The Retirement Savings Time Bomb ... and How to Defuse It."
The idea that retirement savings is locked up for a far-flung future date is a mental block for a lot of potential savers, says Slott. "That is one of the things that turned me off from (traditional) IRAs years ago," he says. "But now that's not the case with a Roth."
The nice thing about a Roth is those earnings won't be taxed during retirement. The trade-off with a Roth is that you don't get a tax deduction now when you make a contribution.
But continuous access to your money and the ability to grow it tax-free more than make up for forfeiting a one-time tax deduction, says Slott.
"When you make a $5,000 contribution to a Roth IRA, you have immediate access to that money," says Slott. "So if you need it, it's there."

 

You can contribute to an IRA

You contribute to a 401(k) through work. Or you're a stay-at-home spouse with no income.
In either case, you can still probably use an IRA to save for your retirement, says Slott.
Workers already contributing to a 401(k) can most likely still make contributions to an IRA if they want, he says. "A lot of times they think if they're in a company plan, they're not allowed," he says. "But that's not true."
Earn above a set income, though, and you may not get the full tax deduction for your traditional IRA contributions, says Slott. But that income ceiling won't affect most wage-earners, he says. IRS Publication 590 provides details about IRAs.
With a Roth IRA, there is no tax deduction, "but there are some high-income limits for who can contribute," he says.
Not working outside the home? As long as your spouse is earning enough to cover the contribution, you can fund your own spousal IRA in your own name, he says.
With an IRA, you can bank up to $5,500 annually per person, if you're 49 or younger. Fifty or older? You can salt away up to $6,500 this year.

Consider health care

One area many people don't consider in their retirement planning is medical costs.
Often, younger workers assume that Medicare covers everything, but it doesn't.
After the age of 65, the average couple will spend about $260,000 out of pocket on health care, including insurance premiums and nursing home care, according to a 2010 study by the Center for Retirement Research at Boston College.
"The problem is most households don't have $260,000 in the first place," says Webb. "What it means is that in practical terms, a lot of households face the risk of impoverishment or ending up on Medicaid."

Prepare to work longer

Retirement-aged workers are staying employed longer or rejoining the workforce. For some, it's a financial necessity. For others, it's a chance to pursue interests or careers they put off in their younger years. And for many, it can be a combination of both.
"And maybe the nature of retirement is changing," says Webb. "It's less of a clean break."
Postponing Social Security payments or retirement account withdrawals often means you'll get more when you do tap those sources.
For those retiring over the next few years, delaying collecting Social Security from 62 to 70 can mean a 76 percent increase in benefits, says Webb.
Two factors may force workers to retire earlier than expected: late-in-life job loss and health problems, he says.
Seniors face a greater risk of having to leave the working world because of health, and also of "being prematurely ejected from the workforce," says Webb.

Think beyond the money

When you're planning and saving for your golden years, don't hesitate to think beyond the money.
Throughout your working life, "Keep your eye on the next job, and prepare so that (your) skills are what employers are seeking," says Rix.
It also doesn't hurt to be a little entrepreneurial, says Martin Yate, author of "Knock 'Em Dead: Secrets and Strategies for Success in an Uncertain World."
If you find something that gives you joy, stick with it, he says. Figure that in time, "I will learn how to make a buck," Yate says. "And in my 50s and 60s, I will either have a little business on the side or be prepared to launch one."
And if your needs and interests change or get refined as the decades go by, that's OK, says Yate.
Whatever your entrepreneurial dreams, you'll be using and sharpening many of the same transferrable skills you use in your "day job," he says. "It will help you be successful."

