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- Student Loan Interest Rates Still Tangled Up In Congress
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On Jan. 20, 2017, the day President Trump took office, total U.S. federal debt tallied up to a staggering $19.9 trillion, nearly double the $10.6 trillion marked on Jan. 20, 2009, when President Obama was sworn in.
That trend will continue...
Here's a question for you: Has higher education become another great American scam?
I'm not talking about the rich getting scammed. They get what they pay for. They can afford to be scammed - they know what's up.
A lot of rich people send their kids to expensive private colleges hoping they'll get a good education that will lead them into their chosen careers. If they haven't chosen a career, rich parents are more than happy to give their kids the "experience" of college, with all its social aspects, country club accommodations, and alumni status.
But then there are kids who want a higher education because they believe a college education is their ticket to gainful employment and well-compensated careers. They pay for it themselves, or their hardworking parents cosign on loans or take out personal loans on behalf of their kids' college dreams.
The world is awash in debt, and it's simply unsustainable. As worldwide debt levels keep setting new records, there's no chance anyone will ever be paid back.
Even "vampire squid" Goldman Sachs, with its tentacles deep into bond markets, thinks so.
The sovereign debt crises we've seen over the last six years have triggered major sell-offs, but odds are high this $200 trillion global problem could start the mother of them all.
The amount of U.S. debt owned by foreign nations has never been higher.
Since Sept. 30, 2014, the U.S. Treasury has accumulated $17.8 trillion worth of debt. That’s roughly 103% of the total U.S. GDP in 2014.
Debt is the proverbial double-edged sword, offering access to costly assets, but sometimes driving overleveraged borrowers into bankruptcy.
Only politicians and some Keynesian economists could convince themselves - along with a good portion of the masses - that more debt is the solution to the world's already crushing levels.
It's gotten so backwards, it's downright scary.
Student debt in the United States has already surpassed the country's auto loans and consumer credit card debt. A student loan bubble looms on America's horizon, and promises dark times should it ever burst.
And earlier this month, the student loan problem worsened.
Federally subsidized Stafford loan interest rates doubled from 3.4% to 6.8% after Congress missed the July 1st 2013 deadline, and instead recessed for the Independence Day holiday.
The failure sparked frustration amongst student advocates nationwide.
However, Congress is able to retroactively "fix" the damage done by the soaring rate increase - that is, if Democrats and Republicans can come to an agreement on the matter.
So far, no dice: an emerging bipartisan Senate deal hit a stumbling block last week.
Even though the House was able to pass its own plan in May, the Senate is still at an impasse.
Democratic senators are avoiding the prospect of trying to "balance the budget on the backs of students."
On the other hand, Republican senators want a plan that doesn't risk adding huge sums to the deficit.
Here's what we've got so far:
The tentative deal ties Stafford loan interest rates with rates on the 10-year U.S. Treasury note.
Additionally, there would be a capped interest rate of 8.25% for undergraduates and 9.25% for all other loans.
Republicans would get a link between the financial markets and borrowing terms through this proposal.
Democrats would get a guarantee that interest rates would not reach 10%, their proverbial line in the sand.
Uncontrolled government spending could force the Fed to monetize the government's debt, creating runaway inflation, former Federal Reserve Governor Frederic Mishkin warned in a report.
If these circumstances were to occur, the Fed would be unable to do much, if anything, to control inflation, Mishkin said in the report, presented at a conference at the University of Chicago Booth School of Business.
In that case, Mishkin and his co-authors, David Greenlaw, James Hamilton and Peter Hooper, argue that the result could be "a flight from the dollar," according to a summary of the report by noted Fed-watcher Steven K. Beckner writing for MNI.
The report states, "Countries with high debt loads are vulnerable to an adverse feedback loop in which doubts by lenders lead to higher sovereign interest rates, which in turn make the debt problems more severe ... Countries with debt above 80% of GDP and persistent current-account deficits are vulnerable to a rapid fiscal deterioration as a result of these tipping-point dynamics."
The authors of the report estimate U.S. net debt, excluding debt held by the Social Security Trust Fund, at about 80% of GDP in 2011, double what it was a few years before. To make matters worse, the United States runs a persistent current account deficit, which is funded by borrowing from other countries.
This puts the U.S. in a worse spot than Japan which, although its debt is much higher as a percentage of GDP, has a large current account surplus and a high savings rate.
