In this podcast, Motley Fool senior analyst Bill Mann discusses:
- Why the investments Amazon and Shopify made were not a "delusion."
- What to watch for among online retailers this holiday shopping season.
- Inventory management being the metric to watch in early 2023.
Mark Kantrowitz is an expert on saving for college and author of Filing the FAFSA. Motley Fool personal finance expert Robert Brokamp talks with him about some of the most common errors people make when applying for financial aid.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
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This video was recorded on Oct. 11, 2022.
Chris Hill: We've got a closer look at the e-commerce landscape and a few tips on paying for college. Motley Fool Money starts now. I'm Chris Hill, joining me in studio it's Motley Fool Senior Analyst Bill Mann. Good to see you.
Bill Mann: I'm not tired of that, actually.
Chris Hill: Neither am I.
Bill Mann: In studio and I must say as chilly as it has been in this room, as we've been here in the past, it is delightful in here today.
Chris Hill: It is. Someone, not you and not me, someone fix the temperature in this studio and it's no longer like a meat locker which is correct.
Bill Mann: Whoever is involved on our side of the thermostat battle is up one at the moment.
Chris Hill: Hopefully, wherever folks are listening, the temperature is just lovely where they are as well. Let's talk about online retail, shall we? Because you had pointed out a Bloomberg article to me. I don't think anyone puts Bloomberg in the same category as the New York Post when it comes to headline writing and I'm not saying they are, but it's pretty straightforward when you have a headline like the great post-COVID online shopping bet was a costly delusion. There's some heat to that headline.
Bill Mann: There is absolutely some heat to that headline and as someone, as you are who has been involved in providing content over the years, you do know in practice that headlines sometimes don't really give you the whole story and the reason why they're written that way is to get people to click on them. I don't love the word delusion in this case because I think a delusion means that something that was done in 2020 that had no chance of succeeding. Basically, the article is saying that all of the growth that happened in 2020 and 2021 in online retailing because of the pandemic has essentially reversed itself and so you have stocks like Shopify that as a result are down 80 percent. You have Amazon, which has lost half a trillion dollars, which I'm assured even in these economic times, it's a lot.
Chris Hill: Yes.
Bill Mann: Company after company after company that made bets, Peloton, my goodness. They made bets on online retailing being something that people would never return to the stores. People are returning to the stores in their droves.
Chris Hill: We have a couple of things I want to unpack here and I'm glad you mentioned the use of the word delusion because I had the same reaction. I get that this was costly, absolutely this was costly.
Bill Mann: That's the right word.
Chris Hill: I don't think it was delusional. It may have been misguided in the optimism and that's something that the article digs into the data around people returning to stores. Something we were talking about right before we started recording, which is the concept of inertia, or maybe not inertia, but just old habits die hard. As convenient as online shopping is, particularly if people are cooped up in their homes for one or two years when they get the opportunity to get out, more than a few of them are going to say, yeah, in the before times, it was a hassle to get in the car and go shopping somewhere, now, it feels like an outing.
Bill Mann: Yeah. I'm going to try and describe a graph, which I know is really great audio. But if you look at a graph of online retail sales, there is obviously a pretty rapid spike in 2020 and then it's drifted back down and the graph basically says that we are at about where we would have been in terms of online sales had the trend just continued from 2019 and in fact, online sales is up about three percent from 2019, which is up. It's absolutely up. But the investments that were made along the way have not paid off. You've got CEOs like Tobi Lütke from Shopify saying ''These investments didn't pay off and it was my fault.'' I don't think it was his fault because we had to give ourselves the grace to know that what happened with the pandemic wasn't necessarily what had to happen with the pandemic. Like we could have in a really dark world at this point still be primarily in our houses. We could have been shut tight.
Chris Hill: That's true. Although I'm going to push back on Lütke because he's the CEO. I as a shareholder, even though my shares are underwater, I appreciate when he came out and he's like, ''Yeah, this is on me because I'm the CEO.'' But I agree with you there's planning for a version of the future that fortunately did not come to pass. Where I want to go is where you think we are with some of these retailers because I think that in the case of Amazon and Shopify in particular, both of them to varying degrees have come out and said, yeah, we over-invested in these areas and we're pulling back from that. I don't think either one of us or probably anyone who's paying attention thinks either of those companies are going away. The question is, what will it take for them to rebound and therefore for their stocks to rebound? I was about to say on the flip side, but I shouldn't assume it's on the flip side.
