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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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Student Loan Officials Warn of New Phishing Scam

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A new phishing scam is targeting students entitled to financial aid refunds, the Department of Education warned in a statement.

Multiple colleges and universities have reported to the department that students have received emails seeking information necessary to gain access to student portals. Attackers who gain access change direct deposit information so that financial aid refunds are sent to the attacker’s accounts.

Fraudulent emails target student sites

Students targeted by the phishing scam receive an email sent through password-protected student websites. The email appears to come from their college or university, the department said in the statement, dated Aug. 31 but not widely reported until the Washington Post published coverage of it Saturday. The Post said the authorities it spoke with had declined to identify which schools reported the attacks.

A sample email provided by Federal Student Aid, an office of the Department of Education, asks students to confirm their updated 2018 bill to avoid late fees. The nature of the emails suggests attackers have researched the targeted academic institutions to understand their communication practices, the statement said.

Redacted sample phishing email posted by the Department of Education (Source: Federal Student Aid)

When students fall victim to the scam, attackers can use their provided information to redirect financial aid refunds to the attacker’s accounts by changing direct deposit information. Many students are entitled to financial aid refunds if they receive loans in larger amounts than necessary to cover tuition, room, and board. The school refunds this excess aid to students so they can use it to pay living expenses.

The Department of Education has warned that federal aid funds distributed inappropriately may become the responsibility of the institution that disbursed the funds.

Student aid portals at colleges and universities are vulnerable to this type of phishing scam because enough do not use two-factor or multifactor authentication to verify that login attempts are legitimate. The Department of Education has urged higher education institutions to impose more stringent security measures, such as requiring students to answer security questions or to provide a PIN number in addition to a username and password.

The department is also urging institutions subject to the attack to consider freezing refund requests or blocking changes to direct deposit information. Taking precautions is essential, as evidence suggests attackers are refining their scheme and may target more institutions as financial aid refunds are distributed in large volumes as the school year gets underway.

Students should also protect their account security by refraining from clicking email links or providing personal identifying information in response to email requests. Instead of using links, always visit websites directly by typing the site’s address into your browser to avoid falling victim to this or any phishing scam.

Federal Student Aid said it would “continue to monitor this situation and will send out additional information as appropriate. That information may include additional examples of the phishing emails, training resources, and best practices about how to avoid falling victim to phishing attacks.”

Beware of other scams, too

The phishing attack on loan refunds is one of many scams aimed at student loan borrowers. These can range from the notorious “Obama student loan forgiveness” scam popular during the previous presidential administration to promises that your loan can be discharged if you’re disabled.

Watch out for red flags such as unnecessary fees or requests for excessive information. And if you do think you’ve fallen victim to a scam artist, follow these steps to protect yourself from further harm.

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Everyone Can Now Freeze Their Credit Reports for Free

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If you have been holding off on freezing your credit report because you’d have to pay a fee, wait no longer. Today — one year and 14 days since Equifax originally announced hackers had exposed the sensitive information of more than 146 million consumers — a federal law making it free for consumers to freeze and thaw their credit reports goes into effect.

The provision rolled into the federal Economic Growth, Regulatory Relief and Consumer Protection Act makes it free to place, lift and permanently remove a freeze on your credit report with credit reporting agencies, regardless of the state you live in.

How will the new law affect me?

Before the law went into effect, it cost consumers anywhere from $2 to $12 to freeze, thaw or permanently remove a freeze a credit report depending on the law in the state they lived in. Only three states (Indiana, Maine and South Carolina) allowed free credit freezes.

Barring protected consumer status or proven identity theft, a consumer generally needed to pay a fee to each of the three major credit reporting bureaus — Equifax, Experian and TransUnion — to complete each credit freeze-related action. For example, it could have cost someone living in Colorado $30 to simply freeze their credit reports (paying $10 to each reporting bureau) and another $36 to thaw or permanently lift the credit freeze on each report.

Now, the big three credit reporting bureaus and other smaller credit reporting agencies are required by federal law to allow all consumers to freeze, thaw and permanently unfreeze their credit reports, free of charge.

Under the law, a reporting agency must notify a consumer of the placement or removal of a credit freeze within one business day if the request was made online or over the phone and within three business days if the request was made by mail.

