Forecast: The State of Student Loans and Financial Aid

My focus has always been on the markets and more macro areas of finance. But I’m working on a new series featuring the “ins and outs” of student loans. My daughter is currently applying to colleges, and as a father I wanted to learn more about the state of student loans from the perspective of a seasoned financial consultant.

So here’s part 1 of that series.

Online Programs, Student Financing
Continuing your education is a critical part of financial success in today’s economic climate. Jobs are competitive and often, applicants with a college degree and little experience have a definitive edge over experienced, seasoned potential job candidates with no degree. Obtaining a college education, however, can be expensive, and many students turn to a variety of cost saving measures to get them on the path to their degree.

Quite often, online programs and trade-oriented colleges can be the best choices for the non-traditional student because of the flexibility they can offer as well as the focus on career-oriented training and education. While many online programs tend to be profit driven and cannot offer all the amenities of traditional degree coursework, there are stalwart programs out there that can provide excellent educational opportunities. Sanford-Brown, for example, has long been a useful resource for workers who want to further their education, and the school offers many practical, career driven degree programs (like pharmacy technician and nursing, two careers in high demand), that can give students the edge they’re seeking in their current jobs, or the ability to switch career paths.

Funding Your Education in 2011

Student loans have long been the first line of defense for those who need a little help funding secondary education. While federal loan programs have been the primary source of borrowed funds for many years, private loan companies do exist and have become more prevalent in recent years as more and more people are looking for loan options due to the economy. Most financial experts (including two I talked to last week), however, still recommend using federal loan programs whenever possible due to the program’s commitment to offering low interest rates and flexible repayment options.

While qualification through a private company may be a slightly easier process (because there are not as many income guidelines and regulations), the federal student loan program offers clear advantages over the private loan market. Federal student loans typically do not begin to accumulate interest charges until the student has graduates or leaves school.

What’s more, federal student loan programs have deferral programs if a borrower meets with unexpected financial hardship during the loan repayment term. Private loan companies tend to be slightly more rigid about repayment and typically cannot offer financing terms and interest rates to rival the federal student aid program.

Stay tuned for more on the world of student loans. It’s an interesting realm ☺.

2011 Forecast: Rates on Insurance

Caught up in the holiday spirit, it’s easy to spend hundreds of dollars on gifts. But amid the spending frenzy is easy to overlook future costs, including those unassociated with shopping, such as insurance costs. Predictions for next year’s insurance costs forecast what insurance rates are likely to do. Consumers can use these forecasts to get an idea of what they’ll be spending next year on insurance.

Car Insurance
With the advent of pay-as-you go plans in California coming next February, intermittent car drivers will save tons. So far, AAA and State Farm introduced the plans for customers who seldom get behind the wheel.

The concept is simple. Drivers report their mileage to the insurance company and agents check how far drivers actually drove. AAA plans to implement a device that will report the mileage, thus speeding up the process.

Calculations for car insurance aren’t simple. Consumers that shop hard online at aggregators touting a free insurance quote or similar comparison offerings can find differences in ultimate costs due to things as specific as ZIP code.

The rates are also based on driver age, history and region. Frequency of use (mileage) does not have an affect, as some consumers have questioned recently. Drivers who don’t often use their cars pay the same rate as somebody who commutes daily. The pay-as-you-go plan will lower rates for some drivers, and if the plans go nationwide rates will fall even more.

Homeowner’s Insurance
Chances are these rates will rise in 2011. In fact, property insurance rates in general are expected to spike. A report from Moody’s last month indicated that little demand caused insurance providers to increase rates. Some states already saw rates increase from different insurers. All State and State Farm announced rate increases.

Life Insurance
Moody’s report drew similar conclusions about all casualty insurance. Back in April, Conning Research and Consulting completed a Property-Casualty Industry Forecast, which anticipated a spike in property and casualty insurance rates in 2011. Moody and Conning noted that a number of catastrophes contributed to expected rate hikes next year.

Overall, 2011 could be a revolutionary year for the car insurance industry, but a pricier year for homeowners and customers with life insurance plans.

USDA Loan Funding

USDA loans have had a rollercoaster year in 2010 with a resurgence in interest for the program, followed by an abrupt lack of funding that halted the loan program for the better part of the spring and summer. It appears, however, that USDA loans are about to receive additional funding, making it possible for more potential homebuyers to take advantage of the helpful program.

