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Rethinking Internet Savings Accounts After the New Money Market Fund Rules

By U.S. News & World Report

New rules for money market funds that will take effect on Oct. 14 will fundamentally change the way money market funds operate. The new rules are intended to prevent runs on money market funds like what was seen in the 2008 financial crisis.

The most important change for retail investors is that prime and municipal money market funds may impose redemption fees or suspend redemptions during times of crisis.

Another change primarily affects only institutional investors. Prime and municipal money market funds that allow institutional investors will be required to maintain a floating net asset value (NAV). This means that you could lose money when you sell if the NAV has fallen from the time you had purchased the fund.

[See: 7 Ways to Avoid Financial Stress Over the Holidays.]

U.S. government and Treasury money market funds are exempt from these new rules. A simple way for investors to avoid these new rules is to move their money into government money market funds. However, this might not be necessary since several brokerage firms have made this change for their investors. In December 2015, Fidelity’s Cash Reserves fund, the world’s largest money market fund, transitioned its investment strategy to become a government fund. It’s now called the Fidelity Government Cash Reserves.

Whether you move to a government money market fund or your money market fund changes into a government fund, an important downside to consider is that yields will be lower. Government money market funds generally have lower yields than prime funds. As an example, Fidelity Government Cash Reserves has a yield of 0.12 percent. One of Fidelity’s retail prime funds, the Fidelity Money Market Fund, has a yield of 0.38 percent.

The case for internet savings accounts. With the new money market fund rules taking effect, investors should consider moving their cash into internet savings or money market accounts at banks or credit unions. Both savings accounts and money market accounts are deposit accounts that are different than money market funds and aren’t subject to these money market fund rules. A money market account at a bank or credit union is essentially a savings account. The only difference between the two is that money market accounts generally offer limited check writing privileges, whereas savings accounts don’t offer any check writing privileges.

One benefit of savings accounts over money market funds is federal deposit insurance. A person’s bank deposits are protected by the Federal Deposit Insurance Corporation (FDIC). Credit union deposits are protected to the same limit by the National Credit Union Administration (NCUA). Both the FDIC and NCUA are independent federal agencies that operate with the backing of the full faith and credit of the federal government.

Federal deposit insurance from either the FDIC or NCUA ensures that you won’t lose money on insured deposits if your bank or credit union fails. The minimum deposit coverage is $250,000 per person and per institution. This amount can easily be increased within the rules of the FDIC and NCUA by establishing payable-on-death accounts with multiple beneficiaries.

The second benefit of savings accounts over money market funds is yield. Higher yields are available on savings accounts, though not all savings accounts boast higher yields. In fact, savings accounts at many brick-and-mortar banks will have lower yields than some money market funds. To receive higher yields, an internet savings account may be necessary. These are savings accounts that must be opened online at a bank or credit union. A recent study has shown that the average yield of internet savings accounts is more than four times the average yield of savings accounts at brick-and-mortar banks.

[See: 11 Tips for the Sandwich Generation: Paying for College and Retirement.]

Comparing the yield differences between the top money market funds and the top internet savings accounts demonstrates the yield advantage of internet savings accounts. Out of the top retail money market funds, Vanguard Tax-Exempt Money Market Fund is a leader with a yield of 0.59 percent. For internet savings accounts, Popular Direct from Banco Popular North America is a rate leader with a 1.26 percent APY.

Some downsides to internet savings accounts. Keeping your cash in an internet savings account rather than a money market fund can have some downsides. The time it takes to deploy the cash into a new investment, such as a stock or bond, could be delayed when money has to be transferred from a bank savings account to a brokerage money market fund. Investors should be aware of the withdrawal limitations and transfer times of their savings accounts.

First, all savings and money market accounts are limited in the number of withdrawals that can be done per month. Federal regulation limits electronic withdrawals to no more than six per statement period. Banks and credit unions will often allow an occasional withdrawal that exceeds the limit, but a fee will be charged.

Second, the electronic funds transfer (EFT) systems of internet savings accounts have delays and dollar limits. If you identify a trade that you want to make with your cash, you’ll have to move those funds from the savings account to your brokerage account. The EFT time can be three or more business days. The exact time will depend on the bank. In addition, each bank sets its own dollar limit that caps the amount that can be transferred per day and per month.

Your brokerage may have an EFT system that’s better than your bank’s system, but that system will likely also have both delays and dollar limits. One alternative is to open an account at a brokerage firm that’s part of a bank with its own internet savings account. Money can then be transferred without delays and dollar limitations.

