Shen Lu is a personal finance reporter at MagnifyMoney. Her work examines the intersection of politics and consumer finance. She frequently writes about financial challenges that women face. Shen Lu recieved her master's degree in journalism with a focus on business and economics reporting from Northwestern University's Medill School of Journalism.
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Jeff Neal, 33, of Lancaster, Pa., bought a bigger house last year when his wife was pregnant with their third child.
They planned to sell their two-bedroom home first, but the buyer backed out of the deal after the couple made an offer on a four-bedroom house in the same city. Fortunately, Neal’s relatives pooled money and lent him the cash so he could pay off the 30-year mortgage on the first home. As a result, the Neals were able to buy their next home before selling the old one.
Neal, who runs an e-commerce website, eventually became the landlord of his first house for a painful eight months, during which time he drove 35 minutes most weeks between his new house and his old one to make sure things were running properly. The total cost of maintenance, taxes, insurance and utilities for his old house amounted to more than $9,000. Owing not just money, but gratitude, to generous relatives left Neal feeling even more unsettled.
“It was challenging, nerve-wracking, and stressful,” Neal told MagnifyMoney.
This spring, Neal sold the old house and paid back his relatives. Although he liked the perks of buying before selling — namely a (relatively) relaxing moving experience — he said next time he would try to sell a house before buying anything new.
Second time’s a charm? Buying a home the second time around sounds easier — you’ve gone through the process before and understand the ups and downs — but the process of juggling two transactions at once can be daunting. You’re both buyer and seller now. The seller in you might want to take advantage of a standout spring real estate market, but the experts we talked to have said that personal circumstances matter more.
May is the best month for home-selling, according to real estate research firm ATTOM Data Solutions. A recent report found that homeowners who cashed out in May received, on average, 5.9% above asking price. June was a close second, with sellers taking home a 5.8% premium. On the flip side, the housing market cools down in the fall and colder months (though homeowners in steamy Miami are reportedly better off selling in January). ATTOM data suggest that October and December are the best months to buy, when sellers received a 1.6% premium on average.
So, buy first or sell first? When is the best time to start the process? MagnifyMoney spoke with real estate experts who analyzed four common scenarios for move-up buyers and listed pros and cons of each.
Selling before buying, timing the market
From a pure economic standpoint, experts said it would be ideal for move-up buyers to sell their homes in the spring, and wait until fall to buy their next house. But real life is often far more complicated. Other factors go into the process of buying besides price, and the stress that comes with two moves may not be worth a better bottom line.
However, for those who can time the market this way, experts said this strategy does work to a homeowner’s advantage. When the two separate transactions are not contingent upon each other, you may enjoy much more freedom and peace of mind than if you sell and buy almost simultaneously.
“When you’re selling and you’re not contingent on the front end, it’s a pretty clean sale and you’re not worried about this other purchase,” said Daren Blomquist, ATTOM’s senior vice president. “On the back end, when you’re actually buying a property, you’re a non-contingent offer, which will put you ahead of the line of a lot of other buyers who are continuing on their home-selling.”
George Ratiu, who leads research for the National Association of Realtors, told MagnifyMoney that those who are in a position to sell in the warmer months and then purchase in the fall months may be working professionals without children. They have a lot more flexibility in timing, as they are not tied to the school calendar.
But there’s an inconvenience factor in delaying the time between when you sell and when you buy. You will have to factor in the housing costs during the gap, as well as the pain of moving more than once.
While such a delay could save you some money, Ratiu cautioned that trying to time the real estate market is about as fruitful as trying to time the financial market — both are unpredictable. Plus, local market conditions can vary from regional or national trends.
“I think trying to time the market is a difficult proposition and one which should take a backseat to a buyer’s circumstances,” Ratiu said.
Selling before buying, but almost simultaneously
In most cases, Blomquist said, move-up home buyers sell their old home first and take the profit from that sale and roll it into the purchase of another home later, but not that much later. The processes happens almost simultaneously because people don’t want to have an interruption in moving, he said.
But because these purchases are typically contingent upon the selling of the old home, three parties are involved in the process, which adds a layer of complication.
“It’s not just you as a buyer qualifying for a loan,” Blomquist said. “It’s another buyer qualifying for a loan on your home. That just multiplies the number of things that could go wrong, that would trip up the sale of the home.”
In hot markets, such as the San Francisco Bay Area, sellers fearful of not being able to find that new house wait longer, exacerbating an already tight inventory. And they have good reason to worry: If it takes longer than you thought to find another home, you risk paying more on intermediary housing expenses.
“You are sitting there without a permanent place to live and that is a risk in and of itself, although I would say that’s a lower risk then taking on two 30-year mortgages at the same time,” Blomquist said.
Buying before selling
This could indeed be a risky proposition for those who buy a new home before selling the old one. Upside: You can take your time moving, which offers a certain level of freedom.
“If the market tanks, you may not get as much profit out of that sale later on,” Blomquist said. “Or if you lose your job, you may not be in a position where you’d want to be owning a home” — much less two homes.
But for those who are close to paying off or have already paid off the mortgage on their first home, the circumstances change pretty dramatically: It’s a lot easier to see that old property as an income generator even if you are not able to sell it right away.
Experts say that people who have this flexibility in their timing and finances are most likely to be retirees. (More on them in a second.)
A bridge loan may tide you over. Younger families like the Neals who buy a house before selling the first, but perhaps lack interest-free financial assistance from relatives, may want to consider a bridge loan. A bridge loan provides the short-term funding required to purchase the new home, buying you time to get your current home ready for sale. Ideally, you would move into your new home, sell your old property, then pay off the loan quickly.
The strategy is not for every real estate buyer because it comes with risks. Plus, bridge loans are not easy to obtain for many. Borrowers in general need to have excellent credit, a low debt-to-income ratio and home equity of 20% or more.
Blomquist said bridge loans work best in tight housing markets where sellers are confident that their first home will sell easily. Read more about bridge loans in this guide.
Hold onto that first home as a rental instead of selling
Retirees who have paid off their first house, and therefore wouldn’t shoulder two mortgages when they buy their next home, may want to hold onto the first home as a rental instead of selling. Or, young professionals moving for a new job where home prices are significantly lower might be able to swing two house payments.
“If you’re able to hold on to that first home, it can become a rental that can generate positive income for you potentially if the numbers work out,” Blomquist said. “And over time, if you own it for another 20 or 30 years, it will likely appreciate in value as well.”
To be sure, not everyone can afford to do this. But if you are able to manage it, a lender will likely count your rental earnings as income, which will also help you to cover the mortgage payment.
However, as we learned in the last recession, home prices don’t always appreciate — sometimes they slide. Maintaining two properties is also no easy task. Ratiu suggested you check your financial goals and time horizon, and think through whether it’s realistic for you to manage all the headaches that may come with renting a residence before deciding to become a landlord.
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What to Know Before You Sublet Your Apartment This Summer
Wednesday, May 2, 2018
Editorial Note: The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities prior to publication.
We’ve all been there. You landed a summer internship or a new job in a different city, or you have to move into a new house before your lease is up.
Rather than doubling up on rent or losing your deposit, consider a sublease. Leasing your apartment to another tenant allows you to get out of Dodge and keep some cash, but you could find yourself in unwanted — and expensive — legal battles if done improperly.
Here’s how you can manage a sublet legally to avoid unnecessary stress and hassle.
Even if you find a reliable subtenant, it’s a good idea to get your agreement in writing. You can find sublease samples online. The samples are basic boilerplates where you can put in the amount of rent, due dates and what the security deposit is.
Some people are able to make a profit off a sublease. Some have to take a loss, such as renting for a price lower than the rent they pay, if they are in a rush to find a subtenant. And others take the same amount of rent to break even. It all depends on the specific sublease situation, said John Bartlett, executive director of the Metropolitan Tenants Organization in Chicago, a tenant advocacy group.
“It is best to rent the unit to a trustworthy person,” Bartlett said. “And if that means suffering a small loss, then that is better rather than holding out to get the full rent or renting to someone with a less than stellar rental record.”
To avoid unexpected costs while you’re away, you can add additional clauses to the agreement to make sure your subletter complies with the terms of the lease. A few common examples:
Require the subtenant to take responsibility for any damage to the apartment during the stay.
The subtenant should keep furniture in good condition, assuming you plan to leave personal items.
If you live in a city that has specific recycling requirements, you can ask your subletter to follow those rules to avoid fines.
Ask for a security deposit
If you are subletting your apartment, experts suggested you take at least one month’s rent as a security deposit. You can request more if you think it’s appropriate, but for tenants of rent-stabilized apartments in New York, you can only take one month’s rent as a security deposit by law.
Remove yourself from the lease, if you can
Bartlett said in many leases, the tenant and subletter appear on the same lease contract. As a result, they will be jointly liable for damages or missed payments. That means that the landlord can go after one tenant or both if things go wrong.
If you don’t plan to return to the apartment, Bartlett recommended you try to convince the landlord to take you off the lease and sign a new lease with your subtenant. That would be the ideal situation for you, but the landlord has little incentive to sign a new lease if they can get you, the tenant on record, to pay rent should things go awry with the subtenant, Rozen said. Your landlord may refuse, but it’s worth a try. Sweetening the deal by paying a negotiated fee to your landlord may be worth it, Bartlett said.
Things you should do before subletting your apartment
Subletting means you become the landlord to the subletter, and there’s no contractual relationship between the subletter and your actual landlord, Jennifer Rozen, a New York City tenant lawyer, told MagnifyMoney.
If a subletter fails to pay rent, or damages the apartment, as long as the lease is still in effect, you could still be on the hook for the full rent amount or the damages, tenants’ rights experts said.
Given the potential risks involved in subletting, here’s some homework you need to do before giving your apartment key to your subtenant:
In some places, like Illinois and New York, you have the legal right to sublet as long as the landlord doesn’t reasonably deny it. In New York, requests must be in writing and sent by certified mail with an attached proposed sublease that includes the subletter’s information. The landlord has 10 days to look over your request and ask additional questions, but Rozen says the entire approval process could take as long as two months. In other states, including Iowa and Kansas, you cannot sublet unless your lease permits it.
No laws prohibit subletting, but the subletting procedure may vary greatly based on specific leases. You should see if your lease has restrictions on subletting. If the lease or the state law requires you to contact the landlord and go through a formal process, then you need to abide.
In many states, landlords cannot unreasonably deny a subtenant, but they do want to be involved in a sublease, according to Bartlett.
“They’re not going to want some person that they don’t even know who it is to live in their unit,” Bartlett said.
Once you are clear on your obligations and responsibilities, you can start looking for a subtenant. Experts interviewed by MagnifyMoney strongly advised that you interview your candidate(s) and do your due diligence.
One way to protect yourself as a tenant is to call your potential subletter’s previous landlords to inquire about his/her rent payment history, Bartlett said. Rozen said it’s legal for you to request W-2s, recent pay stubs and credit reports from the prospective subtenant, or recent bank statements if this person is a freelancer or unemployed.