Read more: http://www.bankrate.com/system/util/print.aspx?p=/finance/retirement/new-retirement-1.aspx&s=br3&c=retirement&t=story&e=1&v=1#ixzz327S2ffsR
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6 tips for financial planning in your 40s

If you're in your 40s, you could be considered either a "late baby boomer" or member of "Generation X." Either way, you're at a time in your life when you're putting youth aside and should be doing some financial planning for your future and your family's future.
A dilemma faced by people in their 40s is that they typically need to be saving for college tuition for their kids and putting money into a retirement account while simultaneously buying a house or saving for a down payment. Financial experts can help you sort out where your savings should be going in your 40s.
"Not having a financial plan is actually just having a really bad plan," says Alexa von Tobel, founder and CEO of LearnVest.com in New York. "Every financial plan is specific to the individual, but you should look at your income and set priorities for paying off debt and saving for different needs."
These financial planning tips are meant to help 40-somethings find balance in their hectic lives of spending and debt.

Build up your cash reserves

Roy Laux, president of Synergy Financial Services in McKeesport, Pa., says the first step in any financial planning is to establish an emergency fund.
"You should have three to six months of your normal income in an account that's safe and liquid," Laux says. "You should also have in that account savings for planned expenses. For instance, if you know you need to replace your furnace in a few years, you should be setting aside money for that in your savings account."
Ronya Corey, a financial adviser with Merrill Lynch Wealth Management in Washington, D.C., says that two-income households may be safe enough with three months of expenses saved, while a single person might need six months' of reserves.
"There's no right or wrong answer about how much cash to have, but you need to be prepared in case your roof needs replacing or if you lose your job," Corey says.

Reduce your debt

If you have credit card debt, student loan debt or medical bills, your next priority should be to reduce and eventually eliminate that debt so that your income can be channeled into saving and investing for the future.
"If you have credit card debt, you need to work on paying that down as quickly as you can," Corey says. "If you have student loan debt, then you should first look to see if it's tax deductible based on your tax bracket. If not, then you should pay that off as soon as possible, too."
In addition to financial planning, Corey says you should check the interest rates on your credit cards and student loans to see if you can find lower rates.
"If you have a lot of debt, you should be using all available funds to pay it off," Corey says. "If you have a little bit of debt and you have, for example, $2,000 per month for savings, you should use one-third to pay down your debt, and then use the rest for retirement savings."

Max out your employee benefits

"In your 40s, you should at least be saving as much in your 401(k) as your employer matches," Laux says. "Even if you weren't making any profit on that investment, your money doubles just because of the employer match."
Corey says since every employer has a different retirement plan, you should find out how much you can contribute, and maximize your contributions up to that limit.
"Find out how your pretax contribution will impact your cash flow because you may be able to contribute more than you think," Corey says.
People in their 40s can contribute up to $17,500 in a tax-deferred 401(k).
"Hopefully, the employer-sponsored retirement plan has someone who can explain the investment options within the plan," Laux says. "In particular, people need to understand why it may be better to be a little more aggressive with their investments at 42 than at 62."

Make your own retirement plans

In addition to saving for retirement at work, Merrill Lynch's Corey recommends making the maximum allowable contributions to a traditional individual retirement account or a Roth IRA, depending on your income.
"The amount you can contribute to a Roth or a traditional IRA went up to $5,500 in 2013 for people in their 40s," Corey says. "The difference between them is that with a Roth IRA, you pay taxes now on your contributions, but you avoid a potentially higher tax later. If you think tax rates are going up, like I do, then a Roth IRA may make more sense."
Traditional IRA contributions are not limited by income, but Roth IRAs are only available to married couples with an adjusted gross income of less than $188,000 and single filers with an adjusted gross income of less than $127,000 in 2013.
"At 40, retirement seems very far away, but it is so important to contribute the maximum you can to retirement savings," says Corey. "If you'll be living on $80,000 per year when you're retired, you'll need $2 million in assets. I wouldn't include Social Security benefits in your planning if you're in your 40s, either because it may not be available or it will be means-tested."

