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Consumers Pay a Price for Trump’s Tariffs on $200 Billion in Chinese Imports

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President Donald Trump made good on his threat of imposing tariffs on $200 billion worth of Chinese-made goods when he announced Monday that a 10% duty will take effect Sept. 24, rising to 25% by the beginning of next year.

The silver lining: The later timing avoids Christmas morning meltdowns from kids who missed out on trendy electronic gadgets due to increased prices. The bad news? This may not be the end of the trade war. China reacted to Monday’s announcement with talk of retaliation, which led President Trump to threaten further tariffs on another $267 billion worth of Chinese imports. That would bring the total value of Chinese goods subject to tariffs to more than $500 billion, virtually all Chinese imports.

Tariffs Explained: What They Are, How They Work, Why It Matters

For now, the administration removed nearly 300 items from the original proposed list, a nod to U.S. companies’ concerns since Trump first threatened tariffs this summer. Popular consumer electronics products such as smartwatches and Bluetooth devices are among those that dodged the higher tariffs. Some consumer safety products, such as bicycle helmets, baby car seats and playpens also were taken off the list.

It could be worse for consumers, but …

The tariffs account for nearly 40% of the $505 billion in Chinese items the U.S. imports annually. Although they will start at a more subdued 10% level, eventually, American consumers will keenly feel the pain from the swath of stiff tariffs on thousands of goods as varied as fish, baseball gloves, luggage, dog leashes, furniture, lamps and mattresses.

“What the tariffs will do is basically cause many people to pay more for whatever they buy in the stores,” said Gary Hufbauer, economist and nonresident senior fellow at the Peterson Institute for International Economics. “It could be worse … 25% is a lot different than 10%.” The PIIE is a nonprofit, nonpartisan economics research institution in Washington, D.C.

“[They thought they might have to pay] $8 for that new T-shirt, they may pay $7, whereas previously it was $5,” Hufbauer said, giving an example.

Before excluding the 300 items, almost 23% of the targeted items on Trump’s $200 billion list were consumer products, according to a July PIIE analysis. By comparison, consumer products made up just 1% of the initial $50 billion worth of Chinese products Trump put into place earlier in the summer.

Why Trump takes a step back

Delaying the full 25% duty is an attempt to mitigate potential political and economic consequences ahead of the midterm election, said Hufbauer.

For one, Hufbauer said, Trump does not want to see the stock market tank before November.

“Many of his supporters own shares, and they would blame him because they thought the stock market was dropping because of his foreign policy, his trade wars,” Hufbauer said.

The U.S. stock market on Tuesday closed higher as investors shrugged off escalating trade tensions.

There is also a concern that if high tariffs are slapped on Chinese imports, American manufacturers that import components from China may have to pay higher prices for those parts or worse, lay off workers as a result. Even though consumers don’t buy parts directly, they end up being incorporated or assembled into products that consumers eventually buy. Manufacturers must either pass along the increased cost to consumers or find other ways to cut expenses.

“Those stories are not good for a person going into an election,” Hufbauer said.

What’s at stake

When the tariffs are at the 25% level, economists estimate that consumers will have to bear about half — 12.5% to 15%— while the rest is absorbed by the producer or manufacturer.

Those who have purchased washing machines this year may have already understood how tariffs affect consumer product prices. The price of imported washing machines shot up 16.4%, three months after the Trump administration imposed 20%-50% tariffs in February, according to the American Enterprise Institute, a Washington, D.C.-based conservative think tank.

There are also indirect impacts, which may emerge more slowly, as 47% of the $200 billion tariff list comprises tens of billions of dollars of intermediate inputs — those parts and components of final products we mentioned earlier — imported from China. Consumers will likely have to spend more on items assembled with parts imported from China that are subject to high tariffs.

What’s next

Trump has been tough on trade since he was on the presidential campaign trail. He has accused China of practicing unfair trade policies, such as forcing U.S. firms to transfer technology to Chinese counterparts. Supporters of the new tariffs hope it will persuade China to play fairer on trade. Even critics agree that China has in some ways stymied growth in U.S. industries, but they also criticize Trump’s protectionist trade policy and say it will ultimately hurt industries and individuals in both countries.

It’s possible Trump will act on his rhetoric and continue to wage a trade war against China, economists said. But Hufbauer thinks Trump is trying to pressure China into making concessions ahead of the upcoming trade talks between Beijing and Washington.

If Beijing is willing to make concessions on some of the main issues Trump raised, the trade tensions could be dialed back a bit, Hufbauer said. “I don’t think we’re going to get into a happy friendly time,” he said. “But I think we could reduce the confrontation a lot if China decides to make some concessions.”

However, if 25% tariffs are imposed on total trade in both directions, then we would enter a full-blown trade war we haven’t seen since the 1930s. In that case, economists said American companies that rely on global supply chains will hold off on investment decisions due to the uncertainty around global trade, which will negatively affect the U.S. economy and eventually cause the unemployment rate to swing up.

“Using the terminology of war, Trump’s misguided trade war is generating lots of collateral damage and friendly fire that is putting [America’s] companies, workers and consumers at great risk,” said Mark Perry, an economics policy scholar at the American Enterprise Institute and professor of finance and business economics at the University of Michigan-Flint.

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Understanding the Risks of Short-Term Loans

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If you’re in need of quick cash but might have trouble borrowing money through traditional means, a title or payday loan might sound like the light at the end of the tunnel — neither requires a stringent approval process and you can get the money quickly.

Although you can easily access these short-term loans, they come with a high level of risk. The biggest risk is that like many payday loan borrowers, you could end up in a nightmare debt cycle, having to pay fees and interest charges that would quickly eclipse the amount of cash you borrowed in the first place.

Keep reading to learn more about the risks and costs associated with some common short-term loans. Next, discover alternatives that can help you get through your financial crisis.

Common types of short-term loans

When you need financing quickly, there are several options to choose from. Before you take out a short-term loan, be sure you understand how long you have to repay the funds, how much you can borrow, and, of course, how much it will cost you.

Payday loans

Typical Term LengthAvg. Loan AmountAvg. Financing Charge

14 days


$10 to $30 per $100 borrowed

Payday loans are high-cost, small-dollar personal loans that become due in a lump sum — typically on your next payday. You can find these types of loans from storefront or online payday lenders.

Many states set limits on the amounts of payday loans lenders can offer, according to Consumer Financial Protection Bureau, and the most common payday loan amount is $500. Loans are available above and below that, depending where you live.

Lenders generally require you to write a predated check for the amount you want to borrow — including fees — or they might ask you for authorization to electronically withdraw money from your bank account.

The lender gives you the funds, then holds the check until the loan is due. If you can’t repay it on deadline, the lender can cash the check or take money out of your account. You can choose to extend the loan term — but that’s when the debt trap begins. You’ll likely incur additional charges each time you roll over your debt for another payday period, making it that much more difficult to pay off the balance.

The average loan term ranges from two to four weeks. Many states have laws that cap payday loan fees, which generally range from $10 to $30 for each $100 borrowed. A typical, two-week payday loan with a $15-per-$100 financing fee translates to an annual percentage rate of almost 400%.

Check out this map by Center for Responsible Lending showing interest rates on the typical payday loan in each state. CRL is a nonprofit, nonpartisan research and policy group.

Stuck in a payday loan trap? Here are the ways out.

Short-term installment loans

Typical Term LengthAvg. Loan AmountTypical APR

Two weeks to several years


197% to 369%

Installment loan borrowers typically get fixed-rate loans with fixed payment schedules.
Understand that many small-dollar installment loans are really high-cost payday loans in disguise. In recent years, payday lenders have moved into the installment loan business to skirt heightened regulations regarding payday loans. Instead of issuing high-cost payday loans, these lenders might offer installment loans, but charge high upfront fees to get around interest rate caps set by state regulatory bodies.

The CFPB reports that the average size of installment loans borrowers take is $1,291 and APRs range from 197% to 369%. Installment loan terms are longer than payday loans and can have terms of up to several years.

According to the Pew Charitable Trusts — an independent, nonprofit policy think tank — lenders in 19 states issue short-term, payday installment loans: Alabama, California, Colorado, Delaware, Idaho, Illinois, Kansas, Missouri, New Mexico, North Dakota, Ohio, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia and Wisconsin.

Car title loans

Typical Term LengthTypical Loan AmountsTypical Financing Charge

15 to 30 days

$100 to $5,500
(25% to 50% of the vehicle’s value)

25% per month

A title loan is another kind of expensive, short-term loan, but it’s secured, which means you have to put up collateral to get the loan. For example, title lenders use your car’s title as a collateral.

You typically have to own your car outright to be eligible for a title loan, but some lenders offer them if you have equity in the vehicle or even a clear title — you just need to have enough car equity to cover the loan. Car title lenders usually make loans that equal 25% to 50% of the car’s value. Title loan term lengths generally run 15 or 30 days. On average, the loan amounts range from $100 to $5,500, but some lenders will issue these loans for $10,000 or more, according to the Federal Trade Commission.

Lenders charge an average of 25% as a monthly financing fee, which adds up to an APR of at least 300%, according to the FTC. You also might be on the hook for additional fees, depending on the lender.

Like payday loans, if you can’t repay a single-payment title loan on time, you might choose to extend your loan term, which will result in more fees. Some car title loans have longer loan terms and you can repay them in installments. Vehicle title installment loans are available in 18 states, some of which allow both single-payment and installment loan structures, according to the CFPB. If you can’t repay the loan at all, you risk losing your car — the lender can legally repossess to recoup the money you owe.

Pawn shop loans

Typical Term LengthTypical Loan AmountsTypical Financing Charge

30 to 90 days


36% to 100%

Pawn shops offer collateral-based loans. You bring in something of value — think jewelry, musical instruments, tools or other household or personal item — and the pawnbroker lends you money based on the value of your collateral. He or she holds onto your collateral until you repay the loan.

The average pawn shop loan amount is $150, according to the National Pawnbrokers Association. Borrowers typically have 30 to 90 days to pay back their loans and get their items back. The cost of these loans varies, depending on state law cap rates and individual shops’ practices. Some pawn shops charge storage fees and insurance fees. Christopher Peterson, director of financial services and senior fellow at the Consumer Federation of America, estimated that on average, these loans’ APRs range from 36% to 100% — or more.

Peterson said pawn shop loans’ APRs are consistently lower than payday loans’, but well-above average credit card interest rates of 15.5%. If you can’t repay your pawn shop loan in full, you lose your collateral, but your loan will be marked as paid.

