Archives for July 28, 2019

When Democratic presidential candidate Elizabeth Warren earlier this week unveiled the details of her bill to cancel student debt, she stressed how it would deliver significant financial relief to borrowers of color.

“The day our bill gets signed into law, that black-white wealth gap would shrink by 25 points,” the Massachusetts senator said. Under the proposal, introduced along with Rep. James E. Clyburn, D-S.C., borrowers with household incomes under $100,000 would get $50,000 of their student debt forgiven. Higher earners would get a smaller share of their debt voided.

Black borrowers do stand to benefit greatly from Warren’s bill. That’s because, by almost every measure, the student debt crisis has hit them especially hard.

“The racial wealth gap is both the biggest and has grown the fastest among those with a college education,” said Jason Houle, assistant professor of sociology at Dartmouth College. ”[S]tudent loan debt [is] potentially one thing that explains why that’s happened.”

Nearly 85% of black bachelor’s degree recipients carry student debt, compared with 69% of white bachelor’s degree recipients, according to the Center for Responsible Lending, a non-profit in Durham, N.C.

The average white student loan borrower owes around $30,000; the average black borrower owes closer to $34,000. White borrowers pay down their education debt at a rate of 10% a year, compared with 4% for black borrowers. Nearly 38% of all black students who entered college in 2004 had defaulted on their student loans within 12 years, a rate more than three times higher than their white counterparts, according to the Brookings Institute.

To understand why debt weighs heavier on black Americans than their white counterparts, you have to look into the past, said Julia Barnard, a student debt expert at the Center for Responsible Lending. “There’s structural discrimination,” Barnard said. “It’s a larger civil rights issue.”

The promise of the G.I. Bill — which offered tuition assistance to Americans who had served in the armed forces — went largely unfulfilled for African Americans, writes Hilary Herbold in an article for The Journal of Blacks in Higher Education.

The law, passed in 1944, didn’t discriminate by race, at least in the education benefits provision, but its terms were “interpreted one way for blacks and another for whites,” Herbold writes. She tells the story of a black veteran who already had a bachelor’s degree but sought to use his G.I. Bill benefits to complete a master’s degree. “The Veterans Administration denied the claim, informing him that he needed no further education,” Herbold writes.

Even for black veterans who were offered tuition assistance by the government, there was the challenge of finding a seat on campus. Fewer historically black colleges existed back then, and other colleges set official or unofficial quotas on how many black students they would admit.

“White institutions in both the North and South were essentially closed to blacks in the 1940s,” Herbold writes. At the University of Pennsylvania in 1946, for example, just 46 out of 9,000 students were black.

More African Americans are attending college today than ever before. Nearly 1 in 4 black people between the ages of 25 and 29 hold a college degree, up from 1 in 10 in 1968. As colleges become more diverse, however, they’ve also become exponentially more expensive. One year at a nonprofit, four-year private college, including tuition, room and board, currently costs $48,510, compared with $22,240 in 2000, according to Mark Kantrowitz, the publisher of SavingForCollege.com.

State funding for two- and four-year public colleges plummeted after the Great Recession, and the cost of attendance has been shifted to families. In 2016, public colleges and universities received about 1.2 times as much revenue from states and localities as from students, compared with 3.2 times as much in 1988. “Funding has been dropping as the student body has been diversifying,” Barnard said.

To cover these high college tabs, students are taking on more debt. Black students have less family wealth to draw on — according to one analysis, the median wealth of white families in 2016 was $171,000, compared with $17,409 for black families — and so they often need to borrow more.

To make matters worse, Barnard said, black students are disproportionately targeted by for-profit colleges, which have come under scrutiny for their high price tags and poor outcomes. More than a quarter of black students attend these four-year schools, compared with 10% percent of white students.

Shaun Joyce was at a college fair in Greensboro, North Carolina, when someone from the Art Institute called him and his mother over to the for-profit school’s stand. Joyce, 17 at the time, told the man he was interested in studying video game design. “He said, ‘We have that!’” Joyce decided to attend.

