Friday, March 31, 2017

College: At What Cost? (Part 2)

Last week’s post about the massive national student debt load, depressing as it might have been, ended on the positive note that innovative thinking might produce alternatives to students piling on more debt to get to graduation day.  MarketWatch recently highlighted a creative program implemented at Purdue University with just that end in mind.
Last year Purdue began promoting Income Share Agreements (ISA’s) as an alternative to private loans and parent PLUS loans.  In the Back a Boiler program (Purdue’s students and alumni are called Boilermakers) the Purdue Research Foundation fronts money to pay for a student’s education in return for a share of his earnings once he graduates.  Purdue adjusts the payment terms according to the student’s chosen major and a projection of his earnings after graduation. 
ISA’s differ from loans in that no interest accrues.  The graduate pays a fixed percentage of income for a defined period of time.  In the handful of comparisons I did on the program’s website, the percentage was always slightly less than 5%.  As the recipient’s salary grows during the term of the ISA, the real dollar payment amount increases.  Students who meet the expected starting salary range and income growth projections will end up paying more than the amount they received in funding.  Nevertheless, Back a Boiler includes high- and low-end protections for the recipients.  Those earning less than a designated minimum amount will not be responsible for making payments; and those with substantially larger incomes will have a cap on the total amount they pay back.
When I first read about Back a Boiler I feared it would unfairly favor those majoring in science, technology, engineering, and math (STEM).  But the online comparison tool looks like it applies payment terms very even-handedly.  Theodore Malone, the university’s Executive Director of Financial Aid, confirmed that the foundation sets up the terms so on average people pay a similar amount for equal funding, regardless of chosen field of study.  Indeed, he reports that in its first year the program’s pool of recipients, in 80 majors, represented every undergraduate college at Purdue.
I like the non-debt aspect of ISA’s.  Yes, it does have the feel of a loan, but unlike a debt to a bank, the ISA affords some protections to a graduate, especially if his income falls or ceases altogether due to unemployment.  The obligation to pay may end well before the full amount is repaid.  Traditional loans are more likely to put a borrower’s credit score in jeopardy.
An ISA can also save the student’s parents’ retirement.  Federal Direct loans are limited to $31,000 over a dependent student’s college career, with Perkins loans of an additional $5500 per year available for those in exceptional need.  After these government-subsidized loan options are exhausted, parents often help by taking out PLUS loans or loans from private banks, generally paying higher interest rates and diminishing what they can put away in their retirement accounts.  That may mean twenty-five years down the road they become a financial burden on their mid-career child.  If there is one financial crisis in the United States that looms larger than student debt it is, in my opinion, the lack of retirement savings across all generations.
But beyond these benefits, the investment mindset of the ISA appeals to me.  Purdue is financing a portion of the beneficiaries’ educational expenses with the expectation that over time it will get the money back, and more.  The university essentially has skin in the game; if it doesn’t offer a quality education and produce graduates that employers want to hire, it stands to lose money by backing its Boilers.  I think Purdue is making a bold statement about its confidence in its own product at a time when employment right after college graduation is not guaranteed.
Mr. Malone stated that Purdue is trying to lure outside money into its ISA program.  I think that is ideal, especially if that money is not treated as an endowment but as an investment that the investor may pull out at any time (within reason).  Such an arrangement makes contributors—people and institutions in the community—investors in the university and its students.  This three-way partnership can promote quality and good educational outcomes that lead to good jobs.
I do have some concerns about ISA’s:
  • Purdue’s Back a Boiler program is not intended to replace federally subsidized loans.  So an ISA graduate will likely end up with both loans to pay back AND a percentage of his income committed to repaying the ISA.  
  • Will ISA’s incentivize students to study to earn the backer’s upfront money?  I hope the backers are smart enough to write into the ISA some provision for what grade point average constitutes an acceptable level to retain them as a backer.
  • Will ISA’s channel graduates into big business or STEM careers instead of entrepreneurship?  This might happen if outside investors are permitted to select only students in certain fields of study for backing.  Most job growth is generated by small businesses. 
  • There is likely to be some fine print to these agreements.  What happens if the graduate dies early or becomes disabled, for example.  It’s “buyer beware” for all the parties of an ISA.
But at least someone is trying something different.
 Until next time,
 “Wisdom is worth much more than precious jewels or anything else you desire.” Proverbs 8:11 CEV

Friday, March 24, 2017

College: At What Price? (Part 1)