USDA home loans have long been a boon to lower and middle income homebuyers, and the program’s main goal is to ensure that even buyers who may not otherwise qualify for a traditional home loan have an opportunity for homeownership. USDA loans feature extended loan terms, an option that brings with it lower monthly payments than a traditional 30-year mortgage, and several flexible down payment and financing options.

In fact, the USDA is one of the only loan programs currently offering a zero down payment option. Borrowers who qualify for the program can choose to pay nothing down and roll closing costs into the loan, making the process very appealing to those who are unable to save up several thousand dollars for a home purchase but who do have the means to make a monthly payment. Additionally, in some cases, the USDA program allows borrowers to finance up to 103% of the purchase price of their new home in order to make repairs or upgrades to their property, making the purchase and renovation of an older home a viable economic option for buyers.

However, in early 2010, funding was quickly exhausted for this government sponsored loan program. While the USDA typically does not have the funds it needs to sustain it through the entire year, the speed at which funds were drained this year caught the attention of mortgage lenders and government officials alike. What’s more, many borrowers were left holding the bill for loans in process when funding ran out, having paid for appraisals, inspections, and surveys but being unable to actually follow through on their loans due to lack of funding. On March 21, 2010 House Representative David Obey (D-WI) introduced HR 4899 to the House of Representatives in order to help remedy this issue.

As of right now, HR 4899 has been passed. It was passed by the House of Representatives on March 24, by the Senate on May 27, and then signed by the President on July 29. Funds will be disbursed to the affected agencies as soon as the usual administrative actions have been completed. The passage of this bill could not come as more of a relief to those eager to use the USDA Direct and Guaranteed loan programs to purchase a home or other property, and lenders are beginning to take applications for the program once again.

The Correlation of Real Estate Markets and the Foreign-Exchange Market

Many new investors may be surprised to hear that an incredibly strong correlation exists between real estate markets and the foreign-exchange (FX) market. The primary driver of both real estate markets and the FX Market is risk. When investors are willing to take risk the real estate market appreciates a swarm of buyers enter the market. In the FX Market, when risk is present, investors will buy currencies that carry a high yield and sell currencies that have a low yield.

But as we all know very well from the Global Credit Crisis of 2008, when risk exits the market, and risk aversion, or an unwillingness to take risk, enters the market, then real estate values fall as there are more sellers than buyers, and currencies that have a high yield are sold and, generally, the U.S. Dollar is bought, since it is seen as the safest place to place capital during times of economic uncertainty.

Let’s take a look at a chart that depicts the movement of the U.S. Dollar before and during the Global Credit Crisis.



As you can see in this chart, the U.S. Dollar holds an inverse correlation with the Real Estate Markets. As the real estate market was booming throughout 2005-2007, due to low interest rates encouraging property speculators, the U.S. Dollar fell consistently. However, when Crisis hit in 2008 and the Sub-Prime Mortgage Crisis unfolded, the U.S. Dollar staged a remarkable bull rally as investors all over the world liquidated risky assets and put their capital in the low-yielding, but safe U.S. Dollar.

No as the economic recovery continues in the United States and around the world, it is becoming very apparent that the recovery is going to take longer than initially expected. Several months ago, in the beginning of 2010, the Federal Reserve actually began raising the discount rate in order to return to somewhat normal monetary policy. But as the recovery has continued, it is beginning to hit major roadblocks. Therefore, during the Federal Open Market Committee Notes that were released during the 2nd week of July, the Fed downgraded growth prospects in the United States, and instead of talking about when to enter a monetary tightening cycle, they actually began talking about when they may have to loosen policy again.

Much of this lagging growth in the U.S. recovery is to due to the housing sector, or the real estate market. Home values are still far off their HI’s. The housing sector did actually rebound quite nicely after the economy bottomed out in March of 2009, but the rebound was due in very large part to the economic stimulus the government had injected in the form of the $8,000 tax credit for first-time home buyers.

That tax credit was extended during the fall of 2009, but it was finally removed permanently in the Spring of 2010. Since the stimulus has been removed from the housing sector, economic figures are beginning to strongly disappoint the market. New housing starts are falling dramatically without the stimulus. This is causing the economic growth to lag in the U.S. and it is actually beginning to bring a bit of strength to the U.S. Dollar. This correlation is not perfect, and sometimes it is difficult to time the movement perfectly, but as a generality, when the housing market declines, on forex charts, the U.S. Dollar will be rising. If we continue to see a falling U.S. housing market, look for the U.S. Dollar to continue rising in the coming months.

Are you aware that Roth IRA conversion could put you into a deadly trap?

