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Student Loan Crisis
The debate over student loan interest rates monopolized news headlines earlier this month. The interest rate on the popular Stafford loans, temporarily reduced to 3.4 percent in 2007, was scheduled to return to its previous level of 6.8 percent as of July 1, 2012.
A bill introduced to retain the low rate never made it through Congress. No surprise here. Democrats and Republicans couldn't agree on how to fund the $6 billion package.
Student loan indebtedness has reached $1 trillion. According to the federal Department of Education's Project on Student Debt, about 72 percent of graduates from private nonprofit universities and 96 percent of those attending for-profit schools bring student debt with them as a lasting reminder of their college experience.
This study was conducted in 2008. Today's numbers are likely far worse.
Higher education funding was a victim of economic cutbacks during the Great Recession. Tuition costs spiraled as state funding dried up. Someone had to ante up the difference. As usual, it falls on those who can least afford it. Those at the bottom of the economic ladder who have nobody below them to pass the burden onto.
Graduates in 2010 left college owing an average of $21,184 in student loans. Those leaving with a law degree averaged $100,000 in outstanding student loans.
Repayment of Stafford Loan debt begins six months after date of graduation. Perkins Loans offer a nine month grace period. Terms vary for other loan types.
In better times, it was expected the graduate would land a job by then. Not so today. Particularly for those with a professional degree.
The U.S. Bureau of Labor Statistics reports that many college graduates have settled for jobs once held by high school grads. An estimated 100,000 janitors in the U.S. have bachelor degrees with 5,000 of them holding doctorates.
In January 2012, there were 317,000 college-educated waiters and waitresses, 80,000 bartenders and 18,000 parking lot attendants.
All respectable employment options, no doubt. But they only barely pay the rent and put food on the table. There's no room left to payoff student loan debt.
The Federal Reserve reports that 27 percent of student loan borrowers have past due balances. How will they be able to start a business or buy a home?
The Obama administration has responded with programs to help those in need. The "Pay As You Earn" program lowers payment caps from 15 percent to 10 percent of monthly income for the approximately 1.6 million students who qualify. Those who make regular payments for 20 years will have any outstanding balance at that point erased.
There's also a program that allows students to reduce their interest rate by .5 percent by consolidating multiple federal student loans. But doing so could also increase interest on a lower rate loan and prohibit you from paying off a smaller loan first.
Standard loan repayment involves fixed monthly payments of at least $50 over a term of up to 10 years. Stretching payments over a longer term will cost less each month, but more over the life of the loan with increased interest.
The rule of thumb is those holding loan debt at graduation of less than their annual starting salary should be able to repay the loan in about 10 years. If your debt exceeds your annual income, you will struggle.
Online student loan calculators can show you how different repayment plans will fit into your budget. The Federal Student Aid web site offers descriptions of various plans and calculators for each.
Experts suggest testing each plan during your grace period. Pretend to make student loan payments but instead pay yourself and bank the money. If you plan to pay $250 per month, you could build an emergency fund of $1,500 over your six month grace period.
Find ways to pay a little extra each month to get this debt off of your shoulders quickly. The SallieMae site gives you cash back rewards toward your student loan when you shop through their site.
Part of your debt can be erased by doing volunteer work or service work such as teaching in low income areas. Find details here.
Forbearance or deferment allows you to reduce or stop your payments for a certain period of time under defined circumstances such as having a baby or unemployment. Interest still accrues during this time so your outstanding balance will continue to grow. Use this only as a last resort.
You can't get rid of student loan debt by any means other than repayment. It is not eliminated via bankruptcy. The federal government can intercept your tax refund, garnish up to 15 percent of your paycheck without a court order and even take a chunk out of your Social Security check. Plus they'll tack on costs associated with having to chase you down for repayment. It won't go away. Don't ignore it.
The student loan program is self-sustaining. Money you repay today is available for the next graduate who needs help. Delinquency denies opportunity to future students. And that truly would create a crisis.
Honoring Our Military
Memorial Day is a time of remembrance, a time to honor those men and women who have paid the ultimate price for our freedom. Some celebrate the holiday by placing flags on the graves of our departed military personnel, some spend the time with family and friends, and some participate or watch their local Memorial Day parade. Whatever it is you did this holiday weekend, I hope you spared a moment to reflect on and give thanks to our brave men and women in uniform.
Taking one day a year to pay tribute to our troops is important, but there are many companies and businesses that pay tribute to our troops every day. How do they do it? They offer discounts on goods or services to military personnel.
A few things I want to mention before continuing. Some businesses only offer discounts at the manager's or owner's discretion and/or some businesses only offer discounts at certain locations or on certain days. In some cases, discounts may even vary by state or month. Always remember to bring your military ID with you when you go to a store and always ask for a manager if the person waiting on you does not know about a particular discount. Some discounts require that you register online first and some discounts you can just walk in and use.
