College classes are about to resume: the time of year when parents tearfully wave goodbye to their sons, daughters and dollars.
A lot of money is being spent to clothe and prepare students from kindergarten through college. For retailers, the back-to-school shopping season ranks second, behind Christmas.
In this week's podcast, Mark Hamrick, Bankrate's Washington bureau chief, interviews:
- The National Retail Federation's Kathy Grannis, who describes the importance to retailers of the July through Labor Day shopping season.
- College planning expert Gary Carpenter, who explains when parents should begin saving for college.
- And Sheyna Steiner, Bankrate's senior investing analyst, analyzes how individual investors flock to actively managed mutual funds, often to their detriment.
'Back to School': Shopping and college planning advice
Our experts can help you get top grades on shopping and college financial planning. Sheyna Steiner tutors on mutual funds.
LISTEN TO AUDIO
Mark Hamrick: From Bankrate.com, this is "Your Money this Week." I am Mark Hamrick reporting from Washington. With summer winding down, back-to-school season is upon us. That means parents and children are shopping for clothing, electronics and other supplies. For retailers, it is second only to the holiday shopping season, in terms of both sales and traffic. The National Retail Federation's Kathy Grannis gives us some timely savings tips. And there's the college crowd: If you are the parent of a toddler, a high school student or someone who's already on a college campus, it's never too early to start saving and planning. CPA Gary Carpenter, with the National College Advocacy Group, tells us about huge debts many families are taking on and how to prepare for tuition sticker shock. And Bankrate's, Sheyna Steiner takes a look at mutual fund managers and who's beating the market when it comes to returns. Sharpen your pencils and shine your shoes because we have all that and more on "Your Money this Week."
In our first segment, tis the season to shop and head back to school. You might be surprised to know how important this time of year is to retailers and also the consumers have scaled back their buying plans for the season. Kathy Grannis is a spokeswoman for the National Retail Federation, the industries' leading trade group, and I asked her how the back-to-school season really ranks.
Kathy Grannis: The back-to-school selling season, which would be the full months of July and August and even through Labor Day, is second only to Christmas in terms of traffic and sales that they see throughout the year so; it's an extremely important time of year for retailers.
Mark Hamrick: Okay, so obviously we know, in many ways, the great recession is still with us in a sense that we're still digging out of some of the things that happened during that time. What's your sense about where we are currently with consumers and their ability to spend and home prices are on the rebound, the job market that's still not fabulous, how are the consumers fairing?
Kathy Grannis: The good news is that, of those we've surveyed the last few years, when we ask about the impact of the economy, that impact has decreased, so we are seeing consumers return to what could be called normal, if you will. But at the same time, we do know that consumer sentiment is extremely volatile right now. Consumers are spending one month and then not spending the next and as such, the sentiment that exists out there is up and down as well. We are seeing improvements in the housing market, as we've actually seen for quite some time. So that does keep consumer confidence up. Stock market trends and other indicators are pointing towards a more comfortable consumer. With that said, we continue to see 7 percent and upwards of 7 percent unemployment and new reports are even saying that income growth is still very slow and those are the two main factors in consumer spending when it comes to the health of the consumer. Income growth and job growth are really two of the key ingredients for sustained consumer spending and that's really what's hitting consumers hardest right now.
Mark Hamrick: I know you surveyed people to find out about their back-to-school spending intentions and you've found that, I guess for both back to school in general as well as for college students, that their intentions were down a little bit, right?
Kathy Grannis: The average family spending on both school and college will decrease their spending this year. Families with children in grades K-12 will spend about 8 percent less this year, which is an average of $634. And those with college students will spend almost 8 percent less as well to about $807. Those decreases aren't significant. It does show that there are plenty of families out there looking to cut corners where they can.
Mark Hamrick: Being an "old geezer," as I am, Kathy, some of us can remember a time when going back to school didn't include needing to buy, perhaps, a scientific calculator or computer or a smartphone. Are electronics one of the key reasons why back-to-school spending seems to be as expensive as it can be these days?
Kathy Grannis: There's no question that when electronics entered the conversation a few years ago that parents' average bill did jump significantly. There wasn't as much of a need for smartphones or tablets even five, six, seven years ago. In these days, I think parents might find peace of mind even, knowing that with the upcoming school year, if their child has their own device; it keeps them off of theirs. Especially with safety in mind, smartphones have really played a big role in how parents communicate with their children. As such, I think electronics in general are just becoming more synonymous with back to school than ever before.
Mark Hamrick: Yeah, absolutely. So what do you think this means about the outlook for the holiday shopping season if people are really watching their pennies, so to speak?
Kathy Grannis: It's hard to specifically compare back-to-school sales and Christmas sales because of the fact that back to school is very needs-driven. Children grow and pencils break, that means Mom and Dad have no choice but to buy new items. You know, if your son doesn't fit in his sneakers anymore, well that's an investment they have to make. But come Christmas time, that same family can choose to do a secret Santa or can choose various ways to cut back on gift budgets. And that's the main difference in back to school and Christmas and that's why we try to make it very clear that a soft back to school or a good back to school is not indicative of any kind of holiday season.