The new law also applies the following changes:

  • The credit reporting bureaus must also provide a webpage that allows consumers to request a credit freeze or place a yearlong fraud alert on their credit report. Prior to the law, initial fraud alerts lasted 90 days.
  • The webpage must also allow a user to opt out of sharing their information with companies for the purpose of advertising credit or insurance.
  • The Federal Trade Commission must also set up a webpage that will list the links to the credit freeze pages for each credit reporting agency.
  • The law requires credit reporting agencies to provide free electronic credit monitoring to all active duty members of the U.S. military.

What is a credit freeze?

A credit freeze, or security freeze, restricts access to a consumer’s credit report. This prevents others from using your information to commit financial fraud.

Neither you nor fraudsters will be able to open new accounts in your name while the credit freeze is in effect. If you are applying for new credit, you can temporarily lift the freeze from your credit report, which is also referred to as thawing the freeze.

A credit freeze does not affect your existing creditors’ access to your credit report if the creditor is conducting account activities like credit monitoring and credit line increases or if they need to place the account in collections.

A warning: The credit freeze doesn’t prevent thieves from using your information to commit all forms of identity theft. The credit freeze only protects against forms of fraud that require access to your credit report.

The credit freeze also won’t stop you from getting prescreened credit offers. However, the new law requires reporting agencies to allow you to opt out of sharing information with companies for the purpose of advertising credit or insurance to you.

How to freeze your credit report

To freeze, thaw or permanently unfreeze your credit report you need to notify each of the three major credit reporting agencies separately. You can contact each bureau online, via phone or by mail.

Online

Equifax
Experian
TransUnion

Phone

Equifax: 1-800-685-1111 (1-800-349-9960 for New York residents)
Experian: 1-888-EXPERIAN (1-888-397-3742). Press 2.
TransUnion: 1-888-909-8872

Mail

Send a letter to each credit bureau by certified mail requesting the freeze. Here are the addresses.

Equifax: Equifax Security Freeze/P.O. Box 105788/Atlanta, GA 30348
Experian: Experian Security Freeze/P.O. Box 9554/Allen, TX 75013
TransUnion: TransUnion LLC/P.O. Box 2000/Chester, PA 19016

Mobile app options exist to put restrictions on consumer’s credit report information, as well:

Note: A credit report lock isn’t exactly the same thing as a credit freeze, though they serve the same purpose. Freezing your credit reports can only be done by phone, mail or the online portals above. Lock/unlock services allow you briefly grant or prohibit access to your credit report using online and mobile apps.

TrueIdentity app by TransUnion — Allows those enrolled in free True Identity service to instantly lock and unlock credit reports.

Lock & Alert by Equifax — Allows consumers to lock and unlock credit reports for free.

IdentityWorks by Experian — Allows those enrolled in IdentityWorks Plus or IdentityWorks Premium services to lock and unlock credit reports. The IdentityWorks Plus and CreditWorks Premium services charge fees.

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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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How Fed Rate Hikes Change Borrowing and Savings Rates

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Since late 2015, the Federal Reserve has raised the upper limit of its target federal funds rate by 1.75 percentage points, from 0.25% in December 2015, to 2.00%. The Fed is expected to raise rates another 25 basis points on Sept. 26.

MagnifyMoney analyzed Federal Reserve rate data to illustrate how the rates consumers pay for loans and earn on deposits have changed since the Fed started raising them two and a half years ago. In short, we find Fed rate changes have wide-ranging implications for consumers.

  • Credit card borrowers are currently paying $110 billion in interest annually, up $31 billion from the annual $79 billion they paid prior to the first Federal Reserve interest rate hike in December 2015, making introductory 0% APR deals all the more attractive.
  • Meanwhile, depositors earned significantly more from savings accounts. In the 12 months ending in June 2018, depositors earned $26.8 billion in interest on their savings accounts, up $16.8 billion from the $10 billion they earned in 2015.
  • According to our analysis, credit card rates are most sensitive to changes in the federal funds rate, almost directly matching the rate change with a 1.92 point increase since December 2015. Credit card rates will continue to rise in line with the Fed’s rate increases, and if the Fed raises them again, the average household that carries credit card debt month to month will pay over $150 in extra interest per year compared with before the rate hikes began. MagnifyMoney estimates 122 million Americans carry credit card debt month to month.
  • Student loan and auto loan rates have also risen sharply, but only half as much as credit card rates, in part because they are long-term forms of lending that are less reliant on the short-term federal funds rate. Federal student loan rates are set based on the 10-year Treasury note rate each May.
  • Savers at big banks have seen little change, with the average savings and CD account passing through only a fraction of the rate increase. However, that masks a big opportunity for savers who shop around and move deposits to online banks. Online banks have aggressively raised rates, and now offer rates in the 2% range, versus just 1% in 2015. That’s over 20 times what typical accounts pay.

