Reducing financial aid complexity

The New York Times has a great article today about costly independent counselors who are paid by parents to advise their high school seniors on the college application and financial aid process. These consultants are paid up to $40,000 to train students, sometimes over their 4-year high school tenure, on everything from the admissions process to essay topics to what extracirriculars are best for a college admissions dean to consider, so that the students get in tot he best possible college program.

While the counselors of this story are obviously afforded only by the wealthy, I think the article speaks to a postsecondary education system that is so complicated that it requires a navigator to help you determine your financial aid options, what your student loan payments will be when you graduate, and what salaries are expected of various majors. True, some of these problems can be ameliorated with a good high school guidance counselor or parents who really examine financial aid material. However, the tangle of financial aid program through the federal government – Pell Grants, student loan programs, Hope and Lifetime Learning Tax Credits, and 529 college savings plans – are complex and difficult to navigate. This is especially true for students whose parents did not attend college.

This complexity includes determining what your aid will be by filling out the FAFSA; concrete information about your aid eligibility doesn’t arrive until months before you enroll, probably after you’ve already determined a college. In addition, the tax credits are received by a family after they’ve already paid tuition, which means it likely does not incentivize their college decision.

This is a case where an ounce of preparation – in the form of a simplified financial aid system – is worth a pound of additional student loans that young adults will be on the hook for once they graduate. There’s several proposals out there that would simplify the financial aid programs offered by the federal government. One proposal by Susan Dynarski and Judith Scott Clayton says that all federal programs should be combined into a simple streamlined grant, and eligibility determined by a postcard sent to the student well in advance of making a decision. Rather than filling out the FAFSA, eligibility would be determined through the family’s tax returns.

Clever ideas – such as this one – are needed to help reduce the complexity associated with going to college, and reducing the amount of debt that will consume young adults’ finances right out of college.

Why people don’t pay off credit card debt with savings they have

While I was home for the holidays, I ran into two friends who had credit card debt, but when I asked, they both had enough money in savings accounts to pay off their debt. I suggested that they pay it off: even the highest yield savings accounts these days might pay about 4 percent monthly, whereas it costs more like 12 percent to revolve credit card debt every month.

Richard Thaler and Cass Sunstein, the authors of the book I’m reading, “Nudge: Improving Decisions About Health, Wealth, and Happiness,” say this is a form of mental accounting. You may that savings fin a special account dedicated for something else, say, a downpayment on a house, and don’t think to use it for other purposes, like paying off the credit card. The sanctity of these special accounts may lead to this kind of behavior.

This seems to be just one example of how our use of financial services is linked to our own biases and behaviors, even when the best outcome — being free off credit card debt — could easily be done.

I have no doubt that financial institutions, and particularly credit card issuers, use this to their advantage: we underestimate the number of times we’ll make a tiny mistake like paying late or going over the limit. And banks charge a $39 fee for each of these mistakes.

In my opinion, each of these “tiny mistakes” is akin to forgetting your mother’s birthday or accidentally leaving your keys in the fridge? What if credit card CEOs were charged $39 every time they forgot which day the garbage man comes?

Pay at the grocery store with two credit cards

I’ve been noticing a trend that many retailers are making it easy to pay for a transaction in more than one way: with both cash and a payment card, or with multiple payment cards. I first noticed this when paying for a couple of household items at Target.  I know it can also be done with payments on Apple’s website also.

Not sure if this this is a symptom of high credit card debt or not. It certainly makes it easier to pay cash for a portion of an item and finance the rest. Or, it could be due to innovation by payment systems. Or maybe they’re just making it easier for people to share purchases — for example, two roommates who can split the cost of the cleaning products they buy at Target.

Not all credit cards are bad for you. Try one from a credit union.

Wanted to plug this post on qvisory.com. While our largest banks are raising rates and fees on their credit card customers with one hand, and accepting hardworking Americans’ bailout money with the other, credit unions and community banks have quietly been surviving, doing business the way it’s always been done: accepting deposits and making good loans to creditworthy borrowers and keeping them on the books (as opposed to quickly selling them to investors).

Credit unions are not only surviving, but still treat their credit card customers with respect by offering cards with friendly terms. While most credit unions have remained small, and true to their mission of serving “people of small means,” a few of them have become very large and have developed less friendly products.