The IRS has introduced Roth conversions to the people but does not target any specific income group and also given an option for three years in 2010 to pay taxes on the conversion.
The investors or hoarders are showing a lot of interest of transferring traditional individual retirement account into Roth IRA. But they should be cautious and smart before converting their account, as there are many traps associated with it. So the investors should update him regarding Roth IRA conversion before applying for it.

But the media is not highlighting the flaws of Roth IRA conversion like the involuntary tax traps and the monetary problem that an individual might come across.

This article would shed some light on the snares laid down for you by the IRA conversion plan. And it would also help you to reconsider whether you should convert, how much to convert, or if you should convert at all. For best results consult a financial advisor.

Beware of the IRA pitfalls:

•Tax is not split but the income:
The taxpayer does not have to incorporate any conversion income on the tax return of 2010 if he converts in the same year. He can split his income into two parts one conversion can be included in 2011return and another in 2012 return. The income can be split over two years but the tax can not be split evenly as it is beyond your control as it depends on the tax rates and over all income of a person.

•Failing to meet 60 days rollover:
Trustee to trustee transfer of account is the best way to shift money from an IRA to a Roth IRA. But many companies do not support the idea of direct rollover rather they straight away address the account owner and hand over a check to him.
In this case you have to shift the fund within 60days into another retirement account that also includes a Roth IRA. But if you fail to roll over into another account within the time limit of 2 months then you are penalized. The amount becomes a taxable fund but it would not be eligible for a rollover program.

PLR as per the retirement expert have termed the private letter ruling can only settle this problem. This is an expensive and time consuming method but it does not guarantee that the Internal Revenue Service would work in your favor.

•Higher Medicare cost and Social security taxation:
If you do a Roth IRA conversion then you might have to pay higher Medicare premiums or social security payment comes under the tax. The benefits of social security are not included in the net income of a tax payer so it does not come under tax. The social security income can be included in gross income if it starts from 50% all the way up to 85% compared to other incomes then it would fall under tax.

•Fail to get a college financial aid:
While granting a financial aid for a student, the college does not keep in account a retired parent’s assets.

Income is one of the crucial areas schools keep a vigil on and if your income includes the Roth IRA conversion then it might trudge your income. But this kind of income is irregular and does not signify your typical income level. And in this way you can lose a valuable financial aid as they would find that you fall under a stable income group.

•A new beneficiary form with each new account:
It is very important to plan your savings properly so that the inheritor of the account does not face a problem after you die. When it comes to IRA and Roth IRA estate planning becomes vital as it ultimately decides who gets the account after the death of the account holder. With every new account you open you have to submit a beneficiary form absolute completed and presented. This task is quite tedious as you have to follow it with every change in the account.

•Avoid the trap of rolling to an IRA in midway:
If you decide to convert as well as roll your 401(k) plan into IRA in the same year then try to avoid this trap. If you are converting IRA, other than IRA assets no additional assets are taken into account for a pro-rata rule.

•Only eligible funds are converted into Roth IRA:
If you take Roth IRA for granted and think that anything can be converted into it then you are wrong. According to the tax code only eligible distribution can be shifted to Roth IRA.
Things that cannot be converted are as follows: hardship distribution, 72t payment, deemed distribution and so on.

•An account that can not be converted:
If you do not have a spouse and you are a beneficiary of a certified plan then you are eligible for an inherited Roth IRA conversion. This transfer must be done directly as 60 days roll over is not possible by a non spouse beneficiary. But if you have a certified plan then you can roll into an inherited Roth IRA. But if you have an IRA plan then you cannot transfer it into a Roth IRA.

•25% penalty charge:
All kinds of IRAs like SEP IRAs and SIMPLE IRAs are qualified to be converted into Roth IRAs. The traditional IRA can be converted any time and that too without the penalty charge but SIMPLE IRA comes with trap.

The SIMPLE IRAs has a catch as there is a holding period for two years and this time frame varies for each individual. The time is counted once the person makes his first contribution. The fund over here cannot be rolled into Roth IRA other than into a SIMPLE IRA for at least two years. And it also falls under taxable distribution for two long years.

So these are the traps that a person needs to be aware before conversion. If you shield yourself then you won't ensnared in this program.

Rate Increase Risk for Jumbo Loan Borrowers

The following is a guest post by Jeff Bowman of TheGreatLoanBlog. If you like the following post, show your appreciation with comments.

