Student Debt: On the Rise Big Time

Student Loans

Student debt is accumulating at an alarming rate for a large number of people. According to a recent study by The Federal Reserve Bank of New York, student debt is approaching $1 trillion, making student debt the second largest after mortgage debt. The study estimates that 43% of 25-year-olds had student debt in 2012. We are meeting young clients with loans in excess of $200,000.

This immense level of debt is creating a drag on the economy. With such a large burden, a recent graduate is less likely to start a business, buy a house, or even start a family.

What has led to these high levels of student debt? Contributing factors include: increasing tuition rates, income levels that do not line up with the amount of debt, states funding cutbacks and the notion that all Americans need a college education. Tuition rates have increased to astounding levels; it’s not uncommon for a graduate school’s tuition to exceed $40,000. Yet, the Center for College Affordability and Productivity reported that around 48% of college graduates are in jobs that do not require a four-year college degree. The amount of a recent graduate’s loan can play a major role in the career decision that person makes when considering monthly repayments.

Many recent graduates are spending between 10 -25% of their income in student loan repayment. There are three new repayment programs that adjust the monthly payments to reflect the borrower’s adjusted gross income and ability to pay. They also provide a forgiveness of any unpaid principal at the end of the loan repayment period. However, these programs are only available to recent borrowers with federal loans and borrowers must meet a number of criteria to qualify for these programs. Additionally, unless the borrower works for the government or non-profit companies, the forgiven balance will be included as taxable income.

When the cost of attending school and the high interest rates for federal loans (6.8%) are combined, the remaining balance can be the same or larger than the original loan amount, even after 25 years of payments. This means that the borrower paid more interest than the original loan was for, and will now have tax consequences on the remaining balance. Also, unless the borrower can prove he or she is physically unable to work and there’s no chance he or she will be able to earn money, student loans will not be discharged in bankruptcy.

DWM is here to help plan a successful financial future for clients of all ages; even those with a seemingly unmanageable amount of student loan debt. Taking advantage of the repayment programs available to a client is just a part of the plan. Make sure you know all the rules for repaying the loans and follow those rules to the letter. Continue to invest in your retirement plan and don’t be afraid to have that Tuesday latté. With strategic financial planning from DWM, that student loan burden can be paid off and out of your life for good.

Greek Rescue Approved- But Europe Not Out of the Woods

Greek rescue

Today Europe finally reached a Greek Deal. Yet, doubt remains over whether Greece will be able to meet the terms of the accord and what the future holds for the euro zone.

The finance ministers agreed to the long-awaited 130 billion euro ($170 billion) deal that would start to reduce Greece’s debt to 120.5% of GDP by 2020. Private sector creditors will take a write-down on their Greek bonds of 53.5%. In return for the new cash, Greece signed up for cuts in pensions, minimum wage, health-care and defense spending, sales of assets and layoffs of public sector employees. However, even with this latest agreement, concern exists that Greece will not be able to meet its future commitments.

The Greek economy shrank by 7% in 2011, 5% of which was in the last quarter. Analysts expect further declines of at least 4% in Greek GDP in 2012 due to the required austerity programs. These structural reform measures, on top of Greece’s already 20% unemployment, will only deepen Greece’s recession. To make matters worse, businesses are not investing in Greece’s future until the euro is secure. Suppliers are not extending Greek firms credit, which is worsening the current liquidity shortage.

Elsewhere in the euro zone there are glimmers of hope. According to the Economist, Ireland has regained competitiveness, Spain’s new government has been able to reform long rigid labor laws, and Italy has passed a pension reform and is soon to propose labor reforms of its own. Yet, austerity in the short-term causes more unemployment and reductions in spending and GDP. Italy, Spain and Portugal are all expected to see a sharp drop in GDP in 2012.

By the end of February, European leaders are expected to agree on a new, higher “firewall” for euro countries that get into financial trouble. A permanent 500 billion euro ($650 billion) fund, the European Stability Mechanism is expected in July. This could bring much-needed momentum to the euro zone.

Yes, Europe has reached a Greek deal. Yet, the road to recovery for the euro zone will still be long and hard.

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