Reuters Money

Occupy colleges? How to shut down student debt

One of the more compelling issues to emerge from the Occupy Wall Street movement is subject of crushing student debt.

College financing has gotten to be too onerous and complicated, so it’s difficult for families to negotiate the process and, as a result, it’s hobbling graduates’ attempts to live normal lives. Congress has largely ignored these Americans, though, as it focuses on the national debt and the Tea Party agenda.

There’s been a sharp uptick in student loan defaults — the highest rate in a decade — as more students come out of college an average $24,000 in debt, yet can’t find jobs.

Part of the psychology embedded in a college education is that the diploma should enable you to get a living-wage job, pay off debts and live a prosperous life. That was the big selling point of a high-cost diploma. That isn’t happening now for most graduates.

When the debt bubble burst three years ago, did students and their parents really expect to be saddled with onerous debts and face a lousy job market when they signed up for expensive degrees?

If we can bail out the banks, we can certainly find long-term solutions to student debt. My colleague, Linda Stern, recently outlined some of the basic money-management approaches to reducing student debt in her weekly column. It’s all good advice on a personal level — from creative payment strategies to loan consolidation to what to do if you simply can’t pay at all.

Margaret Atwood on debt and consequences

What might be most surprising about the myriad economic problems around the globe right now is how many major world economies seem to have been taken by surprise by the concept of debt. Maybe they should have been reading more Margaret Atwood.

Atwood isn’t only one of the world’s premier novelists, she’s also the author of the nonfiction “Payback: Debt and the Shadow Side of Wealth,” which hit the presses just as the financial crisis arrived in the fall of 2008 (timing that one review described as “freakishly prescient”).

Atwood is currently releasing her new essay collection about science fiction, “In Other Worlds,” and  sat down with Reuters Money for coffee in Manhattan. We chatted about how debt has been dominating the headlines – and, perhaps, reshaping our sense of self.

Reuters Money: How did the issue of money and debt come to interest you?

Margaret Atwood: I came to this subject through studying literature. Money is everywhere. Charles Dickens, for instance, is completely obsessed with debt. His father went bankrupt, and was thrown into debtor’s prison. As a child, Dickens had to go off and work in the factory, and he never forgot it.

You’ve said that the current debt crisis was entirely predictable. How so?

MA: I’m always sorry when I’m right. It really is true that you can go back through history and trace the influence of money on crises. If you look at conditions right before the French Revolution, you’ll see that they were having a lot of money problems. They kept firing finance ministers and coming up with one new scheme after another, but those at the top wanted to keep everything for themselves. Conditions were top-heavy, with a lot of debt, the price of food going up, and many out of work — which all sounds very familiar right now.

Divorce stress meets recession mess, and women struggle

When Carol Meerschaert of Paoli, Pennsylvania divorced 10 years ago, she experienced first-hand how starting over as a single mom also means managing the money without any help.

Her kids were 7, 10 and 14, and even though she had income as a dietician, “it certainly was very challenging,” Meerschaert recalls. She moved into a smaller home, paid her own mortgage and, in time, funded college tuition for her eldest daughter.

“She had to drop out of school for a year — a school she loved,” Meerschaert says. “I went back to school, too, to get an MBA so I could make more money.” She never lost her house, or her nerve. But other woman aren’t so lucky.

Experts say alarming numbers of women emerge from divorce lacking even the most basic money management skills, to the point where many begin single life as financially illiterate. Meanwhile, the serpentine economy of 2011 has only placed added strain on unhappy couples and divorced women.

A new study by the University of Virginia’s National Marriage Project found that divorce rates have followed the fall and rise of the nation’s troubled economy during the last four years. Between 2008 and 2009, divorce rates dropped significantly as families experienced unemployment and mortgage stress. In 2008, the divorce rate fell 24 percent, and in 2009, 57 percent. The rate is on the rise, however, as the nation slowly recovers from the recession.

“The current economic climate has certainly added more complications to the divorce process,” says Linda Lea Viken, president of the American Academy of Matrimonial Lawyers.