Mark Hamrick: And yet, when we're talking about the cost of electronics, I mean, these are really great tools for consumers to use as they try to plan their spending for back to school or the holiday season. It's great having access to information, right?
Kathy Grannis: I think one of the main benefits of online shopping, even smartphone and tablet devices, when it comes to these kinds of spending events where it's a lot busier than Mother's Day but maybe not quite as busy as Christmas; parents who do have a large shopping list can compare prices and research products before ever leaving the house. For certain items, it's definitely beneficial to check out the peer reviews and the prices before you head down the street to the store. But, of course, other items, such as apparel and footwear, really do rely on children involvement, if you will. So parents have to weigh what's most important and figure out when to go to the store and simply what to buy online.
Mark Hamrick: Yes, as one who has been a parent trying to remind the child of the purse strings there, that could be a difficult battle indeed. Kathy Grannis, thanks so much for your time.
Kathy Grannis: Wonderful, thank you for having me.
Mark Hamrick: Kathy Grannis, she's senior director for media relations with the National Retail Federation. She spoke with us from her office in Washington, D.C.
Who knew, with the notion of higher education, would become synonomous with constantly rising tuition bills. For current or aspiring college students and their parents, the high cost of education is all too often translating to large debt. And as we hear in our second segment this week, in a worst-case scenario, it can sometimes force an interruption in attending class when can people can no longer qualify for loans. Recently, Congress approved legislation intended to give some relief, legislation avoids the doubling of interest rates on federal loans involving more than 7 million students. Our guest: CPA Gary Carpenter, executive director of the National College Advocacy Group. I asked Gary for his reaction to this move by the House and Senate in Washington.
Gary Carpenter: This probably should have been done years ago. I'm a little disappointed that it's being done now, especially when interest rates are at historic lows. They've now moved the configuration of the interest rate from a fixed rate to a variable rate. It's sort of a hybrid and what I mean by that is, each year they're going to establish what the interest rate's going to be for loans dispersed within that year and it's going to be tied to the 10-year Treasury note, which will probably go up in the future. And that loan will have the interest rate that it is originally dispersed at. Now, they do have caps on them but I think … we were talking a lot recently about a 6.8 percent rate for an unsubsidized Stafford loan. I think in five years, under this present program that they have, people will look back and say, "Boy, I wish we had those 6.8 percent fixed rates again." So again, it's … yeah, it's a good thing, but it should've been done a long time ago and I'm afraid it's not going to help out families that much in the future.
Mark Hamrick: Yeah, it's sort of being done under the cover of currently low interest rates, which are, as you acknowledged there, are widely expected to rise down the road. And there is some move within Congress, whether they can find agreement or not to try to come up with a better, longer-term solution. Gary, you're one who works with this kind of an issue on a day-to-day basis with parents and obviously students, is there a real disconnect out there these days between the actual cost of education and families, generally speaking, ability to afford it?
Gary Carpenter: Oh, absolutely, and I think this arises from two areas. One is, families, although they think education's expensive, they've been told it is but once they go and their child starts looking at these colleges and they start to realize the price tag that's associated, even with the public in-state institution right now, they are a little surprised to say the least. Now, that being said, on the other hand, too, many families say, "Well, we want to make sure our child has a good start in life. Yeah, we're going to have to maybe make some sacrifices for this, but we're going to go ahead and do it anyway." And I think they sort of go in with blinders on, and what I mean by that is, they might get through the first year of college expenses and then all of a sudden hit the second and the third year and say, "My god, this is mounting tremendously, the debt involved in it." And unfortunately, there are some families, I'm sure, that've gotten into the third year and because they've accumulated so much debt, they can't borrow anymore. And what I mean by that is, lenders aren't going to lend to them. So you have a situation where you have a student that's in school, may be forced to drop out, has this tremendous debt and now they have no degree. So it's a big disconnect between families and the cost of college.
Mark Hamrick: So obviously, there are people at all ends of the spectrum here. There are those that have either very young children and expect that they'll go to college someday and there are those that are in the middle of the funding hurricane that you just talked about. What about those who have essentially the lifetime of their children yet to plan, a lifetime until they go to college, what's the most important thing they should do right now?
Gary Carpenter: Start right now, today. I mean, when that child comes home from the hospital, the next thing you want to do is start saving for college and that sounds crazy, but at the present inflation rate of college, which in a private school right now is in an area of $200,000-$250,000 for four years of school. You look out 18 years from now; you are going to be pushing $400,000-$425,000 for four years of a private institution. So you can never start too early. In fact, I've run into some families, believe it or not, that have opened 529 plans, even though they have no children yet and one of the spouses will be the account owner, the other spouse will be the beneficiary and then when a child does come around, they change the beneficiary to the child. And so they're even getting a head start there on saving for college costs. That is a rare situation but I have seen it happen.
Mark Hamrick: So the 529, probably the most popular vehicle to save; let's say someone has a child who is either within a year or two of going to college or indeed heading right off to college; are they in a situation where it's essentially too late? Or is that the time you really want to look at maximizing the financial aid that is principally being made available by the school?