We have Amazon and Shopify, then there's a company like Wayfair. I'm not a shareholder, I am a customer. I've had good experiences with Wayfair. Wayfair fits the same category in terms of e-commerce stock down over time, spiked in 2020 all that stuff. But Wayfair is in a business that they're not selling mattresses. This is a once every 10 years type of product. They have a lot of different things. But after you've bought some new furniture, how many years are going to pass before you're buying more? I'm wondering when you start to look at the e-commerce landscape, do you start to separate some of these stocks into categories? One way of slicing them is, OK, these are going to be fine, it's just a question of when. These others, I'm going to watch a little bit more closely.
Bill Mann: Well, so Wayfair very heavily levered toward two things. One was furniture sales in general. A furniture company is levered toward furniture sales. What happened a lot in 2020 and 2021 is that people started redoing their spaces, but it's also levered toward the housing market, and the housing market itself has pulled back. You're exactly right to point to it as being an e-commerce company, but it's not one with a huge amount. It's not fast turnover goods. I imagine with Wayfair that one of the things that they're paying attention to do now is just the fact that they had clawed forward revenues, that they may have gotten any way down the road.
The company is actually in OK shape, as much as any company whose stock is down 89 percent can be. But the other interesting thing to me, if you think about how spending has happened this year and this is the most interesting thing to me about where we are because a lot of people believe that we're in a recession or recession is coming, but consumer spending has been healthy. But in 2022, it has been much more about bits than Adams. People want to be out of their houses. They are spending on experiences, the very same experiences that they didn't get in the last two years because everything was closed or things got pushed down the road. I hate to keep saying this because I think at some point it becomes a little bit silly, but we have to remember that 2022 is a bit of an echo boom from two of the weirdest years that I hope we will ever have in our lifetimes.
Chris Hill: How much does the upcoming holiday retail season affect the way we think about these? Because it's easy for me to imagine, put aside the earnings season we're about to be hit with, it's easy for me to imagine fast forward to January, particularly from businesses like Amazon and Wayfair, we start getting results and details on how the holiday quarter went for them. It's easy to imagine thinking like, OK, the worst is behind them.
Bill Mann: Not only is the worst behind them but another thing that's going on right now is that a lot of these companies, the one that we think about the most is got to be Peloton, which is in the process of essentially undoing all of the growth plans that it had. But a lot of companies are sitting on huge amounts of inventory, and inventory if you think about it in a business perspective it has a cost associated with it, it's got storage costs, it's got all sorts of things that aren't just while it's been made but not sold. I think that when we're talking about the weirdness when we come to the earnings reports that will happen in January going into February, the inventory numbers are some of the things that are going to be most interesting. They might not come with great revenue numbers because as you know the easiest way to fix an inventory problem is to discount, but I think for consumers it's going to be a pretty good holiday season in terms of pricing out there. Then I'm hopeful as a citizen, as a person of Earth, as a person who is fascinated by markets that we begin to hit more of a steady state in the beginning of the New Year.
Chris Hill: Bill Mann great talking to you, thanks for being here.
Bill Mann: Thanks, Chris.
Chris Hill: As high school students across America are prepping their college applications, parents of those students are thinking about what it's all going to cost. If you're the one writing the tuition check you might want some help paying for college. Mark Kantrowitz, who is an expert on saving for college, and he joins Robert Brokamp to discuss some of the most common mistakes that people make when applying for financial aid.
Robert Brokamp: Let's start with that free application for federal student aid better known as the FAFSA, so as of October first students and parents could fill it out and submit it for the 2023-24 academic year. What is the FAFSA? Why should folks file it as soon as possible?
Mark Kantrowitz: The FAFSA is a financial aid application form that provides access to money from the federal government, state governments, and most colleges and universities. You should file off the FAFSA as soon as possible on or after October first, which is for the next fall financial aid. Because some of the forms and financial aid are awarded on a first come first served basis, this includes not just state grants in 15 states but also some federal aid and some college aid. Some colleges have very early deadlines or they have two deadlines; a preferred deadline and a regular deadline. Students who filed the fastest sooner on average get twice as many grants as students who file it after three months have passed.
Robert Brokamp: Who should or shouldn't do the FAFSA? I imagined some folks might be listening to this and say, you know what I make too much money I'm not going to even bother.