Viken cites a new survey where 85 percent of the organization’s members reported a jump in divorce settlement difficulties since 2008 due to housing debt. That, in turn has impacted child custody cases due to relocation issues, 53 percent of members reported.

Why household debt reduction could jumpstart economy

If we could move beyond the housing crisis, where would we find the seeds of a broad-based turnaround?

Right now most of the country is anguished over the slack job market and global economic uncertainty. Almost half of U.S. homeowners are feeling house poor. That is, most folks can’t get their wealth out of their homes or even put a realistic price tag on it. They may even be stuck in a house that’s worth less than its mortgaged value.

This morass has led to a massive liquidity and consumer psychology malaise. Is there a way out? Yet there are signs that the clouds are parting.

Ingo Winzer, president of Local Market Monitor, a real estate information service, says he is seeing indications that lower consumer debt and increased spending may lead to an uptick.

“After 28 straight months of pulling back on the reins, consumers have finally found a level of debt that feels good enough to allow more spending to flow,” Winzer surmises.

“During those 28 months, the level of consumer debt per person — let’s leave mortgages out of this — fell 13 percent, from $8,600 to $7,500. During the last recession with a real estate crash, 20 years ago, consumer debt dropped 14 percent.”

Yet what about all of those millions of homes on the market, the unresolved foreclosure mess and an economy that isn’t really creating any new jobs?

A silver lining: Credit cards buffered from rate hikes

With the downward plunge of the stock markets and the potential for interest-rate hikes following the downgrade of U.S. debt, consumers are understandably worried about their own interest-rates going up. But one bit of good news in all this volatility is that credit cards are somewhat insulated, for right now.

That’s “somewhat” because the protections are for what you’ve already spent and not what you’re going to spend going forward.

Banks have moved most credit card holders to variable interest rates, so it would seem the impact of any rate hike would be devastating and immediate. But ”consumers have new protections against sudden rate hikes, thanks to the credit card reform law,” says Dan Ray, editor-in-chief of CreditCards.com. The good news is that consumers have some time to plan ahead in case rates do jump.

First of all, any rate hikes that would happen would not affect existing balances, only new charges, thanks to the changes in 2009. (TransUnion, the credit reporting giant, says the average credit card balance in the U.S. is about $4,700.)

Secondly, there will be some lag in rates for consumers going up because rate hikes are tied to the prime rate, which is driven by the Federal Reserve, not the markets. But there is some bad news, too, because banks have pushed their customer to variable rates, and that means that any rate hike that does kick in will hit right away for new charges. Banks can also increase the margin of how much above the prime rate they will charge you, as long as they give you 45 days warning.

So, if your finances can’t handle a rate increase, the prevailing advice from credit experts like Bill Hardekopf, founder of LowCards.com, is to stop spending so you’ll know that your existing balance is locked in at the current rate.

Ray from CreditCards.com says, “It’s important to assess and plan. If you’re carrying a large amount of card debt, use a credit card calculator and play some what-if scenarios. Could you afford the payments if rates jumped, say, 5 percentage points?”

Gold Mine: Links and tweets from around the Web

One consequence of the stock market decline is that everyone is talking about investing in gold as it hits record highs. But what are they saying?

A quick trip around the Web today came up with a treasure trove of things to think about, from advice on what to do now, to historical perspectives to funny tweets. There’s analysis that says gold will go up, there’s analysis that says gold will go down. And there are worldwide repercussions that you might not have ever considered.

Here’s a sampling:

From the anti-gold crowd, there’s Roland Gribben, writing in the London Telegraph that this gold rush is nothing new and there shouldn’t be such a frenzy, and Alexander Green, Investment U’s chief investment strategist, writing in ETF Daily News that gold and silver investors are losing their minds. And then there are true contrarians, like Gary Noth writing on LewRockwell.com, that all the experts telling you how to invest in gold, or why to invest in gold, are not worth listening to.

