Personal Finance

Why parents will pay $500,000 for Ivy League admissions consulting

Published

2 months ago

October 18, 2024

Business Finance News

Ivy League architecture at Princeton University.

Loop Images | Getty Images

At the nation’s top schools, including many in the Ivy League, acceptance rates hover near all-time lows.

“College admissions only ever gets more competitive and there’s a lot of stress from families about the stakes and how to get in,” said Thomas Howell, the founder of Forum Education, a New-York based tutoring company.

For some families, getting their child into a top school is an investment, and to that end there is almost no limit to what they will spend on tutors, college counselors and test prep.

‘Top 20% or bust’

Meanwhile, as the sticker price at some private colleges nears six figures a year, some students have opted for less expensive public schools or alternatives to a degree altogether. For those willing to pay for a four-year, private college, it should be worthwhile, the sentiment often goes.

“The value proposition of higher education is splitting,” Howell said, “it’s either a top school or a real value.”

For this crop of college applicants, it’s “top 20% or bust,” he added.

As a result, universities in the so-called “Ivy Plus” are experiencing a record-breaking increase in applications, according to a report by the Common Application.

The “Ivy Plus” is a group that generally includes the eight private colleges that comprise the Ivy League — Brown, Columbia, Cornell, Dartmouth, Harvard, University of Pennsylvania, Princeton and Yale — plus the University of Chicago, Duke, Massachusetts Institute of Technology and Stanford.

To get into this elite group of schools, many families look for outside help to get a leg up.

“The consensus is it’s only worth going to college if it’s a life changing college,” said Hafeez Lakhani, founder and president of Lakhani Coaching in New York.

“What hasn’t changed is people with enormous resources willing to invest over $100,000, which is about 20% of our clients,” Lakhani said. “This might be the single largest thing they’ve spent on other than a car.”

Lakhani Coaching’s clients spend an average of $58,000 on counseling, but some have spent as much as $800,000 over the course of several years, according to Lakhani.

At that price point, students receive “essentially a ‘SEAL-team’ level tutor through almost every class,” he said. Lakhani was equating the academic support with the highest level of organization and execution that epitomizes the training of a Navy Seal, the special operation force that stands for sea, air and land teams.

Lakhani charges $1,600 an hour for his services, the top rate at his company, and still, families often choose to work with him over the less senior coaches there, some of whom charge about $290 an hour, he said.

Even if he charged more, that dynamic likely would not change, he added.

Parents often say, “it’s worth the investment,” he added. “That word investment comes up over and over again.”

Christopher Rim, founder and CEO of college consulting firm Command Education.

Courtesy: Christopher Rim

At Command Education in New York, counselors meet with students weekly starting in eight or ninth grade. Families are charged $120,000 per year, not including the Standards Admission Test (SAT) or American College Test (ACT) test prep. By graduation, they’ve spent roughly half a million dollars.

Command caps the clientele at 200 students worldwide, mostly on a first-come, first-served basis, although they will turn students away if they don’t think they can deliver the desired outcome, according to Christopher Rim, the founder and CEO.

“At the end of the day, results are most important,” he said.

‘This is not a neighborhood tutor’

Ten years ago, Howell started Forum Education in New York City, but his business ballooned since the pandemic, he said.

“Two things happened after Covid, the normal learning environment disintegrated, there was more time in the day for tutoring — and a greater need for it,” Howell said.

In the face of increased demand, rates are also rising, to the tune of roughly 30% a year, he said.

His tutors now charge up to $1,250 an hour for academic help, which does not include college counseling.

The vast majority of students come from New York City private schools with household incomes over $1,500,000 according to Howell’s account. Last year, these families spent around $38,0000, on average, on tutoring, often in addition to a college consultant.

“This is not a neighborhood tutor picking up a side gig,” Howell said. These academic tutors work full-time in the field and make well into the six-figures, he said, and two tutors on his staff earned more than $1,000,000 last year.

To be sure, the business of college counseling is growing year after year, driven in part by increased concerns about college’s return on investment, which is making these specialists a worthwhile expense, according to IBISWorld, a market research firm. In 2024, total revenue reached $3 billion.

‘An imperfect meritocracy’

Of course, many high schools have tutors and counselors who serve the same purpose at no cost at all.

However, depending on the number of students in a class, it can be difficult to get personalized advice about college planning.

Plus, the number of counselors available to students has been steadily dwindling for years. Currently, the national student-to-counselor ratio is 405 to 1, according to the National Association for College Admission Counseling.

Those that can afford outside help do have an advantage.

Children from families in the top 1% are more than twice as likely to attend an “Ivy Plus” college as those from middle-class families with comparable SAT or ACT scores, according to the National Bureau of Economic Research.