Let’s take a closer look at how the Fed rate hike impacts different financial products:

Credit cards

Most credit cards have a rate that’s directly based on the prime rate, for example, the prime rate plus 9.99%. As a result, card rates tend to move almost immediately in line with Fed rate changes. In the current cycle, the rates on all credit card accounts tracked by the Federal Reserve have increased 1.92 points, roughly in line with the Fed’s increase of 1.75 points.

That said, consumers can still find attractive introductory rate offers.

For example, 0% balance transfer offers have continued to have long terms even as the Fed hiked rates, with offers still available for nearly two years at 0%.

Credit card issuers make up for the rate hike with the automatic rise in variable back-end rates, as well as the increasing spread between the prime rate and what consumers pay on new accounts. They can also increase other fees, like late payment fees or balance transfer fees to keep long 0% deals viable.

The Federal Reserve tends to hike up interest rates gradually over time. And people in credit card debt will barely notice the rate increase in their monthly statement. When rates are increased by 0.25%, the monthly minimum due on a credit card will increase $2 for every $10,000 of debt.

The danger of such a small increase in the monthly payment is complacency. Remember that by paying the minimum due, you could be in debt for more than 20 years.

Rates are expected to keep rising, so it makes sense for consumers to lock in a low rate today. The best ways to lock in lower rates are by leveraging long 0% balance transfer deals or by consolidating into fixed rate personal loans.

Savings accounts

On average, savings account rates haven’t changed much since the Fed started raising rates. That’s largely because big banks with the biggest deposits and large branch networks have less incentive to offer higher rates, and this skews national data on rates earned because most savers don’t shop around to find higher rates at online banks and credit unions.

Consumers who shop around can find much higher savings account rates than three years ago, and shopping around for a better rate on your deposits is one of the best ways to make the Fed’s rate hikes work in your favor.

Back in 2015, it was rare to see savings accounts pay 1% interest.

Today, many online banks are competing for deposits by offering savings account rates approaching 2%, flowing through about half of the Fed’s rate hike into increased rates for depositors. These rates will continue to rise as the Fed hikes rates. The increases are already apparent in the data: In the 12-month period ending June 2018, depositors earned $26 billion in interest on their savings accounts, versus the $10 billion they earned in 2015.

CDs

CD rates have moved faster than savings rates, up 0.19 points for 12-month CDs since the Fed started raising rates. That’s in part because they are a more competitive product that forces consumers to rate shop when they expire at the end of their 6-month, 12-month or longer term.

But that rate rise doesn’t fully reflect what some smaller banks are passing through, as the banks with the largest deposits have been slow to raise rates.

The rates on 1- and 2-year CDs at online banks have been increasing rapidly, and are now well over 2%, reflecting much of the Fed’s rate increases since 2015.

The rates on 5-year CDs have not been increasing as quickly. As a result, the rate curve has been flattening.

A reasonable strategy would be to invest in short-term (1- and 2-year) CDs. If competition on the short end continues, you can get the benefit in a year on renewal.

And if long-term rates start to rise, you can redeploy or build a ladder in a year.

Student loans

Federal student loan rates are set based on a May auction of 10-year Treasury notes, plus a defined add-on to the rate. Today, rates for new undergraduate Stafford loans stand at 5.05%, up from 4.30% before the federal funds target rate began to rise.

Since student loan rates are determined by the 10-year Treasury rate, rather than a short-term rate, they are less directly related to changes in the federal funds rate than some shorter-term forms of borrowing like credit cards. Instead, future market views of inflation and economic growth play a role. Federal student loan rates are capped at 8.25% for undergraduates and 9.5% for graduate students.

For private refinancing options, rates depend on secondary markets that tend to follow longer-term rates, rather than the current federal funds rate, but in general, a rising rate environment could mean less attractive refinancing options.