Learn more: Why are short-term loans risky?

You’re likely entering the danger zone if someone offers a short-term loan that comes with an APR higher than 36% — the benchmark for affordable small loans — no matter how the loan is structured.

Here are just a few reasons to be wary of short-term loans:

They can quickly balloon over time

Payday, title and payday installment loans are often called predatory loans because they are very different from healthy, small-dollar loans that provide wealth-building opportunities or income-smoothing possibilities — these risky, short-term loans are designed to profit based on borrowers’ inability to repay them. That way, high-cost lenders can keep charging fees.

“There’s no shortage of personal stories or accounts of individuals taking out a few hundred dollars, like $200 or $300, and actually end up paying over $1,000 just in fees,” said Scott Astrada, director of federal advocacy for CRL. “And their principal has never even [gone] down by a dollar.”

Here’s an example of what can happen with these types of loans: Say you need $500 today and you take out a loan with a $15-per-$100 finance charge. That means you owe $575, which is due on your payday in two weeks.

“A person who doesn’t have a $500 today is not going to have $575 in two weeks,” said Ed Mierzwinski, senior director of the Federal Consumer Program at U.S. PIRG, a grassroots consumer program.

If you keep rolling it over by paying another $75 every two weeks, three pay periods later you’ll end up incurring a shocking $225 fee on a $500 loan, which equates to a 391% APR. “That’s a debt trap,” Mierzwinski commented.

Installment loans might sound like a safer bet because you’re making fixed monthly payments over a set period of time. But they can also be unaffordable, Peterson said.

“You could have a 500%-interest-rate-two-week payday loan that you just pay the interest on and you roll over multiple times, or you can have a 500%-interest-rate-year-long installment loan where you just pay interest and never decrease the principle,” Peterson said. “If you just take the money and don’t pay attention to the labels or the ink on the paper for the contract, these are essentially the same loan.”

The CFPB study found that nearly a quarter of payday installment loans end up in default. Of all the short-term products, online payday installment loans have the highest default rate — 41%.

Your bank account might be at risk

Short-term loans might have a domino effect on your financial security.

“It’s not uncommon for the debt trap not only to threaten the financial security of the borrower, but to have far-reaching, devastating effects on the whole financial life of the borrower,” Astrada said.

To take out a payday loan, you have to have a bank account; often, you have to give lenders access to your bank account to withdraw your payments (or give them a predated check). Lender is entitled to cash your predated check if you don’t pay them back. That could lead to overdraft fees, bounced check fees, your bank closing your account — all of which could significantly damage your credit. Some risky loan borrowers even end up in bankruptcy.

You could lose your possessions

To get a short-term title loan, your collateral is your car. Keep in mind that you lender is within his or her legal rights to take possession of your vehicle if you default on the loan.

“For $200, $300 or $500 that you need, you are putting your car that could be worth $2,000 or $3000 at risk of being repossessed by the high-cost predatory lender,” Mierzwinski said.

Moreover, if a lender takes possession of your car, you won’t be able to get to work, which will eventually affect your ability to repay the loan. Approximately 22% of car title installment loans end in default, and lenders repossess about 8% of those, according to the CFPB.

When you take out a pawn loan, you might risk losing your collateral, but at least nothing will happen if you walk away from the debt. That’s why pawn loans are relatively safer than other high-cost short-term loans. Peterson suggested that if you want to take out a loan from a pawn shop you select the collateral that you can live without — think twice before you pawn a family heirloom.

When can short-term loans be a good idea?

There are countless reasons — many beyond your control — you might need money fast. Medical emergencies, unexpected job loss or car repairs can easily send your finances spiraling. Before you take out a short-term loan, first ask yourself whether it’s necessary to borrow some quick cash for the expenses. For example, it’s not a good idea to take out short-term loan for a want, rather than a need, like a lavish vacation.

“If you’re taking out small-dollar loans that just simply pushes the problem forward in terms of having more expenses and income, that’s a dangerous situation because then you’re not actually addressing the issue,” Astrada said.

You should consider short-term loans only when it’s absolutely necessary, such as for a true emergency. If you do decide on a short-term loan, avoid the high-cost, predatory ones. Instead, shop for the lowest APR you’re eligible for and borrow only as much as you need. Read on to find some better, safer alternatives options with reasonable interest rates.

Where to find a good short-term loan

Start with your local credit union or community bank

Plenty of community banks and credit unions offer personal loans or small-dollar loans with much lower interest rates than payday or title loans. In addition, these types of financial institutions are much better regulated than high-cost lenders.

For example, all federal credit union loans have an 18% interest cap, with one exception — Payday Alternative Loans, which have interest rates capped at 28%.

Look for credible, online lenders that offer lower-APR loans

Some banks and nonbank, online lenders also make decent installment loans, even for people with not-so-great credit scores. There are decent personal loans for people with bad credit. Online lenders typically offer loans to borrowers with minimum scores of 600. The higher your score, the better rates you’ll likely get. The exact products lenders offer you can depend on your credit score, credit history, income and where you live, but the APR should not exceed 36%.

Compare lenders on our personal loan marketplace.

When considering a short-term loan, there are a few things you must avoid. Because you don’t want to get into a bad cycle of debt, consider these points when you’re choosing a loan product:

1. The total loan cost
The main difference between a small-dollar loan that’s predatory and one that’s beneficial to a consumer is the interest rate. “Anything over 36% is very, very high-cost credit,” Astrada said.

2. How many questions the lender ask you
Risky loan lenders don’t ask for much information about your finances and the process is quick and easy. Legitimate financial institutions, however, have strong underwriting standards and typically access your personal and financial information to determine your ability to repay.

“[The lack of strong underwriting], where you can click three buttons online, walk through a store and walk out in five minutes. Yes, it’s more convenient, but it’s also like the bait of getting into one of those debt traps,” Astrada said.

3. Additional fees
Be wary of a host of tangential loan charges, such as prepayment, membership, convenience or origination fees. The loan itself might be small, but if a lender includes points and fees in the APR, your cost of borrowing can skyrocket.

4. Transparency
Steer away from products that don’t offer disclosure on rates and terms. If the lender is not transparent or ambiguous about additional fees, loan terms and your APR, consider it a red flag.

Alternatives to short-term loans

You might not have to take out a payday loan if you take certain actions. Consider these:

Contact your creditor to make a payment plan. If you know you might miss payments or have already missed some, don’t panic. Contact your creditors first. Some might work out a payment plan with you, especially if you have an emergency. For example, many utility companies and hospitals offer lower interest — even 0% — payment plans to make sure that you can pay past due balances over the course of several months.

Shop around for the lowest-cost loan. Check with credit unions and community banks to see if you qualify for a small-dollar personal loan. Also search for credible financial companies offering installment loans with lower APRs.

Ask friends and family for help. Don’t be embarrassed to ask friends or family if you need a quick, short-term loan. A Pew Charitable Trusts study found that many borrowers trapped in payday-loan debt cycles eventually got help from friends and families. You’re way better off asking for help from them instead of getting in over your head with a predatory loan.

Take a credit card cash advance. When you borrow cash against your credit card’s line of credit on your credit card, it’s called a cash advance. Unfortunately, cash advances often come with high interest rates and additional fees.

In fact, a cash advance APR is typically 5% higher than the APR for purchases. On top of that, you’ll incur a 3% or 5% fee on the amount of each cash advance you take. It’s not an ideal solution, but still likely cheaper than a payday or title loan in the long run.

Make a budget and save for emergencies. Look at your income and expenses and make sure you don’t spend more than you earn. Avoid unnecessary spending. At the same time, build some savings so that next time an emergency arises, you have a cushion to fall back on instead of turning to credit for help.

The bottom line

Say no to costly short-term loans. Don’t fall for the convenient, quick money — those predatory loans can cost you a great deal in the long run. If you do a need short-term loan, shop around for the lowest-cost one you can find. Try local banks, credit unions and credible financial companies. If you can’t secure a loan because your credit is bad, you have no income and you don’t own anything that qualifies for collateral at a pawn shop, you may need to seek alternatives as mentioned above, but a three-digit, payday or title loan isn’t going to fix your problem.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Shen Lu
Shen Lu |

Shen Lu is a writer at MagnifyMoney. You can email Shen Lu at


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How to Prepare Yourself for the Next Recession

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This month marks the 10th anniversary of Lehman Brothers’ bankruptcy, a collapse synonymous with the 2008 financial crisis. The U.S. emerged from the Great Recession in 2009, entering what may be one of the country’s longest periods of economic expansion.

But if all good things must end, it’s natural to wonder when to expect the next downturn and how to prepare. There’s chatter that a recession is on the horizon, and while no one knows exactly when, some economists think the U.S. economy could enter a downturn in 2020. The Federal Reserve also signals that gross domestic product — the value of all goods and services produced across the economy — will slump in 2020. Echoing fellow economists, Tendayi Kapfidze, chief economist at LendingTree, MagnifyMoney’s parent company, said he expected the economy to slow the second half of 2019.

“This does not mean it will go into recession though,” he noted, “although the risks are higher when underlying growth is slower.”

When the economy takes a turn for the worse, it could put your financial goals, as well as your job, in jeopardy. It’s time to take a look at your overall financial picture — investment, savings and debt — to make sure you will be in a strong position to ride out any potential economic storms.

MagnifyMoney surveyed nearly a dozen certified financial planners to help you prepare for the next recession, financially and mentally. They shared four pieces of advice to reduce risks.

Take a look at your 401(k)

When it comes to preparation, the No.1 rule is to not let a looming recession dictate your financial decisions. In other words, don’t try to time the market. However, you can prepare for a recession by having good investing habits — having a strategy and sticking with it.

“The best thing people can do now is just verify that that their portfolio is appropriate for them,” said Angela Dorsey, a certified financial planner based in Torrance, Calif. “If it’s too risky, you should make changes now and not wait for the recession.”

Do nothing if you have the right investment mix

Over the past few years, many people have aggressively invested in equities as the stock market has been on a roll. Now, it’s time to ask yourself: “How would I feel if the market goes down 20% in a year?”

Be honest with yourself: if you think you can tolerate the potential loss, have an investment strategy and the discipline to stick to your plan when the market goes down, stay on course. Do so especially if you are young, when time is on your side and you can afford to have a stock-heavy portfolio.

