Last Word on Money: July 2018

Tuesday, July 31, 2018

Student Debt is a Marriage Killer

The news for student borrowers just keeps getting worse. The total student loan debt in the

U.S.

stands at a record $1.5 trillion. The average individual outstanding balance is $34,144. The percentage of borrowers with debt over $50,000 has tripled over the last decade.

Now CNBC reports that one in eight divorces nationally is caused by student loans.

That is an alarming statistic, but I don’t find it particularly surprising. I’ve written in this space before about the growth of student debt, the role of money in relationships (and their demise), how couples don’t talk to each other about money before or even after marriage, and how money is always cited in surveys as the leading cause of stress. Why would we think that young borrowers could elude those pitfalls? If anything, the stress is multiplied for them.

Young couples are less experienced generally in handling money. While we might romanticize the early years of a marriage, that time is often spent in a delicate give-and-take as the parties learn about each other and establish the ground rules, boundaries, and personal and shared territory that will define their lives together. It’s also when the pair is most likely to be idealistic as they imagine their future together.

Now factor in about $70,000 in student loans, tight budgets as they adjust to the realities of living outside the safe environs of a parent’s home, potentially being blindsided by their mate’s debt, and the very real possibility that they will have to delay fulfilling some of their dreams—whether that’s a new home, a new car, or even children—and the stress level climbs dramatically. As it turns out, it’s enough to lead to a split and was cited as the main reason for their divorce by 13% of 800 adults surveyed by the Student Loan Hero group.

It would require a book to elaborate on all the ideas to avoid and/or handle high student debt. But I will share just a few thoughts.

Avoidance: Hold down a part-time job during the school year and work summers to pay your way through college. While it may not be enough to avoid borrowing altogether, it means less will have to be borrowed. Also, consider attending a community college for two years. Given what I see going on at college campuses around the country and what passes for higher learning these days, you might actually do better for yourself at the community college level and be guaranteed admittance (based on having decent grades) to a participating university for the second half of your college education.

Share: It makes no sense to hide your financial situation from your spouse-to-be. Marriage is a team effort, and both parties need to know the whole picture to work effectively together. It’s only fair and makes for more realistic planning and less disappointment and heartache. Make finances a regular topic of discussion (not argument).

Budget: Or more euphemistically, have a spending plan. Having a solid first job after college and regularly bringing home a check that’s more than you’ve ever made before can blind you to the need to plan how to disburse and save that money. Don’t let it. And craft a plan to pay off the debt ahead of schedule. Set goals and work mightily to achieve them.

Pre-nup: Okay, this was CNBC’s idea, not mine. I’m not even sure I endorse it. But in order to prepare for the possibility that the love of your life really just needs you to help him pay off his debts, have a prenuptial agreement that ensures that should the marriage end in divorce you are repaid for any money you contributed to paying off loans he brought to the marriage. Just be sure you broach this idea with tact and love.

Until next time,

Roger

“Will not your creditors suddenly arise? Will they not wake up and make you tremble? Then you will become their prey.” Habakkuk 2:7 NIV®*

*Scripture quotations taken from the Holy Bible, New International Version® NIV®

Monday, July 23, 2018

The High Cost of Protecting Consumers

You might have noticed I have a particular interest in health care and health care insurance as it relates to personal finance. That is not surprising when you consider I have a background in both areas. That experience shapes my perspective on the economics of health care and tilts me toward a certain way of thinking about the subject.

Last week’s post addressed consumer choice as a driver of health care price inflation; but I also wrote that I believe a second factor influences that inflation just as much or more. That factor is government regulation.

A key tool used in some nations for keeping the cost of care lower is to employ workers with just the minimum skills needed for the job to which they are assigned. In other words, don’t have a physician, or even a nurse, take medical histories from patients. Have a clerk who took a course in medical terminology do that. But that is not the American way. When working at (not for) a large hospital system, I never ceased to be amazed that nearly an entire building on the campus held nothing but offices manned by doctors and nurses doing paperwork instead of patient care. Much of the paperwork was mandated by government rules for programs like Medicare and Medicaid. Insurance companies add their own requirements to the workload. Highly paid medical professionals labored all day long, week after week, never seeing or treating a patient.