Ten's of millions of luxury homeowners have adjusted from an ARM with a fixed rate period into a fully adjustable jumbo loan. Following the large drop in LIBOR rates since 2007, floating with the 6-month or 1 year LIBOR index has been an excellent risk homeowners took the last few years. Even if they were not aware of the relationship of their mortgage payment and the workings of the global short-term money market.

In the last few weeks it has become crystal clear that Europe is having a massive government debt crisis which started in Greece and is spreading throughout the European Union. This crisis is causing major moves in all the various LIBOR indexes and the action in Europe will translate into higher mortgage payments in the US whenever someone reaches their semi-annual adjustment period.


The underlying rate trend in these indexes in the last few weeks is a steady march higher as governments, banks and corporations are going to market to borrow hundred of billions of Euros. This is pushing LIBOR rates up for the 6- month and 1 year about .25% within the last two weeks. All the LIBOR indexes are at the highest levels in over a year despite massive liquidity being pumped into the system by the EU Central Bank and the FED.


Now we aren’t in the danger zone yet for US based jumbo mortgage loans that are floating considering that the average margin to the 1Y LIBOR is 2.50% arriving at a current floating rate of 3.25%. But a plausible scenario of a consistent flow of gov/corp borrowers, an improving global economy over the next year could push LIBOR rates consistently higher. Any real growth in the economy will be meet with higher interest rates and this will be reflected on the hundreds of billions of dollars worth of jumbo loan mortgages that are sitting with rates of about 3.25-4% now.

We think homeowners that are floating against the LIBOR indexes without a plan to sell soon or get another ARM this year or a fixed jumbo mortgage are gambling with their mortgage payment. Not having a solid plan is a very dangerous proposition given the huge debt crisis that continues to unfold around the world. I am a firm believer in having full coverage auto insurance given the cost of coverage vs the financial risk of an accident. Millions of American’s are just waiting for a financial accident when they get their new rate increase notice. Most ARMs adjust every six months with a 30-60 day notice of the new interest rate and payment. The jumbo loan trend has only been down for the last few years as the world almost fell into a financial black hole during the 07-08 meltdown.

I think with the economic recovery gaining speed that it is only prudent to lock in another ARM or a fixed jumbo mortgage while we are at the lowest rates in history. Avoiding an interest rate increase that for millions would come as a nasty surprise. If you need to refinance your jumbo mortgage within the next few years it’s prudent to explore your jumbo loan options now.

Seeking Contributors

OK, so when I said "this coming Friday," I actually meant "a couple Mondays from now." Instead of a roundup, though, I wanted to start with something a little different: A request for help.

The days of going it alone are over. While the mission and scope of AI isn’t changing, it’s time to add some new voices. The goal is to find a few people who would be willing to contribute ongoing pieces to keep the site afloat.

This is one of the strongest and smartest readership bases in the finance world. It’s also a great platform for weekly or even on-the-spot commentary and insight. If you’re interested in contributing, send an email to accruedint at gmail.com.

Accrued Interest is Back - with Roundups

I'm bringing back the Accrued Interest blog this coming Friday, when we'll start a weekly feature of the best articles/discussions from the bond market, mortgage world, and financial industry.

With a strong readership built over the years, this can be a weekly jumping off point for thoughtful discussion of developments in these markets. (Pending Financial Regulatory overhaul anyone?)

If you have any tips for articles to feature, send them my way at accruedint on Gmail.

See you Friday!

Well, don't get all mushy on me. So long, Princess.

This may not come as a surprise to many of you since I haven't written anything in a month, but this will be my last post on Accrued Interest.

The reasons why I'm shutting it down are several. First, I have taken a much more expanded role at TheStreet.com. This is taking up some of the time and mental energy I had been using on Accrued Interest. Second, I will be starting a completely new professional endeavour within my firm. I expect this to take up vast amounts of my time in the next couple years.

The bottom line is that I don't want to be doing anything that doesn't live up to my own standards of quality. I have come to the conclusion that if I kept this blog going I'd only be writing once a week, if that, and I'm not sure the quality of even infrequent posts would be at the level I've achieved in the past.

I'd like to thank every one who ever read the blog, particularly those that I've corresponded with and gotten to know a bit. The blog covered one of the most wild times in my career, where at times I wasn't sure what the finance world would look like. I was very glad to have the outlet to express my thoughts on the direction banking and finance should take, even getting invited to the Treasury Department to discuss it with people who were shaping that direction.