Mark Kantrowitz: If you could afford to pay for college using pocket change, then you probably don't need to file the FAFSA. But the FAFSA not only provides access to gift aid and what grants and scholarships from the colleges and the government, it also provides access to student loans and student employment. The student loans are relatively low cost, so they have lower interest rates and there are a good way for the students have skin in the game, because of the annual and aggregate loan limits and you probably won't end up borrowing more than you're starting salary.
Robert Brokamp: The first could be rather extensive it has more than 100 questions that you likely won't have to answer every question, and it takes about 30-60 minutes to complete. That means there's plenty of room for errors, so let's discuss five of the most common. Error number 1, reporting retirement assets or the family home as an investment.
Mark Kantrowitz: Although retirement assets and the family home are technically investments, they're not reportable investments. The FAFSA ignores a net worth of qualified retirement plans like a 401(k), 403(b), IRA, Roth IRA, SEP, SIMPLE, and pension plans, it also ignores a net worth of the families principal place of residents. If you include these as investments on the FAFSA, it's going to significantly reduce your eligibility for need based financial aid. This is one of the most common serious errors involving the FAFSA.
Robert Brokamp: I should point out that this is for the FAFSA, there are some schools that have a different rules, some follow what's known as the CSS profile. Maybe there's about 200 private schools now, for that you often do have to report some of these assets.
Mark Kantrowitz: You do report retirement plans on the CSS profile. It isn't always clear whether the colleges are using that information, they might use it only if you have exceptional assets or income in other ways. They do require most of the colleges that use a profile for you to report your family home, but some of them will cap it at 2-4 times income so that you're home equity that's built up over decades, won't eliminate aid eligibility by as much.
Robert Brokamp: Got it, so let's move on to Error number 2. Reporting 529 plan incorrectly.
Mark Kantrowitz: If 529 plan is owned by a dependent students, that's called a custodial 529 plan or by a dependent students parent, it's reported as a parent asset on the FAFSA, and then qualified distributions are ignored. Do not report a custodial 529 plan accounts that it's owned by a sibling, because that's owned by the sibling and you only report that on the siblings FAFSA, so not on the students FAFSA. Now, if a 529 plan is owned by anybody else; a grandparent, aunt, uncle or non custodial parent, the parents are divorced, it is not reported as an asset on the FAFSA, but distributions are reported currently as on taxed income to the beneficiary, the student on the FAFSA. Now, the question that's used to report this a cash support question is going to be dropped in 2024-25 as part of FAFSA simplification. During FAFSA simplification the number of questions on the FAFSA will drop by about two-thirds from 108 to about three dozen, and that's one of the questions they're getting rid of. Now, who owns a 529 plan can therefore have a big impact on aid eligibility, if it's reported as a parent asset and most 5.64 percent of the asset value reduces aid eligibility. If it's currently reported as a grandparent asset or aunt, uncle or some other third-parties asset. The asset value doesn't reduce aid eligibility, but distributions can reduce aid eligibility by as much as half of the distribution amount.
Robert Brokamp: Yeah. There's a couple of things there. First of all, just as a general principle for financial aid eligibility, it's always better to be something to be considered a parental asset than a student asset because student assets are factored in more. Then you talked about that simplification precedent that came from a law in 2020 but none of those changes will take place this year. This is the last year of the old regime, correct?
Mark Kantrowitz: The Consolidated Appropriations Act of 2021 implemented fastest simplification, something that center of Lamar Alexander had been lobbying for, campaigning for a very long time. Because he was retiring, it was going away present for him that this policy objectives that he cared a lot about was finally implemented. It was supposed to go into effect this year in 2023, 2024, but the US Department of Education said that they wouldn't be able to implement it that quickly, and so it's been delayed to 2024, 2025.
Robert Brokamp: Got it. Then to highlight the other thing you pointed out, that distributions from like a grandparent-owned 529. Those can have a harmful effect on financial aid. What you should do is use that money for later and the kids college career rather than sooner, correct?
Mark Kantrowitz: Correct. You could even wait until after the child graduates to take qualified distribution of up to $10,000 to repay student loans. It's a lifetime limit per borrower and so you can take $10,000 to repay the student's loans or beneficiaries loans and for each of the siblings an additional $10,000. If you change the beneficiary to be the parent, you can use it to repay parents plus loans, but this is across all five-nine plans. You can't use multiple five-nine plans to get beyond that $10,000 limit.