“You definitely shouldn’t get yourself in a situation where you no longer have the right to be in the apartment because you find the sublease, [but] you don’t know whether the person is financially viable,” said Rozen, who has represented hundreds of residential and commercial tenants.
If you want to go forward with a subtenant whose financials are questionable, you could ask him or her to pay upfront the partial or full rent amount for the sublease. “That’s the safest thing to do because the only thing you can do as the tenant of record is pay the rent to avoid getting sued by the landlord, then you have to go after the subtenant,” Rozen said.
What’s the risk of subletting without asking your landlord?
Although it’s best to inform your landlord of the sublease and follow the rules, in reality, many people don’t do that. It’s fine if you don’t get caught, but the consequences could be severe if you do.
In many leases, Bartlett said, there’s a clause stating that the unit is only for the person named on the lease. If the landlord finds out that a tenant has sublet their property while keeping it in the dark, the landlord could terminate the lease and demand that you leave the property. You could be liable for any damages or unpaid rent, experts said.
In New York, if your landlord finds out about a subtenant he or she didn’t approve, or simply doesn’t want the subtenant, the landlord may send you a legal notice requiring you to remove your subletter in 10 days. The landlord cannot directly evict the subtenant without getting you involved. Miss the deadline and your landlord could terminate your lease and try to evict you in housing court, which in turn, removes the subtenant. Or worse: “If you have a legal fee provision in your lease, then the landlord would be entitled to collect their legal fees from you if you go to court … and lose,” Rozen said.
What to do when things go wrong?
When she was in law school, Rozen sublet her apartment, but her subtenant wouldn’t leave the apartment when the lease was up and stopped paying rent.
In that situation, Rozen said the tenant would have to file a claim in court against the subtenant. Such cases often takes months, unless your subtenant voluntarily moves out after the case is filed. In Rozen’s case, her subletter finally left the apartment willingly, but he skipped on two months’ rent and left town. It was too late for Rozen to sue at that point.
“I will never make that mistake again,” Rozen said. “I was a poor law student.”
If your subletter doesn’t pay rent or damages your apartment, Rozen said the first step is to write a demand letter explaining the situation and threatening to sue if they don’t repay the rent or the costs.
If a demand letter doesn’t work, an easy and inexpensive way to handle the situation is to file a small claims lawsuit, which typically doesn’t require hiring an attorney, Rozen said. You could collect up to a few thousand dollars, depending on your state. In New York, for instance, the maximum is $5,000.
Resources for tenants
There are many housing advocacy groups across the country dedicated to helping tenants. When involved in disputes with your landlord or your subletter, you can turn to local organizations for legal advice and assistance. To find your local tenant advocacy groups, check out this Tenant Rights page on the U.S. Department of Housing and Urban Development website.
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A March government study found that about 12,000 recipients of the TEACH Grant, a grant for college students who agree to teach needed subjects at lower-income areas, had their grants converted into loans.
This happens sometimes because students didn’t fulfill their service obligations, and other times it was due to minor process errors, according to the U.S. Department Education’s study of the TEACH Grant program.
The report said 63 percent of TEACH Grant recipients who began their teaching service before July 2014 had their grants converted to a loan, either because they had not met the service requirements or the annual certification requirements. When TEACH Grant recipients first received their grants, the study says, 89 percent participants thought they were likely or very likely to meet the service requirements.
Ashley Norwood, consumer and regulatory adviser at American Student Assistance, a nonprofit organization dedicated to helping students complete the financing and repayment of higher education, told MagnifyMoney she has seen more grant recipients face the grant-loan-conversion issue as more students have signed up for the program, and it happened for various reasons.
“I don’t think anyone is all at fault. I think that it’s a combination of errors,” said Norwood.
The program is complicated — the amount of paperwork and procedures required to administer and participate in the TEACH Grant is onerous, she said. Oftentimes, schools don’t offer rigorous upfront counseling about the grant due to a lack of resources or personnel. And on the students’ part, they don’t always stay on top of the service obligations and other requirements they agreed to, Norwood said.
In this guide, we offer expert tips for getting the grant and avoiding the grant-loan conversion. We also provide actionable advice for grant recipients whose grants have been converted to loans.
Since 2008, the federal government has been offering TEACH grants to college students who commit to teach in a needed field, like math and science, at a school that serves students from lower-income families.
A student can receive a Teacher Education Assistance for College and Higher Education (TEACH) Grant of up to $4,000 a year, but budget cuts reduced the maximum award in recent years:
For any 2017–18 TEACH Grant first disbursed on or after Oct. 1, 2016, and before Oct. 1, 2017, the maximum award was $3,724.
For any 2017–18 TEACH Grant first disbursed on or after Oct. 1, 2017, and before Oct. 1, 2018, the maximum award is $3,736.
Recipients must complete coursework needed to begin their career as a qualifying teacher, and must sign an agreement to teach at least four years in an eight-year time frame after graduation. After finishing their program, they must provide an annual certification that they are currently teaching in a high-need field and a low-income school or intend to do so. Those who do not meet the requirements will see their TEACH Grants be converted to unsubsidized loans.
How to get the TEACH grant
Step 1: Do the research
If you are interested in applying for TEACH Grant, you should contact the financial aid office at your school to find out whether your school participates in the TEACH Grant and which courses of study are TEACH Grant-eligible. The financial aid office staff should be able to walk you through the benefits and service requirements.
As of the first quarter of the 2017-18 academic year, 572 higher education institutions participated in the grant, according to the American Association of Colleges for Teacher Education. Schools determine which programs are TEACH Grant-eligible.
It’s not as simple as an English major hoping to teach English after graduation being eligible for the grant. A program of study that’s eligible for the TEACH Grant is a specific program designed to prepare students qualified to teach in a high-need subject. You want to make sure you are enrolled in the right program. It could be an undergraduate, graduate or post-baccalaureate program.
A post-baccalaureate program is not TEACH Grant-eligible if your school also offers a bachelor’s degree in education.
Step 2: Apply
Once you decide to participate in the program and are enrolled in the right program, you will need to apply for a TEACH Grant by completing a FAFSA form.
Step 3: Complete counseling
Then you will need to complete TEACH Grant Initial Counseling, which occurs online and explains the terms and conditions of the TEACH Grant service obligation.
This is an important task because you will learn what exactly you are signing up for during the process. It takes about 20 minutes to complete the counseling, and you will need a FSA ID and your school name for it. You must complete the counseling process every year you receive a TEACH Grant, and you can do so here.
Step 4: Sign the agreement
The last step in the grant application process is completing an Agreement to Serve, a legally binding document that explains the service obligations and conditions of the TEACH Grant, as well as your rights and responsibilities if the grant is converted to a loan. You commit to those terms when signing the Agreement to Serve.
Each year you receive a TEACH Grant, you must sign an Agreement to Serve. A read-only version of the agreement can be accessed here. You can sign the document here. Your school will be notified once you submit your Agreement to Serve.
An additional note
It is important to keep a copy of all of your TEACH Grant paperwork and correspondence with your grant servicer for your records.
What to do while you’re still in school
You only qualify for a grant if your score is in the top 25th percentile on college admissions tests, and you need to maintain a cumulative 3.25 GPA to maintain your eligibility for the funds, according to the American Association of Colleges for Teacher Education. Remember to complete the counseling and the Agreement to Serve each year that you receive a TEACH Grant.
When you’re looking for employment, make sure that you are going to teach full time in a high-need subject in a school serving low-income families.
Experts suggest grant recipients be cognizant that this grant can turn into a loan if you are not careful.
Norwood said if you decide that you are not going to teach or you are not going to serve in a low-income area, you may return the grant, but you have very little time to make that decision. You can cancel the full grant or a portion of it the first day of the school’s payment period or 14 days after your school sends you a notification stating your right to cancel. If you do so during the timeframe, your school will return to the Department of Education your awarded funds, which won’t be converted to a loan.
How to prevent the TEACH grant from turning into a loan
Meet all the service requirements
Once you complete your education, you have to meet all the requirements stated in your Agreement to Serve:
1. You must teach in high-need fields
They are identified by the federal government or a local education agency. Common high-need fields include bilingual education, science, reading specialist, math and foreign language. The subject you teach must be listed within the Teacher Shortage Area Nationwide Listing for the state in which you teach, either when you begin your service or when you sign the Agreement to Serve, according to the Department of Education. The most recent list is here.
Norwood said that it’s fine if teachers bounce around qualifying subjects, but if you teach any of the fields not considered a high-need one, then you’re not performing the required service.
2. You must work full time in qualified fields for at least 4 years
They don’t have to be four consecutive years, but you need to finish your teaching service within eight years of graduating. And more than half of the classes you teach each school year are in high-need fields.
3. You must teach in a school serving low-income families
You must perform the teaching service as a highly qualified teacher (defined by Title IX) at a low-income elementary school, secondary school (public or private) or educational service agency.
Qualified schools are listed in the department’s annual Teacher Cancellation Low-Income Directory. Schools operated by the U.S. Department of the Interior’s Bureau of Indian Education (BIE) or on Indian reservations by Indian tribal groups under contract or grant with the BIE qualify as low-income schools. That list is here.
4. You must provide your TEACH Grant servicer with documentation of service performance process
Within 120 days of completing the education for which you received a TEACH Grant, you must tell your TEACH Grant servicer in writing that you are working as a full-time teacher (or that you plan to do so), according to the terms and conditions of the TEACH Grant service obligation.
Complete the annual certification
Every year, you have to offer your grant servicer paperwork documenting your teaching service. You can obtain the required form from your servicer. The paperwork must be signed off by the chief administrative officer or an authorized official at the school where you taught for the year being certified. The official must confirm you performed qualified service in the right school and more than half of your classes were in high-need fields.
If you have completed your education but are not employed in a qualifying teaching position, you must notify your grant servicer at least once each year that you still intend to satisfy your service obligation.
Your TEACH Grant servicer is supposed to contact you periodically to confirm your intent to satisfy your obligation, but experts said you need to be on top of providing annual information. Take it upon yourself to make regular contact with your servicer, particularly if you don’t start your qualified service immediately after finishing your education.
At the latest, you should start your qualified teaching service four years after completing the program where you received the TEACH Grant, Norwood said.
If you don’t meet any of the service requirements, your grant will be converted to a direct unsubsidized loan. Read more about conditions that convert a TEACH Grant to a loan here.
Common problems
Norwood said many people encountered issues because they didn’t get the right paperwork to keep the servicer updated of their progress, possibly because they didn’t keep their address up-to-date with their servicer. It could also be that they didn’t complete the form correctly or missed the deadline to submit their annual certification.
“If I had a piece of advice, I would say just to students to make sure they really pay attention to what they’re signing, and open mail from the Department of Education or a servicer as soon as it comes,” Norwood said. “Don’t ignore it.”
A staff member at the American Federation of Teachers spoke on background that sometimes the grant is converted to a loan because the recipient made a minor error in their paperwork, but there is no appeal process with the servicer, and so the teacher can’t correct it.