I was also humbled by the level of discourse that often accompanied my own posts. While I think I'm a pretty smart guy and a half-way decent writer, nothing pleased me more than that the blog attracted people who were just as intelligent and well-spoken and who were willing to marshall a logical argument. If I could change one thing about the world, it would be to temper the hyperbole-laden and sound byte driven debate that persists in this world. To get to a place where a guy like Russ Roberts gets more attention than a guy like Marc Faber. A world where people are willing to acknowledge the opposition's argument and where we're open minded to new evidence that contrasts our own thinking. Instead we live in a world of instant analysis and where fame is equated with legitimacy.

If you'd like to keep in touch with me, please e-mail me sometime in the next few weeks and I'll give you a new e-mail address to use. After about a month I'll stop checking the accruedint e-mail.

Thanks again to all those that have supported the blog over the years.

Oh, and I just can't resist. One last surge of Star Wars geekery.


"Master Yoda, you can't die."

"Strong am I with the Force, but not that strong."

"Guards, leave us."

"Afraid I was going to leave without giving you a goodbye kiss?"

"So...you got your reward and you're just leaving then?"

"All right. Well, take care of yourself, Han. I guess that's what you're best at, isn't it?"

"What are you looking at? I know what I'm doing."

"I can't believe he's gone."

2010 Forecast: No, no different

Is it really different this time? In other words, is this recession really different from past recessions? I argue only in terms of magnitude. It was a bad recession, but it ultimately wasn't any fundamentally different. Will the recovery be muted? I actually don't think so. I just think we went down so hard that it will take a long time to recover. Unemployment, for example, will be relatively high through 2010, but mainly because it got so high in the first place. I expect fairly consistent improvement in all economic indicators through the year.

If you disagree with the above, fair enough. Clearly the Fed should accommodate if the economy isn't growing. But what if we are recovering? Even if its a slow recovery? What should the Fed do? If this time really is no different, then they should do what they always do after a recession. Tighten policy.

Milton Friedman argued, quite convincingly I think, that the perfect monetary policy was to have relatively small and stable growth in money supply year after year. He actually argued that this could be done robotically, and that actual human judgement was a detractor to the process rather than additive. While I'm very sympathetic to this view, its clear that given today's banking system, we can't measure the de facto money supply accurately enough to implement the computerized Federal Reserve that Friedman envisioned.

John Taylor then argued an alternative in the 1980's. If we can't measure money directly, let's measure its impact and try to target that. He said we could measure the output gap (difference between real GDP and potential GDP) and the difference between actual inflation and ideal inflation, then set monetary policy to push these numbers back toward the goal. This is the genesis of the Taylor Rule.

Now let's back up for a moment. Look at the history of the Taylor Rule vs. actual policy during the so-called Great Moderation.

Taylor has argued that if we look at most of this period, actual policy seems to follow the Taylor Rule quite nicely. He argues that the Great Moderation occurred because of this enlightened policy.

Then we get the 1999-2006 period.

Policy was consistently off, mostly being too low from 2001-2004. What did we get? A pretty poor decade of economic performance.

Where are we now based on the Taylor Rule? Right this minute my estimate is that its calling for Fed Funds to be -2%! Hence why I thought QE made sense. We can't get traditional monetary policy easy enough. But if GDP growth is just 2% in 1Q and 2Q and CPI hangs around 1.5, the Taylor Rule suggested Fed Funds rates jumps to 0.75%. If inflation accelerates to just 2%, the recommendation is 2% by the end of the second quarter.

Realistically, the Fed can't (or won't) hike 200bps in just a few months. They are more likely to move in 25bps or 50bps clips lest they spook the market too much. Given that they meet every six weeks, it would take them 10 months to get from 0.25% to 2% at 25bps per-meeting hikes. If we throw a couple 50bps moves in there, it still takes them 7-8 months. This is why they need to start removing extraordinary accommodation now.

Remember, that monetary policy isn't really about interest rates. Fed funds is just the tool the Fed uses to alter the money growth rate. As such, we could say that the Fed's extraordinary liquidity measures are creating a de facto funds rate well below zero. The flip side of this is that with the economy improving, the effective funds rate is even further from its proper spot. So even if the Taylor Rule suggested rate is zero, the Fed would need to slow the money growth from its current pace considerably.

Ben Bernanke is currently talking about the lessons of 1938. I say learn the lessons of the Great Moderation and stick with a stable monetary policy.

Next up... what happens if the Fed keeps rates low? (I'll tell you what, we'll all end up working for this guy or spending more time designing Facebook layouts. Scary :) )