Robert Brokamp: Got it. Let's move on to Error number 3, reporting the wrong year's income.
Mark Kantrowitz: The FAFSA is based on two-year-old income information to enable the use of something called the IRS data retrieval tool. This is also known as prior year income. For the 2023, 2024 FAFSA, it's going to be based on 2021 income. Now, even if you know what your 2022 income is, maybe you wait until January to submit the FAFSA, though I don't recommend waiting, you can't substitute 2022 income for 2021 income. But you can also can't substitute 2020 income for the 2021 income. You'll have to use the correct year. Now, if your income has changed, maybe through job loss or pay cut, you should contact the college financial aid administrator at your college to ask for a financial aid appeal. The college financial aid administrator has the ability to substitute any 12 month period for the period required on the file when there are special circumstances. Job loss and pay cuts are among the most common special circumstances and also the most likely to be approved.
Robert Brokamp: All right. Error number 4, incorrectly reporting student or parental marital status.
Mark Kantrowitz: Well, sometimes the parents decide to file the files on behalf of their child to take care of it all and they answer both apparent questions and the student questions. This is a big mistake because parents often get confused about who's questions are answering. I've seen parents start to FAFSA with their own FSA ID instead of the students FSA ID, and that's as though the parent is applying for financial aid to go back to college themselves. Some of the more common problems that occur is sometimes swap their own social security number with that of the child or their marital status with that of the child, or they'll swap a sibling for the child, or they'll get the date of birth wrong.
This is why it's really important for the students to complete their portion of the FAFSA and the parent can leave theirs. But sometimes they will swap the answer, the student marital status question, so it's a parent or vice versa. Also, marital status must be accurate as of the date the FAFSA file. Sometimes well-meaning parents will file the FAFSA on behalf of the child who's about to get married thinking that they're going to take care of this for them. But a student who's married is considered to be an independent student and that change can have a big impact on aid eligibility, and sometimes the student is intentionally delaying filing of the FAFSA so that it can reflect their new marital status. You can't anticipate a future change in status, so if you're getting married tomorrow, you can't file the FAFSA today as though you're married or vice versa as divorced.
Robert Brokamp: Let's get to our final error, choosing to not use the IRS data retrieval tool.
Mark Kantrowitz: The IRS data retrieval tool will transfer information from your federal income tax returns into the FAFSA. This not only increases the accuracy of the FAFSA by avoiding many common arrows like entering cents for dollar amounts. If you do that, you might be multiplying your dollar amount by 100 because it ignores the decimal point. Sometimes you have copying errors or digit transposition errors, it transfers it directly from the federal income tax return. Any data elements that is transferred from the IRS to the FAFSA is assumed to be correct and is not subject to a process called verification where you have to provide the source documentation for everyday element on the FAFSA or certain selected data elements. This significantly reduces the chances that you are going to be selected for verification. It used to be as much as a third were automatically selected for verification. More recently, it's been 18 percent because many more applicants are using the IRS data retrieval tool. In fact, if you use the IRA data retrieval tool, the odds of being selected for verification or in the single digits. That is going to save you not just money because of greater accuracy, but also time and hassle dealing with verification.
Robert Brokamp: All right. Let's get to the final question for you, Mark and that is, what is your best overall advice when it comes to getting the most financial aid?
Mark Kantrowitz: I've three key tips. First of all, minimize income during the base year that prior year upon which the FAFSA is based. If you going to realize capital gains, offset them with capital losses, don't take distributions from retirement plans, even a tax-free return of contributions from a Roth IRA will count as income on the FAFSA, an increasingly income has a big impact on aid eligibility. Second, apply, file the FAFSA as soon as possible on or after October 1st. Then finally, appeal for more financial aid if your family's financial circumstances are in any way unusual. That could be a change from the prior-prior year to the present or anything that distinguishes your family from the typical family, such as high unreimbursed medical or dental expenses, high dependent care costs for special needs child or elderly parents, private 10-12 tuition, anything that's a little bit different is worth asking for an appeal. The worst second happens, they just say no.
Robert Brokamp: Well Mark, this has been super-helpful. Thank you so much for joining us.
Mark Kantrowitz: You're welcome.
Chris Hill: As always, people on the program may have interest in the stocks they talk about and the Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.