Legacy Admissions debate: Why schools are ending the practice

“Higher education is an imperfect meritocracy,” Lakhani said.

However, the wealthiest students hailing form the country’s top private schools are primarily competing amongst themselves as schools look to build a diversified class.

“When you are applying from an affluent family, the people you are competing against are people in a similar bucket,” Lakhani said.

The irony is most don’t want to admit that they’ve received private help, even if they are fortunate enough to get it.

“Every parent wants to say their child does it on their own,” Rim said.

Is an Ivy League degree worth it?

A study by Harvard University-based non-partisan, non-profit research group Opportunity Insights compared the estimated future income of waitlisted students who ultimately attended Ivy League schools with those who went to public universities instead.

In the end, the group of Harvard University- and Brown University-based economists found that attending an Ivy League college has a “statistically insignificant impact” on earnings.

However, there are other advantages beyond income.

For instance, attending a college in the “Ivy-plus” category rather than a highly selective public institution nearly doubles the chances of attending an elite graduate school and triples the chances of working at a prestigious firm, according to Opportunity Insights.

Leadership positions are disproportionately held by graduates of a few highly selective private colleges, the Opportunity Insights report found.

Further, it increases students’ chances of ultimately reaching the top 1% of the earnings distribution by 60%.

“Highly selective private colleges serve as gateways to the upper echelons of society,” the researchers said.

“Because these colleges currently admit students from high-income families at substantially higher rates than students from lower-income families with comparable academic credentials, they perpetuate privilege,” they added.

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Personal Finance

36% of American consumers took on holiday debt, averaging $1,181

Published

8 minutes ago

December 26, 2024

Business Finance News

Manonallard | E+ | Getty Images

Many Americans are capping off the holidays with new debt balances.

This season, 36% of American consumers took on holiday debt, according to a new survey from LendingTree.

Those who racked up balances this season took on an average of $1,181 in debt, up from $1,028 in 2023. However, that is still down from $1,549 in 2022, LendingTree found.

Less than half — 44% — of the people who took on debt expected to acquire those balances, a sign that this holiday season is still financially challenging for many people, according to Matt Schulz, chief credit analyst at LendingTree.

Higher prices caused by inflation remain an issue for many individuals and families this holiday season, he said.

“Some of it is people just wanting to wrap up what’s been a difficult year by spreading a little joy, and maybe they ended up taking on a little bit of extra debt to do so,” Schulz said.

Those most likely to take on debt this season include parents of young children, with 48%; millennials ages 28 to 43, with 42%; and individuals who earn $30,000 to $49,999, with 39%, according to LendingTree.

Consumers who went into debt over the holidays run the risk of still carrying those balances when next year’s holiday season comes around. Almost half of Americans still have debt from last year’s holidays, WalletHub recently found.

Meanwhile, paying down debt is a top financial resolution for 2025, according to a recent Bankrate survey.

For those who want to get out of debt, it helps to get started as soon as possible, Schulz said.

Successfully knocking off those balances has its own reward in the way of freedom, said Laura Mattia, a certified financial planner and senior vice president at Wealth Enhancement Group in Sarasota, Florida, who works with clients at all levels of wealth.

“People love to be debt free,” Mattia said. “The idea of not owing anybody any money is extremely comforting.”

Negotiate your interest rates

For those who took on holiday debt, 42% said they are paying interest rates of 20% or higher, typically through credit cards or store cards, LendingTree found.

The good news is that it’s possible to get better interest rates — and therefore lower the total amount it takes to pay off your debt — by pursuing either a 0% balance transfer credit card or a debt consolidation loan.

“There’s really no better weapon against credit card debt than a 0% balance transfer credit card,” Schulz said.

Most offers provide either 12 or 15 months without accruing interest on the transferred balance, he said. However, a fee for transferring the balance may apply.

Gen X most likely to max out their credit cards, survey finds

Pick a debt paydown strategy you can stick with

Those people in debt may want to pick from different strategies to tackle their balances.

That includes the avalanche method — which prioritizes high interest rate debts first — or the snowball method – which puts the smallest balances first.

“What really matters more is finding the one that works best for you and that will keep you motivated,” Schulz said.

Mattia said she often advises clients to start with the smallest balances first, so they immediately feel their situation improving.

“What deters people the most is when they feel like they’re not making progress and they give up,” Mattia said.

Try to increase your savings

While paying down debt balances may be the primary goal, it also helps to set aside some cash for emergencies.

That way, when an unexpected expense comes up — or next holiday season rolls around — you may not have to lean quite so much on credit cards, Schulz said.

“One of the best ways to break out of the cycle of debt that so many people find themselves in is to save while you’re paying down your debts,” Schulz said.

Still, it’s important to keep in mind that the best interest rates available on savings are around 5%, while credit cards are charging north of 20% and prioritize accordingly, Mattia said.