Among those bullish on gold are the powers that be at JP Morgan Chase, who issued an advisory predicting that gold will hit $2,500 by the end of the year. There’s also analysis from the Autochartists Team at FXStreet.com that shows gold continuing to go up. And then there are reports like Maike Currie’s in InvestorsChronicle.co.uk that explain why “the sky’s the limit.”

For historical perspective, there’s a link to an Alan Greenspan essay on gold from 1966 that was first published in Ayn Rand’s  ”Objectivist” newsletter titled “Gold and Economic Freedom.” It’s mostly a defense of the gold standard, but it includes gems like: “Deficit spending is simply a scheme for the confiscation of wealth.”

As for unintended consequences of gold and uses of gold that you might not have thought of, there’s an article on the “Consequences of high gold prices on weddings in Pakistan” and one on gold-plated contact lenses that are now, even more, the folly of the rich. And for anyone considering wedding bands, there’s the statistical note that now gold is as valuGolable as platinum.

Social Security, Medicare dodge bullet, but cuts loom

Social Security and Medicare dodged a bullet in the debt ceiling battle, but beneficiaries still have plenty to fear from the next phase of the deficit reduction war.

The agreement to raise the debt ceiling means seniors will receive their August Social Security benefits – something many worried about after President Obama said last month that he “couldn’t guarantee” the payments if default occurred. Likewise, Social Security and Medicare benefits both were exempted from the $917 billion in first-phase cuts that paved the way for the debt ceiling deal.

But major benefit cuts seem likely to emerge from the second phase of this process. A 12-member Congressional committee must identify another $1.5 trillion in spending cuts, bringing the total deal to $2.4 trillion in cuts over 10 years. That group will have a November 23rd deadline to finish its work, which will then go to an up-or-down vote – no modifications allowed – by Dec. 23rd.

What’s more, if the committee cannot agree on at least $1.2 trillion in savings, or Congress rejects its findings, automatic spending cuts totaling that amount would kick in starting in 2013. Medicare would be subject to the automatic cuts, although Social Security and Medicaid would be exempt.

The enormous pressure to identify $2.4 trillion in cuts boosts the odds that Social Security benefit cuts will be proposed. Re-stating what I’ve said so many times: this would be unfair and unwise. Social Security doesn’t contribute to the deficit, and it will be a critical source of support for recession-ravaged seniors in the decades ahead.

The most likely cutting tactic is the chained CPI measure of cost-of-living adjustments (COLA). This is the only way to get near-term savings from Social Security, since it reduces benefits for current retirees. By contrast, a higher retirement age would have to be phased in over many years.

A chained CPI could be implemented as early as 2013. The chief actuary of the Social Security Administration estimates that the chained CPI will rise about 0.3 percentage points less per year than the inflation measure used now, the CPI-W. With compounding, that translates to a monthly benefit cut of 8.4 percent for a retiree at age 92 (calculated from age 62, the first year of eligibility), according to the National Academy of Social Insurance.

Answers to the 7 big “what-ifs” of debt default

The debt negotiations are getting down to the wire. Republican and Democratic lawmakers are scrambling to broker a deal to raise the country’s $14.3 trillion debt ceiling before Tuesday, when the Treasury will no longer be able to borrow funds to meet all of its obligations. That’s why major credit rating agencies are considering a downgrade of U.S. debt.

What does that mean for consumers? Here are some answers we compiled from Reuters Money experts:

Should I be worried that I won’t receive my Social Security benefit in August?

Not immediately. Social Security’s coffers are full enough to make the August payments. And cash flow is positive – the system generates more from current revenue than it spends on benefits and its own administrative costs. The main source of revenue is the payroll tax paid by employers and employees (the Federal Insurance Contributions Act, or FICA); other income sources include interest payments on bonds in the Social Security Trust Fund (SSTF) and taxes paid by higher-income beneficiaries.

Last year, revenue totaled $781 billion, while outgo was $713 billion. And even if funds aren’t on hand in a given week to pay benefits for timing reasons, the SSTF can redeem bonds to make up the shortfall.