“You just stick with your 401(k) contributions, stick with your portfolio,” Dorsey said, using an example of a 30-year-old investor. “Because she’s young and she’s got all these years right out of the recession and be prepared for the next bull market.”

That said, Dorsey recommended you rebalance your portfolio if it strays from your strategic allocation — a balanced mix of stocks, bonds and other securities — no matter how old you are and which economic cycle you are in.

Basically, your portfolio should be appropriate for your risk tolerance. If your plan is to have 70% of your investment in stocks and 30% in bonds, but the market has gone up, a greater percentage of your overall wealth may now be in stocks. What you should do now is verify that allocation and make sure your portfolio is still balanced 70-30.

Reallocate your assets if you are worried

However, if you are nervous about an economic downturn and think some loss in your retirement savings will keep you up at night, or you may act emotionally, the time to rebalance your assets is now.

“When you’re not emotional about it, when it’s not free falling like it did in 2008 or in 2001, 2002, you can make some adjustments,” said Scott Bishop, a certified financial planner in Houston, Texas. “Because you can see if there’s some flaws in your portfolio that might be subject to market risk by lack of diversification.”

You need a strategy in your portfolio that keeps you invested but may reduce the risk.

1. Balance more assets toward fixed-income securities
Depending on your risk tolerance and whether you have other sources of income, when you’re gearing toward a more conservative portfolio, you need to bulk up on less risky, fixed-income instruments. Fixed-income securities include bonds, money market accounts and CDs within or outside of your retirement plans.

This holds especially true for those approaching retirement but still holding an aggressive portfolio — you don’t want the money you need in retirement to take a hit right before you retire. If you have a bigger portion of your portfolio in bonds, fixed income or cash, you could pull money from that fixed-income piece during a recession.

“The last thing you want is to have a major part of your portfolio in the stock market, and when it goes down, it takes a big hit,” Dorsey said.

2. Invest in an earlier target-date fund
Another strategy to protect your savings from a huge loss: moving your core savings — the money already invested — into a target-date fund that’s earlier than your expected retirement date. If you are young but it’s bothering you to see your $10,000 401(k) savings turn into $1,000, this method can also apply to you.

The investment mix in a target-date fund will change over time, transitioning into more conservative assets as you get closer to retirement. The sooner the date of the fund, the more conservative the allocation is.

Let’s say you are going to retire in 2040, but you are already concerned about the market. Take your invested 401(k) money and maybe put it in a more conservative allocation — a 2025 or 2030 target-date fund.

“That allocation protects you more against the downside,” Bishop said. “If the S&P 500 goes down by 20%, maybe you’d be down by 10% or 12%, something very recoverable but also not so low-interest that if the market goes up for another year, you’re not going to completely miss out.”

3. Invest new monthly contributions aggressively
Whether you manually allocate your assets or move a lump-sum principal to a target-date fund, keep contributing to your 401(k) but invest the new money aggressively in stocks, so that in the long run you will build the equity back up in your contributions.

“If the market does go down, would you like to have your new money buy cheaper stocks?” Bishop said. “Unless their plan balance is already huge given their age, like they already have $1 million, it’s OK to have a level of volatility.”

Don’t act on fear

One common pattern that financial planners have seen is that people take action because of emotion.

“When they are emotional, they tend to buy on greed when the market’s going high and sell on fear when the market’s going down,” Bishop said. “If you’re buying high and selling low, you’re doing exactly the opposite of what you need to do to make money in the market.”

A recession is completely normal. With your retirement savings, you’ll need to keep a long-term perspective, because another bull market will arrive.

The bottom line: Do not panic when the next recession hits or allow your emotions to get in the way. Take a deep breath and start preparing for it now by looking at your asset allocation and rebalance your investments if needed.

“Don’t sell,” Dorsey said. “Selling is the worst thing you can do.”

Reduce your credit card debt

As a recession looms, one way to protect yourself is to pay down your high-interest debt. This is to make sure that you will have enough liquidity when a recession hits.

“That’s the best risk management tool,” said Dennis Nolte, a certified financial planner in Winter Park, Fla. “With interest rates going up, anybody that’s got revolving debt realizes that their interest rates on their debt are going up. If you get a 20% credit card, start paying that down, first and foremost.”

Build your emergency fund

Another way to strengthen your foundation is to be sure your emergency fund is cash-flush.

For those who don’t have an emergency fund, it’s the perfect time to start saving three to six months of your spending in an emergency account — you don’t want to be forced to pull money out of the stock market during a correction for any unexpected event, such as a job loss.

Some people prefer to save their emergency funds in a plain vanilla savings account with a brick-and-mortar bank. As the Federal Reserve continues to raise interest rates, interest rates of online savings accounts, money market accounts and short-term CDs have swung up, as have short-term Treasury bond yields. If you stash a portion of your rainy day cash in one of these shorter-than-one-year guaranteed-income accounts, or buy short-term Treasury bonds, you can have something liquid but also will get a reasonable return.

If you’re young, more adventurous and financially-secure, Nolte suggested you invest part of your emergency money in a Roth IRA, rather than shovelling every penny of your emergency fund in a plain savings account for an emergency that may never happen. You can take your contributions out anytime without any tax penalties, leaving the interest in the account.

Set aside cash for short-term needs

If you have money invested in the market for short-term goals, be it getting your roof repaired or buying a car or a house in the next few years, it’s time to take those funds out. That money needs to be set aside in an interest-bearing account, so it won’t be influenced by the market.

“[This] should be the case anyway, but over the last few years people have gotten a little too ambitious and say, ‘Oh gosh, I want to buy a house in five years so let’s be super aggressive and put it all in stock so it can grow.’” Dorsey said. “They can grow but they can also go down.”

The bottom line

No one likes a recession, but all economic cycles have their peaks and their troughs. Avoid letting a recession dictate your financial goals and decisions. Don’t make drastic changes to your stock portfolio based on fear. You can prepare for the recession now by revisiting your 401(k) portfolio and making sure you have a balanced mix appropriate for your own risk tolerance. When the next downturn occurs, remember that another expansion will eventually arrive. As for reducing debt, establishing an emergency fund and setting aside cash for short-term needs, these are good financial habits to have even when the economy is humming along.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Shen Lu
Shen Lu |

Shen Lu is a writer at MagnifyMoney. You can email Shen Lu at


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Can’t Pay Your Student Loans? You Can Lose Your License in These 16 States

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In many states, failing to repay student loans could cost one a professional license to perform a job, and in the case of Iowa and South Dakota, even losing a driver’s license.

Sens. Elizabeth Warren (D-Mass.) and Marco Rubio (R-Fla.) in June introduced legislation that would prevent states from suspending, revoking or denying state licenses because borrowers default on their student loans, in the hopes of alleviating some of the financial burdens on Americans who are already saddled with student loan debt.

Americans owe a whopping $1.53 trillion in student loan debt, and almost 11 percent of the debt was at least 90 days delinquent or in default at the end of the first quarter of 2018, according to the Federal Reserve Bank of New York. Meanwhile, almost 30 percent of workers in the United States need a professional license to perform their job, according to The Brookings Institution.

In recent years, six states — North Dakota, Washington, New Jersey, California, Oklahoma and Virginia — have repealed laws that allowed states to suspend or revoke professional licenses as a penalty for student loan default. The Warren-Rubio bill exercises such efforts at the federal level.

After reading state laws, MagnifyMoney found that as of Aug. 24, 2018, at least 16 states deny, suspend or revoke state-issued professional or driver’s licenses if loan borrowers default on their student loans. In some states, such laws impact a wide range of professions requiring a state license, such as teachers, nurses and barbers; in others, only certain jobs are affected. Here are the states where these penalties exist and may be enforced:


Overview of the law

When borrowers default on student loans (payments are 180 or more days past due) made by the Alaska Commission on Postsecondary Education, the state’s higher education agency may order licensing entities to not renew the debtors’ licenses. The licensing authority can take action to stop granting a license renewal once they receive notice of unpaid student loans.

Jobs affected

All jobs that require state-issued professional licenses, certificates, permits to perform, including teachers, nurses, pharmacists, security guards and pesticide applicators.

If you lost your license because of student loan debt

The licensing agency will notify you of the refusal of non-renewal. Within 30 days of receiving the notice, you may request a review by the commission. However, in order to have your license renewed after the review, you have to prove that: 1) you have paid off the entire loan, including interest and principal, along with all the collection costs; or 2) you have entered into a payment plan with the commission and have made on-time payments in full for the four most recent and consecutive months under the plan.


Overview of the law

The Arkansas State Medical Board may revoke or suspend a license, impose penalties or refuse to issue a license when a physician in this state has breached a Rural Medical Practice Student Loan and Scholarship contract. Recipients of rural medical practice loans are obligated to practice medical care in rural Arkansas full time and follow the terms in the contract they signed with the state’s student loan and scholarship Board.

Jobs affected

Physicians on Rural Medical Practice Student Loan and Scholarship contracts.

If you lost your license because of student loan debt

The loan recipients who get their medical licenses suspended won’t be able to practice for a period of time equivalent to the time they failed to follow their loan obligations. They can’t get their licenses back until they pay off their loan and penalties.


Overview of the law

In Florida, the Department of Health may suspend a state-licensed health care practitioner who has failed to repay a student loan issued or guaranteed by the state or the federal government. The borrower will be fined 10 percent of the defaulted loan amount.

Jobs affected

More than 50 professions that require state health department licenses, including nurses, medical physicists, body piercers, septic tank contractors and dentists. See the full list here.

If you lost your license because of student loan debt

To lift the suspension, the borrower has to enter a new payment term agreed by all parties of the loan and pay the fine within 45 days after he/she was notified of the suspension.


Overview of the law

A professional licensing board can suspend the license of anyone who has defaulted on any federal education loan. Authorities may also suspend licenses of people who failed to comply with service obligations under any service-conditional scholarship program.

Jobs affected

More than 40 professions that require state-issued professional licenses. A few examples: chiropractors, dietitians, librarians and physical therapists. See a full list on this page, under the drop-down menu “Boards and Licensed Professions.”

If you lost your license because of student loan debt

When the licensing board receives written notification that you are making payments on the loan or satisfying the service, it can restore your license.


Overview of the law

Hawaii licensing authorities can deny a license application or a renewal or suspend a professional license if you default on a student loan made or guaranteed by the state, state agencies or the federal government. License suspension can also occur if you are not complying with obligations under a student loan repayment contract or a scholarship contract. Your license could also be in jeopardy if you are at least 60 days past due with payments under a repayment plan.