How do you pick the best credit card? Those offered by the largest U.S. banks all have very similar features, fees, terms, and conditions, now that consolidation in the industry means that only a handful of lenders make up the lion’s share of the market. The only way they seem to differentiate themselves is through the design of the card or through rewards programs, which are, of course, just window dressing on the true costs of using a credit card.

Instead, you might try getting a credit card from a credit union. Cards offered by credit unions generally make their terms clearer in their offers, and they’re often on much friendlier terms and conditions, says a 2005 report by the consumer group Woodstock Institute, which surveyed the 10 largest banks and 10 largest credit unions at that time. Though credit unions’ cards may be more difficult to find—you’ll have to be a member of a credit union first, and they likely aren’t sending you credit card solicitations every week like banks are—credit unions usually offer all the benefits of a bank credit card, but in a way that is more clear and friendlier.

(Read rest of post.)

Credit cards and colleges collude

File this under “you thought credit card companies are shameless, and now colleges are helping them out.”

Last week, the New York Times had a terrific article on how colleges sell lists of their students, alumni, and staff to credit card companies- in one case at $25.5 million over 11 years- and use those deals to market their cards using the colleges’ emblems and mascots. This comes on top of the numerous credit card solicitors already hanging out at football games, bookstores, student unions, and on the first week of school, offering a mini basketball or blanket in return for credit cards with shady conditions and astronomical rates.

Certainly, students have the right to behave as foolishly as they want. But this article smacks of parallels to the tobacco industry, which also markets to very young adults in an attempt to get them hooked on their product for life at a very young age.

One topic of interest for me lately is the credit card business model, and determining how much longer it can be sustainable. With their numerous ads, direct mail marketing, and these enormous deals with colleges, obviously credit card companies devote enormous resources to marketing. While I don’t doubt that their business model works, it seems like banks would want to control how shameless they look, especially in light of most of them receiving funds through the TARP bailout.

Check out mint.com

File this under “nifty web apps to help you budget your money.”

I’ve been wanting to check out mint.com for a while, and figured the New Year was a good excuse as any to start using a budget web application. Mint.com is a tremendously easy and convenient way to see how you’re spending your money. First, after setting up an account, you give mint.com the passwords to your bank account, credit card, savings account, and other accounts — rest assured that mint has partnered with most financial institutions to create a secure connection.

Mint then categorizes all of your purchases into home, utilities, food & dining, etc. This is all done by importing your bank account or credit card statement — I had to categorize a couple of the transactions that mint didn’t recognize. Your purchases are displayed in nifty pie charts, allowing you to see how well you budget your money. You can even compare your spending on certain categories (e.g. food and dining, a grouping where I hope to reduce my own spending) to an average of other users of the service.

Once you get over the creepiness of signing over a few of your passwords, mint.com has tremendous convenience and utility. Better than any budgeting software I’ve used. And it’s free.

I was referred to mint.com by qvisory.com, another website I’ve been a big supporter of.

Generation What?

I’m still searching for a real theme for this blog as evidenced by the hodgepodge of topics I’ve been posting on. But increasingly I’d like to write about the generation I’m in and the in between years that we’re in, brought on by the fact that the economy has made it harder to attain the traditional markers of adulthood — moving out, a job with good benefits, and having enough to get married. This economic uncertainty brings with it many challenges, including indebtedness. I think it certainly applies to anyone born after about 1980.

But what do you call this generation? Generation Y makes sense, it’s the one after Generation X. The millennials is widely used, but makes us sound like beings from outer space. I like this candidate from blogger Matt Yglesias for a good name — Generation Trail, because we’ve all been forced to play Oregon Trail at some point.

Journalists mischaracterize the bad economy that Boomers left for Gen Y

Generation Y is in a perilous economic condition: by the time we enter the workforce, we’re saddled up with so much student loan debt we could be paying 15 percent of our income to service it. Incomes for workers haven’t risen since the 1970s, and our jobs are less likely to offer full health benefits and a good retirement plan. Baby boomers — and specifically conservative boomer lawmakers — have made sure that the safety net that keeps our wages, health care, and education secure has been shredded.

That’s why I think that Boomer journalists — including the writer of this Wall Street Journal piece “The Next Bailout: Your Adult Children?” — are misinformed about the economy when they portray Gen Y as “kids” whose “moms and dads will face tough questions about whether to bail [us] out.”