I phoned my brother this week.  Amid all the family small talk and recalling of good memories, we somehow found ourselves talking about how we paid for our college education.  We worked every summer and had part-time jobs during the school year.  We only earned minimum wage for most of those jobs.  And minimum wage when I enrolled at the University of Virginia was $2.00 an hour.  Nevertheless, my brother and I ended up with very little debt at graduation.  My loan payment was $90 every three months, and I paid it off in about two years.
Of course, you have to consider the other side of the picture.  A full year’s tuition at UVA back then was $415.  I could work twelve forty-hour weeks during the summer, at two dollars an hour, and save more than enough to cover the next academic year’s tuition.  The part-time job during the school year and on winter and spring breaks would cover room and board.  Even after I transferred to a private college, I was able to cover all the expenses with my income/savings and a modest monthly stipend from a Social Security survivor benefit.  I didn’t borrow any money until my last semester, a summer session when I ordinarily would have been working full-time.
But beginning in the 1980’s the cost of higher education began to grow exponentially, far outpacing the national inflation rate and the ability of the average student  and his family to pay for even the majority of tuition and related expenses.  Loans became the norm.  MarketWatch reported these trends for the period 2004 to 2014:
  • The share of funding states provided to public colleges dropped from 62% to 51%
  • The share of tuition that colleges asked families to pay increased from 32% to 43%
  • The average student debt at graduation climbed from $18,550 to $28,950 (It is well over $30,000 now.)
Business Insider cited a study that demonstrated college tuition increased almost 260% from 1980 to 2014, compared to a 120% increase across all consumer items over the same time.
Upwards of 44 million people owe $1.3 trillion in student loans.
This was an issue during the last presidential election when at least one candidate proposed that college education be offered free to everyone.  Someone has to pay for it, of course, and that provided fodder for the debates: how do we pay for “free” higher education?  The answer seemed to be that we’d just spread the debt and the pain across more people in the form of higher taxes.
I doubt the political climate now will allow “free” college education to become a reality.  But the current model of financing it is unsustainable.  What’s the answer?
 Economists and social scientists note that the Millennials (loosely defined as those born between 1982 and 2004), with the aid of technology, are forcing change to nearly every industry in the United States, from communication to transportation.  Some believe that banking stands to be impacted more than any other sector of the economy.  “Virtual wallets”, banking apps, crowdsourcing, rotating savings and credit associations…banks will look quite different and face unforeseen competition, especially given the historically high distrust of banks among the under-35 crowd.  Yet banks are a critical part of the loan business.  So are we seeing the seeds sown for the end of financing higher education with massive amounts of student debt? 
Innovators see opportunity in crisis; and as they apply their creativity to resolving this national dilemma there may be some new ideas on the horizon for eliminating the student debt crisis.  In next Friday’s post I’ll weigh the pros and cons of one well-known university’s partnership to help its students pay for college.
Until then,
“The rich rule over the poor, and the borrower is slave to the lender.” Proverbs 22:7 NIV®*
*Scripture quotations taken from the Holy Bible, New International Version® NIV®
Copyright © 1973, 1978, 1984, 2011 by Biblica, Inc.™
Used by permission.  All rights reserved worldwide

Friday, March 17, 2017

The Green is Still Gold

Many years after I first heard it read, it’s still one of my favorite poems, Robert Frost’s “Nothing Gold Can Stay”.

                        Nature’s first green is gold,
                        Her hardest hue to hold.
                        Her early leaf’s a flower;
                        But only so an hour.
                        Then leaf subsides to leaf.
                        So Eden sank to grief,
                        So dawn goes down to day.
                        Nothing gold can stay.

