The Interest Rate Dilemma — And How We Can Beat It…
In a few weeks, my oldest son Riley will be heading off to college. I knew this day would come, but it just feels like it was such a short time.
Between high school graduation and college orientation, the whole experience stirs up a whirlwind of bittersweet emotions – part nostalgia, part apprehension, but mostly pride.
That, and the sudden realization that you are about to cough up a lot of money.
I know I’m not the first parent to go through this, nor will I be the last. In fact, parents all across the country are facing a similar situation right now…
Is it too late to make any last-minute deposits to the college savings account? I’m only half-joking. When the account was first opened back in 2003, I was still working as a financial advisor. I lectured my clients daily about the importance of making college funding contributions as early (and often) as possible. You want to allow ample time for compound interest to work its magic.
I knew the math all too well. But college always seemed so far in the distant future – and I’m a professional procrastinator. We did our best, but what can I say, the future snuck up on me. It’s here. And the University of Arkansas will be wanting a check soon. The administrators were kind enough to summarize the expected financial outlay for tuition, textbooks, lodging, and meal plan.
It all comes to one grand total of $37,823. Per Year.
In all honesty, we haven’t set aside nearly enough for that college tuition – a few scraps for a hungry bear. It won’t keep the beast quiet for long. Fortunately, we have reserves elsewhere that can be tapped. Still, I would strongly encourage those of you with young kids not to wait until the cap and gown fitting to start salting money away. Act early and take full advantage of your state’s 529 savings plan (including any tax deductions or other perks).
The Interest Rate Dilemma
Fortunately, the good folks over at Sallie Mae are happy to help cover any funding gaps with low-cost student loans. And thanks to today’s low-rate environment, well-qualified borrowers can access funds as low as 1.13% for a variable loan and 4.25% for a fixed loan.
Choosing the right option can be a real dilemma. Even the most prescient rate forecasters can’t reach a consensus on where borrowing costs will be a year from now – let alone when the class of 2025 graduates. Like an inscrutable poker player, the Fed is tough to read and plays its cards close to the vest.
And that brings me to my bigger point… The twelve men and women appointed to the Federal Open Market Committee (FOMC) wield considerable power. They influence not only the rates you pay for a car or a house (or a student loan), but their very words can set the trading tone for global stock and bond markets, unleashing powerful rallies and equally spectacular crashes.
So when Jerome Powell or any other Fed member speaks (Powell did yesterday, for instance), it pays to listen.
Let’s circle back to the loan dilemma. We’ve had rock-bottom rates for well over a decade and that is unlikely to change over the next couple of years. The Fed wants to remain accommodative. So there is a strong argument for choosing the low variable rate and pressing your luck.
Yet, it takes well over a decade to pay off most student loans. Who knows what things will look like in 2031? The economy is racing, and there is no ceiling once rates start to move higher. There’s some reassurance and peace of mind in being locked in at 4.25% regardless of what the Fed does.
Personally, I’m leaning towards taking the variable loan with no pre-payment penalty. If and when rates climb back above 4.25%, I can always pay off the balance in cash. Either way, it’s a good time to be a borrower in this environment.
Yesterday, I wrote about how the Fed’s decisions have a very real impact on the everyday lives of Americans. Believe me, I don’t write about this stuff just to gin up animosity toward the Fed. They are humans, after all.
Instead, I want readers to understand what they’re up against – and that I’m right there with you. It’s more important to have your head in the game than ever before.
Of course, the calculus is a little different if you’re an investor who needs to earn income. If you’re like most readers of High-Yield Investing, you’re probably not socking away money for a kid’s tuition anymore. Your goal is to find good, sustainable yields that can support you in retirement. Preferably, the higher the better (it’s right there in the name, after all).
I mentioned in my previous piece that there seems to be this notion that all the good high yielders are gone. People seem to be too quick to blame the Fed and abandon their search for quality income payers. I think that’s a mistake…
That’s why I just released a new report about five “bulletproof” income payers who have proven to be so strong, so reliable, and so generous… that they can be counted on, no matter what happens with the economy.
Each of them yields over 5% right now. And each one has provided fantastic long-term returns. I have little doubt that they’ll continue to do so for years to come.