Save for college tuition

If you're in your 40s and have kids, you may have already started saving for their college tuition, depending on their age. The best advice from financial advisers is to start saving as early as possible after your kids are born, even if you can only save a small amount. Hopefully, you can increase the amount you save for college as your income rises.
You can begin a 529 college savings plan to reduce the amount you or your kids may have to borrow to attend college. Many state universities also offer a prepaid tuition plan that allows you to lock in tuition at current rates.
Laux says that families need to have a rational conversation about ways to minimize college expenses, such as choosing a state school over a private college, doing military service or spending the first two years at a community college followed by two years at a four-year university.
"One of the best things to do is to start saving as early as possible for college," Laux says. "If you're in your 40s and your kids are near college age and you haven't saved much for retirement, it's not necessarily wise or appropriate to pay for all of their college expenses."
Laux says one option is to have your kids pay some of their own costs by working during their college years.

Insure your family

"It's important for people in their 40s to do an insurance-needs analysis," Corey says. "Often, people in this age group need a lot of life insurance because they have young kids and day care costs that could be higher if one spouse passed away. It's hard for a lot of people to have saved enough to take care of their family without life insurance if someone passes away."
Corey says term life insurance, especially for a healthy person in his or her 40s, is relatively inexpensive.
"Most people think they are appropriately covered with their insurance policies, but they find out after a disaster that they're not," von Tobel says. "You should check your health insurance, your home insurance, your auto insurance and your life insurance policies to make sure you have the right coverage. An umbrella insurance policy that adds a layer of protection over your auto and home insurance is also a good idea, particularly if you have assets over $1 million."
Laux says 40-somethings also should check on their disability insurance to be sure they have coverage and to estimate whether they need additional insurance. Most companies provide only up to 60 percent of your income if you are disabled, he says.

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Skip college, forfeit $800,000: Fed study

Monday, 5 May 2014 | 1:30 PM ET

Jupiter Iamges | Getty Images

 

Over a lifetime, the average U.S. college graduate will earn at least $800,000 more than the average high school graduate, a study published Monday by the Federal Reserve Bank of San Francisco shows.
That's after accounting for the high cost of college tuition and the four years of wages lost during the time it takes to complete a typical undergraduate degree, the researchers found.
"Although there are stories of people who skipped college and achieved financial success, for most Americans the path to higher future earnings involves a four-year college degree," wrote Mary Daly, the San Francisco Fed's associate director of research, and Leila Bengali, a research associate, in the latest Economic Letter from the regional Fed bank.

Paying for college

Students and parents are looking beyond loans and scholarships to pay for college.

A college student who pays $21,200 in yearly tuition will recoup that investment by age 38, the researchers found. About 90 percent of students at public colleges, and 20 percent of students at private colleges, pay less than that amount, they found. By retirement, that student will have earned $831,000 more than a peer who never went to college.

For those students who pay the astronomical tuitions levied by top private U.S. colleges, however, the benefits may be smaller, the study suggested.
"Although some colleges cost more, there is no definitive evidence that they produce far superior results for all students," they wrote, adding "... redoubling the efforts to make college more accessible would be time and money well spent."

The other student debt crisis

Kelley Holland | @KKelleyHolland

Wednesday, 30 Apr 2014 | 8:00 AM ET

CNBC.com

What's really behind the student debt crisis 

 

Monday, 28 Apr 2014 | 4:00 PM ET

College students are struggling with debt, but graduate student debt is rising at least as rapidly. CNBC's Kelley Holland explains why, and what students can do.

When Nicole Armbrust decided to earn a master's degree in social work, she wasn't particularly worried about the cost.
\
"I had always heard from faculty, staff, students that if you wanted to go to grad school, there's so much funding available that you wouldn't have to take out as many loans as undergrad," she recalled.
Wrong. The aid was not available, so Armbrust wound up taking out both a federal Stafford loan and a $30,000 private loan. She earned her degree, but salaries in her field are relatively low. So Armbrust has struggled to keep up with loan payments—not always successfully—even though she has one full-time job and two part-time ones. Her private lender offers no income-based repayment options, she said.
"I really feel like I will die, despite how hard I work, with my loans," she said.
 