And with just eight lines, forty words, he captured the sad, fleeting pleasure of what is perfect and beautiful.
In his lifetime Frost won four Pulitzer prizes.  But I would nominate this poem for a Nobel prize in economics for its succinct explanation of why you should not invest in gold: it has no staying power.
Yes, I admit, that’s a bit of a stretch; but stick with me here.
I’m sure you’ve seen ads touting the advantages of investing in gold, perhaps featuring stacks of gold bars and bags of gold coins.  Gold has an age-old allure for humans.  Its gleam, its reputation for high value, its association with the rich and powerful and famous—it has a certain appeal to our emotional side.  On a more rational level, I’ve heard three reasons offered for investing in gold.  First, it helps diversify an investment portfolio (i.e. it gives its owner another kind of investment that might go up in value when others go down).  But more than that, it supposedly grows in value and is a protection against inflation; and finally, it will always be treasured and might be the only currency worth anything in a national or international emergency.
I suppose gold can give an investment portfolio more diversity, though I wouldn’t sink much (any?) of my own retirement money into it.  Portfolio diversity can be achieved in other ways.
How does gold perform as an investment?  The Motley Fool, a multimedia financial services company, cited a comparison of investments done by finance professor Jeremy Siegel and published in his book, Stocks for the Long Run.  According to Siegel’s study, a dollar invested in gold in 1802 would have grown to $4.52 (adjusted for inflation) by 2012; but a dollar invested in stocks in 1802 would have been worth $704,997 by 2012.  Siegel is definitely bullish on stocks; but his analysis is in line with what others have said about gold, including the most famous investor of our era, Warren Buffett.  It is not where they put their money.
Gold does not pay dividends.  Its growth in value must come from what people are willing to pay for it; and demand can be fickle.  Moreover, gold has to be stored and maybe insured, costs that eat away at value.
But will all the people who’ve hoarded gold in anticipation of a worldwide economic collapse have the last laugh?  We actually have some small scale models of what an economic collapse looks like, how people behave, how goods are bought and sold.
Frederick Taylor, in his book The Downfall of Money, chronicles the hyperinflation in Germany between the world wars.  People were pushing wheelbarrows of paper money to the grocery store to purchase a single loaf of bread—and even then they were not guaranteed it was enough because just in the time it took to walk to the store the currency lost value.  That would have been an opportune time for the gold to come out of the vaults and prove its worth as an inflation hedge.  But no, gold did not become the currency of choice.  As Taylor reports, “Throughout the country, barter had become the habitual mode of trade for millions of ordinary Germans who had no access to foreign currency.” (page 289) It was a barter economy.  And even some local currencies (not gold) sprouted into use.
Unless most everyone has a stash of gold, it is almost useless in extreme economic situations.  Who can give change for a gold bar?  A grocery merchant in Germany in the early 1920’s would have spurned payment in gold in favor of having his customer come to his house to effect some needed repair that he himself was incapable of performing.  Tangible skills and home-grown produce and meat become extremely valuable in dire national emergencies.
I don’t mean to criticize anyone’s choice to invest in gold.  It might have some sentimental value to its buyer or some other non-economic worth.  But as an investment vehicle or financial salvation during an apocalypse, forget it.  I still like the green in my wallet.
Happy St. Patrick’s Day.  Until next time,
“How the gold has lost its luster, the fine gold become dull!  The sacred gems are scattered at every street corner.”  Lamentations 4:1 NIV®*
*Scripture quotations taken from the Holy Bible, New International Version® NIV®
Copyright © 1973, 1978, 1984, 2011 by Biblica, Inc.™
Used by permission.  All rights reserved worldwide.

Friday, March 10, 2017

Saving Your Retirement Account: "Share" It

When housing prices tanked during the Great Recession of 2007-2009, it set off a general alarm.  People who had been borrowing against the growing value of their home or had been flipping houses—speculatively purchasing properties and quickly selling them for a profit as prices were rapidly rising—saw that income source dry up, leaving them holding one or more houses that they could not unload or loans they could not repay.  Some took huge losses, defaulted on their loans, or even declared bankruptcy.  But for many other homeowners the drop in their property’s value had no practical impact.  They were not interested in selling their house, had not borrowed against it, enjoyed living in it, had no need to sell it.  For them, the devaluation of their home was all on paper.
That actually gives us a very useful way to look at our other investments. 
The average person saving for retirement is invested in mutual funds.  Mutual funds are sold in shares, and thus have a share price, much like the stock of an individual company.  That share price will typically fluctuate daily.  This only makes sense because mutual funds are collections of individual investments (like company stocks) that themselves fluctuate in price.  Although you probably measure your account value in dollars and cents, it is also measurable by numbers of shares.
What happens during a recession?  What most people see is the value of their investments going down as the stock market declines.  They are “losing money”, they reason, so to stanch the losses they take their money out of the mutual funds before they “lose it all” and put it into something safer; or even withdraw it entirely and put it into the bank where it’s insured and they at least get one hundredth of one percent interest.  Hey, it’s better than losing money, right?
 Not so fast.  Remember our contented homeowner.  As long as he didn’t have to sell his home, the drop in its value was essentially meaningless.  He might even save money on his property taxes due to a lower assessment.  Its value might be down temporarily, but he still owned one house.  Not 75% of a house or half a house.  One full house—and one day its value would go back up.
Likewise, the retirement investor still owns the same number of shares of mutual funds, even though their value is falling during a recession.  If he panics and sells those shares, he has converted a paper loss into an actual loss.  If he puts the money back into the stock market when things have “settled down” and stocks have risen, then what he has done is sold his mutual fund shares for a low price and bought them back at a higher price.  Moreover, since he sold the shares cheap and bought them back when their price had risen, the amount of money he withdrew will now buy fewer shares.
We tend to be protective of our money, especially if we’re counting on it for our future financial well-being.  It’s hard to watch the account balance falling when we’ve saved so diligently for years.  But mutual funds, being by nature a diversified investment and not reliant on just one or two companies’ stock prices to sustain them, typically make good investments for retirement.  If you are investing through a company 401k plan, then the funds they’ve selected to make available to you are usually pretty solid choices.  Unless they are geared to foreign investments, they will probably follow the general trend of the U.S. stock market, which has been upward throughout its history, albeit an uneven ride at times.  Those who stuck it out during the stock market plunge a few years ago and kept their money invested, have seen their investments grow beyond pre-recession levels.
Of course, if you are in or near retirement that means you may have to withdraw some of your investments to support yourself.  That puts you in the shoes of the homeowner whose house is depreciated at the very time he has to sell:  your paper loss will be made very real.  You will want to protect your dollars and cents account value, and that may well require a different strategy.  This is not investment advice.  Consult a professional for that.  I just want to give you a different way to look at your investments and save you from making what I think is the most common investing mistake: actions taken in panic that will deplete your account as effectively as any recession.
Until next time,
“Then he which had received the one talent came and said….I was afraid, and went and hid thy talent in the earth; lo, there thou hast that is thine. His lord answered and said unto him.…thou oughtest therefore to have put my money to the exchangers, and then at my coming I should have received mine own with usury.”   Matthew 25:24-27 (KJV)