Gary Carpenter: Well, really, you're late in the game. You want to really start looking at this as if you're going to qualify for financial aid. You want to start looking in the freshman, sophomore year of high school and even earlier, to start to plan and organize your finances to identify if you're going to qualify for financial aid and if you are, then you want to make sure that you do certain things. If you're not going to qualify for financial aid, then you're going to have a whole list of other things that you can do. So planning now as the summer, between the junior and senior year, you're late to the game. Can you do some things? Yes, but you're not going to have a lot of success if you haven't planned earlier.
Mark Hamrick: I've heard at least one expert recently talk about the desire to, let's say, bargain between the parents and the educational institution. How many schools are willing to do that?
Gary Carpenter: Well, I think it really comes down to the school and what the demand is for that school. If you have a Harvard, OK, which you have thousands of students trying to get into and it's just a select number of seats available for the freshman class, there's not going to be any bargaining there. But if you have a school that has a number of students that have to fill the seats for the freshman class and there's not a lot of applicants there, you may have the ability to go back and talk to the college. And ask for some additional help, which could be in the form of what we call tuition discounts. So, again, never say never; don't be afraid to ask. The worst they can do is say "no." If you don't ask for anything, you're not going to get anything.
Mark Hamrick: Gary Carpenter, beyond that, is there one single point of information you'd like to leave people with, with regard to this entire conversation?
Gary Carpenter: Yes, I think the most important thing is to keep an eye on the college debt. We've got a tremendous problem now with students coming out of school with large debt, either or unemployed or unemployed. And having tremendous problems trying to manage this debt and this debt cannot be discharged to bankruptcy. It's going to be with you forever. So I think families, really, as they go into this process where they're in the middle of college now or they're starting to look at college, you really want to look at, "How much can I afford to borrow?" If (you) can't afford the school, realize it right away and look for a school that you can afford but be very, very careful about the accumulation of student debt.
Mark Hamrick: Well, it's an important issue, it's a serious problem, and we really appreciate your great advice. Gary Carpenter, thanks so much.
Gary Carpenter: Thank you. Have a good day now.
Mark Hamrick: Gary Carpenter is executive director of the National College Advocacy Group and runs a firm in Syracuse, N.Y., named College Planning Services. If you want more information on Gary Carpenter's group, you can check out their website NCAGOnline.org. Also at Bankrate.com, we have a variety of free online calculators helping you to see what it will take to save for a college education, as well as for student budgeting and even calculating student debt. That's at our site, Bankrate.com, and just click on the financial planning tab.
Next up, we head to class to learn a bit about the best-performing mutual funds. For that, we turn to senior investing reporter and analyst, Sheyna Steiner.
Sheyna Steiner: Last year, the stock market brought mostly glorious gains to investors. All kinds of benchmark indexes wrapped up double-digit returns and as a result, indexed funds reaped plenty of benefits but their returns were largely unmatched by actively managed funds. Indexed funds passively follow an index. Actively managed funds attempt to beat the returns the broad market serves up by seeking out the mix of companies they think will do better than the benchmark. The problem is, active management only succeeds part of the time. Only one asset class consistently beats its benchmark, that's international small cap mutual funds, according to (Standard & Poor's). That's where investors can get the most benefit from active management. Despite that, many investors continue to buy actively managed mutual funds representing all kinds of asset classes, completely ignoring the fact that on average more than two-thirds of domestic small, mid and large-cap funds do worse than their benchmark, according to S&P. Once you factor fees into the equation, the performance of actively managed funds looks even worse. A recent analysis by the firm's style of research pitted hundreds of global stock funds against the MSCI World Index, a benchmark index made up of companies from 24 countries. Before fees, a bit more than half of the funds did better than the benchmark. After subtracting fees from the returns, less than one-third of the funds beat the index in 2012. The deck is stacked against individual investors picking the right actively managed fund at the right time, but most fund investors continue to place bets on active management. For "Your Money this Week," I'm Sheyna Steiner.
Mark Hamrick: Finally, our look at this week in business history. On Aug. 13, 1965, it was a musical shot heard around the world, involving the British invasion by the Beatles. That's when the fab four played to some 60,000 fans in New York's Shea Stadium, which many regard as the beginning of the era of stadium rock in the U.S. This summer, any number of acts saw $5 million or more in gross ticket sales at just one stadium concert alone. Such concerts have become a summer staple all these years since the Beatles hit our shores. For that Beatles concert, there was a record gross at the time of more than $300,000.
You've been listening to "Your Money this Week." Our thanks to guests, Kathy Grannis and Gary Carpenter, and Bankrate's own Sheyna Steiner for helping us to do our homework this week. If you enjoyed the podcast, please rate and subscribe to the program. We're hoping you could help us to get the word out. For more on this and other personal finance issues visit Bankrate.com and you can follow us on Twitter @Bankrate. Our editor-in-chief is Julie Bandy; managing editor, Katie Doyle, my editor is Holden Lewis. So thanks for producer Lucas Wysocki for his work in the studio. I'm Mark Hamrick, from all of us here at Bankrate, here's hoping you have a great week.