“I was really excited,” Joyce, now 30, said. “It was a point of pride for me to get a degree.” His mother attended college and planned to study criminal justice but had to drop out when she became pregnant with him.

Without any family savings to draw on, Joyce took out more than $60,000 in student loans. Like many other former students of the Art Institute, which at one point had some 50 campuses across the country, he said the education there proved a complete disappointment. “I never actually learned video game design,” Joyce said.

Today he works from home, writing recorded phone messages for companies, and earns around $30,000 a year. In the meantime, his student debt has ballooned to over $100,000. He’s fallen behind on many of the payments, causing his credit score to tank. He doesn’t qualify for car loans. Even finding a landlord to rent to him was a struggle.

“I’m 30 but my life still feels like I’m 18 because it hasn’t been able to move anywhere,” Joyce said.

Planning for retirement isn’t something that can be done overnight — it takes decades of hard work and preparation.

For many people, the biggest struggle is saving enough for retirement. One in five Americans has nothing at all saved for retirement, according to a survey from Northwestern Mutual, and money is also the No. 1 source of stress among the survey participants.

However, saving is only half the battle. Even if you spend your entire career saving diligently, one simple mistake in retirement could wreck your plans for the future.

Why spending wisely is a critical component of retirement

You’ve spent years socking away money for retirement, and then once you’re finally retired, it’s time for the fun part: spending your hard-earned cash. It may be tempting to go a little wild your first few years of retirement, checking off all the activities on your bucket list. But if you let your spending get out of hand, it could throw off your retirement plans for the rest of your life.

You risk running out of money down the road by withdrawing too much each year from your retirement fund. Even if you only go slightly over your budget, all that money adds up over time. For instance, if you withdraw just $5,000 per year more than you intended for 10 years, that’s $50,000 you’ve overspent. Depending on how much you need to get by each year, that could be a year or two worth of retirement income.

Also, if you withdraw more than you should, it’s tough to get back on track when you’re living on a fixed income. Unless you pick up a job in retirement, you may not be able to save any more than you already have. You might be able to grow your savings if the stock market experiences an upswing and your investments benefit from higher rates of return, but there’s no guarantee that will happen. You could also withdraw less over the following years to make up for the years you spent too much, but if money is already tight, you may not be able to cut costs enough to get back on track.

To avoid that scenario, make sure you have some type of plan in place before you retire to ensure you don’t withdraw too much too soon.

How much can you safely withdraw each year?

There are a few types of withdrawal strategies you can use when determining how much you can take from your retirement fund each year.

One of the most popular strategies is the 4% rule, which states that you can withdraw 4% of your savings during the first year of retirement, then adjust that number each following year to account for inflation. So if you have, say, $750,000 saved for retirement, you can withdraw $30,000 your first year. Then if inflation runs around 3% per year, that means you’d withdraw $30,900 the next year. By withdrawing at this pace, your savings should last around 30 years.

The 4% rule is a good starting point, but it does have its flaws. For example, it assumes you’re going to be spending the same amount every year of retirement. But it’s likely you’ll need more money some years than others, particularly as you age and as healthcare costs increase. That said, the 4% rule can get you in the right ballpark with your spending so you have a rough idea of how much you can withdraw each year.

For a more flexible approach, you may opt for a more dynamic withdrawal strategy that allows you to adjust your withdrawals yearly to fit your unique situation. For example, if you’re seeing lower rates of return on your investments, you may need to withdraw slightly less that year so your savings last longer. But when you see higher returns, you could be able to splurge and withdraw more. Or if you find out you may face expensive healthcare costs in the future, you can adjust your spending now so you have more cash saved for those expenses.

A dynamic withdrawal approach allows you to roll with the punches, which makes it more flexible than the 4% rule. However, it’s also more complicated, and you may need help from a financial advisor to figure out exactly how much you can withdraw each year. 

Regardless of which type of strategy you choose, it’s also important to think about how taxes will affect your withdrawals (assuming your savings are invested in a 401(k) or traditional IRA and you’ll owe taxes on your withdrawals). If you opt for the 4% rule, for example, the amount you can withdraw each year is the total amount you can spend — meaning it needs to cover all your expenses plus taxes.