Personal loans

Personal loan rates tend to be driven by many factors, including an individual lender’s view of the lifetime value of a customer, funding availability and credit appetite. Most personal loans offer fixed rates, and in a rising rate environment overall, we expect these rates will go up, making new loans more expensive, so consumers on the fence should consider shopping for a good rate sooner rather than later. Since the end of 2015, rates on 2-year personal loans tracked by the Federal Reserve have increased by 0.65 basis points.

Auto loans

Prime consumers who shop around for an auto loan can still find very low rates, especially when manufacturers are offering special financing deals to move certain car models.

But the overall rates across the credit spectrum have gone up since the Fed raised rates, in part due to the rate hikes and because of recent greater than expected delinquencies in some parts of the auto lending market.

Mortgages

Since the Fed started raising rates in late 2015, the average 30-year fixed mortgage rate has increased from approximately 3.9% to 4.6% as of Sept. 13. The mortgage market tends to follow trends in longer term bond markets, like the 10-year Treasury, since mortgages are a longer-term form of borrowing. That shields them from the impact of Fed rate increases, and it’s not unusual for mortgage rates to decline during some periods when the Fed is raising rates.

What can consumers do

Rates are only going to go up. That means life is going to get more expensive for debtors, and more rewarding for savers.

If you are in debt, now is the time to lock in the lowest rate possible. There are still plenty of options at this point in the credit cycle for people to lock in lower interest rates.

If you are a saver, ignore your traditional bank and look online. Take advantage of online savings accounts and CDs to earn 20 times the rate of typical big bank rates.

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.

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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.

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Survey: Vast Majority of Multilevel Marketing Participants Earn Less Than 70 Cents an Hour

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.

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Take a look at your Facebook or Instagram feed and you’ll easily find at least one friend or family member constantly posting about the makeup, oils, supplements and even sex toys they sell to make some extra cash working from home. Most of these products and systems are provided through direct sales companies that use a sales model called multilevel marketing (MLM).

MagnifyMoney was curious about the return on investment for multilevel marketing participants and how their involvement affects their personal network of family and friends. We surveyed 1,049 multilevel marketing participants involved with at least one company over the past five years. Our conclusions show that most participants could earn significantly more money in exchange for a lot less time and money invested if they were employed in a minimum wage job.

Key takeaways

  • Most participants make less than 70 cents per hour in sales – before deducting expenses.
  • Fewer than half of participants made $500 in in the last five years.
  • Men report earning significantly more sales than women.
  • Married men and people who got money from friends and family to participate are the most likely to lie about how much they’re earning, fight with close friends and family, and even lose friendships than other groups.

What is multilevel marketing?

Multilevel marketing, or network marketing, describes a business strategy used by some direct sales companies. The sellers, called participants, earn commission or profit directly from the items they sell to their network. In addition, the strategy rewards participants who recruit new sales members to the company by giving the recruiter a commision from their recruit’s orders. In turn, the recruit can theoretically recruit another person and that third person in the recruitment chain can recruit a fourth, and so on.

Commissions from the last person recruited go to everyone up the recruitment chain. Recruits are often expected to purchase “starter kits” or inventory to start selling products, which also earn the recruiters (and the recruiters’ recruiter) commission. Thus, multilevel marketing as a business strategy incentivizes participants to grow a sales network underneath them, also called a downline.

MLMs often target stay-at-home mothers and others who may be interested in earning income in their downtime. But success in multi level marketing can be costly. Participants are encouraged to spend money to attend conferences and training seminars, invest in marketing materials and host events with the hope of selling products. All of the expenses are out of pocket and non-reimbursable by the company providing the products.

Multilevel marketing companies are swamped with controversy because the strategy lends itself to the proliferation of pyramid schemes.

The findings are concerning

The MagnifyMoney survey of 1,049 American multilevel marketing participants revealed many other concerning findings about the financial side of involving oneself — directly or indirectly — with multilevel marketing companies.

As far as side-gigs go, the earnings are minuscule

It’s hard work making money in multilevel marketing. Overall, 20% of participants never made a sale (18.3% if you exclude people who signed up just for discounts) and nearly 60% of participants reported earning less than $500 over the past five years.