We’re not kids waiting for our mommies to come tend to us again. Rather, we’re workers contributing to near-record high productivity, but facing more economic uncertainty than boomers ever had to face. Some of the jobs that college prepared us for don’t exist any more, and we have fewer tools to mitigate the damage. Boomers didn’t have to deal with the predatory credit cards, mortgages, and checking accounts that we do, thanks to a de-regulated financial system, where one late payment means that my lender jacks up my rate to 30 percent. 

But based on the literature out there, this WSJ writer is indicative of how the boomers portray us:

Similar to questions about the overall economy,” many parents are wondering, “Should I bail my kid out? Or let him claw his own way, let him fail?” says Bruce McClary, a credit counselor for ClearPoint Financial Solutions, a nonprofit Richmond, Va., credit-counseling service.

…

But student-debt worries are “going through a lot of people’s minds right now,” says Robert Allen, a Downington, Pa., father of three young adults in their 20s who have all taken student loans. “Children are coming out into one of the worst job markets God ever made and lugging with them all this debt.”

Two of Mr. Allen’s three children succumbed to credit-card pitches on campus and took on $700 each in debt very quickly. After scolding the lenders — “Haven’t you credit-card people taken enough money from innocent young people already?” — the Allens made the large initial payment demanded by the credit-card vendor. Then, they required their children to step up their work hours and split remaining payments 50-50. “They have to have some skin in the game” to learn responsibility, Mr. Allen says.

…

“You can make speeches and say, ‘I’m going to let you handle this yourself and you’ll pay the consequences,” says Mr. Allen, an ex-Marine who works two jobs. But for parents who have co-signed the loans, “that’s stupid … because the minute they start taking water on their credit, you’re coming up in the gunsights” of creditors.

Not all of us are need coddling from our parents like these examples. If she interviewed a Gen Yer for her article, she might know that Gen Y is making its own financial decisions, albeit in a much more complex environment, and asking our parents for advice. And the intergenerational transfer of wealth isn’t new — what’s new is that the boomer’s policymakers have so shredded the safety net that we’re going to need our inheritance now to get by. Moreover, it’s obvious the WSJ’s audience doesn’t reflect reality. Not all of us have rich parents that can give us a “bail out.” Moreover, 20 percent of us our foreign-born, who likely aren’t used to parental largesse.

Boomers had it much better. College wasn’t nearly as expensive, and Pell Grants and other educational supports easier to find. After college, lower-skill jobs with good incomes were more readily available. Labor unions made sure that wages were tied to productivity, and that jobs came with good health care and retirement plans. Unemployment insurance was much stronger for times when you were out of work.

I realize that this post makes me sound like an angry, entitled young person. But, given that the government and the economy gives us far less support than the boomers for our education, health care, and retirement, I’m with those who say Gen Y hasn’t asked for enough. And I’m hoping someday we’ll might be able to express that to the boomers.

Emotions from traders around the world: they’re sad, stressed, scared, about to vomit

I’d like to take a break from the seriousness of this blog (if it can be called that) and focus on a trend I’ve noticed: our nation’s stock traders seem to be showing some real emotion. I’ve always wondered if each trading floor comes with its own photographer to take pictures at just the right time. Sometimes I like to imagine that I’m the only contestant in a caption contest. Other times I just like to comment on them. Here are some of my faves:

Hands-on-head: A classic trader look.

 

She went with a variation of hands-on-head: HAND-on-head.

 

 Our nation’s great Media showed us images from around the world so we know that global traders are also emotional. Hands-on-head is also popular in India.

 

He’s having a bad day obvi. He should have stocked his satchell with advil. Ouch.

 

“How was work today hon?”
“Oh, the usu. Just stared off somewhere with my hands on my mouth.”

 

Our economy may soon be at the point where its o.k. to steal things if you need to, so as far as I’m concerned, these guys should help themselves to what’s left inside that Budweiser truck.

 

 

Here’s my ultimate fave: the vom shot. Don’t vomit, bro.

Barney Frank, Committee Chair and Entertaining Guy

Barney Frank not only serves as a capable Chair of the House Financial Services Committee, but also have entertaining skills. Deflecting the claims that he somehow was to blame for Fannie and Freddie’s demise, he made this appearance on the O’Reilly Factor. While O’Reilly started self-destructing, Barney managed to sneak in the line “Your stupidity gets in the way of rational discussion.” I’m going to try to use that in convo more often.

If the video player doesn’t embed in your browser, link here.