At the end of the day, the most important thing is that you have some type of withdrawal strategy. If you choose to wing it and hope for the best, you may end up spending too much each year of retirement and your savings will run dry too soon. But the more you plan, the better your chances are at having your money last the rest of your life.

Millennials are waiting longer than previous generations to get married, but that doesn’t mean they’re navigating their finances solo.

About 30 percent of millennials are married, and about 15 percent of people age 25 to 34 live with an unmarried partner, according to the U.S. Census Bureau.

Married or not, for most couples, managing money eventually becomes — at least in part — a team endeavor.

You don’t have to divulge every dollar, debt and detail when you start dating, but if you’re moving toward a future together, you need to cover the basics.

Start with up-front conversations about income, goals, spending and debt.

Even if you’re not combining any accounts now (or ever), a partner’s finances can affect yours. For example, one low credit score can affect a couple’s ability to rent an apartment together or qualify for a mortgage. As your situation changes, consider your plan for sharing expenses, how you save for shared goals and more.

“Talking about money is often one of the most uncomfortable parts of a relationship,” said Ted Rossman, industry analyst at CreditCards.com.

But most experts recommend that couples schedule money meetings at least once a month — think of them as money dates — and use the time to review budgets, check in on goals and revise the approach as your lives or relationship changes.

If you’re splitting shared expenses, consider each person’s income and other liabilities.

If one person earns significantly more than the other, you may want to divide shared bills proportionally, say a 60-40 split, for example.

To streamline payments for shared expenses, you may want to open a joint checking account where each month you both contribute enough to cover rent and other household expenses.

Limiting that account to cover the cost of shared expenses, keeping separate credit cards and waiting to buy a home together are particularly smart moves for unmarried couples because they don’t benefit from the same legal protections as married couples.

Eventually, you may merge most of your accounts, draft one shared budget, and set guidelines for how much either partner can spend without checking in with the other first.

For most couples, sharing finances isn’t an all or nothing deal. And over time, as your relationship evolves, your financial strategy will likely change, too.

“Long term, I often recommend a yours, mine and ours approach,” said Britton Gregory, a certified financial planner in Austin, Texas.

All income goes into a joint account that covers shared expenses, including the rent or mortgage, groceries, utilities, and other agreed-upon items.

Also drawn from the shared account: an agreed-upon amount or percentage of income transferred to individual accounts for each partner’s personal or discretionary spending.

No doubt, it’s tempting to sign up for a “quick fix” to clean up your credit. Who wouldn’t want to instantly find a way to add 100 or more points to a credit score to qualify for a rewards-packed credit card? Or maybe, finally, qualify for a great deal on a car loan?

But the Federal Trade Commission and others are warning that any company that charges money in advance for credit repair is going against the law.

The federal Credit Repair Organizations Act, which was enacted in 1996, makes it illegal for credit repair companies to lie about what they can do to clear up a clouded credit report, or charge upfront fees before they do the job they promised to do.

Things can go really bad when consumers latch onto ridiculous claims — such as that somehow you can piggyback on a stranger’s good credit to shore up your credit history.

Yes, there are even a string of YouTube videos to convince you this is brilliant idea.

Some outfits have said things like: “From 620 to 780+ in 3 Weeks? Yes!”

The Federal Trade Commission took action in late June to stop an operator called Grand Teton Professionals that pitched fake credit repair services via various websites, including DeletionExpert.com, InquiryBusters.com, and TopTradelines.com.

The FTC complaint alleges the defendants bilked consumers out of $6.2 million.

Since at least 2014, the FTC claimed, the company and its websites operated an unlawful credit repair scam that deceived consumers across the country.

Don’t bet negative marks will disappear

The egregious claims included falsely promising that they could remove negative marks on a consumer’s credit report as well as extracting thousands of dollars in illegal advance fees, according to Gregory Ashe, senior staff attorney for the FTC in Washington, D.C.