Using median results, MLM participants worked 14 months out of the past five years for 33 hours per month. Overall, participants earned a median of $18.18 per month, translating to $0.67 an hour, before deducting business expenses. Meanwhile, workers in the service sector — the lowest-paid of all major occupations in the U.S. — earn an median $10.53 hourly compensation.

If flexibility is a priority for people looking for extra income, MLM participants should know they may earn more money working as an independent contractor in the gig economy. For example, the Economic Policy Institute reports Uber drivers earn an average $11.77 an hour, after vehicle expenses and fees are considered.


The gender wage gap is ever-present among MLM participants, as men earned a median $35 a month, while women earned a median $14. According to the Direct Selling Association, women made up about 73.5% of membership in direct selling companies in 2017.

Some lie about their earnings

If you ask an MLM participant how their business is going, you may not get a straight answer, especially if the participant is a married man, or if you already gave them some money for the business.

A little more than 22% of all MLM participants admit they have lied to friends and family about the money they earned or their total investment in their MLM business — granted, the relationship dynamic between seller and customer may encourage participants to lie about their income and investment to make sales and win over recruits. The focus of direct selling is selling your product to your network of family, friends and acquaintances. As a subset, multilevel marketing takes that a step further, as participants also try to recruit new participants from their personal network.

Based on the responses, married men and those who already received money from friends and family were more likely to lie. In response to the MagnifyMoney survey, 36.5% of married men and 35.2% of those who borrowed money from their families and friends admit to lying to friends or family about how much they spent or earned to participate.

In addition, 42.7% of married men say they’ve fought with close family and friends about how much time or money they’ve invested, as did 42% of MLM participants who got money from loved ones to cover some or all of their participation costs.

Some go into debt

The financial burden of success in multilevel marketing may encourage participants to rack up debt to attend conferences and training or pay for marketing materials and other expenses related to involvement.

Nearly one in three (31.6%) of MLM participants said they used a credit card to finance their involvement in the business, and nearly one in 10 (9.1%) participants report taking out a personal loan. Of those who used a credit card, 15.4% say they haven’t finished paying off their MLM-related debt. Of those who haven’t paid off their credit card debt, 63% report earning less than $500 from their MLM business. Separately, nearly half (49%) of those who haven’t finished paying off their credit card debt spent between $100 and $500 on their MLM involvement, overall.

About one-fifth of participants said they borrowed money from friends and family members. The borrowing may have had a negative impact on their relationships as nearly a third (30.9%) of participants who did persuade a friend or family member to give them money said they ended up losing a friendship, and more than two-fifths (40.2%) said they fought with close family and friends over the time or money invested.

Going into debt to participate in an MLM

Borrowing to participate in an MLM isn’t advised, based on our findings of a poor return on investment. But if you do, it’s important to understand your financing options.

If you are among those who may consider participating in a multilevel marketing company and need to borrow to cover your business expenses, you may want to consider using a personal loan as an alternative to financing with a high-interest credit card or risking your relationship with friends and family members by asking them for money.

A personal loan is a fixed-rate installment loan, as opposed to a revolving debt like a credit card, so it may help limit the amount of debt you get yourself into. Generally speaking, personal loans charge lower interest rates than credit cards to borrowers who are able to qualify for the best terms, so they may be a less-expensive borrowing option for those with good credit scores. As of this writing, borrowers may qualify for personal loans with rates as low as 5.99%, whereas the average interest rate charged on credit cards is 15% APR, according to Federal Reserve data.

If you do opt for using a credit card, you should consider applying for a credit card with an introductory 0% APR period, during which new purchases will not accrue interest. You just have to make sure you pay off the balance before the end of the intro period, otherwise you’ll have to pay interest on the remaining debt at the regular purchase APR — maybe even deferred interest on the amounts you paid during the 0% APR intro period.

If you already spent money on a high-interest credit card and want to save interest while paying it off, you could apply for a balance-transfer credit card with an intro 0% APR — or you could consolidate your debt with a low-interest personal loan.

Before deciding to borrow, you should always compare rates on personal loan offers from multiple lenders to ensure you get the best terms available to you. You can compare your top rate offers from multiple lenders in minutes with our parent company, LendingTree.

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Top U.S. Student Loan Officer Resigns, Slams Trump Administration

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The U.S. student loan ombudsman, the top government official in charge of protecting student borrowers from predatory practices by lenders and loan servicers, announced that Monday he was resigning his post in protest at the end of this week.