Friday, March 3, 2017

Outsmarted by...a WHAT?!

Several media outlets have reported on an unusual and potentially groundbreaking murder case in Arkansas.

Thirty-one year-old James Bates invited a couple of buddies to his Bentonville house in November 2015 for beer and to watch some college football on television.  At some point they decided to soak in Bates’ hot tub.  Bates said he went to bed around 1 a.m. but awoke the next morning to find one of the two friends dead, floating face-down in the hot tub.

Bates was charged with murder, but his defense attorney argues that the death was a tragic accident.  She points to the victim’s blood alcohol level that was four times the legal limit to drive in the state.  But the Benton County prosecuting attorney counters that investigators found evidence of a struggle, including injuries to both the victim and Bates, as well as dried blood in the house.

Sad story, but fairly routine stuff, as murder cases go.  What is unusual is the witness that the prosecution wants to subpoena.  I’m guessing you have at least a passing acquaintance with her:

Meet Alexa, the voice control system of Amazon’s Echo smart speaker.

This voice-activated device can answer users’ questions, play music, give directions, read the news aloud, connect to other smart devices, and much more.  Police learned that Bates had such a device in his home and was heard to be streaming music on it the evening of the murder.  Now they want to examine it for any pertinent evidence it might have collected.

My thoughts immediately went to George Orwell’s chilling novel, Nineteen Eighty-Four, and the omnipresent “telescreens” it depicted that enabled the totalitarian government (“Big Brother”) to hear and see all.  We are told that Alexa and similar devices are only activated when their name or some other verbal cue is spoken.  Then the requests made of the device are filtered through a speech recognition system in Amazon’s cloud servers so an appropriate response can be sent back to the device to carry out the request.  As far as I know, Amazon has no stated policy on how long this voice data is retained.  And can we be sure Alexa is not eavesdropping and recording when we haven’t spoken her name?  And if it doesn’t now, will that always be the case?

But Alexa, it is argued by her fans, is so convenient to have around and makes life so much easier.  And that brings to mind a survey I read about a few weeks ago.  Mintel, a global research firm based in London, found that Millennials (the name given those born from 1982 to 2004) generally are 60% more willing than previous generations to share details about personal preferences and habits with marketers.  But even among the Millennials who claim they would not give the most private information to marketers, 30% would relent and provide it in exchange for an incentive as small as a $10-off coupon.

Whether we think about it or not, we all are selling our information.  I really don’t care if the grocery store uses my rewards card to learn that I buy blueberries every week; I like getting the lower prices to which the card entitles me.  But what information would I rather they did NOT track?   And signing up for a new store credit card and getting 20% your in-store shopping that day in exchange?  Would you jeopardize your credit score and add another temptation to spend just to save a few bucks on one day’s shopping? 

What are we willing to sell, and at what price?  WE become the product when another party gives us something for “free”.  Freedom is usually taken piecemeal, not whole.  Are we giving up little bits of freedom for convenience?  For money?  Is there a line we tell ourselves we would not cross?  Will we hold that line if everyone around us has sold out to have the latest gadget in their homes?

The wrangling over what Alexa may or may not offer up as evidence will be closely watched in legal circles.  Amazon is loath to assist the state, citing privacy rights.  Legal experts point out that the right to privacy is not absolute and may be breached—with cause and the proper search warrants—in a case such as this. 

But in the end, Alexa may not be the star witness and may not be what exonerates or convicts Bates.  It turns out Mr. Bates’ house is a “smart” house, with several “smart” devices, including his water meter.  And the meter showed that around 2 a.m. on the night of the murder someone at the house used a very large quantity of water—as if cleaning up a mess such as, say, a murder scene.

Outsmarted by a water heater.

Until next time,

 "What shall a man give in exchange for his soul?" Matthew 16:26b KJV