This month: Would you trade your Social Security payments of tomorrow for student loan debt relief today? – The Student Security Act, 9 tips to lower investment taxes, How will Federal interest rate hikes affect us in practice? Is there a holistic solution to the 401(k)? and more…
Student Security Act: Would You Trade Your Retirement Benefits for Student Loan Debt Relief? – Detroit Free Press
What if you could trade your future Social Security retirement payments for student loan payments today?
Would you do it?
In a survey of 943 student debtors conducted by LendEDU, 46.3% said they’d be willing to delay their retirement age 22 months, in exchange for $12,000 off their student debt. And more than 30% said they’d trade any amount of retirement deferral time required to wipe out 100% of their debt.
In 2016, Social Security projected that it would run out of funds in less than 20 years if something isn’t done.
This doesn’t give millenials a very bright picture of their future in terms of retirement. Couple this with the fact that 5 million Americans are currently in default on their student loans, with the default rate expected to approach 40% by 2023, and trading Social Security benefits for student loan relief doesn’t seem like such a bad idea.
Enter U.S. Rep. Tom Garrett’s proposal H.R.1937 – Student Security Act of 2017.
The Student Security Act would allow student loan borrowers to knock $550 off their outstanding principal for every month they agreed to postpone their retirement, thus delaying their eligibility for Social Security benefits. Garrett says the Social Security Administration estimates that his proposal would save it $725 billion over the next 75 years — in addition to whatever reduction in stress-related illnesses resulted from relieving tens of millions of students of their massive student debt obligations.
While it seems risky to to borrow from your “future self” over the long run, is it any surprise? Isn’t that the same posture our elected representatives in Washington have adopted toward practically every fiscal challenge they confront?
What happens when an entire generation, many of whose members have worked hard all their lives, suddenly have little to show for it at retirement age?
While the move from company pension plans to employee directed contribution plans (401k) in the 1980’s may have helped companies better meet their quarterly financial targets, it has placed an unmanageable burden on employees.
As a result, the retirement situation has changed dramatically for American workers. Baby Boomers and Gen Xers are currently at risk of not having enough to maintain basic living standards at retirement. And this risk is intensified explicitly by the insanity of rising health care costs in our country.
The problem with 401(k)s:
- 401ks earn less on average due to high administrative expenses and limited investment strategies.
- Employees often do not have the investing expertise to manage their own plan and therefore earn substantially lower rates of return then professionally managed plans.
- At retirement age, employees often do not have the expertise to decide how to withdraw funds, determine a spending rate, and map out a distribution or investment strategy.
We need a holistic solution.
In their book, Rescuing Retirement, authors Theresa Ghilarducci and Tony James propose such a plan. Their “Guaranteed Retirement Account (GRA)” requires no new taxes, does not increase the deficit, and actually reduces the administrative burden on companies that sponsor plans. They believe that while business leaders should be coming up with solutions to address the burden they’ve created by pension changes, public policy must also play a role. Check out their proposition. What do you think?
Scumbag “debt-relief” scammers are calling people in Kentucky, hustling them to pay a fee in exchange for “a promise” to lower or resolve their debt. Someone recently sent a recording of one of these calls to the Attorney General of Kentucky, who thereafter issued a warning. This particular company is calling itself “Financial Planning Card Services,” and in the recording, it claims to be able to negotiate your interest rate on your credit cards with any major bank to as low as ….wait for it….%0.0. For a fee, of course.
The FTC prohibits for-profit companies that sell debt relief services over the phone from charging a fee before they actually settle or reduce a consumer’s debt. And this is because they usually do not settle or reduce a consumer’s debt. In fact, if they do nothing at all, it may be better as they usually make things worse.
The FTC has brought scores of law enforcement actions against these bogus credit-related services and even has a list of Credit and Debt Repair Scams press releases describing them. But it doesn’t stop them from happening. Ranging from credit card, student loan, mortgage and auto loan modification schemes, desperate consumers continue to get duped again and again. Don’t fall prey to these scams.
If you are looking to buy a house, borrow money for college, or are trying to pay down credit card debt, an increase in interest rates will affect you directly. This in-depth article tells you how, and what you can do to try and ease the pain. Some takeaways:
Rates on credit card debt are typically tied to indexes that track the Fed’s moves closely. One option for borrowers whose rates increase is to consolidate their balances into a fixed rate personal loan.