Because the servicer is very particular and exact about details, the American Federation of Teachers advises educators to carefully review all the forms they send to the servicer.
What to do if you feel you your grant is wrongly converted to a loan
The Department of Education contracts servicers to handle the TEACH Grant, and FedLoan Servicing currently services TEACH Grants. It monitors the process to make sure recipients do everything correctly and, after you complete the paperwork certifying that you’ve met all the qualifications, you send over the documentation. In the event that a grant must convert to a loan, FedLoan Servicing will execute it, apply interest retroactively and begin loan servicing.
If you think you have done everything correctly and met all the requirements but your grant is converted to a loan, experts suggest you engage with your grant servicer first.
Norwood advised grant recipients in this situation to reach out to the people whom you have been working with on the grant. If that doesn’t work, you can then seek help from the servicer’s ombudsman, an impartial mediator who will take a look at the situation, identify problems and help settle the issue, Norwood said.
If FedLoan Servicing’s ombudsman can’t help solve the problem, you can then file a dispute with the Federal Student Aid Ombudsman Group with the education department. The ombudsman is established as a neutral party to help fix problems that include grant-loan conversion.
You can reach the ombudsman online, by phone at (877) 557-2575, or at: Office of the Ombudsman U.S. Department of Education 830 First Street NE, Mail Stop 5144 Washington, D.C. 20201-5144
Depending on specific situations, Norwood said issues caused by recipients, such as missing a deadline, may not get much sympathy. But if processing errors occurred on either side, there may be some leeway there, and a loan may revert back to a grant, Norwood said.
How to repay a TEACH grant that converted to a loan
If the grant converts to a loan, you will be given the opportunity to pay the interest that accrued before it capitalizes.
“If you can make extra payments,” Norwood said, “I would make extra payments to help pay down that interest.”
But if you can’t, interest capitalizes when the loan enters repayment at the end of a 6-month grace period, which starts the day after your grant is converted to a loan.
Norwood advises you make sure to get on a repayment plan that works for you. If you have other federal loans in your name, you may consolidate them.
Interest rates
The loan servicer will retroactively apply interest, which accrues from the time you received your first grant, as if you signed a loan instead of received a grant.
For instance, if you signed the agreement in September 2013, it would be subject to the interest rate applied to unsubsidized direct loans disbursed in September 2013. The servicer will calculate your outstanding interest as if it had accrued over the last five years.
If the grant is wrongly converted to a loan, Norwood suggests the recipient still make payments, because you could always get refunded later.
You can also ask for the loan to be placed in forbearance while your case is being investigated by the Department of Education. This way, you can put off making payments until you’ve received a resolution. If the grant was indeed wrongly converted to a loan, Norwood said you won’t need to get a refund because you haven’t paid anything upfront. But if the loan doesn’t revert back to a grant, you at least paid the interest that accrued during the forbearance.
Repayment plans
The repayment plans for a student loan converted from a TEACH Grant are the same for all other federal loans. You can go with the standard repayment plan, graduated plan or income-driven plan, among others. Your loan servicer will be FedLoan Servicing.
This article may include links to SimpleTuition, a subsidiary of LendingTree, MagnifyMoney’s parent company.
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As China and U.S. Up the Ante, When Should Americans Worry About a Trade War?
Friday, April 6, 2018
Editorial Note: The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities prior to publication.
The story was originally published on April 4, 2018.
Update: Trade dispute between the United States and China escalated for the second time this week as President Donald Trump threatened late Thursday to add tariffs on additional $100 billion in Chinese goods, a week after announcing tariffs on $50 billion in Chinese imports.
Trump said the new tariffs were a response to China’s “unfair retaliation” of announcing its intention to impose 25% tariffs on $50 billion worth of U.S. exports. China was answering the Office of the U.S. Trade Representative’s (USTR) Tuesday plan to impose 25% tariffs on 1,300 products imported from China.
“If the U.S. persists in unilateralism and trade protectionism despite opposition from China and the international community, China will fight to the end and hit back resolutely,” a spokesperson for the Chinese Ministry of Commerce said in a statement Friday in Beijing.
The U.S. imports $479 billion worth of goods from China, its largest trading partner. If the announced U.S. tariffs on $150 billion in Chinese products were to be implemented, nearly a third of Chinese imports would be affected.
The Trump administration was first to the punch. On Tuesday evening, it proposed a plan to slap 25% tariffs on 1,300 products imported from China. The products range from industrial supplies, machinery and raw materials to consumer goods, such as dishwashers and automobile parts, according to the Office of the U.S. Trade Representative (USTR).
In retaliation, China immediately announced its intention to impose 25% tariffs on $50 billion worth of U.S. exports. The list included soybeans, airplanes and automobiles, as trade experts had expected earlier.
China and the U.S. have been swapping tariff threats for the past few weeks. Neither country has imposed this week’s newly announced taxes yet, but it’s certainly a game of global trade “chicken” that has the whole world watching.
“This is very nerve-racking,” said Sherman Robinson, a nonresident senior fellow at the Peterson Institute for International Economics, a nonpartisan, nonprofit think tank in Washington D.C.. “The U.S. has basically gone rogue in the world trading system, and the Chinese are simply reacting to what the U.S. is doing.”
How did we get here?
President Donald Trump has been tough on trade since he was on the campaign trail as a presidential candidate and has had China in his crosshairs for a while, arguing the country hasn’t been playing fair on trade. Many critics agree that China has in some ways stymied growth in U.S. industries, and supporters of the new tariffs hope it will force China to play fairer on trade.
Trump made good on his campaign promise to rein in trade by announcing sanctions on steel and aluminum imported from China in early March. Later in the month, he threatened to impose 25% tariffs on $50 billion worth of Chinese industrial goods. At the time, the list of products impacted wasn’t released. Until now.
In turn, the Chinese Ministry of Commerce announced it would impose higher duties on $3 billion worth of 128 U.S. products exported to China, including fresh and dried fruits, pork, wine, seamless steel pipes and recycled aluminum, in response to the steel and aluminum sanctions. China imposed these tariffs on Monday.
Where Americans will feel the sting
Eventually, consumers will begin to feel the impact in indirect ways. For starters, the stock market plunged Wednesday morning in response to the newest tariff announcements (but later rebounded). And eventually, consumers may see higher prices on goods that are made using Chinese-sourced parts, experts say.
U.S. tariffs on Chinese imports will raise the prices of the resources used to produce final products for U.S. manufacturers and producers, which will eventually get passed along to American consumers in the form of higher prices, explained Mark Perry, an economics policy scholar at the American Enterprise Institute and professor of finance and business economics at the University of Michigan-Flint.
In addition, many jobs may be at risk in both countries, as sales and profits would decline as the cost of goods and services rise, Perry said.
This time around, China — America’s third-largest export market, and the second largest market for U.S. exported agricultural products — is targeting U.S.-exported aircrafts and agricultural products such as soybeans, which could have a much larger-scale effect on the U.S. economy.
“It’s going to hit right up in the Midwest, where all our soybeans are produced,” Robinson said. “It’s going to hit Seattle, where our airplanes are produced and all over the industry in the Midwest and East.”
Consequently, farmers, automakers, Boeing and their suppliers could lose business, Robinson said, and workers could lose jobs.
Perry said for General Motors alone, the new steel and aluminum prices would increase their cost by about $1 billion annually in materials because everything they buy contains steel and aluminum. If automakers have to pay more for the raw materials, then cars and trucks might become more expensive, he said.
“If it hits fast, there will probably be macro shots, you’ll have repercussions with stock markets and you may have layoffs,” Robinson said. “If it’s slow, then there’s time for adjustment. You’ll see people lose jobs, but there will be time for the labor market to adjust.”
Experts had long predicted that China would target U.S. agriculture products and airplanes. But the Trump administration’s decision not to target everyday consumer products imported from China, such as textiles, garments and shoes, was a surprise.
The likely reason is that the Trump administration has been careful not to do anything that would directly hurt consumers, Robinson said. Another reason could be that hitting the apparel industry could hurt the first daughter and adviser to the president, Ivanka Trump, who owns a namesake clothing line, Robinson said.
“Her imports of her clothing line would not be affected by the U.S. tariffs [Trump announced Tuesday],” Robinson said.
‘The ball is really in the U.S. court. They’re the ones who started this.’
Robinson explained that a trade war usually starts out with just a few sectors and then escalates to include other sectors as well. He said whether there will be a full-blown trade war is mostly depended upon what the U.S. does, because the rest of the world has to decide how to react to the U.S. efforts.
If we moved toward a widespread trade war, the most extreme result could be that the U.S. decides to withdraw from the world’s trading system, cutting both exports and imports, Robinson said. And if the rest of the world holds firm to the rules-based trading system in the World Trade Organization, which Trump scorns, and all the other multilateral and bilateral agreements that they’re pursuing, then it would mostly hurt the U.S., he added.
And American consumers would ultimately pay the price.
“It would damage the structure of the U.S. employment if it’s done rapidly. It would undoubtedly cause some kind of a recession,” Robinson said. “If it’s done slowly over time, it means a major change in the structure of production, basically away from tradable goods to non-tradable goods. We become a nation of services workers, hamburger flippers.”
This would be the opposite of the stated goal of the USTR and Department of Commerce, which is to bring industries back to the U.S.
China’s Foreign Ministry spokesperson Geng Shuang said in a Wednesday press conference that China is open to further dialogue.
“We hope that the U.S. side could have a clear understanding of the current situation, remain level-headed, listen to its business community and general public, discard unilateralism and trade protectionism as soon as possible, and work with China to resolve trade disputes through dialogue and consultation,” said Geng.
“It may be that now having up the ante, everyone will step back and behave like adults,” Robinson said. “But the ball is really in the U.S. court. They’re the ones who started this.”
If history is any indicator, there is no winner in a tit-for-tat trade war, experts say.
“There’s a long history of previous attempts at trying to impose tariffs and protectionism,” Perry said. “We have mountains of evidence that this has never worked out in favor of the country imposing protectionism, but it’s like seems like an economic lesson that we never really learn.”
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Acting Director of the CFPB Asks Congress to Limit the Consumer Agency’s Power
Thursday, April 5, 2018
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In Mick Mulvaney’s first report to Congress, released on April 2, the Consumer Financial Protection Bureau’s acting director didn’t just highlight the consumer watchdog’s past work but also included recommendations for Congress to limit its power.
In the report’s introduction letter, Mulvaney requested that Congress:
Fund the Bureau through Congressional appropriations;
Require legislative approval of major Bureau rules;
Ensure that the Director answers to the President in the exercise of executive authority; and
Create an independent Inspector General for the Bureau.
“The Bureau is far too powerful, with precious little oversight of its activities,” said Mulvaney. The power wielded by the Director of the Bureau, he added, “could all too easily be used to harm consumers, destroy businesses, or arbitrarily remake American financial markets.”
What’s at stake?