Student debt is straining millions of students' finances, and it is a hot-button topic on college campuses across the country. But if you look at who is really borrowing heavily, it's the graduate students.
Graduate students made up less than 18 percent of all the students receiving federal loans in the academic year 2012-2013, but they received about 40 percent of the federal money, according to an analysis of Department of Education data. And a study released in March by the New America Foundation found that for the roughly 64 percent of graduate students who take out loans, the median debt for their undergraduate and graduate education was over $57,000 in 2012, up from just over $40,000 in 2004.

"The people who are borrowing are borrowing everything," said Jason Delisle, director of the federal education budget project at the New America Foundation and the author of the recent study. "If you're going to borrow for graduate school, it's generally not people who are borrowing just to fill in the gaps."
The growth in graduate student borrowing has many roots. First, overall graduate student debt has increased as graduate school enrollment has risen. Between 2002 and 2012, applications to graduate school grew at an annual average rate of 4.5 percent, according to the Council of Graduate Schools. The growth was 3.8 percent at public universities and colleges, and 6.1 percent at private, nonprofit ones.

Tuition has been rising as well, though it varies widely depending on what a student is studying. Average tuition and fees at several top-tier business schools were close to $59,000 for the 2012-2013 school year, according to a U.S. News & World Report survey, up more than $6,000 from 2010.
Debra Stewart, president of the Council of Graduate Schools, said that on average, graduate school tuition increased 14 percent from 2004 to 2012, but that was far less than the 25 percent increase in undergraduate tuition over the same period.

Still, even a 14 percent increase over eight years can bite—especially when there is less aid available with tuition. Consider, for example, what is happening with masters degree programs in education.
Both in education and in areas such as social work and public health, students often come from public sector jobs, and many of those public sector employers provided tuition assistance in the past. But government budget cuts have slashed tuition assistance programs, as Armbrust found, so borrowing by students in these fields has skyrocketed. Stewart said borrowing increased 38 percent from 2004 to 2012 for students seeking a master's in education.
The good news is that the federal government, far and away the biggest provider of graduate student loans, offers various kinds of help with graduate student debt. For example, students who graduate and have low initial salaries can qualify for income-based repayment plans. If their income never rises above the federal ceiling, they can stay in the program for 25 years, at which point their loan will be forgiven—though they may wind up paying more total interest over that time. (If they start earning more, they can pay off their loans earlier.)

Students who graduate and go into public service have other options. For example, if they make 120 complete and timely income-based monthly payments, they may have their federal loan balances forgiven after 10 years.

Generations of student loan debt

 

CNBC's Eamon Javers reports student loan debt is building, becoming a lifetime and in some cases a generational burden.

Some critics say those programs are actually contributing to the rise in graduate student debt. Partly that's because people making income-based payments may take longer to pay off their loan, and wind up paying more in interest. But mainly, these critics say, it's because the federal loan assistance programs create the wrong incentives for students.

"Essentially anybody can go to graduate school, no money down," said Delisle. Because the federal government offers basically unlimited borrowing for graduate school, even for related living expenses, students can take on large amounts of debt—even for degrees that may never lead to salaries that will make loan repayment easily manageable.

But others say the repayment programs are a useful tool for students with low starting salaries to get on their feet. Charles Pruett, assistant dean for financial aid at Georgetown University Law Center, says students who graduate from Georgetown may land clerkships that are prestigious but low paying. Income based loan payments let them have the experience, and they can then repay their loans more quickly if they move into more lucrative work.

Pruett argues that much of the increase in graduate student debt may be a product of the financial crisis and the recession. "People lost their jobs and went to graduate school," he said. "They didn't have money, and it's one of the few times in your life that you are able to borrow money to live."
Debra Mollen, now an associate professor at Texas Woman's University, doesn't regret borrowing to pay for her master's degree in counseling psychology. She took out roughly $20,000 in loans to pay for her master's, and received full funding from her university for her doctorate. Now 42, she says she finished paying off her loans a few years ago. "My professional life is very fulfilling and I'm pleased with the way my career has been going," she said.