Jobs affected

Jobs that require professional licenses issued under 25 state licensing boards.

If you lost your license because of student loan debt

Your license can be renewed or reinstated when the licensing authority is notified that you are making payments or satisfying the terms of the student loan, student loan repayment contract or scholarship contract and are no longer in default or breach of the loan or contract.


Overview of the law

The Division of Professional Regulation of the Department of Financial and Professional Regulation can deny licenses or renewals to those who have defaulted student loans or scholarships provided or guaranteed by the Illinois Student Assistance Commission, any governmental agency of the state or any federal government agency. Your license can also be suspended or revoked if you are proven to have failed to make satisfactory repayments for a delinquent or defaulted loan after a hearing.

Jobs affected

Jobs that require state-issued professional licenses. The professions include physicians, nurses, pharmacists, physical therapists, dentists, barbers, accountants and more. Check out the full list of state-licensed occupations in Illinois here.

If you can’t apply for a license because of student loan debt

If you have established a “satisfactory repayment record,” the department may issue a license or renewal.


Overview of the law

Any license authorized by state laws, including a driver’s license, can be denied, revoked or suspended if a borrower has defaulted on a loan owed to or collected by the Iowa College Student Aid Commission.

Licenses affected

Professional licenses issued by the state that workers need to engage in a trade, profession or business. There’s no single, full list of affected licenses, but such licenses include those for massage therapists, social workers and interior designers; those who drive; and recreational licenses for hunting, fishing, boating or other activities.

If you lost your license because of student loan debt

You can get a license approved or reinstated if you schedule a conference with the commission to enter into an agreed on a repayment plan or pay off the debt within 20 days after you receive a mailed notice about your alleged loan default or a notice of suspension, revocation, denial of issuance or non-renewal of a license.


Overview of the law

In Kentucky, licensing agencies may not issue or renew a professional or vocational license to someone who’s in default or has failed to meet any repayment obligation under any financial assistance program administered by the Kentucky Higher Education Assistance Authority.

Jobs affected

Jobs that require state-issued professional licenses, including home inspectors, athlete agents, alcohol and drug counselors and more.

If you lost your license because of student loan debt

You should receive a notice either from the Kentucky Higher Education Assistance Authority or from a relevant licensing authority giving you a deadline to respond to the notice and enter into a “satisfactory” repayment agreement. Assuming you do, the authority will send the licensing agency a notice certifying that you are no longer in default and have made satisfactory repayments, repaid the loan in full or have been waived from repaying the debt. At that point, you may resume your professional or occupational license.


Overview of the law

The state of Louisiana can deny an application for or renewal of any professional or occupational license to anyone who has defaulted on a federal student loan guaranteed by the Louisiana Student Financial Assistance Commission (LOSFA).

Jobs affected

Jobs that require state-issued professional licenses, which include dentists, nurses, physical therapists, insurance agents and more.

If you lost your license because of student loan debt

LOSFA has entered into a contract with the Educational Credit Management Corp. (ECMC) for the servicing its LOSFA-guaranteed federal student loans. LOSFA advises borrowers to contact ECMC to enter a payment arrangement with ECMC or repay the loan. LOSFA needs to confirm compliance with your loan obligations for your license to be released.


Overview of the law

A professional or occupational license can be denied for any applicant who is in default on an educational loan under any program administered by the Massachusetts Education Financing Authority (MEFA) or the Massachusetts Higher Education Assistance Corp. (MHEAC). MEFA offers loans to students who are residents of or attend college in Massachusetts. MHEAC, known as American Student Assistance, provides federal student loan programs.

Jobs affected

Nearly 170 jobs that require state-issued professional licenses from 39 boards of registration. The professions include architects, psychologists, physicians and more. See a full list of state licensing boards here.

If your license is denied because of student loan debt

You should receive a notice of denial and can then ask your loan agency for a review of the alleged default within 30 days of receiving the notice. If you enter into a repayment agreement or other arrangement with the loan agency, or if the agency determines that the notice of default was in error, the educational loan agency will notify the relevant licensing authority, which will then issue the license to you.


Overview of the law

In Minnesota, health professionals who have defaulted on a federally secured student loan or failed to fulfill a repayment or service obligation can face denial of a license by a health-related licensing board. The board can also take disciplinary action against the debtor.

Jobs affected

Health-related professionals, including physicians, nurses, dentists, therapists and barbers. See a full list of the state’s health licensing boards here.

If your license application is denied because of student loan debt

A licensing board has to consider the reasons for the default. It cannot impose disciplinary action against anyone with total and permanent disability or long-term temporary disability lasting longer than a year.


Overview of the law

When certain health care practitioners and hospital employees fail to comply with an educational loan contract obtained through a state-paid educational leave program, their professional licenses can be revoked. Grantees of the paid education leave program entered a contract with a state health institution, where they agreed to work in a health care profession, such as a physical therapist, or as a licensed practical nurse in the same sponsoring institution for a period of time equivalent to the amount of time when the applicant receives paid leave compensation.

Jobs affected

Health-related professionals and hospital workers who earned their licenses through educational paid leaves offered by state health institutions. This includes nurses, nurse practitioners, speech pathologists, psychologists, occupational therapists, physical therapists and any other needed professions determined by the sponsoring state health institution.

If your license is revoked because of student loan debt

A revoked license will be restored if you can prove that your contract is no longer in default.

New Mexico

Overview of the law

Under the state law, New Mexico barbers and cosmetologists may face denial of issuance or renewal, suspension or revocation of their occupation licenses if they have defaulted on a student loan. The state statute doesn’t specify what kind of student loans they are. (Repeal of this rule was scheduled in 2014 but delayed to 2020.)

Jobs affected

Barbers and cosmetologists.

If your license is denied renewal because of student loan debt

Before the Board of Barbers and Cosmetologists takes any action against your license, you can request a hearing within 20 days after being served a written notice about the default. After the hearing, the board will take steps to impose a fine up to $999 or take other disciplinary actions, which may include suspension, revocation or refusal to renew a license. The state statute doesn’t offer information about resolutions for those who’ve lost their licenses because of student loan default. The New Mexico Board of Barbers and Cosmetologists has not responded to MagnifyMoney’s inquiry regarding the remedies.

South Dakota

Overview of the law

South Dakota established the Obligation Recovery Center in 2015 to recover debts owed to the state, including unpaid university tuition or fees. The state law demands a number of licenses, registrations and permits, including a driver’s license, be withheld from anyone who owes money to the state. While South Dakota is not in the student loan business, students have reportedly had their driver’s licenses suspended because their unpaid student debt got transferred to the Obligation Recovery Center, which at that point became debt owed to the state.

Affected licenses

Driver’s licenses, a hunting or fishing license, a state park or camping permit, a registration for a motor vehicle, motorcycle or boat.

If you lost your license because of student loan debt

In order to restore the license or permit, the debtor has to either pay the debt in full or has entered into a payment plan with the center and be current on payments.


Overview of the law

State licensing authority may suspend, deny or revoke the license of anyone defaulted on a repayment or service obligation under any state or federal student loan or service-conditional scholarship program.

Jobs affected

Jobs that require government-issued professional licenses, including teachers, dentists, massage therapists, nurses, barbers, geologists, accountants and many more. (There is no single, full list of affected licenses.)

If you lost your license because of student loan debt

Within 90 days after you receive notification of the alleged default, you can keep your license if you pay off the debt, enter into a payment plan or service obligation or comply with an approved repayment plan.


Overview of the law

Licensing agencies in Texas can deny a renewal for a license to anyone who has defaulted on a student loan or a repayment agreement guaranteed by the Texas Guaranteed Student Loan Corp.

Affected jobs

All professions that require state-issued professional licenses. The rule applies to auctioneers, electricians, midwives, physicians and many more.

If you can’t renew your license because of student loan debt

Your license can be renewed if the Texas Guaranteed Student Loan Corp. issues a certificate to clarify that you have entered a repayment agreement or the loan is not in default anymore.

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What You Need to Know About IRS Ruling on 401(k) Match for Student Loan Repayments

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For millions of people in this country saddled with student loan debt, saving for retirement or paying down debt is an either-or decision. A new IRS ruling may help employees faced with such a dilemma accomplish both goals in the future.

What the ruling means

The IRS issued a private ruling on Aug. 17 to allow an unnamed company to implement a new type of benefit for student loan borrowers within its 401(k) plan. This company submitted a ruling proposal last year in order to help its employees tackle education debt.

Under the current plan, if a worker contributes at least 2% of their income to a company-sponsored retirement account, the employer will make a 5% match contribution.

The company proposed to amend the plan by allowing workers to opt into a student loan repayment program. As long as employees can prove that they are paying at least 2% toward student loan debt, the company will make a 401(k) contribution equal to 5% of their salary to their retirement plan, even though they don’t actively contribute to their 401(k).

Why it matters

Concerns have grown among employers in recent years that workers are not saving for retirement because of student loan debt. Many have looked into ways to include student repayment in their benefit offerings to not only incentivize employees to pay off debt while saving for retirement, but also to recruit and retain talent, according to Chatrane Birbal, director of government affairs at the Society for Human Resource Management (SHRM).

However, companies have a technical barrier to overcome in order to do so. Under the “contingent benefit” provision in the 401(k) tax code, employers generally cannot make benefits contingent on an employee making retirement contributions, with the exception of an employer-matching contribution, which is free money to employees.

“So you can’t say, ‘If you don’t defer at least 3%, you don’t get to sign up for health insurance or long-term disability,’” said Christine Roberts, a Santa Barbara, Calif.-based attorney practicing employment benefits law. “The exception to the contingent benefit rule is the free match. You have to defer to get the free match money.”

Jeffrey Holdvogt, partner of Chicago-based law firm McDermott Will & Emery LLP, said it’s possible this employer filed a private letter ruling because there was some uncertainty over the ability to provide a retirement plan contribution that is directly contingent on an employee making student loan repayments.

But the IRS ruling cleared the company’s concern, stating that the proposed plan was a permitted contingent benefit.

“So basically what they said was, ‘You can treat the match that is based on the student loan repayment the same as a regular match, and it doesn’t violate the contingent benefit rule,’” Roberts said.

What it means for student loan borrowers

The IRS ruling is beneficial for employees in this company who have little or no ability to shunt money over to their 401(k) because of heavy student loan debt.

“They’re not losing free employer money just because they have to repay their student loans,” Roberts said.