The CFPB is a U.S. government agency responsible for establishing consumer protection regulations and regulating key parts of the financial sector, such as the mortgage and debt collection industries. It was established in the wake of the 2008 financial crisis as a centerpiece of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The agency has zealously targeted bad actors in the financial industry since its creation, reclaiming nearly $12 billion for more than 29 million consumers. Its latest high-profile actions included fining Wells Fargo in the unauthorized accounts scandal and creating new rules around payday lending. It has also rolled out new regulations in the mortgage, credit card, debt collection and prepaid card sectors.
The Trump administration and Republicans have long sought to curtail the CFPB’s power as part of a broader effort to lighten federal regulation over financial institutions.
While Mulvaney has been trying to dismantle the CFPB in various ways since Trump appointed him last November, consumer rights groups see his report to Congress as a significant action because he is formally recommending rules to undercut the agency and strip away its tools to carry out its mission.
If implemented, the recommendations would effectively stop the CFPB from protecting consumers in the future, consumer rights groups say.
“It’s another example of his effort to hamstring the bureau, to undermine its mission, to turn it into an agency that has the interest of financial predators at heart, rather than the consumers that it was statutorily created to protect,” said Rebecca Borné, senior policy counsel at Center for Responsible Lending, a nonprofit, nonpartisan organization based in Washington, D.C.
A closer look at Mulvaney’s recommendations
1. Funding
How it is now: Right now, the CFPB receives funding through the Federal Reserve. Under its former director Richard Cordray, the CFPB requested $602 million in funding for fiscal year 2017, below the funding cap of $646 billion.
The proposed change: Fund the bureau through Congressional appropriations.
In the past, CFPB’s funding requests have always been fulfilled by the Federal Reserve, and below the cap set by the Fed. But now Mulvaney wants the consumer bureau’s budget controlled by Congress.
Congress is known for being heavily dependent on campaign contributions from the financial sector, according to The Center for Responsive Politics, a nonpartisan, independent and nonprofit research group tracking money in U.S. politics. Borné explained that the statute that created the bureau, Dodd-Frank, intentionally made the agency’s funding independent so that it would not be subject to the political winds of Congress and vulnerable to the financial industry lobbying it.
So the question is: How much money would Congress budget for the CFPB? No one knows for sure, but consumer advocates have serious concerns about putting the agency’s funding in the hands of Congress. Mike Litt, consumer campaign director with the U.S. Public Interest Research Group, a nonpartisan consumer advocacy organization, thinks that “they would likely starve the agency to death so that it would not be able to do its job.”
In January, Mulvaney requested $0 in quarterly funding from the Federal Reserve, saying it would make do with dipping into its reserve funds. Litt said Mulvaney’s proposal for Congress to control the agency’s funding is much more problematic.
“It’s one thing to have a you know a director who is against the agency’s mission to request zero dollars for its operations for the next year,” Litt said. “It’s a whole [other] level to remove the agency’s independent funding forever.”
2. Rulemaking
How it is now: The CFPB creates and enforces federal consumer financial laws on its own. Before establishing a final regulation, the CFPB publishes proposals to address an issue and invites the public to comment.
The proposed change: Require legislative approval of major bureau rules.
Litt said this would make the CFPB not just the only banking regulator, but also the only agency across the board where Congress would be in control of approving major rules.
“It runs counter to the way that administrative agencies in this country work and have worked for many years, which is Congress delegates authority and the agencies pass rules,” Borné said.
Mulvaney didn’t lay out specific reasons for making this recommendation, but it falls in line with his overarching argument that the bureau has too little oversight.
“This would just make it that much harder for a new rule even being issued in the first place and that is new territory that is dangerous,” Litt said. “It means major new consumer protections wouldn’t even see the light of day.”
3. Director’s role
How it is now: Dodd-Frank requires that the head of the CFPB be appointed by the president and confirmed by the Senate, but works independently from the president. The director serves a 5-year term and can only be removed from office due to “inefficiency, neglect of duty or malfeasance in office.”
The proposed change: Make the director answer to the president. The president can remove the director without cause.
Borné said the CFPB director role was created to be independent to make sure he or she acts based on what data show, rather than what the president says.
If implemented, Litt said Mulvaney’s proposal would mean that the president can fire the director for no reason, which takes the effectiveness away from the head of the CFPB.
“Even a director who believes in the agency’s mission might think twice because they know that the president could fire them without cause,” Litt said.
But supporters of this proposal think the CFPB has too much concentrated power in its single-director structure.
Peter J. Wallison, senior fellow in Financial Policy Studies at the American Enterprise Institute, a nonpartisan public policy research institute, called the structure a “major — even historic — break with the past,” when Congress created multi-headed and bipartisan bodies to head other federal agencies.
“Because the director of the CFPB cannot be changed by the president, this powerful agency is insulated from the results of the electoral process that puts a president in office,” Wallison wrote on a February analysis.
4. Independent inspector general
How it is now: The Federal Reserve’s Office of Inspector General oversees the CFPB.
The proposed change: Create an independent inspector general for the bureau.
Borné said this is an unnecessary proposal because there is already an inspector general for the CFPB from the Fed, which was carefully designed by Dodd-Frank, Borné said.
“It’s hard to say for sure based off of a one-line recommendation in this report but likely the point of that recommendation is to replace the current Inspector General for the CFPB with one that is appointed by the president, which would then serve to undermine the independence of the agency,” Litt said.
But supporters say an independent inspector general would provide greater transparency and accountability at the bureau. Sen. Rob Portman, R-Ohio, introduced similar legislation last year to create a dedicated, Senate-confirmed Inspector General for the CFPB.
What’s next?
Congress would have to pass legislation implementing Mulvaney’s recommendations.
Mulvaney is due to testify before Congress next week. From there, it remains to be seen whether Congress will act on his suggestions.
Experts say that consumers have voiced support for a strong independent consumer bureau, which have helped fend off attacks on the CFPB in the past few years. A 2017 Center for Responsible Lending poll, conducted jointly by Republican- and Democrat-aligned firms, found that 73 percent of Americans of different political affiliations supported the CFPB.
As long as consumers continue to speak up, experts say they are hopeful that members of Congress will respect the will of their constituents to keep the independent structure.
“At the end of the day, reining in Wall Street, ensuring a fair competitive marketplace is not a left issue or right issue,” Litt said. “It’s a big guy, little guy issue.”
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How to Make Your Child’s Expensive Activity Fit Your Family Budget
Wednesday, April 4, 2018
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Roughly 40 percent of American families spend more than $1,000 a year on their children’s extracurricular activities, and 20 percent spend more than $2,500 annually, according to a January SunTrust survey of about 510 adults.
Some families spend a lot more.
MagnifyMoney spoke to three families with children who have exceptional interests or talents in sports, arts or cultural experiences to learn about the costs, decision-making processes and money-saving tips related to helping their children pursue their passions. While families have different priorities and values, they have one thing in common: They want the best for their children and have to make financial sacrifices to make it work.
Common obstacles
Deferring retirement savings
Peggy Chen and her daughter, Sophia, who is holding her trophies from piano competitions. (Courtesy of Peggy Chen)
Peggy Chen, 58, of East Brunswick, N.J., is a single mother who supported her daughter Sophia, now 32, and son Albert, 28, as they pursued their musical talents and passions growing up. The siblings eventually became professional musicians, one a pianist, and the other a violinist. But in order to focus on her children’s futures, Chen had to put hers on the back burner. She didn’t save for retirement while raising the kids.
The costs were high from the beginning. Growing up, Sophia played three pianos, including a Steinway grand piano the family bought for about $25,000 when Sophia was 9. She took an hourlong lesson with a top-notch piano instructor each week, who charged $70 an hour in the 1990s. If she was preparing for contests, the lesson would last 30 minutes longer. Chen herself accompanied Sophia to almost every single piano lesson and competition. The constant piano maintenance, tuning, travel and lodging for competitions also ate away a huge part of the family disposable income.
“There was no budget,” Chen said matter-of-factly. “We’d squeeze out however much money was needed to pay for her practices and performances.”
Chen’s then-husband took home about $25,000 a year as an accountant. Chen, a violin teacher, supplemented family income by giving lessons at home. Although barely scraping by, the couple wanted to give the best to their first child, developing her talent in any way they could.
When Sophia was in 8th grade, Chen and her husband divorced. Chen, a Taiwanese immigrant who had never worked in the U.S. and couldn’t even tell the difference between a checking and savings account at the time, had to work three jobs. Her top priority was making monthly mortgage payments to avoid being homeless.
Even at such a difficult time, Chen continued paying $70 for Sophia’s weekly piano lessons. Being extremely frugal allowed her to take care of the necessities and support her budding musicians.
“I’d be thrilled if I saw a penny on the ground, as if I won a lottery,” she said. “I didn’t dare to waste a nickel.”
Still, Chen said she had no financial planning. She only started saving for retirement a few years ago, when Sophia and Albert had both graduated from college.
Putting off paying down debt
The Rechkemmer family from Iowa has five children. It is not easy for the parents to financially support all the children’s extracurriculars. (Courtesy of Molly Rechkemmer)
Josh and Molly Rechkemmer live with their five children in a suburb outside of Iowa City, Iowa. He is an architect and she a part-time academic adviser and lecturer at the University of Iowa.
Their kids — Gracie,18; Sam, 16; Hannah, 13; Kate, 11; and Luke, 9 — are all involved in arts or athletic activities. Most days, each kid has two things going on after school.
The family is constantly in their minivan, traveling to different games, auditions, training sessions, competitions and rehearsals. The busy schedule has meant their finances are always tight.
Despite painstakingly budgeting and planning ahead for big payments, covering expenses for the kids’ extracurriculars have hampered the Rechkemmers’ ability to pay down debt quickly. The couple has credit card debt, a mortgage, car loans and student loan debt.
“Partly we try to do it wisely, and partly we just also know that we’re only going to have these kids in our house for what? Ten years,” Molly said. “And so we want to do things for them to help them develop.”
Prioritizing their children’s activities means spending thousands of dollars they could otherwise put toward their debt.
“I think almost a minimum per kid per year is easily $1,000 on the low end, and probably $3,000 to $4,000 on the high end,” Josh said.
Private sport teams with out-of-town competitions are particularly expensive. The parents have to pay for all of the uniforms, training and tournament fees and travel. Just for one season of one club sport, the cost for this big family easily adds up to at least $1,000.
Choosing what’s ‘fair’ when you have multiple kids
When there’s more than one child, it’s not always easy to decide who gets more resources from the family budget.
For the Rechkemmers, it could mean going with inexpensive recreational sports leagues instead of a club team, Molly said. But other times they would go for the more costly option, like the club teams, if they see a gift requiring a higher level of time and financial commitment.
“We’d love to say it’s always proactive, that we’ve intentionally made those decisions and thought it all through,” Molly said. “But a lot of the times it’s also reactive. An activity comes up and we have to make a decision whether or not they get to do it.”
Molly acknowledged that they haven’t always made the perfect decisions. There are things the family had heavily invested in, but the kids eventually lost interest. Retrospectively, they also realized that they might not have done enough for other kids.