These U.S. municipalities are already in terrible fiscal shape due to the effects of The Great Recession. Now they're facing the effects of automatic tax increases and deep spending cuts of 9%, about $560 billion in total.
Like Gramm-Rudman-Hollings from 1985 that imposed automatic spending cuts, these powerful one-two combinations will floor cities that have unwisely come to rely on federal aid.
"Cities are going to be facing very rough waters for the next couple of years," predicted Michael Pagano, dean of the College and Urban Planning and Public Affairs at the University of Illinois-Chicago.
I hear from countless investors around the world every week. Many of them want to know what "else" they can do to protect their financial future, especially now that the markets could get ugly (again).
Here are a few quick thoughts:
1) Chart your course
A surprising number of investors tell me that things were going along just fine then - boom - one day they woke up and everything had turned into a disaster.
If only it were that simple. The truth is digging a hole takes time and a whole lot of effort. If you're in trouble now it's because you haven't been paying attention for a while.
Knowing what to do is only 10% of the game. The other 90% comes from having a plan.
I don't care if it's nothing more than on the back of an envelope or a Post-it like the ones that cover my desk. It's vitally important you have one.
Unfortunately, "Beating the S&P 500" doesn't qualify as a plan. Neither does "retiring in style." You have to plan for real-life goals.
For some people, this may be paying for a grandchild's education. For others it might mean building up $20,000 over five years to take that once-in-a lifetime trip, accumulating $300,000 to build a vacation home, or ensuring that you have $2,000-$10,000 a month to live on 20 years from now.
You have to be specific. That way you learn to control your money before it controls you. If you need help, find a competent financial advisor immediately and ask the right questions.
If you realize you can meet your goals by hitting singles, it makes no sense to constantly swing for the fences and risk striking out. Lower your risk and concentrate on the return of your money rather than the return on your money.
Not only will you sleep better, but chances are your returns will be more consistent for having done so.
2) Refinance your home (and everything else, too)
Interest rates have fallen for more than 30 years to near zero. They are unlikely to fall much further. If anything they are likely to rise. Nobody knows exactly when or how high they will rise, but that's not the point.
What's important to realize (and that many people have forgotten) is that the median 30-year mortgage rate is nearly 9%, or roughly 150% higher than the best rates available today. Even a minor uptick means you will lose huge amounts of purchasing power.
Obviously you have to pay closing costs every time you refinance, but the fees can be worth it if you plan to be in your house long enough to break even.
Here's how to run the numbers.
The London Whale trade, as it is informally known, was originally reported as a $2 billion loss. But now The New York Times has reported the loss will total $9 billion -- and maybe more.
But Money Morning subscribers were well aware of the possibility JP Morgan's losses would exceed $4 billion or $5 billion. Money Morning Capital Wave Strategist Shah Gilani repeatedly said this "hedge" was really a bet, and was among the first to predict how large the losses would eventually turn out to be.
Gilani, who hosts the radio show "On the Money!" in addition to his Money Morning duties, had this to say about JP Morgan's ill-conceived bet:
"What it does is shine the light on what is actually happening. It's not the loss in terms of the money, it's the loss in terms of faith for [CEO] Jamie Dimon, that he has been pushing hard against the regulators... in particular to the Volcker Rule, saying there is no need for it and it and that banks have a good handle on their risk... and that we (JP Morgan) don't have a problem with it because we are just hedging."
Just hedging? Gilani certainly doesn't think so.
Gilani said that statement is a flat-out lie and that Dimon has basically lied to Congress in his testimonies over the past weeks.
In the testimony before the House Financial Services Committee last week, Dimon said the London unit had "embarked on a complex strategy" that exposed the bank to greater risk even though it had intended to minimize risk.
The fiscal cliff is a real crisis looming at year's end. The fragile U.S. economy could face an unparalleled fiscal punch of as much as $720 billion if the scheduled changes go through as planned. They include the Bush-era tax cuts set to expire Dec. 31 and billions of dollars in programmed federal spending cuts.
U.S. Federal Reserve Chairman Ben Bernanke has warned that shocks from such changes will most likely cause the economy to contract, causing a recession.
And without cooperation from Congress, there's no alternate route for the U.S. economy to take.
Ernie Gross, Ph.D., MacAllister Chair and professor of economics at Creighton University, told Forbes, "The fiscal cliff is an almost 100% certainty."