Paying for Future Tuition
The Texas Tomorrow Fund permits parents to buy a credit at today's price taking the average of Texas State Universities, and save it for the future use of their child. On average Texas Universities increase tuition about 7% a year, therefore each credit increases yearly its value by that same amount as well. The recipient has up to 10 years after entering college to use the credits. If the credits are not used, it is possible to cancel, but with a 164 dollar penalty fee, plus 10% of gains would be deducted for taxes. My parents bought me 64 credits in 1995 paying a total of 4,876 dollars. Last year I was a junior and accessed 32 of those credits, which equaled 3,400 dollars.
This year I questioned doing the same, as a senior, for a couple of reasons. If I were to access the 32 remaining credits in my Texas Tomorrow Fund, Boston University would receive about 3,638 dollars, which would be today's Texas’ going rate for 32 credits. This year, my tuition is completely covered by grants and loans, and I do not live in university housing, rather I pay rent directly out of my pocket. By using my remaining credits now, I run the risk of Boston University’s Financial Aid doing one of three things. The best option would be for them to accredit it to my account so I could withdraw it and have it as cash today. The second option would be for them to lower my current loans, even though I am not being charged interest yet. And the third and worse option would be for that money to be used to lower my grants.
I then computed what would happen if I leave the credits in the fund and assume Texas’ tuition continues to increase, but at the more conservative rate of 5%. The expiration of the fund would be in 2009 (since I started college in 1999), which is 7 years from now. 3,638(1+.05)(to the seventh power) = $5,119 minus the 164 penalty fee = $4,955 minus the 10% of gains = 4,955 - [(4,955 - 2,438) 0.1] = 4,955 - 251.7 = $4,703.29
In conclusion, the best choice for me is to leave the credits in the fund because it is a sure way of them increasing in value rather risking my financial aid award being changed. Plus, if I decide to use the cancellation of the funds toward the repayment of my student loans, I would definitely be able to pay back more later. Exactly when would be best to cancel depends on the interest of the loans and the increase of Texas' tuition.
Interest Rate and Savings
Interest rates are often used as an indicator of our nation's economy. In the late 1970's and up until the mid- 1980's, interest rates were rather high. This could be attributed to the high inflation that the country was experiencing. This could have been from increased government debt and also a result of the oil shock on the country. Real prices of goods were increasing rapidly. In any regard, the high interest rates caused people to save their money rather than spend it. For my parents however, it was a different story. They had decided to buy a house, and to do this they needed a mortgage. The current rate at the time, as I have been told, was around 23%! This is quite a high percentage, considering it is has been less than 10% for the past five years. However, they had no choice because it was time to start a family. Since then , they have refinanced their mortgage many times and are paying today around 6.5%. The point is, when interest rates are high, economic assumptions tell us that saving increases. However, this is not always the case, so and our assumptions do not always stick. Sometimes people are forced to invest during times of economic turmoil (on a better note, I was also told that my grandparents got some pretty good deals on certificates of deposit from their local bank during this time).
Interest Rate and Buying
I had just finished a long shift at work one day and decided to wait for my mom to give me a ride home. When I got outside, I scanned the parking lot for the familiar family sedan. It wasn’t in sight, so I just figured my mom was on her way home. As more and more time passed, I began to loose patience and decided to call home to see if anyone had left to come get me yet. When my mom answered the phone, I became very confused. She told me, however, that my sister was going to come get me instead, and that she should be there any minute. All of a sudden, a brand new sports car pulled into the parking lot. The horn was beeping and loud music was coming out all the windows. As the car approached me, I soon realized it was my sister behind the wheel. I couldn’t believe it! My sister had gotten a new car! As I stepped inside, I immediately asked her how she was able to make such a big purchase, especially during a time when the country is in such an unsteady economic state. This was a time when consumers cut back on their spending….or so I thought. “I was able to buy the car because of the interest rate!” she said, turning down the radio. “Interest rate?” I questioned. “But I thought the interest payments were extra amounts of money paid on the principal purchase.” “They are,” she said. “But now is the time when they are so low. Because consumer purchasing has greatly decreased, many sellers offer incentives to customers. The low interest rate is what allowed me to get this new car!” It all seemed so simple. Because of such low interest rates, some people are able to benefit with smaller payments. Now, instead of associating low interest rates with low payback on investments, I realize they also benefit the other side of the market. This experience opened my mind to the importance of interest rates, no matter how high or low they may be.
Interest Rates in Japan
In the commercial banks in Japan, the interest rates are as low as 0.1%(even less) owning to the sluggish economy that has been going on for more than a decade. Japan enjoyed a high economic boom until the early 1990s. According to my mother, the highest interest rate she can remember is when it reached around 7% in the late 1980s, when the bubble was coming to its highest. Now, the interest rates are so low that many people, including my parents, find it meaningless to put their money in the banks. Recently, a lot of people are engaging in "gaika-yokin" which means "deposit in foreign currency." For the most part, this foreign currency indicates U.S. dollar. Because you can only earn insignificant amount in returns, Japanese people are beginning to deposit their money in the forms of U.S. dollar because the interest rates on the U.S. dollar are much higher than that of when you deposit in Japanese yen. For example, the interest rate on "gaika-yokin" is as high as 3 or 4% while Japanese commercial banks offer only 0.1% on the deposits. Instead of putting all of their money in banks, my parents are shifting their money to "gaika-yokin" and buying stocks, government bonds, because the returns are much greater than otherwise.