Albert is playing the piano as his sister Sophia watches. (Courtesy of Peggy Chen)
Chen said she had never expected it would cost so much to develop Sophia’s piano talent. When it came to her second child, Albert, she downgraded the spending — she gave Albert violin lessons herself.
“I taught him myself, and he sat in the first chair,” Chen said. “I thought it was enough: no competitions, no anything else.”
Albert graduated from Northwestern University with a bachelor’s degree in political science and violin performance. He now studies at the San Francisco Conservatory of Music.
Making trade-offs
Emmeline dePillis and her family at the local Shichi Go San festival in 2008. Maria, then 7, is dressed in kimono on the right. (Courtesy of Emmeline dePillis)
Emmeline dePillis is a business professor at the University of Hawaii at Hilo, on the southernmost island of Hawaii where a large population of Japanese immigrants live.
Her older daughter, Maria, partly of Japanese descent, is passionate about Japanese language and culture. She is getting ready for her third extended trip to Japan.
For her last two trips, Maria went in a group where her school covered some expenses, but the family still had to pay more than $1,500 out of pocket each time. It cost less than if they had planned and paid for the trips themselves, dePillis said, but sending Maria on those trips meant putting off other purchases.
“Each time we were like, ‘Well, that’s a lot of money, but that’s a good deal,’” dePillis said. “And she loves it so much. It was like, ‘Well, maybe we can’t buy a new refrigerator this year, but it’s worth it because it’s such a good opportunity.’”
In the Rechkemmer family, a lot of other entertainment activities have to go: movies, concerts and short family vacations.
“Instead of planning a long weekend to take our family to Chicago and doing things like the planetarium, the aquarium and all those things, we might have a long weekend in Chicago where we spend most of the time at a baseball tournament,” Molly said.
How to make it work
Financial planners say plainly there are no perfect solutions to fund children’s expensive hobbies. But they stress that families need to take a holistic view of their finances, understand the level of risks and discuss with the entire family — yes, kids included — to make sure everyone understands the commitments and agrees on the sacrifices to be made.
To help families facing tough financial decisions around paying for kids’ activities, we gathered advice from parents and experts who have experienced these dilemmas firsthand:
1. Prioritize family values
dePillis said her family decided to fund their daughter’s Japan trips because her husband and her both value education highly.
“We see our daughter’s passion for Japanese culture as an educational thing,” dePillis said. “This is not just, ‘Oh, I’m going for fun.’ So if it’s ‘Let’s go to Disneyland’ versus ‘Let’s give Maria a chance to go to Japan for this educational experience,’ we would choose the educational experience for her.”
Prioritizing family values is the most important step to take in the decision-making process, experts say. There are no right or wrong decisions, but ultimately, the parents should thoroughly think why they are investing in the hobbies.
“The real way to be successful at this is to really identify what the family goals are, and then trying to balance out what their goals are for the future with what they think they can realistically provide for,” said John Rivers, a Clinton, N.J.-based financial planner at Newroads Financial Group.
2. Make a budget
In the Rechkemmer family, Josh, the father, tracks family spending almost religiously on spreadsheets, and he tries to budget for upcoming activities far ahead to make sure that they wouldn’t be hit by unexpected expenses.
The family budget for kids’ recreational and entertainment activities could go up to $10,000 a year. That translates to 10 percent of the family income.
Experts say there is no formula of how much should be spent on children’s hobbies that fits all families — again, it depends on family prioritization — but they do need to set a budget, look at the family finances holistically and trim expenses elsewhere.
3. Cut back on spending
When it comes to trimming expenses, pros say it’s more likely that the family’s lifestyle needs to change.
For example, when someone in the Rechkemmer family has a weekend sports tournament, they minimize the number of family members staying overnight in a hotel. For holidays and birthdays, Molly and Josh give practical presents for their kids, such as sports equipment, instead of the trendy electronic toys that their children long for.
Sam Rechkemmer plays baseball in May 2015. (Courtesy of Molly Rechkemmer)
For Chen, diligent saving on every single thing helped her get through the tough years. She barely had any expenses for herself.
“My life was pretty much bare-bones,” Chen recalled. “I’d always only buy food that passed expiration dates or was about to expire. You wouldn’t die eating it, anyway.”
Jude Boudreaux, founder of New Orleans-based Upperline Financial Planning, said the best strategy he’s seen is downsizing a family home. A client of his sold their big home and moved into a much smaller space — with no mortgage — to free up cash to pay for children’s activities.
Boudreaux said, typically, it’s easier to cut a family’s big-ticket expenses to make financial wiggle room. Parents need to make conscious decisions about whether or not to buy cars, or send their children to private schools if they also hope to develop their hobbies, he said.
But there is a bottom line: “Taxes must be paid. Utilities must be paid. Insurance must be paid,” said Lauren G. Lindsay, a financial adviser based in Covington, La.
After paying all the fixed bills and life necessities, families can look at the discretionary expenses and trim spending based on family priorities, Lindsay said.
4. Eliminate activities when needed
For the most part, the Rechkemmers try to stick to their budget, but there are moments when things get out of hand. The couple has periodically paused and reflected on the reasons they do all these activities.
“If it is to develop good friendships and stay active and be healthy and finding enjoyment in life, then that doesn’t need to come with the high burden of debt and so much stress,” Molly said. “If [the activities are] putting us into debt and causing so much stress, then it’s time to rethink if it’s all worth it and try to kind eliminate some things.”
5. Look for other resources or sources of income
Chen, the avid saver, said being thrifty wasn’t enough — she had to find other ways to earn more to support the family. Often she found herself participating in laboratory tests, earning $10 here and $20 there. Little things add up, she said.
At times, the mother and children all used their skills to support the family: Chen taught violin upstairs, Sophia taught piano downstairs and Albert went to students’ homes to tutor them in math.
You may be able to find outside help, too. For example, having Maria go on group educational trips allowed the dePillis family to save, as the school covered a large chunk of the expenses.
Lindsay encourages parents to explore financial aid opportunities before shelling out money for expensive extracurriculars, as some local camps and sports associations offer scholarships.
6. Talk to the children
Experts say the biggest “no no” when it comes to investing in children’s extracurricular activities is not consulting their opinions.
“Make sure it really is for them, not for us,” said Boudreaux, a parent himself. “Check our egos at the gate when we make the decisions.”
The kids need to be involved in the decision-making and understand the financial sacrifices the family is making, to make sure they will be as committed to the choice as parents are, Boudreaux said.
The dePillis family did that with Maria, and they worked out a plan together.
Maria is expected to enroll in the University of Hawaii at Hilo’s Japanese Studies program in the fall. She has made an agreement with her parents to stay in state for college. The in-state tuition is about $7,200 a year. Maria has also agreed to stay home during college so she could avoid taking out student loans.
“If she had gone to an out-of-state school, we would be paying $20,000 a year or more,” dePillis said. “I mean, imagine saving that kind of money. We feel like, ‘Oh, yeah, we will send you to Japan as much as you want.’”
7. Understand the consequences
The reason why these decisions are tough is that essentially, every spending choice is a trade-off, and it’s hard for parents to picture potential future risks, Boudreaux said.
Some trade-offs, such as deferring retirement or putting off paying debt can have severe consequences, experts say. In general, financial planners suggest parents put themselves and their futures first.
“Kids can get their own loans, and we can’t borrow for retirement down the road,” Rivers said.
However, in families where children are expected to support their parents in their old age, maybe it’s worth making those sacrifices now, experts say. In that case, parents should explicitly and appropriately communicate with their children about the expectations.
Chen said she has no regrets about putting off saving for her retirement.
“She was so good,” Chen said. “It would have been a pity if she had given up after a certain level.”
Sophia eventually studied piano performance and English at Oberlin College and Conservatory of Music. She became a journalist after graduation, but still keeps performing. “I am pleased that she has piano as a great lifelong companion,” Chen said.
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Although Nelson made a quite handsome salary when she was younger, she didn’t save because she spent about 25 years putting almost everything toward taking care of her three children, now all grown. She only started putting away money in 2006, but the financial crisis and recession wiped out all her investment earnings. She’s trying to catch up, but Nelson also has student loan debt and a mortgage, not to mention the costs of caring for her aging father. Nelson said she regrets not starting to save earlier.
“If I had put away even $100 a month 25 years ago, by this time my retirement (savings) would have been enough,” she said.
Nelson’s story is many older women’s story: They didn’t or couldn’t save much when they were young, and when they reach 50 or 60, they worry about not saving enough for retirement, while grappling with debt and caretaking tasks.
Older women’s money issues
Studies have shown that older women face severe economic hardships. Women ages 65 or older are 80% more likely than men of the same age to be in poverty, a 2016 National Institute on Retirement Security (NIRS) study found.
This is because women in general earn less than men throughout their careers, and they are more likely to take time off from their career to care for children and elderly family members, experts interviewed by MagnifyMoney say. That means they are likely to have even less savings and Social Security benefits in retirement.
Knowing that they may be in a greater need for health care and live five years longer than men, many women fear they will outlive their savings. As a result, they tend to work longer to make up for the missed savings throughout their career and investment loss following the financial crisis, experts say.
Labor force participation among women ages 55 to 64 increased to 59% in 2015 from 53% in 2000, peaking at 61% in 2010, according to the NIRS study.
Victoria Nelson, 54, is a registered nurse in Lawrenceville, Ga. She says she worries about not saving enough for retirement. (Courtesy of Victoria Nelson)
Nelson, for example, went back to work just a few weeks ago after staying home since 2011, when she was diagnosed with a brain aneurysm. To financially stabilize herself after she got sick, she had to dip into one of her retirement accounts, which came with a hefty 20% penalty, plus taxes.
Nelson now works night shifts and has a day job of visiting patients at home to make extra money.
“And if they are single, seriously, the longer they can keep working, the better.”
While working so much is the financially smart move, it can be exhausting. Nelson doesn’t get much rest.
“I don’t have a choice,” she said, laughing.
Among the older female population, those more likely at financial risk are single women — divorced, widowed and never married — and women of color, according to experts.
Life after retirement
Nancy Jervis, 73, is a cultural anthropologist. (Courtesy of Nancy Jervis)
Nancy Jervis, 73, a cultural anthropologist from New York, said If there is anything that she wishes she had done when she was younger, it would be to pay more attention to her money.
Jervis is now living on Social Security, an annuity and retirement savings of about $100,000 from 20 years of working at a nonprofit organization.
“I’m just making it right now,” said Jervis, who sees herself a member of the “plain, old American middle class.”
“If inflation happens, I’m messed up.”
Jervis has been single for most of her life. For years, she supported herself by working various temporary jobs in the U.S. and overseas, but was caught in a crunch at age 42 when she had her son, Ben. Around the same time, she started her first full-time job and was saving money for the first time — she had to once she had a child to raise all by herself.
The nonprofit organization started contributing 12.5% of her salary into a retirement fund, and she only had to save 2.5%. Her employer eventually lowered the contribution to 10%, and Jervis saved 5%. The organization also fully paid for the health insurance that covered her and Ben.
“I’m lucky that I had those benefits,” Jervis recalled. “Or, I would be in real trouble now.”