Will other companies follow?

Only 4% of American companies surveyed by SHRM indicate they offer student loan payment benefits, according to Birbal.

Although the specific ruling is limited to one company, oftentimes other employers look at these kinds of private letter rulings made public by the IRS as informal guidance on similar issues, Holdvogt said

Experts believe this particular ruling is likely to spur more interest and confidence in pushing forward with similar student repayment benefit programs among other employers.

But because of the limited applicability of this specific ruling, Roberts said she doesn’t expect this practice to pick up widely just yet.

“The environment we’re in right now is that to be certain, employers would all have to get their own private letter ruling,” Roberts said. “If they have a very high-risk tolerance, they would copycat this, but they maybe would only match 50% or 100%. And if they’re cautious, but they can’t afford a private letter ruling, they wait for wider guidance.”

While it’s unclear whether and when the IRS will issue broader guidance for all employers on this matter, there is a lot of hope that such benefits will become the norm because of growing interest in this issue from employers and legislators, experts said.

“The fact that the IRS issued this private letter ruling, I think, makes it more likely that the IRS comes out with more guidance of general applicability,” Holdvogt added.

This article originally appeared on Student Loan Hero, another LendingTree-owned site. 

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What Are Tariffs Anyway?

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By now, you’ve probably heard that President Donald Trump wants to up the ante in his trade war with China by unleashing a new round of tariffs. And maybe you remember his metals tariffs that hit the European Union earlier this summer, and now he’s threatening to double metals tariffs for Turkey. But perhaps what you’ve really been wondering all along is: What is a tariff, anyway?

Let us fill you in on some important context before you dive back into the latest trade tension escalations.

Tariffs: Defined

A tariff is a tax that the federal government levies on imported products. It’s often charged as a percentage of the value of a product that a U.S. buyer pays a foreign exporter.

For instance, the general tariff rate on an imported dishwasher is 2.4%. If a foreign exporter sets the price at $500, an American importer would have to pay an additional $12 tariffs on the machine, which makes the dishwasher’s total import price $512.

In the U.S., tariffs are collected at 328 ports of entry, which are controlled by Customs and Border Protection (CBP).

In order to get the foreign goods cleared through customs, U.S. importers have to pay the duties, which they are likely to pass on to consumers later.

The money paid on imported goods flows into the Department of the Treasury. Customs duties make up a small fraction of the federal government’s revenue.



How much are the tariffs?

The United States is one of the world’s largest importers. In 2017, the U.S. imported goods worth $2.4 trillion from other countries. China, Canada and Mexico are America’s top three trading partners.

U.S. tariffs are on the low end among countries in the world. Most foreign goods enter the U.S. duty-free, such as industrial goods and raw material like oil. In 2016, according to The World Bank, the average applied U.S. tariff across all products was 1.7%. In comparison, China placed an average 3.5% tariffs on imported items, and Canada’s applied tariff rate was 1.6%.

Only 30% of the total U.S. imports in 2017 were subject to tariffs, and the average duty applied to those items was less than 5%, according to the Pew Research Center.

The U.S. International Trade Commission listed U.S. tariffs on everything from orange marmalade (3.5%) to dishes (6.5%) in its detailed Harmonized Tariff Schedule.

How are tariff rates decided?

Countries apply different rates of tariffs on different types of products imported from different countries. Some countries have high tariffs on imports, while others are low-tariff countries.

Within the World Trade Organization (WTO) system, members agree to not charge tariffs on imports above certain levels, which are set forth by the WTO in detailed schedules.

Countries can also negotiate tariffs on imports and exports through bilateral or regional agreements, such as the North American Free Trade Act (being renegotiated now), as long as the rates are within the WTO tariff limits.

The U.S. has free-trade agreements (FTA) with 20 countries. FTAs reduce trade barriers, eliminating tariffs charged on products traded between partners. This year, the U.S. has upset some of its trading partners, such as Canada and Mexico, by applying steep tariffs on steel (25%) and aluminum (10%), which we will discuss in a second.

“Once you get into a trade war, it seems like the trade war supersedes any previous agreements you might have,” said Mark Perry, an economics policy scholar at the American Enterprise Institute and professor of finance and business economics at the University of Michigan-Flint.

Trump’s trade war tariffs

To protect certain domestic industries, the U.S. — as well as other countries — sometimes impose additional tariffs, or penalty tariffs, on foreign imports if it determines there is unfairness in trade or some damage to the U.S. economy.

“That’s what you’re talking about when you’re talking about steel and aluminum tariffs that Trump put on,” said Gary Hufbauer, economist and nonresident senior fellow at the Peterson Institute for International Economics (PIIE). “His view, which many disagree with, including me, is that imported steel and aluminum threatens the national security of the United States, so we put on extra tariffs on those.” PIIE is a nonprofit, nonpartisan economics research institution in Washington, D.C.

Imposition of harsh tariffs is both an economic tool and a foreign policy tool. But Trump is wielding it mostly as a foreign policy tool to punish other countries, including U.S. allies, citing national security concerns, which is unusual, said experts who also question the economic benefits.

Penalty tariffs are often much higher than the single-digit regular tariffs. Trump has slapped tariffs of up to 25% on foreign imports so far. Countries hit with Trump’s tariffs include China, Canada, E.U. nations, South Korea, Brazil, Argentina, Turkey and Australia.

Before Trump came into office, about 4% of U.S. imports were covered by penalty tariffs, PIIE researchers estimated in a 2017 study. This figure could increase to 7.4% if the Trump administration were to follow through on the tariff barriers announced during Trump’s first 100 days in the office. That was before Trump threatened to slap new tariffs on billions worth of Chinese imports.

A backlash could hurt American companies who export overseas. Targeted countries often retaliate against U.S. exports, hurting certain domestic industries as foreign demands drop. Companies that heavily relied on exports may slash staff, which could have an impact on the labor market, Perry said.

How much of the tariff gets passed on to consumers?

Duties are incorporated into the retail prices of products, differentiating from your local and state sales taxes. How much duty consumers have to pay on each item depends a lot on the product and on the country from which the product comes into the U.S.

On average, consumers have to bear about half to two-thirds of the tariffs on imported products, according to economists. The rest is absorbed by U.S. companies and/or foreign exporters.

Stiff tariffs on raw materials make it more costly for American manufacturers to produce products, which in general ultimately translate to higher prices on consumer products sold at retail stores.

“The prices would go up for consumers both for the imported goods and then also for the protected goods from the protected industry or protected manufacturer in the U.S. who now is able to raise prices because of less competition,” Perry said.

Sometimes the entire cost of penalty duties gets passed on to consumers. This is because the U.S. imports many types of specialized machinery that have to be approved by some government agencies, for instance, medical equipment, and there may be only one supplier who makes that product. Due to a lack of alternative import sources, the exporter isn’t likely to make a concession, so the U.S. importer is responsible for the full tariff amount and passes it on to consumers, Hufbauer explained.

For lower-end products where a lot of foreign suppliers compete with one another to sell to America, the consumer impact is next to zero. Take T-shirts as an example.

“If you put a tariff on T-shirts from one country, if they want to continue to export in competition with all the other countries, they will have to absorb the tariffs, meaning they will have to cut their prices by the amount of apparel,” Hufbauer said.

Tariffs: A brief history

With all of this chaos caused by tariffs, you may be wondering how President Trump is able to single-handedly wield such a powerful tool. Congress has delegated much of the decision-making power to the president, but there are signs the chambers may want to take it back. Sen. Mike Lee of Utah introduced a bill last year that would require congressional approval for certain trade actions.

But trade upheaval is nothing new here. Tariffs have a long history in the U.S., back to the beginning of the country in the 1700s. Because the country was saddled with debt from the Revolutionary War and had no federal income tax until 1913, customs duties were a major source of revenue for the federal government until the end of the Civil War.

Tariffs were a testy issue in the 19th century, too. The Republican Party, which had close ties to industrial firms, put harsh tariffs on imports to protect, reducing competition from counterparts from Great Britain and France, Hufbauer said.

The state of economic isolation continued through the dawn of the Great Depression. When the infamous Smoot-Hawley Tariff Act was enacted in the 1930s, world trade almost came to a standstill, which further damaged the already-troubled U.S. economy.

“That was kind of the last straw maybe that really turned it from a recession into a depression,” Perry said.

Since World War II, the U.S. has more or less moved in the direction of open trade, until now — tariffs are coming back as Trump further implements his protectionist trade agenda.

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How Payday Lenders Get Around Interest Rate Regulations

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Although an increasing number of states has passed laws to protect consumers by capping interest rates on payday loans, lenders have found creative ways to get around those regulations and issue loans with sky-high rates.

“We see payday lenders utilizing schemes just to get out from as many kinds of restrictions as they can,” said Diane Standaert, director of state policy at the Center for Responsible Lending, a nonprofit, nonpartisan organization focused on consumer lending.

Here are three common strategies lenders use to exploit loopholes:

1. They’ve pivoted toward high-cost installment loans instead

One way lenders bypass federal regulations is by offering installment loans instead of the usual, lump-sum payday loans. Unlike traditional payday loans, which borrowers have to repay in full on their next paydays, an installment loan gives borrowers a fixed payment schedule that enables them to repay their debt over time.

Many small-dollar, installment loans come in the form of personal loans. Personal loans are generally perceived as less risky because the borrower knows exactly what their monthly payment is and the rates are fixed, meaning they never change. But just because it’s called an installment loan doesn’t mean it’s any cheaper than a regular payday loan.

A 2016 CFPB study found the average amount of these “payday installment loans” is $1,291 and their APRs range from a staggering 197% to 369%. Installment loan terms vary from a few weeks to several years.

Alex Horowitz, researcher for the consumer finance project at The Pew Charitable Trusts, pointed out that the transition from single-payment loans to multi-payment loans is driven in part by regulatory scrutiny, but also by consumer preference because borrowers want more time to repay. What’s good for borrowers is even better for lenders — and they can make very high profits from these loans.

“There are extreme examples on the market where a $300 or $500 loan can last for 18 months, which is far too long,” Horowitz said. “And if a borrower has it out for even half that time, they would repay several times what was borrowed.”

Although some states have cracked down on payday loans, they are far more lenient with high-cost installment loans. In Delaware, for example, lenders can issue borrowers only five payday loans per year. After that, Horowitz said lenders could switch to offering less-than-60-day installment loans, which aren’t subject to the same annual limit.