Many Anheuser-Busch Theme Parks offer free admission to any active duty military personnel under their "Here's To The Heroes" program. Free admission includes the active member and up to three direct dependents. Participating parks include: Busch Gardens Williamsburg or Tampa Bay; SeaWorld San Antonio, Orlando or San Diego; Sesame Place; Water County USA; and Adventure Island. Valid Department of Defense ID required and some other restrictions apply, so check out their web site for more information.
The non-profit organization Veterans Tickets Foundation offers free tickets or discounted pricing to sporting events, concerts, festivals, theater performances, meals and much more. Every day there are events with empty seats that could be filled with military personnel. The Veterans Tickets Foundation matches donated tickets and/or discounts with those who serve or served. You have to become a member and provide proof of service to access all their discounts and benefits. If you would like to join or if you have unused tickets you would like to donate, check out their web site.
There are a few web sites I found that compile lists of companies that offer discounts to military personnel, including Brad's Deals, 4 Military Families, and Military.com. Be sure to do your own research first though. Offers/discounts change all the time and, as mentioned before, may vary by state or location. It doesn't hurt to call the store before going to verify that the discount is available. Listed below are just a few discounts I found on these web sites:
This is just a very short list of what is available. There are hundreds of companies that offer discounts to military personnel every day. Check out the web sites above for lots more choices!
If you own or run a company but do not offer a discount to military personnel, I urge you to consider it. It is not only a great way to help those who served our country, but it could also help you generate business. Our military personnel are a loyal and dedicated group, and word of mouth is a great advertising tool.
One last thought... some businesses offer a military discount but do not advertise it. It is always worth asking when you arrive whether or not they have a discount for military personnel. The worst that can happen is that they say no. The best is that you may receive an unexpected surprise.
Markets continued to reverse earlier month declines as investors "became accustomed" to the European debt crisis. Polls have shown ever increasing political support for parties and candidates who favor the necessary austerity measures to avoid a Greek exit from the European Union (EU). Greek politics are both complicated and messy, however suffice to say reason may still prevail. But make no mistake about it: If Greece exits from the EU, followed by Spain and perhaps even Italy, the EU will collapse - triggering all sorts of economic chaos. The next milestone will be the Greek Elections on June 17th. Stay tuned.
But talking about the woes of the EU is beginning to sound like a broken record. What other financial news should we worry about? The much hyped Facebook IPO has really turned into a cataclysmic flop, with the only winners being those who shorted the stock (taking a short position in a stock means you're betting it will go lower). As I type this, NASDAQ:FB is testing all time lows at well more than one fourth off the initial offering price. And while many have criticized the NASDAQ for botching the offering, and they did, the real problem was the initial price was simply TOO HIGH. WAY TOO HIGH. Even at the lows (so far) of $28 per share, the stock is still more than 75 times earnings. At the initial offering price of $38, the stock was near 125 time earnings. So, if your neighbor's landscaping business generates $100,000 per year in income for his family, would you be willing to pay $12.5 million dollars for it? Me neither.
Of course it is not quite fair to compare a neighborhood landscaping company to an upstart technology company, but it is important to keep in mind that the principles are the same. It is true that many companies trade at high "Price/Earnings", or P/E ratios, usually an indicator that the market expects robust FUTURE earnings. As a point of reference, Apple Computer (NASDAQ:AAPL) trades at just 14P/E. Caterpillar (NYSE:CAT) trades around 11P/E and Wal-Mart Stores (NYSE:WMT) at 14P/E. Venerable United Parcel Service (NYSE:UPS), until Facebook the richest IPO in history, today trades for less than 20P/E (it had only an 28P/E at the initial offering price).
In traditional business school classes, it has been generally taught that if a stock had a P/E ratio of much over 20 times it was considered "pricey". Putting that into perspective, a share of stock that cost $100 and earns $5 per share has a 20P/E. You don't have to be a math whiz to realize that is a 5 percent return on your investment. So if you were bold enough to fork over 38 bucks for a share of FB, you could expect to earn about 30 cents next year, or a .8 percent return (that's POINT eight percent). You could probably even match that risk-free in an FDIC insured bank account, despite some of the lowest savings rates in a century. The risk/return matrix just doesn't make sense. Of course, now with FB trading around $28 per share, the paltry earnings go almost nowhere in offsetting the more than 25 percent loss of PRINCIPAL - if you were lucky enough to have gotten in on the ground floor. Remind me again, what this company sells and how they make money at it??? It is a pity the media suckered a whole bunch of investors on this folly. Once thing is certain, Mark Zuckerberg is among the few who is likely smiling.
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