Jervis’ current annual income is a little over $51,000 — too much to be eligible for the city’s rent freeze program for seniors and disabled residents. After paying all her fixed living expenses, Jervis spends a good chunk of her fixed income on health care, which amounted to more than $7,300 last year.
Jervis doesn’t know what health care could cost her when she gets older. She worries about running out of money.
How can older women ensure a secure retirement?
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Stacy Francis, certified financial planner and founder of Francis Financial, who frequently works with women around retirement, told MagnifyMoney that Jervis’ fear will resonate with almost every woman in their 50s, 60s or 70s.
Experts suggest that, in general, women should save 70% to 80% of their pre-retirement earnings to live comfortably in their later years. But, Francis said on the conservative end, she would recommend women try to reach 100%. The reason is that although some expenses will go down after retirement, such as commuting and work clothing, other areas of life may need more money, namely health care, which could be completely unpredictable and astronomically expensive.
But even on the low end, those savings goals can feel out of reach for women within a decade or two of retirement. The Schwartz Center for Economic Policy Analysis at The New School gathered a few calculators that can help you estimate how much you need to save for retirement based on your personal information. They are Target Your Retirement by the Center for Retirement Research at Boston College; the AARP Retirement Calculator; Retirement Nestegg Calculator by Dinkytown.net; and New Retirement.
While certainly a challenge, it’s not impossible for late savers to prepare for a financially secure future. We asked experts how to do it, and here’s their advice:
Delay Social Security benefits until age 70
Although it’s tempting to start collecting Social Security at age 62, experts suggest women who can still work and are healthy wait longer. Because for every year you don’t collect Social Security after your full retirement age, which varies depending on your actual age, your benefit goes up 8%, until you reach 70.
“Social Security is even more important for women [than for men] because we live longer, we are likely collecting longer,” Francis said. “It makes [more] sense for you to wait for that bigger benefit at age 70, and then collect it for the next 25 years, than collecting at age 65 that smaller benefit and collecting it for a longer period of time.”
Take advantage of catch-up contribution
Nelson plans to retire at 65, or 70 at the latest, if her health condition allows. To catch up with savings, she now contributes 13% of her salary to her newly built retirement account, and her employer contributes 7.5%.
Experts say the simplest thing for women to bump up savings for retirement is to take advantage of the IRS catch-up contribution. If you are age 50 and over, the IRS allows you to save $6,000 more on top of the $18,500 annual contribution limit in your 401(k). For individual IRAs, the catch-up amount is $6,500.
Invest more aggressively if you saved too little in the past
Jervis acknowledged that she has invested too conservatively over the years — her retirement fund allocation was always 50% in stocks and 50% in bonds when she was working. It’s even more conservative now that she is retired.
“Being too conservative in your investment can actually put you in a greater financial risk because us women we have a longer life expectancy,” Francis said, “as well as how many of us, unfortunately, are coming to retirement with not necessarily enough saved.”
Equities are the true engine of a portfolio, and women shouldn’t be afraid of it, Francis said. She suggests for women not on track with their retirement savings to invest more in stock if they have the risk tolerance.
A good rule of thumb for stock-bond ratio is to subtract your age from 120 (or 110) as a starting point to calculate your stock asset exposure, experts say. For example, if you are 65 years old, your stocks-to-bonds ratio should be 55:45, or 45:55.
Maria Bruno, senior investment analyst at the Vanguard Investment Group, told MagnifyMoney that for people in retirement, a ratio of 60:40 stocks to bonds is considered a balanced allocation for them.
“If God forbid she’s really behind, it could even be 30% of bonds,” Francis said.
This piece of advice has Jervis on edge because her savings are her emergency fund.
“Although I am seeing my savings diminish, and making money in the market is the way to go, I’m not sure I have the nerve to do it,” she said.
Think of yourself first, not last
Nelson has always been the breadwinner at home, even before she separated from her husband in 2012. For a long time, she had to juggle multiple jobs so she could take care of her children, which involved paying $1,000 a month for child care. She regrets not saving for retirement earlier, but she also felt like she didn’t really have a choice.
“Because [the] mistake we make is that we think, ‘Oh, I need to pay child care. I need to do this and that for the kids,’” Nelson said. “But then you don’t think about [yourself]. You put your retirement last.”
Women are natural nurturers, Hannon said, so they have an instinct to give. For example, experts say it’s common for women to take money out of their savings to help kids with school.
“Kids can get loans for college and you can’t get a loan for your retirement,” Hannon said.
While women may not be able to replace the money they gave to others instead of themselves in their early years, they can still protect their future by putting themselves first now. Of course, that’s easier said than done. Putting yourself first is rarely as simple as cutting off support for adult children.
Nelson’s 86-year-old father needs care around the clock. She chips in $1,000 a month to hire caretakers for him. Still, she does this while working toward her own financial goals. She just doubled on her mortgage payment to about $2,000 a month in the hopes that she won’t have to be in housing debt in 10 years. Meanwhile, she is about to start paying off her student loan debt — $52,316 — for a master’s degree in nursing she received two years ago, when she was staying at home with disability.
Adjust your lifestyle if you haven’t saved enough
Nelson doesn’t have much spare money for herself after saving for retirement, paying for her father’s caretakers and making debt payments. She cut back on shopping, dining out and going to movie theaters.
“I’m adapting, I’m managing,” Nelson said. “I won’t say it’s hard, because I’m not hungry.”
Francis stressed that it’s absolutely imperative that women make sure they stay within their budget now so they can afford their needs in the long term.
“If you have not been tracking your spending, guess what? When you retire, there’s no option any longer,” she said. “The stakes are too high that if you are not being conscious about where your money is going, there is no room for error and there’s no ability to make up for overspending in retirement.”
Although Jervis didn’t pay much attention to money when she was young, she has to now as she lives on a fixed income.
Facing deteriorating health, she’s been homebound for more than a year, and she has a home health aid come to her apartment three times a week. That is an additional $600 monthly expense that she would rather not spend.
Jervis said it’s not so dire yet, but if things got worse, she might cut more expenses like cable and her car (so she no longer has to pay for insurance) to make some wiggle room for more urgent health care expenses. She figures that, at some point, she’ll have to cut back on spending even more.
Prepare for unpredictable health care costs
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All the women interviewed for this story, who are in their 50s, 60s and 70s are concerned about the unpredictable health care costs they will face in the future.
Consider a Health Savings Account
If you have a high-deductible health plan (HDHP), experts suggest you consider a Health Savings Account, which has a triple-tax benefit: The money you put into an HSA is tax-deductible; the balance grows tax-free and rolls over each year; and withdrawals from your HSA for qualified medical expenses are not taxed.
The annual maximum HSA contribution in 2018 is $3,450 for an individual and $6,850 for a family. If you are at least 55 years old, you can contribute an additional $1,000 annually. You can read more about using an HSA as a retirement tool in our guide.
Look into long-term care insurance
Buying long-term care insurance may be another way to prepare. Long-term care insurance is separate from your regular health insurance. It pays out for nursing home, home health care or assisted living and other expenses not covered by regular insurance when you have a chronic medical condition, a disability or a disorder, for two to five years.
Nelson bought a long-term care policy with her previous employer, which cost her about $100 per month. When she was sick and homebound, the policy paid out $8,800 a month. After she started her current job, the policy is still paying her $3,000 a month, which she will stop receiving in a year. Her current job also offers long-term care insurance as part of the benefits package, and Nelson said she plans to buy it as soon as her current coverage ends.
But not every job offers cheaper group insurance. Many people have to buy individual plans.
Francis, the CFP, said she’s in her 40s and she bought a long-term care policy when she was in her late 30s. Her family medical history compelled her to go with a premium plan, and while she admits buying the policy in her late 30s was a little early to start paying $3,700 a year for coverage she wouldn’t likely need for decades, she knew that buying it later would cost much more. She estimates her premium would be twice as expensive if she bought it today.
Francis said if women have close family members who have significant health issues, it may make sense for them to look at such care policies when they are younger.
On average, a 55-year-old single woman buying new coverage pays $2,965 a year for a long-term care policy that pays out $150 a day for up to three years, or $164,000 in total benefits, according to a 2018 price index from the American Association for Long-Term Care Insurance. A single 60-year-old woman can expect to pay an average of $3,475 a year for the same plan. And the average annual premium is $4,270 for a 65-year-old single woman.
Last resort: Medicaid
Jervis said she’d looked into long-term care plans, but decided not to buy because they are too costly for her. She can manage for now because she’s on Medicare, which covers 80% of her medical expenses, and she pays $300 a month for supplementary insurance, which covers the other 20%. But with greater health care needs on the horizon, Jervis thinks she will have to go on Medicaid. Without sufficient savings or long-term care insurance, that’s pretty much the only option.
What’s the takeaway for younger women
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The financial obstacles these older women face are a cautionary tale for younger women. And they have some advice for them.
Start saving as early as you can
After learning from her own mistake of not saving early, Nelson told her daughter, Brittney (a MagnifyMoney reporter), to start saving as soon as she got her first job.
“Start saving for retirement now,” she said. “Even if you have kids, make your retirement your priority.”
Experts acknowledge that it’s hard for young women who are out of college to save 10% or 20% of their income, but they should nonetheless save, starting small and then slowly increasing the amount each year as they get raises. When you are young, time is on your side. The earlier you can start to put away money and benefit from compounding interest, the better, said Francis.
And spend less while saving hard.
“Do a budget. Live as mean and lean as you can,” Hannon said. “I’m not saying to not have a good life, but you have to balance it between enjoying life.”
Fight for salaries and raises
Another lesson an older generation of women learned the hard way: Negotiate your salary. Many older women didn’t negotiate when they were young, because they were not raised to do so.
“I didn’t feel I had the right to negotiate,” Nelson said, adding that she didn’t negotiate for salaries until five or six years after she started working. “I wish I had the courage, but I was scared that if I negotiated too hard, I might not get a job.”
They hope the younger generation will do better.
“Fight that wage,” said Hannon, 57. “Your starting salary is key to your financial security if you are going to stay at one company, because that’s where all your raises come from, so the higher you can start, the better you are going to be the rest of your life.”
Pay attention to your finances
Francis said the biggest misstep she has seen among older women is that they didn’t pay close enough attention to their finances while they were younger and working. And when they were a few years out from retirement, they’d find out they were behind on savings.
All too often, Francis said, women in marriages divert the task of investment and family financial planning to the husband. Hannon said she finds that many young women still at some level rely on men as a financial plan, expecting that they are going be in a partnership.
But odds are against their favor. Here is a sober reminder from experts: Most women are going to be single at some point in their life, and they need to be prepared for that.
In the U.S., there are 3.2 divorces per 1,000 people, compared with 6.9 marriages per 1,000 people, according to the Centers for Disease Control and Prevention. Roughly 40% of women ages 65 and over were widowed, compared with about 13% of men, according to the U.S. Census Bureau.
“You should always plan your money as a single person,” Hannon said. “Don’t defer it. If you defer it for somebody else to make decisions, it’s a huge mistake.”