Celebrate small wins

In the aftermath of the holidays, give yourself grace if you spent more than you intended, said CFP Jesse Sell, managing principal at Prevail Financial Partners in Stillwater, Minnesota.

“It’s not terribly uncommon to kind of let otherwise good discipline go for a few weeks over the holidays,” Sell said.

As you work to pay down your overall debt, it helps to break it down into smaller goals that you can celebrate along the way, he said.

Once you hit a smaller milestone, celebrate that victory with a small reward.

Admittedly, paying down debt is not really fun, Sell said.

“Try to find ways to take some positives out of it and keep the momentum and focus going,” Sell said.

Personal Finance

The Roth 401(k) is becoming more common

Published

7 hours ago

December 26, 2024

Business Finance News

Filippobacci | E+ | Getty Images

Retirement savers, take note: more employers have added a Roth savings option to their workplace 401(k) plans.

And, due to a legislative change, it’s likely the remaining holdouts will soon offer it, too.

About 93% of 401(k) plans offered a Roth account in 2023, according to an annual poll published in December by the Plan Sponsor Council of America, an employer trade group.

That’s up from 89% in 2022 and 62% a decade ago, according to the survey, which polled more than 700 employers with 401(k) plans of varying size.

How Roth, pretax 401(k) savings differ

Roth refers to how retirement savings are taxed.

A Roth is an after-tax account: Savers pay tax upfront on their 401(k) contributions but, with some exceptions, don’t pay later when they withdraw money.

Roth conversions on the rise: Here's what to know

By contrast, pretax savings have been the traditional route for 401(k) plans. Savers get an upfront tax break, deferring their tax bill on investment earnings and contributions until later, when they make withdrawals.

It seems like many aren’t taking advantage of Roth availability: About 21% of eligible workers made a Roth contribution in 2023, versus 74% who made a pretax contribution, according to PSCA data.

How to choose between Roth or pretax contributions

Choosing which kind of 401(k) contributions to make — pretax or Roth — largely comes down to your current tax bracket and expectations about your future tax rate, according to financial advisors.

You want to choose the one that will keep your tax bill lowest. In short, it’s a tax bet.

This requires some educated guesswork. For example, many financial advisors recommend Roth accounts for those who are early in their careers, a point at which their tax rate is likely to be lower than in the future, when their salary will almost certainly be higher.

“We always recommend [Roth] for someone who’s in a low salary, typically the younger working folks,” said Olga Ismail, head of retirement plans consulting at Provenance Wealth Advisors.

“It’s the lowest tax bracket you’re ever going to be in, so why not take advantage of it now if you can?” she said.

A Roth 401(k) also provides a unique savings opportunity. Roth individual retirement accounts — Roth IRAs, for short — have a lower annual contribution limit than 401(k)s and have income caps on eligibility. A 401(k) has no income caps. So, a Roth 401(k) lets higher earners access a Roth account directly, and allows all savers to contribute more money to a Roth account than they could otherwise.

Financial planners also generally recommend diversifying among pretax and Roth savings. This grants tax flexibility in retirement.

For example, strategically withdrawing money from a Roth account for income may keep some retirees from triggering higher premiums for Medicare Part B and Medicare Part D. Those premiums may increase with income — but Roth withdrawals don’t count toward taxable income.

Also, while many people expect their tax rates to decline in retirement, this isn’t always the case.

Why Roth 401(k) adoption will increase

More savers will likely soon have a Roth 401(k) option available to them if they don’t already.

A 2022 retirement law known as Secure 2.0 will require “catch up” 401(k) contributions to be made to Roth accounts, if the worker’s income exceeds $145,000 (indexed to inflation). That rule takes effect in 2026.

High earners age 50 or older would be required to contribute any additional savings over the annual 401(k) limit to a Roth account, meaning nearly all 401(k) plans would likely need to offer Roth accounts, Ismail said.

401(k) plans opening to more part-time workers

Workers can save up to $23,000 in a 401(k) for 2024. Those age 50 and older can save an extra $7,500 in catch-up contributions.

“Offering Roth as an option has become a best practice the last few years,” and due to the mandate for high earners, “we will continue to see Roth become commonplace,” said Hattie Greenan, PSCA’s research director.

Additionally, Secure 2.0 allows businesses to make an employer 401(k) contribution like a match as Roth savings. About 13% of employers said they would “definitely” add the option, and another 35% said they’re still considering it, according to PSCA data.

Personal Finance

What it would cost to live like the ‘Home Alone’ family today

Published

2 days ago

December 24, 2024

Business Finance News

Home Alone (1990)

20th Century Fox

The classic Christmas movie “Home Alone” tells the improbable tale of a family who leaves their 8-year-old son home when they leave for vacation.

