Thursday, October 27, 2011

Is Student Loan Forgiveness the Answer?

President Obama announced changes to the “Pay As You Earn” plan on Wednesday, October 26, 2011 that would/could ease the repayment of student loans. According to the College Board, the average public in-state tuition rates are increasing 8.3 percent for the 2011-12 year.

President Obama pointed out that the average college graduate owes $24,000 in student loans and that the 2011 graduates have an average debt load of $27,300. USA Today reported that outstanding student loans will reach $1 trillion ($1,000,000,000,000) before the end of the year. Currently, student loan debt in America has surpassed credit card debt. Is this our next financial crisis?

The highlights of the “Pay As You Earn” plans or income-based repayment plans are to:
·        Start this option is 2012 (vs. 2014)
·        Cap student loan payments to 10% of discretionary income (vs. 15% )
·        Forgive any remaining balance after 20 years (vs. 25 years)
·        Support consolidation of direct government student loans with government-backed private loans helping an estimated 5.8 million people. This would essentially allow refinance the private loans at lower government rates.

According to a White House fact sheet, a teacher $25,000 in debt and earning $30,000 a year will see their payments reduced to about $114 a month.

Student loans do not go away in bankruptcy unless under extreme circumstances and it looks like this could be one alternative to help people who have a lot of student loan debt. Current repayment plans include the options of 1) Standard Repayment plan of 10 years with a minimum payment of $50.00; 2) Extended Repayment plan if you have more than $30,000 in Direct Loan debt -repayment over 25 years; 3) Graduated Repayment letting you start out with low payments and increase your payment amount every two years; 4) ‘income contingent’ and 5) ‘income-based’ repayment plan.

As you take on student loan debt, you have to decide if and how you will be able to repay your loan. These new changes may not be right for everyone, especially if you do not have a lot of student loan debt and you get a high paying job after graduation.

Borrow wisely, study hard, have fun and pick the right repayment plan for you.

Monday, October 10, 2011

Making Sense of Occupy Wall Street

As a business professor I am torn about the Occupy Wall Street protest (OWS).  On one hand, the capitalism and free market economy enable people to “pull themselves up from their bootstraps” and become wealthy by inventing, creating, developing and delivering new and creative products and services that meet a need.  Doing this at a price consumers will pay while making money is an art and science.  For those who have this talent and gift, should they not be compensated for taking risks?  Isn’t that what makes American business great?  This is the land of opportunity….right?  Just look at what the late Steve Jobs did to help make your life better.  We didn’t have to buy an overpriced MP3 player, but Jobs had the gift to make the i-anything what we as Americans wanted to buy.
On the other hand, I read about executive compensation in the millions while the business is laying off workers or not giving them a raise and I wonder how many line jobs those millions of dollars to one person could pay for. I wonder what is “fair” compensation for CEOs who run corporations.  Is anyone worth $1 million a year, $5 million a year, $30 million a year or even $4 billion a year? Does greed cause us to “bend” the rules, influence decision that our more about us and not so much for the greater good?  Is it the corporation that should be concerned with the greater good?  I can argue with myself all night long about these issues and not come to a clear conclusion. 

Maybe that is what I am struggling with the OWS protest, I don’t know exactly what they want and when they will be satisfied enough to unoccupy Wall Street.  I don’t know if they have clearly stated what they want to see changed. 

From my desk, here are my suggestions for clarity of goals:
1.      Deal with executive compensation and fair pay. Limit executive compensation to a times average salary.  Whole Food touts CEO John Mackey’s salary and cash bonus to no more than 14 time the average worker’s salary.  This should also include stock options and differed compensation.  If the people on top want a raise, everyone should get a raise. This may develop a sense of teamwork, community and doing good for everyone.

2.      Limit the amount of contributions to political campaigns, politicians, and political organization.  Isn’t America to be governed for the people, by the people?  Take the all corporations out of politics and limit individual contributions so no one can buy influence.