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How a U.S.-China Trade War Would Affect American Consumers
Wednesday, March 28, 2018
Editorial Note: The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities prior to publication.
Tensions over trade are percolating between the United States and China as President Donald Trump on March 22 threatened to impose higher tariffs on a wide range of Chinese imports, just weeks after announcing sanctions on steel and aluminum imported from China.
These are not just big, empty talks between Washington and Beijing. The stock market plunged in fear of a looming trade war. Experts interviewed by MagnifyMoney say the consequences of trade fights would eventually be passed onto consumers; historically, there is no winner in a tit-for-tat trade war.
“Our exporters would be disadvantaged. Our farmers would lose some sales. Import prices would go up for U.S. companies,” said Mark Perry, scholar at The American Enterprise Institute and professor of finance and business economics at the University of Michigan-Flint. “U.S consumers would be negatively affected with higher prices, and the U.S. workers could see some job losses.”
Where consumers will feel a difference
Trump’s threat is to impose 25 percent tariffs on $60 billion worth of Chinese industrial imports in response to China’s alleged practice of forcing foreign firms to transfer technology and intellectual property in joint ventures.
The details of exactly which items will be subject to higher tariffs are currently unknown. The United States Trade Representative (USTR) has 15 days from the date of Trump’s announcement to release a finalized product list.
Experts say consumer electronics, industrial machinery, toys, apparel and footwear would be the easy targets among other goods imported from China.
If the tariffs fall on consumer goods, consumer product prices could rise, experts say.
Sherman Robinson, nonresident senior fellow at the Peterson Institute for International Economics, told MagnifyMoney that a key question is how much of those tariffs fall on intermediate goods — bits and pieces of a final product — that U.S. producers buy from China to assemble and produce final products. Apple products, for instance, use screens produced in China. If the the goods and services used in the production process were cut off, U.S. productions would be damaged, Robinson said.
“The question is, would the administration be careful enough not to damage U.S. producers?” Robinson said.
Already, experts estimate that new tariffs on steel and aluminum that went into effect March 23 will cause higher prices for the two materials.
Perry said for General Motors alone, the new steel and aluminum prices would increase their cost by about $1 billion annually in materials for everything they buy that has steel and aluminum. If automakers have to pay more for the raw materials, then cars and trucks might become more expensive, he said.
Jobs might be at risk, too. In the auto industry, for example, if automakers were to see their profits decline as a result of the higher cost of Chinese imports, there’s a risk they could lay off some of their workers, Perry said.
“They might pay more for [the resources they use to produce the products], but they might be selling at the same price,” Fishman said. “It’s because supply doesn’t dictate their price, but demand does in a globally competitive world.”
But Fishman said that companies whose margins are much thinner might suffer from higher tariffs, eventually marking up their final products’ prices.
Footwear companies may be a case in point.
Matt Priest, president and CEO of the Footwear Distributors and Retailers of America, a trade group, told MagnifyMoney that about 70 percent of all the shoes sold in the U.S. come from China, which already has an average tax of 11 percent imposed by the U.S., nearly 10 times the average 1.3 percent duties applied to all Chinese imports.
“When there is the potential to add additional tax on Chinese goods, and rumor that those goods could include footwear,” Priest said. “We obviously grow very concerned because we go based on history, based on economics, based on the structure of our industry that that will be that Americans will pay more for their shoes.”
How likely is a full-on trade war?
In retaliation to the previous steel and aluminum sanctions, the Chinese Ministry of Commerce announced it would impose higher duties on $3 billion worth of 128 U.S. products exported to China, including fresh and dried fruits, pork, wine, seamless steel pipes and recycled aluminum.
“China does not want a trade war with anyone. But China is not afraid of and will not recoil from a trade war,” the Chinese Embassy said in a statement.
China’s response to Trump’s tariff announcement seems largely muted. Of the $3 billion in U.S. exports it plans to impose higher tariffs on, most are agricultural and metal products.
However, Fishman said this is a strategic way to answer Trump’s tariff threat — by pressuring him in areas that are politically significant to him.
This action could potentially hurt U.S. farmers and manufacturers in the Midwest and the West, important regions for Trump.
“They don’t want to have this escalate too far, and Trump’s kind of unpredictable,” Perry explained. “Trump is acting politically, so it would make sense for China on the other side to act with some political motivation, and strategically design their trade policy to hurt Trump as much as possible.”
If trade tensions continued to escalate, experts anticipate China’s next target would be Boeing aircrafts, soybeans and U.S. business services, which would have a much larger-scale impact on the U.S. economy.
Cui Tiankai, China’s ambassador to the U.S., said that China is looking at “all options” to respond to tariffs imposed by the administration, including cutting back on buying U.S. Treasury bonds, in an interview with Bloomberg.
“We believe any unilateral and protectionist moves would hurt everybody, including the United States itself,” Cui said. “It would certainly hurt the daily life of American middle-class people, and the American companies, and the financial markets.”
No real winners
Robinson explained that a trade war usually starts out with just a few sectors and then retaliates across other sectors. He said whether there will be a full-blown trade war is mostly up to what the U.S. does, because the rest of the world has to decide how to react to the U.S. efforts.
If we moved toward a widespread trade war, it’s very possible that the result would be the U.S. withdrawing from the world’s trading system, cutting both exports and imports, Robinson said. And if the rest of the world holds firm to the rules-based trading system in the World Trade Organization, which Trump scorns, and all the other multilateral and bilateral agreements that they’re pursuing, then it would mostly hurt the U.S., he added.
And American consumers would ultimately pay the price.
“It would damage the structure of the U.S. employment if it’s done rapidly. It would undoubtedly cause some kind of a recession,” Robinson said. “If it’s done slowly over time, it means a major change in the structure of production, basically away from tradable goods to non-tradable goods. We become a nation of services workers, hamburger flippers.”
This would be the opposite of the stated goal of the USTR and Department of Commerce, which is to bring industries back to the U.S.
“Hopefully this is Trump just kind of being a little bit exaggerated or outrageous or, just doing this as an initial move and then he’ll back off on it,” Perry said. “There’s a long history of previous attempts at trying to impose tariffs and protectionism. We have mountains of evidence that this has never worked out in favor of the country imposing protectionism, but it’s like seems like an economic lesson that we never really learn.”
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4 Reasons College Students Should Be Relieved By The New Spending Bill
Friday, March 23, 2018
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Congress passed a $1.3 trillion spending bill in the wee hours Friday to avoid another government shutdown and fund the federal government through the end of September. President Donald Trump signed the bill Friday afternoon after threatening to veto it.
It’s no wonder the President isn’t a fan of the budget — it completely goes against his own education agenda, which included calls to either defund or decrease funding for several education programs targeted at college students.
Instead, Congress’s spending bill includes measures to boost funding for these programs.
Overall, the 2,232-page bill includes about $2 billion in additional spending on higher education across a wide range of programs.
Student advocates call this a win for students.
“While they don’t help current borrowers, [they] will go a long way to help primarily low-income students afford college in the future and hopefully would reduce the amount of borrowing they may need to do,” said Antoinette Flores, a senior policy analyst of Postsecondary Education Policy at American Progress.
Public Service Loan Forgiveness lives on. Notably, the budget provides an additional $350 million in funding to the Public Service Loan Forgiveness program (PSLF). It’s an unexpected boon for the popular program, especially since President Trump’s first two education budget proposals have called on Congress to phase the program out.
3% bump for Pell Grant recipients. In addition to the funding bump for PSLF, Congress also raised the maximum Pell Grant for low-income students by 3% to a total of $6,095 for the 2018-19 academic year. Trump and Education Secretary Betsy DeVos had sought to freeze the program last month in a budget proposal.
Campus-based aid programs get a boost. In addition, appropriators provided modest increases in funding for Campus-Based Aid Programs, including the Supplemental Educational Opportunity Grant ($840 million, a $107 million increase) and Federal Work Study programs ($1.1 billion, a $140 million increase).
Aid for college student parents triples. Funding for the Child Care Access program that helps student parents pay for child care more than tripled, from $15 million to $50 million, experts say.
“These are peanuts in terms of the federal government’s budget, but that’s a big, big thing for that program,” said Jessica Thompson, policy and research director at The Institute for College Access and Success, a nonprofit organization dedicated to making higher education more available and affordable for Americans.
Public Service Loan Forgiveness lives on (for now)
Although the spending bill gives an extra $350 million to fund PSLF for qualified borrowers, it isn’t a permanent change (the entire spending bill is only good through September).
“It’s just a short one-time funding. And it will be on a first-come, first-serve basis,” Flores said.
Already, there has been much confusion among student loan borrowers who thought they were eligible for PSLF but later found out they did not qualify. A couple of high-profile cases have been reported last year where borrowers thought they were going to receive PSLF, signed up to get forgiveness but found out they weren’t eligible because of their employer or because they did not have the right types of loans needed to qualify. In some cases, their loans did not qualify because they were put into the incorrect repayment plan due to issues with their loan servicers.
The $350 million one-time funding is potentially one way to address this issue, Thompson says.
“[Congress is] attempting to set aside some money to help solve that problem for borrowers who are in that kind of devastating situation where they really did everything right, but for reasons outside of their control, turns out didn’t meet the technical specification of the program,” she said.
The scope of this issue is unknown because the program was implemented in 2007, and the first borrowers became eligible just a few months ago in October 2017.
Pell Grant recipients get a small but significant boost
Currently, about 7.5 million lower-income students are eligible for Pell Grants.
Thompson explained that over the last six years, Pell Grants had an automatic annual inflation adjustment but that expires after this year, and Congress has not moved to continue that. The grant’s purchasing power is relatively low because it’s been around for more than 40 years, and it has not risen to keep up with college cost hikes, Thompson said, but any increase to the Pell Grant helps borrowers.
“The No.1 way that we reduce student loan borrowing is increasing grants,” Thompson said.
In the new budget bill, Congress increased the annual Pell Grant cap by $175 for the 2018-19 academic year, pushing the maximum award up to over $6,000 for the first time.
“It’s a 3% increase, which is modest, but it’s really important,” Thompson said. “The increase will more than offset the loss of the inflation adjustment next year.”
Experts say the current spending bill is part of that two-year package, and students can assume that the current increase spending levels would be carried forward for at least two years.
But Thompson said she is ultimately concerned about the ongoing Higher Education Act reauthorization process, where the president, education secretary and House Republicans have made proposals to make massive cuts to the federal student loan program, which would affect student loan borrowers in a much bigger way.
“[Congress] has set a really nice example here by prioritizing education spending and saying, ‘You know what? When we have extra resources like this, this is a place where we should be investing, not cutting, not freezing, not gutting,’” Thompson said. “But in the grand scheme of things, we are very focused on the ongoing threat to the federal loan program and to federal loan repayment.”
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The GOP’s Dodd-Frank Overhaul is Underway — Here’s What It Means for You
Wednesday, March 14, 2018
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*Update: On Wednesday, the Senate voted 67 to 31 to overhaul the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 in a bipartisan effort to loosen several financial regulations put in place in the wake of the financial crisis. It will now move to the House.