It will be argued that the regulations protect patients. That is always the excuse for imposing more rules on an industry: we’re protecting consumers. But if our health outcomes are no better than in less-regulated countries, have the regulations done their job? If 100,000 Americans die every year from medical errors, have we succeeded in protecting patients?

But that is only half the story. Over-regulation scares away medical professionals because they feel they have to spend too much time doing paperwork rather than seeing patients. There are fewer and fewer solo practitioners and small, independent medical practices. These offices typically just don’t have the resources to keep up with all the rules and requirements. The physicians end up joining a large network that does employ the necessary people to do the paperwork; but then they are reduced to patient care factories, closely watched to ensure they see a minimum number of patients and keep their average time spent per patient to a prescribed limit. The care rendered in these large networks tends to be higher-priced, naturally; but research has also shown they tend to use more health care resources: ordering more tests, referring more frequently to specialists, etc. In other words, regulation drove up costs and limited consumer choice and competition.

In many cases where the physician doesn’t want to join a network, he simply opts out of accepting Medicare patients because he finds the regulatory burdens too overwhelming. If the pattern continues, disabled and elderly patients on Medicare will have seriously restricted networks of potential providers to choose from.

This being a personal finance blog, I’ll extend this argument to the Consumer Financial Protection Board, an agency born out of the last recession. It, too, purports to protect consumers. But as it is often said about banking regulations, they are very good at addressing the previous recession. They do not and cannot anticipate the next crisis that will launch us into a recession. Meanwhile, they restrict consumer choice and make banking ever more expensive.

So don’t assume that every law, regulation, and federal or state agency that claims to be serving and protecting the public actually accomplishes that goal. The unintended bad consequences of these tools often outweigh the good they might do. Be an intelligent and discerning consumer of the noise out of Washington from lawmakers and bureaucrats.

Until next time,

Roger

“There is a way that appears to be right but in the end it leads to death.” Proverbs 14:12 NIV®*

*Scripture quotations taken from the Holy Bible, New International Version® NIV®

Friday, July 13, 2018

Cheap Seat, Cheap Bed...What's the Difference?

When you book a flight do you fly first class or carefully consider price as the main factor in making a choice of airline and seat? When you schedule a surgery, do you look at price or consider only the quality and convenience/location of the facility and physician?

There, I believe, you have one of the two fundamental causes health care costs are out of control in this country. There are tools out there to compare costs of medical and dental procedures at different facilities/providers, but as consumers we have been removed from the pricing picture because we’re paying someone else—the insurance company—to pay for the actual services. If we shop at all, we’re typically shopping for the best insurance plan, the one that is likely to cost us the least out-of-pocket. Once we make that choice, we select our providers based on other factors than price.

The result is that we have bigger and fancier hospitals that resemble hotels more than the now-old-fashioned image of what a hospital looks like. I suspect you’d complain, as I likely would, if I had anything other than a private room there during a stay. And I wrote about this a few weeks ago, but we have more specialists rendering care and not enough first-level or primary care providers. That drives up costs.

I point the finger at myself in this matter, too. I came face-to-face with the choice this week when I went on my health insurer’s website to check which doctors are in-network for a specific procedure. I was pleasantly surprised that the site offered quality ratings and price estimates based on their claims history with those providers. I found a $900 difference between the low-cost provider and the doctor I was leaning toward choosing. In this case, it actually would come mostly out of my pocket since I have a high-deductible plan. Nonetheless, I am almost certain to go with my higher-priced preferred doctor. He had high quality ratings (but so did the low-cost provider), came with recommendations from a couple of friends who are health care professionals, and practices at a facility that’s one-third the distance from my home compared to the other choice.

(I appease my conscience by telling myself this is a preventive/screening service and thus likely a cost-saver in the end for everybody.)

As long as we shop based on convenience and “the experience”, we will likely see health care costs continue to rise because providers will cater to those preferences. And even if we don’t pay the price directly, we will pay it through higher insurance premiums (including Medicare) and deductibles.

Nations with much lower health care costs but comparable or better outcomes (think India) tend to centralize services (i.e. you have to travel farther to get some specialized services/procedures) and make some aspects of the experience more like an assembly line than the American concept of quality care. Could we accept that here? As one author quoted by Bloomberg recently said, we tolerate cramped seats and peanuts for a snack in order to snag a cheap flight and extra luggage at no charge; why not apply that principle to choice of health care provider?

