Sunday, 29 April 2012

Student Loan Bill

Congress is getting the idea....maybe.  The Wall Street Journal’s article “Trying to Shed Student Debt” inspired this blog.  The article states that Senator Dick Durban is proposing a bill that would allow forgiveness of "private" student loans in bankruptcy so that private lenders will become more cautious about making student loans. Federal student loans would not be forgiven.
I have two problems with this legislation: 1) it is an uneven playing field. Why should private lenders have different standards than government lenders? 2: this is treating the symptoms, not the cause. The causes, as I see them, are many and complicated but the top three are the high cost of education, lack of financial literacy, and lack of personal responsibility.
1. The high cost of education. Reduced government support and increased college cost, along with a recession has left college more expensive and students with less in savings. We also need to ask if a college education is a benefit only to the student or to society as well.  If we determine that society benefits from a well-educated workforce and community, then we, as part of this community, need to make a commitment of help keep the cost of higher education affordable to everyone. This means increasing government financial support to education.

2. Financial literacy or lack thereof.  We need a financially literate society, where individuals know how to make wise financial decisions.  This starts with parents teaching and involving their children in decisions about money.  We all need to be reminded that money is it a limited resource with opportunity cost, that you have to make tough choices about needs and wants, and that every investment has risks and rewards.  A college education is an investment with risk and rewards, and the calculated pay-back, return on investment (ROI), should be considered when choosing a major and/or career.  Will my ROI be greater if I attend a two-year technical or community college, attend a private college or university, or attend a public college or university?  One has to be realistic about future income potential when taking out student loans.  Even with the best major and the best education, no job or future income is guaranteed.  You have to work hard to get the job, salary, and career that you want.

3. Personal responsibility.  If you borrow money, you need to be responsible and pay back your loan.  This needs to be communicated to students at the time they take out a loan.  Just like the CARD act, where your credit card statement tells you how long it will take to pay off your credit card, students need to be aware of their future payments, the time it will take to repay the loan, and the total cost of interest on the student loan.  When they sign their student loan documentation, they are signing away part of their future income for a minimum of 10 years!  They need to be fully aware of the cost of repayment, and the opportunity cost for the next 10 years of repayments; the opportunity of buying a house, car, or going on vacation.

As I stated in the beginning, there are a lot of causes to high student loan debt and hopefully these three ideas can be implemented to treat the cause, not the symptoms.  If you like this idea and want to work for solutions to the problem, not reacting to the symptoms, please forward it on to your congressional representative and/or the White House. The e-mail for the House of Representative can be found at http://www.house.gov/representatives/your Senator’s at http://www.senate.gov/general/contact_information/senators_cfm.cfm 

Thursday, 26 April 2012

High Cost of STD (STudent Debt)

Can you believe that both agree!?! Yes, it might be really cold and someplace is freezing over, but President Barack Obama and Mitt Romney both agree that student loan interest rates should not be increased.  This would keep current interest rates at 3.4%, not raising them to 6.8% on July 1st.   By not increasing the rate on student loan interest rates, the government is stating that it will “cost” $5.9 billion.

Woo, wait just a minute-- did anyone question that figure?  Being an old banker, we tried to have a 3%-4% spread on money; the cost of deposits verses the cost of loans to make money.  The government can borrow money (cost of deposits) at almost zero percent, yet they are charging 3.4%.  Even the ten-year treasury is at 2%. Not a bad positive spread.  I also just financed a new car for 60 months at 1.9% at my local credit union.  Why is the government charging so much on student loan interest and want to raise it even higher?
I know, the “cost” of $5.9 billion is really forgone profit if rates were higher. Yes, I am very bias towards higher education and feel that this is the way we can recover from our recession and the only way to continue to be a leader in the world.  China, India and other countries are catching up or have caught up in technology and education.  We need an educated nation to survive and thrive in the future.
According to the Federal Reserve Bank in New York, it estimates that about 15 percent of Americans (not students) have outstanding student loan debt totaling $870 billion.  Other estimate student loan amounts as high as $1 trillion ($1,000,000,000,000.00) Yes that is a lot of zeros!  This amount exceeds the total borrowed on credit cards and auto loans according to the New York Times. Two thirds of the student loan debt is held by people under 30. The average 2011 graduated walked across the stage with over $25,500 in student loan debt.  Is this our next housing bubble that will put us in another recession?
How do student loans affect students?  Living back with parents, not buying houses, cars, delaying marriage, and the list goes on.  If we truly believe that education is an investment and benefits society as a whole, as well as the individual, we need to keep it affordable and attainable. Here is a short, fun little video about the effects of STDs (STudent loan Debts)  Enjoy the video; don't play the lottery.

Sunday, 8 April 2012

Filing Bankruptcy While Averaging $115,881 per Month?

Yes, this is what Warren Sapp, former NFL player and Dancing with the Stars contestant did on March 30, 2012.  Mr. Sapp filed for Chapter 7 in South Florida stating that he owes more than $6.7 million to creditors and back-child support and alimony.  His reported assets are $6.45 million.  What does this mean and how did it happen?

It happens because Mr. Sapp was spending more than he could afford, even more than his income of $115,000 a month.  Bankruptcy happened because of poor financial decisions, poor financial planning and thinking of the short-term, immediate gratification--not the long-term gain.  It happened because he was living life beyond his means.

Chapter 7 bankruptcy is also known as “straight” bankruptcy or liquidation and allows an individual to keep certain exempt property.    Assets are sold by a bankruptcy trustee to repay creditors and many unsecured debts are discharged.  Florida does not allow the bankruptcy courts to sell your home because the equity is protected by the Florida Constitution.  Florida also exempts IRS approved retirement and pension funds and personal property valued at $1,000 or less.  Chapter 7 bankruptcy also allows you to reaffirm your secured debt so you can keep your car, furniture or house by renegotiating with your lender.

For Mr. Sapp, he has 240 pairs of Nike Jordan shoes worth $6,500, a watch worth $2,250 and a lion skin rug worth $1,200 that will likely be liquidated by the bankruptcy courts.  However, his Super Bowl ring and 1991 national championship ring will not be auctioned off because he lost them.

Lessons Learned:
Ø  One can always spend more than he or she makes.
Ø  You need to have a budget and keep a spending limit to what you can afford.
Ø  When is enough ‘enough’? Really…how many Jordan athletic shoes do you need?
Ø  Review your values and make sure you are using money as a resource to reflect your values.
Ø  Live below your means; always pay yourself first and save at least 10% of your income.
If you want a pair of Nike Jordan shoes, contact the South Florida bankruptcy court!