California bars lenders from issuing payday loans of $300 or more with terms of less than one month. And lenders’ costs for the loan are limited to $45 per pay period. But lenders can issue installment loans of more than $2,500 in California — without interest rate caps.

Standaert said more than half the loans in the California short-term lending market carry interest rates in excess of 100%, and many California lenders make loans of more than $2,500.

RISE, an online lender that provides consumers with short-term installment loans and lines of credit, offers California loans between $2,600 and $5,000. As of August 17, 2018, a $2,600 loan with a 16-month term has a whopping 224.35% APR.

Standaert said over the last two to three years, payday lenders have been making a push all over the country to try to legalize the longer-term payday loan. So far, 10 states have rejected such proposals.

2. Lenders operate as loan brokers

In Ohio and Texas lenders bypass state interest rate caps by acting as credit service organizations instead of direct lenders. A CSO basically refers borrowers to loans from third-party lenders. And that lender can tack on a sky-high CSO fee to your loan.

“That credit service organization is really not providing any value,” said Christopher Peterson, director of financial services and senior fellow at the Consumer Federation of America. “What’s really happening is that businesses exploit a loophole to generate effectively very high-interest rates; they are just doing it through a cocktail of broker fees and interest rates together.”

Take Ohio, for example. In 2008, the state passed the Short Term Loan Act, which caps the maximum short-term loan amount at $500 and the APR at 28%. But lenders can simply become licensed CSOs, which enables them to charge an additional fee to make up for the lost interest revenue.

In Ohio, RISE currently charges a CSO fee of $917.56 on a $1,000 loan — resulting in an effective APR of 299%. And LendUp, another online lender, charges a CSO fee of between $20 and $25 per $100 to borrowers in Ohio. But Ohio lawmakers have made efforts to close this loophole: In July 2018, Gov. John Kasich signed a bipartisan bill into law to restrict short-term loans.

Under current Ohio state law, CSOs are barred from selling, providing or brokering any loan that is less than $5,000 with an APR higher than 28% — or a loan with a term shorter than a year. The law increases the maximum short-term loan amount to $1,000 from $500, but limits loan terms to 12 months and caps the cost of the loan to 60% of the original principal.

The new rules will go into effect in May 2019. Horowitz said the act will provide lower-cost direct lending to Ohio borrowers, whose cost will be three to four times lower than the state’s current CSO rate. Standaert said that although the new law is an improvement on the current market, it still leaves borrowers exposed to high-cost direct loans because it legalizes a number of charges, including monthly maintenance, loan origination and check collection fees. This can send APRs through the roof, even with the CSO loophole is closed.

More than 3,000 CSOs operate in Texas, which is why it’s called the “Wild West” of payday lending. According to Texas Faith for Fair Lending, a grassroots consumer advocacy group, more than 98% of registered CSOs in this state are payday and auto title lenders.

3. Lenders issue lines of credit instead

Some states have a payday lending statute in place that sets interest rate caps but not for other types of loans, such as a line of credit.

A line of credit works like a credit card, only at a much higher price point. The lender allows you to borrow money up to your line’s limit and charges interest when you draw on the money. Once you repay the funds you borrower, that money is available for you to use again.

Horowitz said lenders in Rhode Island, Virginia and Kansas can charge more in fees and interest by issuing lines of credit instead of payday lending statutes. CashNetUSA, a major online payday lender, charges a 15% transaction fee in Virginia and Kansas when you draw on your credit line on top of the 299% APR, which makes the effective APR much higher.

Smart ways to shop for short-term loans

There’s no getting around the fact that consumers rely on short-term installment loans to fill gaps in financing when they don’t have better alternatives. Although it’s a good sign that many states have capped rates on payday loans, it’s clear that payday loan alternatives can be just as expensive — if not more. It is crucial for consumers to be savvy about which types of loans they choose and compare several options to get the best deal available.

Start with your local credit union or community bank

Many community banks and credit unions offer small-dollar loans at much lower interest rates than you’ll get with a payday or payday installment loan.
For example, all federal credit union loans have an 18% interest cap, except for the Payday Alternative Loans, which are capped at 28%. In addition, these financial institutions are much better regulated than the high-cost lenders.

Shop around and compare

Ideally, you want to look for a fixed-rate loan with an APR of 36% or less. At LendingTree, the parent company of MagnifyMoney, you can shop and compare offers from multiple lenders at once. Fill out a short online form and you can be matched with offers from up to five personal loan lenders. If you’d rather shop by visiting lenders online directly, see if they offer a prequalification tool that will enable you to check your rate and determine if you can prequalify without requiring a hard credit pull.

Check out our review of the best personal loans for people with bad credit. And if you’re wary of taking out a personal loan, check out this guide to the best options when you need money quickly.



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Minimum 500 FICO

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24 to 60


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How Trump’s Proposed $200 Billion China Tariffs Could Affect You

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.


Americans may feel a sting in their daily lives from the next swath of tariffs that President Donald Trump threatens to slap on $200 billion worth of Chinese-made products.

Trump’s initial tariffs on $50 billion worth of Chinese imports steered clear of popular consumer products. But as he looks to put a 25% tax on an additional $200 billion of China-made imports, it’s almost inevitable that U.S. consumers would see price hikes on items as varied as fish, baseball gloves, vacuum cleaners, computers, luggage, tires, dog leashes, furniture, lamps and mattresses.

Last year, the U.S. imported $505 billion of goods from China, meaning this next round of tariffs would account for nearly 40% of Chinese imports.

Almost 23% of the targeted items on Trump’s $200 billion list are consumer products, according to an analysis conducted by the Peterson Institute for International Economics (PIIE), a nonprofit, nonpartisan economics research institution in Washington, D.C. For comparison, consumer products made up just 1% of the list of the initial $50 billion worth of made-in-China imports subject to added tariffs.

“I mean, when you get to $200 billion, you’re covering most everything,” said William Reinsch, Scholl Chair in international business at the Center for Strategic and International Studies, a bipartisan, nonprofit policy research organization based in Washington, D.C. Reinsch previously served as the president of the National Foreign Trade Council.

The new tariffs may take effect after public hearings are held, which end on Aug. 30. A hearing is scheduled from Aug. 20-23 at the U.S. International Trade Commission at 500 E Street SW, Washington D.C., beginning at 9:30 a.m.

Where would consumers be hit mostly?

Based on the import value in 2017, the PIIE analysts found the major consumer products targeted are:

  • furniture ($11 billion);
  • seats ($10 billion);
  • computers ($8 billion);
  • lamps, lighting and parts ($7 billion);
  • travel bags ($7 billion); and
  • agricultural and food products ($6 billion).

Affected household goods are:

  • cooking appliances ($3.8 billion);
  • vacuum cleaners ($1.8 billion); and
  • refrigerators ($1 billion).

To break down the list further:

Dozens of fish are on the hook for price increases. That includes tilapia, salmon, cod and trout. When you eat out, your restaurant bill may also go up if you order seafood like tuna, squid and octopus that come from China.

If you like to cook with typical Chinese food ingredients, you may find higher prices on lychees, sea urchins, garlic, bamboo shoots, dried mushrooms and monosodium glutamate (better known as MSG), which are on Trump’s list.

As you browse the aisles at your nearest big-box store, you may find household supplies with higher prices including toilet paper, facial tissue, paper towels and napkins, as well as dishes, plates and cups made of paper or paperboard.

Clothes and accessories made of leather or furskin, including belts, gloves and mittens may cost more. Also on Trump’s list: bed sheets, linens and towels.

And if you live in one of the more than 84 million U.S. households with a pet, take note: Prices of dog leashes, collars, muzzles, harnesses and dog and cat food may swing up, too.

You can check out the full list of more than 6,000 Chinese items subjected to tariffs here.

How would consumers be hurt?

Immediate impact

Some effects are immediate. On the one hand, tariffs would raise the prices of the made-in-China products that Americans buy in stores, but on the other, domestic producers may jack up the prices of their products, too.

“Usually what happens is that when the domestics discover that their competitions’ prices are going up, they’re tempted to raise their prices to take advantage of the situation,” Reinsch said. “They won’t raise it as high as the foreigners have to raise it, because after all, as long as they’re a little bit cheaper, they have an edge.”

In that sense, the consumer wouldn’t gain much if they switch from a Chinese product to the American-made version.

Reinsch estimated that consumers can see the effects rolling out between three and six months after the tariffs are imposed.

How much would prices go up?

It’s hard to predict whether American importers would ease the tariffs by paying themselves or pass part of or even the full cost onto their customers — it depends on the industry, alternative import sources and market conditions. As a result, consumers may not have to bear the full 25% tariff on every Chinese product, if it was to be imposed, experts say.

“Generally speaking, the more expensive the item, the more likely that the manufacturer or importer is to swallow a part of the tariff,” Reinsch said. “Otherwise, the cost will be pretty significant.”

Economists estimate that on average, about half of that unfavorable tax hike — 12.5% to 15%— would be passed on to customers, and the rest absorbed by the producer or manufacturer.

Shoppers who looked for washing machines this year may have already understood how tariffs affect consumer product prices. The price of imported washing machines shot up 16.4% three months after the Trump administration imposed 20%-50% tariffs in February, according to the American Enterprise Institute, a Washington, D.C.-based conservative think tank.

Indirect impact

Other effects are likely to emerge slowly, as 47% of the $200 billion tariff list comprises tens of billions of dollars of intermediate inputs — parts and components of final products — imported from China. Even though consumers don’t buy such things directly, they end up being incorporated or assembled into something else, and the additional costs will feed into the final products.

U.S. importers or producers may not be able to switch quickly to alternative suppliers in other countries, so American companies may have to pay the higher price for the parts and probably pass that cost onto consumers, said Gary Hufbauer, economist and nonresident senior fellow at the PIIE.

But even if American companies alter their supply chain and find a vendor that makes the same thing with comparable quality, the products probably won’t be as cheap as the Chinese parts used to be.

“If it was cheaper than the Chinese product, you would have found it a year ago, and you’d already be there,” Reinsch said. “So, it’s pretty certain that if plan A, which is China, suddenly becomes more expensive, it’s pretty certain that your plan B will also be more expensive — not as expensive as the tariffs but more than you were paying before.”

Either way, the consumers are going to lose, either from immediate price hikes or when the impact of the tariffs is sprinkled into the supply chain of a product that in part relies on Chinese components.

“[The tariffs] will all find their way finally to consumer prices,” Hufbauer said.