While rates on federal student loans are fixed for life, rates for new borrowers are adjusted annually. So students taking out loans for this fall can expect to pay higher rates than in recent years. Rates on federal student loans to undergraduates can’t exceed 8.25 percent. The cap is 9.5 percent for graduate loans, and 10.5 percent for PLUS loans. Borrowers who do have variable rate student loans may want to look into refinancing with lenders who offer fixed-rate loans.
If the Fed keeps raising short-term interest rates, mortgage rates may follow, but not as rapidly. Fannie Mae projects that rates on 30-year fixed-rate loans will rise modestly this year and stabilize in 2019. Borrowers with variable-rate loans can lock in today’s rates by refinancing into fixed-rate loans. However, avoid stretching your finances by buying prematurely merely to lock in today’s interest rates.
Stress and debt are inextricable. But Americans alone are currently looking at a 7 year high in overdue credit card payments, and that kind of stress is palpable.
Of 1,000 debtors owing an average of $13,884, 88.6% reported stress levels directly related to their debt. What’s more, 38.7% felt their debt had stressed their relationships with friends and family.
While over 60% believe they’ll be debt free at some point in the future, there is a fairly large chunk of people who don’t believe that they will ever be free of debt. This is bad news for lenders who will take a loss if discouraged debtors simply give up.
Should lenders become more proactive in helping people repay their debts by offering more flexible repayment options such as extending terms or reducing interest rates?
Debtors want to be debt free, lenders want to be paid. Perhaps a more cooperative relationship towards accomplishing this common goal may help Americans rid themselves both of their high stress levels, and their sense of hopelessness that they will never get out from under.
With still one week left before the 2017 tax deadline, here are some final pointers on finding tax savings in your investment tax calculations.
- Shift Toward Capital Gains – It’s preferable from a tax perspective to have investments that rely on price appreciation for returns instead of income generation. Returns on the investments are taxed at the capital gains rate (10-20%) while returns on income generation are taxed per the standard income brackets.
- Qualified Pass-Through Income – The recently passed Tax Cuts and Jobs Act (TCJA) allows a 20% tax deduction on qualified pass-through business income for tax years 2018 through 2025. Be sure to take advantage if this applies to your situation.
- Take Full Advantage of Retirement Accounts – Contributions to retirement accounts are either tax-deferred or tax-free, depending on whether they are funded with pre- or post-tax dollars. Contribute up to the limit or, at the very least, contribute up to the limits of any employer-matching program. If you haven’t fulfilled your 2017 IRA limits, you have until the tax-filing deadline April 17th to make designated contributions to the 2017 tax year.
- Allocate Your Investments Wisely – If you have a blend of accounts, allocate your investments with taxes in mind. For example, stocks that provide dividend income are better applied to a tax-advantaged account to get the maximum compounding effect and avoid taxation on the dividends as ordinary income.
- Control Emotions on Stocks – Resist the urge to sell during market drops like the recent correction – especially with any stocks or mutual funds that you have held for less than a year. To receive the lower capital gains tax rate on the proceeds, you must have held the stock for at least one year prior to the sale.
- Use Tax Loss Harvesting – Are some of your stocks underperforming? By “harvesting” losing stocks and selling them off, you can offset up to $3,000 of other capital gains and/or ordinary income. If losses are greater than $3,000, you may be able to carry the excess loss forward to neutralize gains in future years.
- Choose Passive Funds – Active fund managers must make more trades to stay ahead of the pack in returns. This increases the turnover ratio of your funds and subsequently raises your capital gains taxes. (It could also put you on the hook for more trading fees.) Passive funds are designed to track performance of a given index, and therefore they require less trading than an active account.
- Check into Health Savings Accounts (HSA) – Assuming that you have a high-deductible health plan (HDHA) and are not enrolled in Medicare, you may contribute funds into an HSA account to pay for qualified medical expenses. The money is invested on a tax-deferred basis and withdrawals for qualified medical expenses are tax-free.
- Consider Municipal Bonds – Municipal bonds have a “triple” tax benefit because they are one of the few investments that are exempt from all three levels of taxation on their earned interest – federal, state, and local (assuming you are buying local bonds to gain the local exemption). They can maximize tax savings on the lower-risk investment portion of your portfolio.
- Make Charitable Stock Donations – By donating appreciated stock to a qualified charity, you receive multiple tax benefits. You can deduct the full current market value of the stock and avoid paying capital gains taxes, regardless of the amount of appreciation.
Make sure to make the most of any tax breaks the government offers. It certainly won’t lose any sleep at night when taking your extra tax dollars should miss these opportunities to pay less.