3.      Make the tax code fair.  When Warren Buffett is saying it is not fair that he pays less in taxes as a percentage of income than his secretary, things need to be changes.  We need to simplify the tax code by getting rid of loop holes to where anyone can do their own income tax.

I know that these three things take time to work through and have to be done through corporate boards and acts of congress. Maybe the Occupy Wall Street protest will grab the attention of the civil unrest in this nation and steps can be taken to save our democracy and do good for the greater good.

Sunday, October 9, 2011

National Document Shredding Day?

There is not an official ‘National Document Shredding Day’ yet … And maybe that’s ok, because it is a good habit to take on daily. If you do not own a shredder, watch for local ‘shredding’ days that may be sponsored by a local bank or your city. On September 30, 2011, the whole state of Tennessee sponsored a document shedding day to promote identify theft awareness.

What should you be shredding? Anything that may contain personal identifying information such as Social Security numbers, your address, date of birth or passwords, cancelled checks, check registers, bank statements or receipts, loan documents, mortgage documents, brokerage statements, school records, credit card, mortgage and finance solicitations, credit card statements, contracts, personal business papers, and credit applications.

Not only are you protecting yourself from identity theft or fraud, often the shredded material will be recycled into items such as commercial grade paper towels, toilet paper and other paper products.

Tuesday, October 4, 2011

Free Checking a Thing of the Past?

The day has come. We are beginning to see the ramifications of the Durbin Amendment - Dodd-Frank Act, which became effective October 1, 2011. The amendment imposes limits on the fees that banks can charge merchants for each customer debit card purchase. To compensate, some banks are looking to make up for the lost revenue via other means, such as charging you a fee for the use of your debit card and/or checking account. You have options as to where you do your banking. It is important to select an institute where the service and products best match your needs.

ABC News has compiled a list of the 10 largest banks and how much each is charging for basic checking accounts and the debit cards. Additionally, you can learn about your local bank and credit union options online.

It only takes a few minutes to do a side-by-side comparison as to your options but can save you significantly over the long run.

Sunday, October 2, 2011

To Convert or Not Convert the IRA

This was the year long debate in our household. In 2010, the federal government dropped the income limit for moving savings from a traditional to a Roth IRA. Additionally, you had a one-time option to pay taxes on the current value of the converted funds over a two-year period. The converted asset then grows tax-free.

To get this tax break off any future earnings of the converted funds, you have to pay income tax on the value of the funds moved.

From Kelly Greene's Wall Street Journal article on 9.30.2011, "The federal government allows the tax-law equivalent of a do-over, says Maria Bruno, an investment analyst at fund giant Vanguard Group, whose customers converted more than 230,000 traditional IRAs to Roths last year, and which has processed 3,900 do-overs this year, as of Monday."

We are one of the 3,900 who converted back. This was a highly contested move in our household. Bob is sure with the current level of the national debt, that by the time we withdraw the retirement savings, we will be under the burden of a significantly higher tax rate. Kristy is pretty convinced we most likely will never retire so it will be a tax that our kids can cover when inheriting the asset. In the final hours.... Kristy won.

Investors who transferred traditional IRA holdings to a Roth in 2010 can move the funds back to a traditional IRA and avoid the tax up to October 17th. If you filed your 2010 tax returns already, you can amend them. We amended our tax returns last month. The weight of such an extra-large tax payment, even spread across a two-year time line seemed insurmountable to Kristy, given our number of other more short-term, family goals.

There were multiple steps to "reconvert", a waiting period, and then the "recharacterize" of the account as a traditional IRA. Calls to our tax advisor, calls to the IRA custodian...

The downside? We lose the one-time option for 2010 conversions of getting to spread the income involved across two tax returns. We lose out on the possible tax-free earnings of the converted fund. Up-side? Significant less tax to pay over the next two years.

Who was right? We will let you know in 30 years.