Check your money market fund. If you’re not sure if it’s worthwhile to move your cash into an internet savings account, at the very least check with your brokerage firm about your current money market fund. Is it a prime or municipal fund which will have the potential of redemption fees and selling restrictions? Is it an institutional prime or municipal fund that allows the NAV to float, and thereby placing some of your principal at risk? If your money market fund has been transitioned into a government fund, how low is the yield?

[See: 6 Strategies to Avoid Working in Retirement.]

You might decide that the best combination of liquidity, safety and yield is an internet savings account rather than a money market fund.

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Rethinking Internet Savings Accounts After the New Money Market Fund Rules originally appeared on usnews.com

Don’t Settle for Student Loans to Pay for Online Education

By WTOP Staff
Online college programs are becoming a more popular choice for prospective students, with one study finding that more than 6 million students enrolled in at least one online course in fall 2015. The popularity of these courses can be attributed in part to their flexibility with working adults' schedules, students' ability to progress more quickly through online programs and, oftentimes, cheaper tuition. [See 10 low-cost online bachelor's programs for out-of-state students.]Online degrees can be beneficial to many college students, but some studies have shown online learners complete their programs at lower rates than students at traditional brick-and-mortar campuses. Individuals with student loans but no degree comprise two-thirds of defaulted borrowers. Though these numbers are not encouraging, just like for traditional programs, there are ways to reduce how much you'll need to borrow for an online program to ensure you won't become one of these statistics. Don't just settle on borrowing student loans to cover the whole cost of your program and living expenses. Instead, start thinking about how to cut costs and cover your balance in different ways, such as the following. -- Grants and scholarships: Even though you are taking an online course, you can still apply and receive grants and scholarships. But your first step should be to complete the Free Application for Federal Student Aid, commonly referred to as the FAFSA, which will allow you to receive a Pell Grant if your expected family contribution is low enough. The EFC criteria and award amounts are adjusted annually, but the 2017-2018 academic year awards range from $606 to $5,920, which could significantly lower the amount you borrow annually. Your next step is to apply for scholarships. You can start by checking online scholarship search engines, such as the Salt Scholarship Search, College Board's BigFuture and Peterson's. But don't forget to take advantage of local organizations and your school's financial aid office. Both may offer scholarships that you can't find with a national scholarship search. [Review these 10 sites to kick off your scholarship search.]For instance, organizations like the Elks Club, Knights of Columbus or the Rotary Club typically offer scholarships annually to local students. Just because you're going to school online doesn't mean you're ineligible. Visit your local library for scholarship listings, and ask around town. You might be surprised how many local organizations offer scholarships. While these scholarships typically aren't large, every little bit counts. Each dollar you receive in a scholarship is a dollar you don't have to borrow and pay interest on. -- Work-study: Another option for online students may be work-study awards. Not all students enrolled in online programs are eligible, but students at some schools -- including, for example, SUNY Empire State College and Liberty University -- are. Work-study awards are not given upfront like scholarships and grants. In most cases, they are an offer to earn up to the awarded amount if you secure an eligible work-study job. While there is a misconception that all work-study jobs must be on campus, students can work for off-campus, nonprofit or public employers as long as the work is in the public's interest. You may be able to work for a for-profit employer if the job is relevant to your course of study. No matter who the outside employer is, it will need to have an established agreement with your college for you to receive work-study funds. Remember, to be eligible for federal financial aid, you must be enrolled and pursuing a degree or certificate. If you're not working toward a credential, Pell Grants and work-study won't be option, but you may still be able to take advantage of private scholarships -- just be sure to read the eligibility criteria carefully. [Explore what to know about financial aid in online programs.]-- Pay as you go: One of the great benefits to enrolling online is the flexible schedule, which can allow you to complete your college coursework around your responsibilities. But prospective students often overlook using their part- or full-time job earnings as an option for paying for college. Almost 80 percent of college students in 2015 worked at least part time while attending classes, according to the National Center for Education Statistics. By budgeting and thinking strategically about your college costs, you can likely reduce your dependence on student loans by paying a portion out of pocket. Many -- but not all -- online programs are less expensive than traditional programs and often have shorter payment periods. Six, eight or 10 weeks are common course durations. Because of the frequency of payments in an online setting, you may be well-placed to pay as you go and possibly avoid borrowing altogether. Attending college online and avoiding student loans may be challenging, but if you are willing to put in the effort, you can limit the amount you need to borrow. More from U.S. News Q&A: Understanding Student Loan Discharge Eligibility Student Loan Refinancing Isn't Right for All Borrowers
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