One of the most hotly contested components of the bill is its aim to loosen oversight of all but the largest banks in the U.S., freeing community and regional banks from tightened regulations they had long complained were overly oppressive.
There were some new amendments added to the rule that were aimed at consumer protection, such as preventing lenders from putting student loans into default after a borrower dies or declares bankruptcy, CNN reports.
The Congressional Budget Office released a report ahead of the Senate’s vote, warning that the bill’s amendments could increase the likelihood of another financial crisis.
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After successfully ushering in the biggest tax overhaul in three decades, the GOP continues to follow President Trump’s lead in their efforts to deregulate the financial sector and create policies that buoy big businesses in the U.S.
The Senate is expected to cast a final vote Thursday on a bill that aims to scale back the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The Dodd-Frank Act was a sweeping piece of legislation that aimed to tighten government oversight of big banks in wake of the Great Recession. The bill is widely expected to pass as it has support from a dozen Democrats in the Senate, and the majority of Republican senators are likely to vote for it.
In an open letter to senators, the Center for Responsible Lending, the National Community Reinvestment Coalition and the National Consumer Law Center called the bill “harmful legislation.”
If it passes, this piece of legislation would be the most significant rollback of financial reform since the financial crisis, according to Joe Valenti, director of Consumer Finance at the Center for American Progress, an independent, nonpartisan policy institute based in Washington, D.C.
The bill has bipartisan support and surprisingly does not contain any mention of scaling back the Consumer Financial Protection Bureau. The CFPB was a centerpiece of the Dodd-Frank bill, and it was given wide reign to regulate and monitor the financial services industry. But that doesn’t mean the CFPB is safe.
As the GOP works to reduce the scope of Dodd-Frank regulations in Congress, Mick Mulvaney, the acting director of CFPB, is doing his part to scale back the agency through other means. Most recently, he announced a review of the “usefulness” of the agency’s consumer complaint gathering and reporting, which includes a consumer complaint database available to the public.
What could these deregulation efforts mean for consumers? We reached out to experts to find out what consumers really need to be concerned about. Those who would be hit the hardest are the country’s most financially vulnerable homeowners and homebuyers — the lower-income families, the minorities and rural Americans, experts say.
Fewer banks are “too big to fail”
In wake of the financial crisis, many banks required taxpayer funds to help bail them out and avoid total collapse. To avoid this in the future, legislators made sure the Dodd-Frank Act included increased oversight over banks’ finances. In order to determine which banks were considered “too big to fail” and needed to be included in this enhanced oversight, the government decided to judge based on assets. Any bank with assets over $50 billion was included, which smaller banks have long argued was unfair and saddled them with much more administrative hassle (i.e. lots and lots of paperwork).
The newest version of the bill intends to ease those oversight requirements by increasing the enhanced oversight threshold to $250 billion from $50 billion. This means that 25 of the biggest 38 U.S. banks — which together hold about one-sixth of the assets in the entire financial sector — wouldn’t be subjected to stricter rules, Valenti explained.
This part of the legislation wouldn’t affect consumers immediately, but in the long run, its impact could be far-reaching. Dodd-Frank introduced strict regulations after the financial crisis to prevent future bank failures and bailouts. With the absence of regulation, it’s possible that banks could fail, particularly in an economic downturn, Valenti said. And in that case, the government could decide to use taxpayer funds once again to bail them out.
The 2008 financial crisis was a case in point.
“In every state, in 2009 and 2016, the magnitude of the crisis was so severe that people may not have felt the bank failures directly, but they felt their own financial situations deteriorate in unemployment and in bankruptcies, and people not being able to keep up with their mortgages and their credit cards,” Valenti said.
How homeowners may be impacted
Some other pieces of the legislation that deal with existing mortgage rules, however, are sure to have a more direct impact on homeowners.
The new bill expands an exemption that allows mortgage lenders to avoid escrowing taxes and insurances on some high-cost mortgages. The escrow requirements forced lenders issuing loans for jumbo mortgages to set up escrow accounts in which future payments for property taxes and insurance could be kept. Basically, homeowners had to be able to make those payments upfront. The rule was enacted to make sure that homebuyers could afford their loans and additional costs.
“Potential homebuyers may not know exactly what they are getting into price-wise once you factor in taxes and insurance,” Valenti said. “And once they are in a home, without an escrow, people may find it difficult to come up with the money for a property tax bill or for homeowners insurance.”
In extreme cases, a homeowner could potentially lose his/her house or have to deal with forced placed insurance, which means the lender picks the homeowners insurance policy for the homeowner, which can typically be expensive and not very helpful to the buyer, Valenti said.
Another rollback of rules is likely to hit lower-income Americans living in manufactured homes, more commonly known as trailers.
As it stands, the Dodd-Frank Act prevents manufactured home companies from steering borrowers to their prefered lender. The new bill removes that requirement.
Alys Cohen, staff attorney at the National Consumer Law Center, explained that manufactured homeowners are some of the most vulnerable homeowners in this country because trailers are much cheaper than regularly built homes, but they may not necessarily provide the homeowner the same value.
“[The bill] makes it more likely that people with manufactured homes get much more expensive loans get than the ones they need to get,” Cohen said.
Race-based discrimination rules rolled back
Dodd-Frank requires banks to collect personal and financial information about the people they approve for loans, such as age, credit score and the race or ethnicity of the borrower, in greater detail than before. And this requirement was installed to monitor possible race-based discrimination in housing lending, experts say.
Before Dodd-Frank, experts say that evidence had shown that borrowers of color who had similar credit scores to white borrowers faced higher-cost mortgages or were targeted for inferior products. In some cases, minority homebuyers would not be able get a home in certain neighborhoods, Cohen added.
Valenti provided an example of how expanded the data is required by Dodd-Frank: “Instead of having a borrower just labeled as Asian Americans/Pacific Islander, you would have a field for Chinese or Vietnamese or Thai or what have you, which is is something I know that the Asian Americans/Pacific Islander community has really fought for over the years.” The same is true for other minority groups.
Valenti said that the specific data points are critical because policymakers, researchers and advocates rely on them to measure discrimination in housing finance.
Under the new bill, the expanded information would be no longer required for about 85% of banks and credit unions that make mortgages, experts say.
“If you carve 85% of the banks out of that requirement, there’s no way to insure that most banks in the country are making loans that aren’t discriminatory,” Cohen said.
Appraisal requirements change for rural homeowners
Another provision in the bill would potentially hurt homeowners in rural areas, where no home appraisal would be required at all if the loan is below $400,000 in home value. An appraisal can be a crucial component of the lending process, because it prevents homeowners from borrowing more money than their home is actually worth. If the appraised value of a property is lower than the buyer’s purchase price, banks will typically refuse to lend the homebuyer more money.
When there’s no uniform rule on how to decide how much someone’s home is worth before they take out a loan, the less likely the home value in rural communities would be accurate, Cohen said.
“The reason that matters is when you are taking out a loan, you want to make sure you are not borrowing more than your house is worth,” Cohen said. “If you borrow more than your home is worth, than you can’t cover the loan by selling the house.”
In this case, even if you sell the house, you still owe the bank extra money, Cohen explained.
“It also means that if you only think you are borrowing, for example, 80% of the home value and you are really borrowing 105% or 110%,” Cohen said. “Then you don’t have any more equity in the house to borrow against later if you need something in an emergency.”
What about the CFPB?
On the CFPB front, the picture isn’t rosy, either.
The CFPB is a federal government agency responsible for establishing consumer protection regulations and regulating key parts of the financial sector, such as the mortgage and debt collection industries.
The agency had zealously targeted bad actors in the financial industry since its creation, reclaiming nearly $12 billion for more than 29 million consumers. Its latest high-profile actions included fining Wells Fargo in the unauthorized accounts scandal and creating new rules around payday lending. It has also rolled out new regulations in the mortgage, credit card, debt collection and prepaid card sectors.
The Trump administration and Republicans have long sought to curtail the CFPB’s power as part of a broader effort to lighten federal regulation over financial institutions.
Richard Cordray was the agency’s first director, holding office from 2012 until he announced he was cutting his tenure eight months short at the end of November 2017. He had been criticized by Washington conservatives but was well-received by Democrats and consumer advocates.
Mulvaney, head of the Office of Management and Budget, took over the bureau in a drama that unfolded into a lawsuit. The fight over who is the legal boss of the bureau is still ongoing.
A former South Carolina representative, Mulvaney had said in a 2014 interview with the Credit Union Times that the CFPB was “a joke…in a sick, sad kind of way.” In 2015, he co-sponsored a legislation to eliminate the agency.
The CFPB called last week for public input on the usefulness of its consumer reporting system.
It was the sixth and last in a series of Requests for Information, as part of Mulvaney’s call for public comment on its enforcement, supervisory, rule-making, market monitoring and education activities that he issued back in January.
“This request for information on the ‘usefulness of complaint reporting’ is cover for Mick Mulvaney to build up a bunk case for why consumers’ voices should be silenced,” Melissa Stegman, senior policy counsel at the Center for Responsible Lending, told MagnifyMoney. “He is even hampering the agency from pursuing justice for the victims of Wells Fargo’s misconduct.”
The CFPB’s Consumer Complaint Database is a public platform that stores more than 1 million complaints about financial products and services since 2011. The CFPB forwards each complaint to the appropriate company for a response and analyzes the data to makes rules and enforce laws. The bureau shares the data with government agencies and presents reports to Congress.
The database has long had the financial service industry on edge, but consumer advocates say it helps hold the big financial institutions accountable. Concerns have been hovering over the database possibly going private under Mulvaney. The Dodd-Frank law requires that there be a complaint system, but it does not require it to be public, Valenti said.
“Mulvaney already has 1.2 million comments from the public on this matter – in the form of complaints about the practices of financial companies,” Stegman said. “He should read these Americans’ stories. 97% of consumers have received timely replies from companies when the CFPB sends them the complaints.”
What happens next
The CFPB started accepting public comments on the complaint reporting system in the Federal Register on March 6. The public comment window ends on June 4.
Ed Mierzwinski, Consumer Program director with U.S. PIRG, a grass-roots group, told MagnifyMoney he anticipates that companies that would like to ignore complaints and keep their abusive practices in the dark will urge the bureau to gut the public database.
“If Mulvaney agrees with the many companies that want to eliminate the public consumer complaint database,” Mierzwinski said, “then the winners will be bad actors that can more easily hide their abusive practices, making it easier for wrongdoers to prosper and consumers to be harmed.”
Experts urge consumers to share their concerns and opinions in support of the public database by submitting comments on this page.
Valenti encourages consumers to keep filing complaints while the public database lasts. He also suggests that they remind their representatives or senators that the system is valuable as issues like this may slip through the cracks while lawmakers are dealing with other things on the table.
“It’s very easy to vote on things in the abstract,” Valenti said. “But when you can show that an agency has really helped people living in your community, those stories are extremely valuable to lawmakers.”
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