Take consumer technology products as an example.

A recent study by the Consumer Technology Association estimated that a 25% tariff on Chinese printed circuit assemblies and connected devices — an input into the production of a host of consumer technology products such as fitness activity trackers, wireless headphones, modems, routers, smartwatches and other Bluetooth-enabled devices — would lead to an average retail price hike of 6.2% on the final products.

Trade talks

In the lead-up to the new tariffs, the U.S. and China are scheduled to be back at the negotiating table in late August to ease trade tensions that have been built up in the past few months between the world’s two biggest economies. Experts interviewed by MagnifyMoney said the meeting would not likely affect the already-announced tariffs due to the tight negotiation window and a large number of issues dividing the two nations.

At best, the administration would delay the implementation of tariffs, and impose the tariffs in stages — perhaps at different rates for each stage, said Hufbauer.

In any case, it’s likely that over the time, individual Americans would feel the effect of higher tariffs when they check out at the country’s largest retailers.

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MoviePass vs. Sinemia vs. AMC Stubs A-List vs. Cinemark Movie Club

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MoviePass is facing stiff competition as several theater chains and startups have launched their own rival theater subscription services.

There’s AMC Entertainment’s AMC Stubs A-List, launched in June, Cinemark’s Movie Club, which hit the scene at the end of 2017 and Sinemia, a startup founded in 2014.

All three competitors seem in their own way to directly target the biggest consumer gripes about using MoviePass — the inability to book tickets in advance, see multiple films in one day and see the same flick more than once.

To its credit, MoviePass isn’t going down without a fight. It already made a dramatic pricing change, slashing its monthly fee from $39.99 at its highest to $9.95 per month, attracting millions of new subscribers in the process. The number of MoviePass subscribers reportedly surged from about 20,000 in early 2017 to 3 million as of June 2018. Earlier this year, it reportedly sued Sinemia for patent infringement. And it recently diversified its offerings with a lower-priced subscription plan.

Cash-strapped MoviePass announced in late July it would raise the monthly subscription to $14.95 but canceled the price hike plan just a week later. Instead, it’s now keeping the $9.95 plan but limiting each member to a three-movie allowance every month starting Aug.15, 2018. For each additional ticket, MoviePass subscribers can get a discount for up to $5. MoviePass members used to be able to see up to one movie per day with the same monthly subscription fee.

For consumers, competition is almost always a good thing. Companies are forced to make their services more appealing in hopes of attracting new customers.

In this post, we will go over the benefits and limits of the four monthly movie subscription packages to help you choose the one that best fits your needs.

MoviePass vs. AMC vs. Cinemark vs. Sinemia

Fees and fine print

AMC Stubs A-List



Cinemark Movie Club


$19.95/month + tax

$7.95/month or $9.95/month depending on the plan

$3.99 to $14.99 per month for individual plans; $8.99 to $89.99 for family plans.



See up to 3 movies per week

3 movies per month starting Aug.15, 2018.

See up to 1, 2 or 3 movies per month, depending on the plan.

1 movie per month


600+ AMC theatres

5,200+ theaters

4,000+ theaters

339 Cinemark theaters


You can’t cancel your subscription during the initial three months of membership. After the three-month commitment, you can cancel anytime and your benefits last until the end of the current billing period.

If you cancel your subscription, you won’t be able to re-enroll or start a new subscription for 9 months. Your account will be active until the last day of your current billing cycle.

You can cancel anytime but Sinemia won’t refund you the upfront annual fee. However, you’ll be able to use your membership until the last day of your plan.

You can cancel any time you want and won’t have to wait for a period of time to reactivate your membership after cancellation. Your benefits are effective until the last day of the current billing cycle.


May charge surcharge when movies are in high demand. (peak pricing is suspended for users who’ve migrated to the new plan)

The monthly fee is actually charged upfront for the entire year. If you prefer not to make a year-long commitment, you have to make a one-time monthly initiation payment of $19.99.

AMC’s fee may seem steep, but with MoviePass adjusting pricing beginning mid-August, AMC Stubs A-List will become the most cost-effective plan for the number of movies it offers every month (12). In addition, it offers more flexibility, such as advance ticket-booking, repeated visits to the same movie and seeing more than one movie on any given day.

Cinemark might look more appealing at $8.99/month, but you can only see one film per month and you’re limited to Cinemark theaters. By comparison, though there are many limitations with MoviePass, like the one-visit-per-movie rule, it’s still one of the better deals — $9.95 — for three movies a month. MoviePass currently has a lower price plan that charges $7.95 for three movies per month. It’s unclear what will happen to this plan after Aug. 15, however. MoviePass has said 85% of its members see three or fewer movies a month, but avid users may be disappointed by the change.

If you are not a frequent moviegoer, Sinemia’s classic plan — one 2D movie per month — is by far the least expensive plan, starting at $3.99/month. But read the fine print. The service charges its fees upfront, meaning you could be on the hook anywhere from to $47.88 to $179.88/year right off the bat, depending on which plan you choose. And if you cancel your subscription before the year is up, they won’t refund you the upfront fee. For those who don’t want to make a long commitment or want to have a test run with Sinemia, you have the option to pay a $19.99 one-off monthly initiation fee, in addition to your monthly plan payment.

Hidden costs

MoviePass recently introduced peak time pricing, meaning users will have to pay a surcharge fee — on top of their monthly subscription — for high-demand movies, depending on the specific title, date or time of day. In New York, for instance, the surcharge can be as high as $8. In order to avoid the additional cost, price-sensitive users will need to pick showtimes and locations accordingly. MoviePass said it would suspend the surcharge for members in the new plan starting August 15.

Variety of plans

AMC and Cinemark are simple with just single plan options. MoviePass has two plan options. Sinemia has the most complex offerings, with four different plans to choose from:

Classic (2D movies only)

  • $3.99 (1 movie per month)
  • $6.99 (2 movies per month)

Elite (all movie formats)

  • $9.99 (2 movies per month)
  • $14.99 (3 movies per month)

Available formats

AMC Stubs A-List



Cinemark Movie Club

All formats, including 2D, Dolby Cinema at AMC, IMAX and RealD 3D

2-D movies only

Varies by plan.

2-D movies only

If you want premium movie formats, go for AMC Stubs A-List or Sinemia’s Elite packages. MoviePass and Cinemark Movie Club members can only see 2-D movies. However, with Cinemark Movie Club, you have a choice to see premium movies, such as IMAX, with some additional fees.

Book tickets in advance?

AMC Stubs A-List



Cinemark Movie Club

Yes. You can make a reservation through the AMC website or mobile app.

No. You can only reserve a same-day ticket if the app indicates e-ticketing is available in a particular theater. Otherwise, you have to book in person. A physical card is needed for ticket purchasing in most cases unless the theater supports e-ticketing.

Yes. You can book your tickets online up to 30 days in advance through the app.

You can also order a physical card separately, which allows you to purchase tickets on the spot at the theater in a MoviePass fashion.

Yes. Tickets can be purchased via the Cinemark app, online, or at the box office.

MoviePass might require the most hassle to reserve a ticket. First, you need to sign up for a MoviePass account online or through its mobile app. Then you have to wait for a physical MoviePass card to arrive in the mail to activate your account. MoviePass users must physically show up at theaters to buy same-day tickets with the card (unless the theater supports e-ticketing, in which case you don’t need the card) and, they have to verify the purchase each time they use MoviePass by taking a photo of the ticket stub and submitting it through the app. You can follow our step-by-step guide to use MoviePass correctly and effectively to avoid unwanted frustration.

With other services, a membership card isn’t necessarily needed for purchase tickets. Members can make a reservation in advance through the services’ websites or mobile apps or at the theater box office.

Can multiple users share a subscription?

AMC Stubs A-List



Cinemark Movie Club





Most of these services don’t let friends or family share subscriptions — the exception is Sinemia. It features a wide selection of family plans for two to six people, charging from $7.99/month (one movie day for two people) to $89.99/month (three movie days for six people).

*Cinemark allows Movie Club members to pay $8.99 for an additional ticket at checkout. Theoretically, it could be a $17.98 monthly subscription for two.

Other perks

AMC Stubs A-List



Cinemark Movie Club

-Members receive the AMC Stubs Premiere benefits for free (worth $15/year+tax).
-Members can earn AMC Stubs points on the monthly membership charge:100 points on per $1 spent.

You can refer up to three friends who, upon sign-up, will get their first month of MoviePass for free.

You can get $5 for referring each friend to Sinemia. Your friend also gets the same credit reward.

-Members can receive 20% off on concession purchases.
-New subscribers can get a free Android smartphone (as of July 10) if they pay $100 for 2 months of wireless services.
-Members can earn Cinemark Concessions points.

While it’s unclear which Android phone comes with a Cinemark Movie Club membership and an additional $100 for two months of wireless services, for those who need a smartphone, the deal just comes in time.

Which subscription service is best for me?

Who MoviePass is best for

If you are a flexible moviegoer who does not mind avoiding peak time to see movies and feel comfortable going through the multiple steps to purchasing tickets, MoviePass is a more cost-effective deal for you. In many parts of the country, such as New York, where a movie ticket easily costs more than $15, you could get your subscription value back by seeing just one movie each month. If you have a taste for indie, low-budget movies, or you simply don’t frequent AMC or Cinemark theaters, you should also stick with MoviePass.

Steer clear of MoviePass if you live in a densely populated area where movies may sell out quickly. You may find it difficult to get to the theater and reserve a seat the same day.

And keep in mind MoviePass will block you from reactivating your plan or signing up for a new subscription after cancellation.

Check participating MoviePass theaters here.

Who AMC Stubs A-List is best for

Mainstream movie viewers who prefer to lock in tickets in advance — especially tickets to premieres of big releases — or have a particular liking for premium movie formats, such as 3D, may want to pay extra for the better service terms with AMC. You could also get discounts on beverages or popcorn at the concession stand. Just make sure you live in reasonable distance of an AMC theater.

Check participating AMC theaters here.

Keep in mind AMC Stubs A-List requires a minimum three-month subscription from its members, during which they cannot cancel their membership.

Who Sinemia is best for

If you only go to the movie theater once or twice a month and are willing to commit to paying an entire year’s subscription upfront, consider Sinemia, whose multi-layer pricing structure could satisfy people with different entertainment needs. For families, couples and friends who would like to see movies together, a Sinemia’s family package could also be a worthwhile investment.

See participating Sinemia theaters here.