But we may say to ourselves, “It’s my health, I need to spend to get the best. It’s more important than the seat choice on a two-hour flight.” Agreed. But if quality and outcome ratings are the same for two providers why would we choose a higher-priced one for any reason other than convenience and the perceived experience? It’s something to think about.

I said at the outset that this was one of two causes health care costs are spiraling ever higher. I’ll address the other reason next week.

Until then,

Roger

“Stop judging by mere appearances, but instead judge correctly.” John 7:24 NIV®*

*Scripture quotations taken from the Holy Bible, New International Version® NIV®

Friday, July 6, 2018

Some Tips for Comparison Shopping

People tend to have one or more favorite stores where they shop, whether it’s brick-and-mortar or online. They typically choose that store based on variety of items offered, convenience, or price. But when it’s time to make a big-dollar purchase, especially one that is not a routine purchase and maybe only bought every few years, the favorite store may not stock it. It’s time to comparison shop. Here are a few things you should compare when shopping. I list these in no particular order; each person will weigh the factors differently depending on his unique circumstances.

1. Get prices/quotes from at least three sources. This should be enough to develop a sense of what the item/service should cost and give the shopper choices or even leverage for negotiation.

2. Know the quality of the merchandise. You will likely have a choice of makes/models (e.g. cars, furnaces, refrigerators, etc.), so while a vendor may only stock/sell one or two brands, make sure with some online research or Consumer Reports ratings that you know the quality of the available models.

3. Know the warranty. I’ve been pleased with the improved longevity of cars. I’m less impressed with the quality of many other manufactured goods. My water heater, for instance, recently went on the blink after just three-and-a-half years. Fortunately, the warranty was for six years, and because that model was no longer made I was able to move up to a model from another manufacturer with a better reputation in the industry. But look out for small print. The warranty may require you to buy into a particular service contract or perform certain maintenance at certain places (or intervals) which you are unwilling to do or for which you are unwilling to pay. Consider all the costs.

4. The real price is important. This is not as obvious as it seems. If the purchase involves installation (or other variables than the item itself), be certain the quote includes installation and details exactly how the installation is to be done, what installation materials are included, how long it will take to install, and includes cleanup and hauling away anything the new item is replacing. But be aware there may be some instances in which it is better to arrange someone else to haul away the old stuff. Some electric companies, for example, will offer a small rebate for letting them haul away an old (10+ years) appliance that is being replaced by a more energy-efficient model. I saved $20 in haul-away fees and netted a $100 rebate that way on my refrigerator purchase last year.

5. Know your payment options. This is a critical one, especially if you don’t have a rainy day fund with enough money to cover the cost. Financing a purchase can add hundreds of dollars to your total expense. All other things being equal, it might be better to purchase a slightly more expensive brand from a company that offers interest-free financing for an extended period of time than a less expensive model that you have to finance at five or six percent interest. But do read that fine print carefully. If you miss a payment you might get hit with a penalty, lose the interest-free period, or both. And if you do have the cash, it might still be beneficial to put it on a credit card (remember to ask if that’s an option and factor it into your choice of quotes) where you can put off payment until the next month and not pay interest (assuming you’re already at a $0 carryover balance) plus get points or other rewards from the credit card company for your large purchase.

6. Get it in writing. This is critical if your purchase is especially large and involves complex professional installation. This is the only reliable way to hold a vendor to his word and accurately compare what each vendor is offering to ensure you are evaluating comparable services—apples to apples, as they say.

7. Be sure the quote specifies how long the price will be held firm while you’re making your decision.

8. Get references. I’m not certain this one is so easy. Vendor-supplied customer references will be skewed to include only those they know will give them a thumbs-up. It’s like carefully selecting the references you include on your resume. I’m skeptical of online tools, too. I’m sure they have protections against vendors packing the reviews with bogus “outstanding” ratings, but I just can’t bring myself to trust everything I read on the internet. Maybe try talking to friends, neighbors, and co-workers about their experiences with the vendors under consideration.

Good luck, savvy shopper. And until next time,

Roger

“Suppose one of you wants to build a tower. Won’t you first sit down and estimate the cost to see if you have enough money to complete it?” Luke 14:28 NIV®*

*Scripture quotations taken from the Holy Bible, New International Version® NIV®