Yet in the years since the 1990 film was released, viewers have focused on another question — how wealthy was the fictitious McCallister family featured in the movie?

The family orders 10 pizzas on the eve of their trip, lives in a house that can sleep 15 people (including extended family) and all fly to Paris for the Christmas holiday.

“They’re well off and in a good place financially,” Cody Garrett, a certified financial planner, owner and financial planner at Measure Twice Financial in Houston, said of the first impression of the McCallisters’ circumstances.

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But the family may not be quite as wealthy as they seem, Garrett said.

To better understand the details of the McCallister family’s financial circumstances, Garrett recently did a deep dive analysis of the family’s finances from “Home Alone” and “Home Alone 2: Lost in New York,” which debuted in late 1992, and hosted a webinar with around 25 financial planners to discuss financial planning opportunities that arise in the movies.

Both movies were shot long before social media made it popular to flaunt personal wealth online. Nevertheless, the lifestyle the McCallister family shows to the world may not necessarily be an indication of their wealth, Garrett said.

“There’s a lot of things that are showing that they spent a lot of money, or at least financed a lavish lifestyle to the public,” Garrett said. “But inside their own home, they’re actually maybe a little scared about money.”

What the McCallister lifestyle would be worth now

The Home Alone Experience created by Disney+, opens in London, offering an immersive experience inspired by the Christmas movie, with set recreations of the McCallister family’s home.

David Parry Media Assignments | PA Wire | AP

What looked lavish more than 30 years ago when the first two movies were shot is now even more luxurious today, thanks in large part to the effects of inflation.

The actual five-bedroom, six-bathroom Winnetka, Illinois, home where the movie was filmed was listed for $5.25 million in the spring. Today, it is still under contract, and a final sale price won’t be known until the deal is finalized, according to Zillow spokesperson Matt Kreamer.

To buy the house at $5.25 million today would cost approximately $34,000 per month, with principal, interest and property taxes, according to Kreamer. That’s with 20% down and a 7% mortgage rate.

To comfortably afford the home, you would need $100,000 per month in income, assuming you’re adhering to an affordability threshold of not spending more than one-third of your income on housing costs, Kreamer said.

“It’s a pretty spectacular house, and certainly one of the more famous movie homes that people can instantly recognize,” Kreamer said.

In 1990 when the first movie debuted, the home would have likely been worth a little less than $1 million, Kreamer estimates, which is still high for that time.

Yet the home may not necessarily point to a high net worth for the McCallister movie family.

“I would not be surprised if they don’t have much equity in their house,” Garrett said, given the couple’s stage of life and circumstances.

In the films, the McCallisters are also driving what at the time were relatively new cars — a 1986 Buick Electra Estate Wagon and a 1990 Buick LaSabre — each of which would be valued at $40,000 in today’s dollars, according to Garrett’s estimates.

While the family is eager to show their wealth — including mother Kate paying in cash for the $122.50 pizza bill while also offering a generous tip — they’re frugal when it comes to the things people don’t see, Garrett said.

How the family talks about money can sometimes point to a scarcity mindset, he said. For example, Kate mentions she doesn’t want to waste the family’s milk before they leave on vacation.

The family’s lifestyle isn’t paid for all on their own. Peter’s brother Rob actually foots the cost of the Paris trip for the family. That airfare would cost around $55,650 today, GoBankingRates recently estimated.

What financial planning lessons are hidden in the movie

Many major details about Kate and Peter McCallister’s finances are not disclosed, including what they do for a living.

Nevertheless, the financial planners who evaluated the family’s circumstances saw some holes that could be addressed with planning.

On the top of their wish list: proper insurance coverage.

Because Kate and Peter McCallister have five children, having enough life and disability insurance should they pass away or become unable to work should be a top priority to ensure their dependents are provided for, according to Garrett.

The movie — which includes many slips and falls at the family’s home as 8-year-old Kevin tries to ward off a pair of robbers — also signals a need for an umbrella insurance policy, in case the McCallisters are found liable for injuries or damages that occur.

Buffett on estate planning: I don't sign a will until my children read it and give suggestions

Kate and Peter — who forget or lose their son Kevin in both of the first two “Home Alone” movies — would also be wise to make proper estate planning arrangements in the event they can no longer provide or care for their children. That includes having wills, powers of attorney, advance directives, beneficiary designations, trusts and proper account titling, all kept up to date.

The couple should name physical and financial guardians who can care for the children. They may also establish a pre-need guardian for the children who can step in if the parents are unable to care for them even for a short period of time, said Aubrey Williams, financial planner at Open Path Financial in Santa Barbara, California.

“If the parents are not there to take care of the kids, there’s the possibility that kids, even if briefly, will become a ward at the state because there’s no one to care for them,” Williams said.