Seth Frotman’s resignation letter, obtained by the Associated Press and National Public Radio, offered scathing words about what he said was a shift by the Consumer Financial Protection Bureau (CFPB) under current head Mick Mulvaney — and the Trump administration more broadly — to protect major financial interests over the needs of consumers.

“Unfortunately, under your leadership, the Bureau has abandoned the very consumers it is tasked by Congress with protecting,” Frotman’s letter read. “Instead, you have used the Bureau to serve the wishes of the most powerful financial companies in America.”

Consumer advocates reacted with dismay to the news, while continuing to take the White House to task for what they see as the erosion of student loan and other consumer protections since early 2017, when President Donald J. Trump took office.

What does the student loan ombudsman do?

As the student loan ombudsman, Frotman served as an advocate for student borrowers in their complaints against student loan servicers.

When dealing with servicers, the ombudsman can help borrowers get the information they need, as well as help them get relief when they’ve been wronged.

Frotman’s resignation comes after the decision to close the Office for Students and Young Consumers, the only federal government office specifically tasked with protecting student borrowers.

“Assistant Director Frotman has been a champion of the 44 million Americans who owe student debt,” Christopher Peterson, the director of financial services at the Consumer Federal of America, said in a press release. “His work at the CFPB has curbed industry abuse and reclaimed hundreds of millions of dollars for student loan borrowers.”

Since its inception, the CFPB has overseen the return of about $750 million to student borrowers who suffered from unfair practices by student loan servicers and taken other actions to protect consumers.

“The CFPB has power to protect consumers through enforcement actions like fines and lawsuits,” said Jay Fleischman, a student loan lawyer and consumer advocate. “Since the Trump administration took over, and more specifically, since Mick Mulvaney has been in charge of the CFPB, actions like the Navient lawsuit have pretty much ground to a halt, leaving consumers exposed to abuses by servicers.”

Not everyone has been happy with the CFPB, however. Efforts to reduce the power of the CFPB have been underway since it was formed, and Mulvaney, a former Republican congressman representing South Carolina, has been one of its biggest detractors.

“It turns up being a joke, and that’s what the CFPB really has been, in a sick, sad kind of way,” Mulvaney told the Credit Union Times in 2014.

Texas congressman Jeb Hensarling, the Republican chairman of the House Financial Services committee, wrote a February 2017 op-ed in The Wall Street Journal, in which he called the CFPB unconstitutional: “The CFPB has eroded freedom, trampled due process and killed jobs. It must go.”

How you can protect yourself as a consumer

Despite the disdain some policymakers have for the CFPB, consumer advocates like Peterson and Fleischman insist that the agency had done a lot of good, putting the needs of citizens ahead of the concerns of the financial industry.

“The [Trump] administration has seized control of an independent consumer watchdog and is strangling one of the only agencies in Washington dedicated to looking out for the rights of ordinary Americans,” Peterson continued in the press release.

So, what can you do if you’re unsure of the protections available to you?

Fleischman said that it’s still possible to file complaints with various government agencies, including the Department of Education and the CFPB. However, he conceded that with the contraction of offices designed to protect students, such a move might be inadequate.

“In addition to filing a complaint, consider sitting down with an attorney,” he said. “Many consumer advocate attorneys work on a contingency basis, so it won’t cost you anything to consult one.”

Fleischman recommended visiting the website for the National Association of Consumer Advocates for information on your rights and how to find a student loan lawyer that might be able to help you.

It’s also possible to influence future policy, and protect the CFPB and the office of ombudsman, by being politically active. Pay attention to higher education bills in Congress, and contact state and federal representatives with your concerns.

And, of course, vote for legislators that will implement policies designed to protect consumers (and encourage your friends to do the same).

“The student loan ombudsman has always been tremendously helpful,” said Fleischman, adding that as the government gives up its role in consumer protection, it’s up to private attorneys and consumer advocates to take on a heavier burden. “That’s what we’re here for. We’re the protectors. And now we’re some of the only ones left.”

This post originally appeared on StudentLoanHero.com, a subsidiary of LendingTree. 

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What Are Tariffs Anyway?

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.

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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.

 

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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 U.S.industries, 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.

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.

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