Keep in mind Sinemia, which charges members a lump-sum subscription fee once a year, won’t refund you if you cancel your membership. If you would rather pay by month, you have to pay a $19.99 one-off monthly initiation fee, in addition to your monthly plan payment.

Who Cinemark Movie Club is best for

If you are someone who lives in a place where a movie ticket costs more than $9 and you do not like to commit to seeing a certain number of movies each month. Cinemark Movie Club allows unused credits to be rolled over. If monthly credits are used up, subscribers can also buy two additional tickets per transaction for $8.99 each. Basically, it’s an indirect way to sell a movie ticket for $8.99 that comes with some conditions. And if you happen to need a smartphone, its current sign-up deal is a steal.

Is MoviePass here to stay?

The finances of MoviePass have recently been called into question. Industry experts have suspected that the company can’t stay afloat with its unprofitable business model. MoviePass buys full-price tickets from theaters and offers them to subscribers.

In May, the company’s majority owner, Helios and Matheson Analytics, reported more than $26 million in net profit losses during the first quarter of 2018.

Because it didn’t have enough money to pay for movie tickets, MoviePass experienced a service outage on July 26, when many customers couldn’t use their MoviePass cards to purchase tickets at theaters. The company had to borrow $5 million in cash the next day to pay its merchant and fulfillment processors. This was the incident that spurred the now-abandoned plan to increase the monthly charge, through which the company hoped to reduce the monthly burn by 60%.

Helios and Matheson Analytics’ stock traded at $0.09 per share on Aug. 6, a nearly 52-week low, down almost 100% from last October’s peak of $38.86.

While MoviePass projects its subscribers to surpass 5 million by August, some analysts have predicted in media interviews that the company has a high likelihood of bankruptcy.

If MoviePass eventually proves to be too good to be true, current users should enjoy the deal while it lasts. At least alternatives are now available.

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Are Scholarships Taxable? Here’s Everything You Need to Know

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 cost of higher education can be astronomical for many students, and while there are many ways to pay for college, scholarships and grants are two of the best ways to make it more affordable. If you are awarded a scholarship, whether it’s merit-based or need-based, congratulations! However, the next thing to consider after receiving a grant is your tax liability on the money — not as much fun but nonetheless important.

Some scholarships and fellowships are tax-free, but some are subject to income taxes. We’ll walk you through the ins and outs of scholarship taxation and how to pay taxes on grants that are taxable.

When scholarships are not taxable

There are fellowship or scholarship grants that are tax-free, according to the IRS, and you don’t need to report them as a source of income, when you meet both of the conditions below:

  • You are studying toward a degree at a higher education institution.
  • All the funds you receive are used for qualified education expenses: You either use the money to pay tuition and fees required for enrollment or attendance at the college or university, or cover course-related expenses, such as textbooks, supplies and equipment.

For example, if you receive a $10,000 scholarship and pay it toward the $20,000 tuition, then you won’t owe taxes on the money. However, if your scholarship is $30,000 and you use $20,000 for tuition and cover your rent with $10,000, that $10,000 is taxable income.

Some other types of grants, such as Fulbright grants and need-based grants like a Pell Grant, are also treated as scholarship funds for purposes of determining their tax treatment: They are tax-free if grantees use them to cover qualified education expenses during the time when a grant is awarded.

April Walker, lead manager for Tax Practice and Ethics at the American Institute of CPAs, told MagnifyMoney that it doesn’t matter if a scholarship is granted by your school or sent to you directly from an organization — you follow the same rules above to determine whether it’s taxable or not.

Take a few minutes to complete this IRS questionnaire to determine whether your scholarship money is taxable: Do I Include My Scholarship, Fellowship, or Education Grant as Income on My Tax Return?

When scholarships are taxable

However, grants should be included in your gross income if they are non-qualifying education expenses, meaning they don’t meet the conditions we just talked about.

Using scholarships for incidental expenses

The IRS explains that scholarship or fellowship funds that are used to cover incidental expenses are taxable. Incidental expenses are the money you spend for non-academic activities that are not required as part of your education, such as rent, insurance, transportation and living expenses.

Compensation for services

If students receive a scholarship or fellowship grant that requires them to be a teacher assistant, research assistant or perform other services, the funds are also taxable as salaries. There are exceptions, though. The IRS said grant recipients of the National Health Service Corps Scholarship Program and the Armed Forces Health Professions Scholarship and Financial Assistance Program do not have to include the scholarship funds they receive for service in their gross income.

Similarly, a grant or fellowship awarded to a non-degree-seeking individual to finance a certain research project, a report or a product is taxable, according to tax specialists interviewed by MagnifyMoney. But you could deduct expenses related to the work, such as travel and supplies for research, from your taxable income.

How to pay taxes on scholarships

Students should expect to receive a Form 1098-T that states their tuition and scholarship amounts from their schools by Jan. 31. If your tax-free scholarship or fellowship grant is your only income, you don’t have to file a tax return or report it, however, if part or all of the grant is taxable, then you are required to file a tax return, according to the IRS.

If you file Form 1040, Form 1040A, or Form 1040EZ, include the taxable amount in the total amount reported on the “Wages, salaries, tips” line of your tax return.

If the taxable amount wasn’t reported on Form W-2, enter “SCH” along with the taxable portion in the space to the left of the “Wages, salaries, tips” line. Form W-2 is the form an employer sends to an employee and to the IRS at the end of each year that reports an employee’s annual income and the amount of taxes withheld from their paychecks. Most likely, graduate students who perform teaching or research services at their institutions will receive a W-2.

If you file Form 1040NR or Form 1040NR-EZ, report the taxable amount on the “Scholarship and fellowship grants” line.

Even if you don’t get tax forms, you must pay taxes on your scholarship income that’s subject to income taxes.

In general, the taxable amount of scholarships would be included in the adjusted gross income on the federal return, said Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting. But depending on your state of residence and other incomes you have, you may also have to pay state income tax on your scholarship income, Luscombe said. Some states don’t have an income tax. Many states with an income tax use federal Adjusted Gross Income as the starting point in determining their state taxes, Luscombe said, and if your gross income is higher than your state’s income tax base, you will pay state income tax on your scholarship.

How can I minimize my tax burden from scholarships or fellowships?

Tax tips for students

Tax specialists advised if you’re a student, whether you are a dependent on your parent’s tax return or an independent student, you should keep track of the scholarships you receive and your qualified education expenses to make sure you spend as much of your scholarship as possible on qualified education expenses. Keep an eye out for a 1098-T, and in the case of graduate teaching assistants or research assistants, watch out for a Form W-2 at the end of the year.

If your scholarship doesn’t cover all your tuition and fees, Walker suggested you still keep track of your expenses, as some may qualify for education credits, which we will talk about below.

Tax tips for working professionals

For non-degree-seeking individuals who received a grant for an independent research project, Luscombe said they may want to treat the grant as a business income.

If you are running a business on your own, you’re most likely seen as a sole proprietorship owner for tax purposes. You will have to report business-related income and losses on a Schedule C (Form 1040) each year. Luscombe said grant awardees may claim the fellowship activity as a business activity on Schedule C to deduct the related expenses from their taxable income.

Under the new tax law, pass-through business owners can deduct up to 20% of their qualified business income from a partnership, S corporation or sole proprietorship. Individuals earning $157,500 or less ($315,000 for married couples) are eligible for the fullest deduction.

Luscombe advised those who received a one-off grant during the year keep separate records of all the income and expenses related to it.

Education tax credits

If part or all of your — or your child’s or spouse’s — scholarships are taxable, one of the ways for you to offset education expenses is to claim education tax credits, which reduce the amount of your income tax. There are two types of credits available: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC).

  • American Opportunity Tax Credit: This credit allows a taxpayer an annual maximum credit of $2,500 per undergraduate student of the costs for school or course-related expenses. Luscombe said AOTC is probably the most generous of tax breaks available for undergraduate education. To qualify for the full credit, your income must be $80,000 or less ($160,000 or less for married filing jointly). The credit is phased out for those whose incomes are above the thresholds.
  • The Lifetime Learning Credit: It allows a taxpayer a credit of up to $2,000 per year per tax return. This credit applies to an eligible student’s costs for undergraduate, graduate or professional degree courses. There’s no limit on the number of years you can claim the credit. You must earn $66,000 or less ($132,000 or less for married filing jointly) to qualify for this credit. The credit is phased out for those whose incomes are above the thresholds.
This interactive worksheet from the IRS can help you answer the following question: Am I Eligible to Claim an Education Credit?

To be eligible for either credit, students should receive a Form 1098-T. You also need to complete the Form 8863 and attach it to your tax Form 1040 or its variations. You cannot claim the credit if you are a dependent on someone’s tax return.

You cannot double dip if you qualify for both credits — you must compare options and choose one or the other. You cannot claim either credit if someone else claims you as a dependent on their tax return.

Tax deductions

If you don’t qualify for either credit, you can look into potential tax deductions to reduce your taxable income. There are two deductions that may be applicable: the Tuition and Fees Deduction and the Student Loan Interest Deduction. You can claim these deductions even if you do not itemize your deductions.

The tuition and fees deduction allows you to deduct qualified higher education expenses of up to $4,000 from taxable income per tax return for yourself, your spouse or your child. You need to claim your qualified deduction on Form 8917. You cannot claim this deduction if your filing status is married filing separately or if someone else claims you as a dependent on their tax return. The income threshold for this deduction is the same as that for the AOTC. (Note: This tax break was supposed to expire at the end of 2016, but the Bipartisan Budget Act of 2018 renewed it for tax year 2017. It’s unclear whether it will be continued for tax year 2018.)

Student loan interest deduction: If your income is less than $80,000 ($165,000 if filing a joint return) and you took out a student loan to pay for qualified education expenses for you, your spouse or your dependent, you may reduce your taxable income by up to $2,500 of student loan interest you paid. You cannot claim this deduction if your filing status is married filing separately or if someone else claims you as a dependent. You should receive Form 1098-E, the Student Loan Interest Statement, which can help you figure out your student loan interest deduction.

This interactive worksheet can also help: Can I Claim a Deduction for Student Loan Interest?

You cannot claim the Tuition and Fees Deduction (if it’s available for tax year 2018) if you have claimed an education credit for the same expense, Luscombe said, but you can still claim the Student Loan Interest Deduction.

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Shen Lu
Shen Lu |

Shen Lu is a writer at MagnifyMoney. You can email Shen Lu at

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