Negative marks could be removed in the case of ID theft, he said, such as if someone opened a credit card using your Social Security number. But otherwise, a credit repair outfit cannot remove legitimate negative remarks. Various negative marks, such as a car repossession, would last seven years on your report and then fall off.

You can, of course, dispute any errors on your own.

In addition, the websites actually went as far as including terms that would prohibit a consumer from making disparaging comments online about the companies. Somehow the consumer could face a $25,000 charge for making negative remarks.

Really? The threat alone, though, meant some consumers wouldn’t take a chance saying a negative word, according to regulators.

“It’s enough to chill a consumer who believes it means what it says,” Ashe said.

As a result, many consumers said they couldn’t find complaints online about the credit repair sites so they thought it was OK to send thousands of dollars, Ashe said.

Some consumers, though, did reach out and complain to the Better Business Bureau, the Federal Trade Commission and their state Attorney General. Such data is gathered and monitored by the Consumer Sentinel Network, an online investigative tool of the FTC. And those complaints helped the FTC in its case.

Ashe said the hope is that others engaging in wrongful practices will take notice of the action against Grand Teton Professionals. (No one answered calls to the company last week. Only recorded music played on the line.)

In Michigan, the Attorney General’s Office has received 13 complaints relating to credit counseling and credit repair issues in the last calendar year.

Consumers are warned to stay away from a company that promises that “it can get rid of most or all negative credit information in your credit report, even if the information is accurate and current,” according to the Michigan Department of the Attorney General’s alert on credit repair scams on its site at www.michigan.gov/ag.

Consumers paid thousands for nothing

Having bad credit can mean that you aren’t able to take out a loan because lenders don’t want to deal with high-risk borrowers.

And when consumers are in a bind, they don’t always think clearly when they see a possible quick fix to their troubles.

Complaints found on the Better Business Bureau site, for example, indicated that consumers paid anywhere from $1,100 to $4,000 to Top Tradelines to piggyback on someone’s credit card accounts to build their own credit history.

“For a fee, defendants offer to register consumers as ‘additional authorized users’ on one or several credit cards or line of credit accounts held by unrelated account holders with long-standing positive payment histories (a practice also known as ‘piggybacking’ credit),” the FTC said in its complaint.

We’re not talking here about the long practice of making a son or daughter an authorized user on a parent’s credit card. That’s a legitimate strategy for building credit.

Instead, we’re talking about an outside company cooking up a deal that involves paying someone with great credit to give someone with bad credit a shot as being an authorized user to build up a credit history.

“They almost act like online companies that set up blind dates,” said John Ulzheimer, a credit expert who formerly worked for credit-scoring company FICO.

Like online dating, you’re not always talking about a happy ending, either.

“The reality is making the person an authorized user is a sham,” said the FTC’s Ashe.

The person with a low credit score is not truly an authorized user; they can’t charge anything on the card. So they would be artificially raising a score, not accurately reflecting their creditworthiness and actual ability to pay their bills, if it worked, he said.

And it doesn’t always work in someone’s favor.

FICO has known about such shenanigans and long ago took steps to make sure that nefarious authorized user accounts would not have any or much impact on your credit score, Ulzheimer said.

Regular authorized user accounts — say between a parent and a child — would still have an impact, he said.

In general, consumers should limit authorized users on their credit cards to their family members or friends. And even then, Ulzheimer said, a significantly higher credit score isn’t guaranteed as a result for someone with less-than-perfect credit or a younger consumer with little credit history.

“It’s not going to turn FICO 500 into FICO 800,” Ulzheimer said.

Here’s a legitimate way to build credit

Ulzheimer said he built up his own credit history as a young man as an authorized user on his father’s credit card. And plenty of people do the same.

About 15 percent of consumers opened their earliest reported credit account with a co-borrower, according to June 2017 report called “Becoming Credit Visible” by the Consumer Financial Protection Bureau.

“The credit records of an additional 9.6 percent of consumers were created when the consumer became an authorized user on someone else’s credit account,” the report stated.

Such data would imply that about 1 in 4 consumers first acquire their credit history from an account for which others were also responsible. But such usage is less common in lower-income neighborhoods, the report said.