Certainly, data on earnings make graduate school look appealing. Unemployment rates decrease with every level of schooling, according to Bureau of Labor Statistics data, and median weekly earnings for those with master's degrees, professional degrees, or doctorates are more than double those of high school graduates.
Still, while borrowing may be the move that makes more education possible, it almost never comes without a cost. And right now, graduate students are learning the hard way how high those costs can be.

—By Kelley Holland, Special to CNBC.

4 steps to protect a windfall

By Marcia Passos Duffy • Bankrate.com

It may seem like a problem you'd love to have: Deciding what to do with a sudden inheritance from a long lost relative or a big win in the lottery.

But, as the sad tales of some lottery winners clearly demonstrate, sudden wealth could quickly spiral into a living nightmare -- with the loss of not only wealth, but also family, friends and even health.
If you're lucky enough to receive a windfall, understanding the psychology of sudden wealth can help you take the right steps to protect your money and lifestyle.
"People think windfalls are about money. But it's really all about change and transition ... and people need time to adjust," says Susan Bradley, a CFP who is the founder of the Sudden Money Institute in Palm Beach Gardens, Fla., and author of "Sudden Money: Managing a Financial Windfall."

Handling a windfall

1. Money moratorium.
2. Emotional inventory.
3. Set aside play money.
4. Review after one year.

Money shock isn't necessarily limited to those who get millions suddenly deposited into their bank account.
In fact, unexpectedly getting as little as three months' worth of salary in one lump sum can set off a chain reaction of panic, guilt and fear for some, according to psychologist Dennis Pearne, co-author of "The Challenges of Wealth" and a wealth counselor and consultant based in Framingham, Mass.
"A person making $60,000 a year ... who suddenly has $15,000 plopped in their lap" can go into money shock, Pearne says.
Following are four steps that can help you adjust to a new financial reality after a windfall.

Step 1: Money moratorium

The shock of a sudden windfall can set off a litany of irrational behaviors, such as giving all the money away, becoming a recluse, spending the money lavishly, and hiding or hoarding the money. Other hallmarks of money shock include engaging in self-destructive and expensive activities such as drinking, using drugs, gambling and sex addiction, says Pearne.
Bradley says such problems stem from the fact that most people don't understand the limits of their new wealth, especially if the windfall is relatively large.
"(The money) can seem infinite ... people often get an 'I'm invincible, anything is possible' feeling," she says.
These powerful emotions may create trouble for those with new wealth.
To counteract these emotions, it's important to allow time to adjust to the new wealth circumstances that follow a windfall. Pearne and Bradley recommend that people who receive a windfall do nothing with their money for at least a few months, if not an entire year.
That means saying "no" to gifts for family or friends, new investments, lavish cars or house purchases, and trips around the world. It's not even wise to retire.
"Park your money someplace safe where it won't depreciate and take a money holiday," Pearne says. He recommends CDs as one possible home for the new cash.
Bradley says the money moratorium acts as a timeout that allows you to come to grips with your new financial situation, set the stage for better decision-making and get your emotions under control.
"Emotionally, a windfall results in a stress reaction," Bradley says. "When people are in that state, they are using their reptilian brain and are prone to react rather than respond."
During the money moratorium, there is a lot of work that needs to be done. While the money is safely parked in CDs for six months to a year, start to assemble a team of advisers you trust, including a fee-based financial planner, an estate attorney, a money manager who has experience with high net worth individuals and an accountant, Bradley says.
"This is a time to discover, organize and explore," Bradley says.

Step 2: Emotional inventory

Sudden wealth can lead to what psychologist Pearne calls "identity dissolution." All the parameters set up in life that define identity are suddenly gone.
After an especially large windfall, traditional work may become an option rather than a necessity; all the years of school training to get to a skill level are no longer necessary for survival.

Read more: http://www.bankrate.com/finance/personal-finance/4-steps-to-profit-from-a-windfall-1.aspx#ixzz30nLTLwoj
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