But here’s the rub: the bonds are obligations of the U.S. Treasury back to the SSTF. A government debt default would put us in uncharted waters, and it’s entirely possible that the Administration could refuse to redeem bonds or divert payroll tax receipts to meet other pressing obligations.

Social Security advocates don’t agree on what might happen.

3 more gloomy bargains: How much the debt deal will cost you

No matter what plan Washington concocts to reduce the deficit, it’s going to cost you something. “Shared sacrifice” is in vogue, but your pain will be bigger if you’re unfortunate enough to earn wages or need social benefits.

Most conservative deficit-reduction plans shred the social safety net and cherished personal write-offs in unprecedented ways. The core elements of each proposal will pare middle-class tax breaks, Medicare and Social Security.

As Yogi Berra once said, “it’s déjà vu all over again.” The $3.7 trillion Senate “Gang of Six” plan and related iterations bear a striking resemblance to a “Moment of Truth” deficit commission report issued, and mostly ignored, late last year and pieces of a Heritage Foundation plan ironically entitled “Saving the American Dream.”

No plan will preserve or protect the American Dream as we’ve come to know it. And the powers that be don’t seem to be rattled by the potential chaos if an agreement on raising the federal debt ceiling by Aug. 2 doesn’t happen. Markets may collapse, benefits will be delayed and salaries won’t get paid if the U.S. can’t issue more debt, but the Beltway bickering goes on.

Instead, we have this power play in the form of Byzantine musical chairs. One sure loser is already ordained, though: Middle America. Let’s look at where the deficit commission, Senate and Heritage plans intersect:

“Broaden the tax base” This is one of the most Orwellian prevarications since the coining of the “death tax.” (Have you ever met a dead person who paid a tax?) When conservative policymakers say this, they don’t mean raising taxes, they mean lowering tax rates and eliminating “tax expenditures,” like deductions for individuals.

The Senate “Gang” plan proposes three tax brackets ranging from eight to 29 percent. Currently the highest personal tax rate is 35 percent. The Senate plan would also cut the hated $1.7 trillion alternative minimum tax. At first blush, both moves will reduce revenue flowing into the Treasury and balloon the deficit. How would the Senate make up the shortfall, considering that it also cuts corporate tax rates from 35 percent to as low as 23 percent? They say: “Reform, not eliminate, tax expenditures for health, charitable giving and homeownership.” Bottom line: Your after-tax cost for healthcare and mortgages may be higher. Although limiting the mortgage interest deduction to one home and capping it isn’t a bad idea, this is not a “broadening” of the tax base. Middle class workers will pay more — unless the cost of healthcare and homeownership mysteriously drop.

5 questions about Social Security and the debt ceiling

Social Security is a pawn in the negotiations to avoid a federal debt default, and that has stirred fear and confusion among current and future beneficiaries. President Obama has threatened not to make August benefit payments in the event of a default, and signaled that he is open to cutting Social Security if it helps him secure a big deficit-reduction deal with Republicans.

Let’s look at where Social Security stands on the D.C. chessboard:

Should I be worried that I won’t receive my Social Security benefit in August?

President Obama stated recently that he “cannot guarantee that those checks go out on Aug. 3 if we haven’t resolved this issue. Because there may simply not be the money in the coffers to do it.”

On its own, Social Security’s coffers are full enough to make the August payments. Social Security is cash flow positive – it generates more from current revenue than it spends on benefits and its own administrative costs. The main source of revenue is the payroll tax paid by employers and employees (the Federal Insurance Contributions Act, or FICA); other income sources include interest payments on bonds in the Social Security Trust Fund (SSTF) and taxes paid by higher-income beneficiaries.

Last year, revenue totaled $781 billion, while outgo was $713 billion. And even if funds aren’t on hand in a given week to pay benefits for timing reasons, the SSTF can redeem bonds to make up the shortfall.

Here’s the rub: the bonds are obligations of the U.S. Treasury back to the SSTF. A government debt default would put us in uncharted waters, and it’s entirely possible that the Administration could refuse to redeem bonds or divert payroll tax receipts to meet other pressing obligations.