Thursday, September 29, 2011

Student Loans Part I

Student loan balances continue to increase every year – here are some of the recent statistics[i]:

  • 67% of students take out federal student loans
  • The average federal loan balance is now $23,186 – if you include PLUS loans the balance goes to $27,803
  • Master’s degree students accrue an additional $25,000, Ph.D. students $52,000 and Professional students an additional $79,836.
  • There is approximately $945 billion in outstanding federal student loans, which exceeds credit card debt[ii]
  • It is estimated that there is $158 billion in private student loans

For this week’s and next week’s Financial Tips I will share some basics on student loans, including what types of loans there are, repayment issues, then finally the recently released default rates.


Federal student loans are also called Direct Loans because they are loans directly from the federal government to the borrowers through the school or university. Your Direct loan is either a Stafford loan or PLUS loan.

Stafford Loans are either subsidized or unsubsidized. Subsidized loans are given out based on financial need and the interest is deferred until after repayment begins (i.e. interest is not charged while you are a student). Unsubsidized loans are not based on financial need, but interest accrues from the day you take out the loans. Interest (and principal) payments can be made while going to school.

PLUS loans are loans for parents of undergraduates and for graduate and professional students. All PLUS loans are unsubsidized. As with Stafford loans, interest and principal payments can be made while going to school.

In general, repayment begins 6 months after you leave school – either dropping out of school or graduating. The interest that has accrued on unsubsidized loans will be capitalized when repayment begins (meaning the accrued interest becomes part of the principal balance).

You can view your Direct loans online by going to This system shows you your loan balances, the type of loans you have and who the servicer is.


Student loans generally go into default after nine months of no payment. If you are facing problems paying your student loans there are some steps you should take before you go into default:

  • Communication with your lender is always an important key – whether you are dealing with student loans, car payments, credit card payments, rent or a mortgage. If you communicate with the lender before payments are late, your lender is generally much more willing to work with you to find an acceptable solution.
  • Deferment – if you are unemployed or having some other type of economic hardship you should apply for loan deferment. During deferment you do not have to make payments on your loans. In addition, no interest is charged on subsidized loans.
  • Forbearance – Forbearance is similar to deferment (no payment is due during forbearance), but interest does accrue on subsidized loans. In many cases you can get a forbearance even if you are already in default.
  • Repayment Plan – If you don’t qualify for a deferment or forbearance you can often find a more favorable repayment plan. The standard plan is level payments for ten years. If that payment is too high there are repayment plans that will give you a lower payment:
    • Extended Repayment – you pay back the loan over 25 years instead of 10. You need an aggregate balance of $30,000 or more to qualify.
    • Graduated Repayment – you still pay the loan back over 10 years, but the payments start our low then increase every 2 years.
    • Income-based Repayment – most borrowers will pay no more than 10% of their income under the IBR plan. Most will pay even less (or have no payment at all). Payments are based on your income and family size. For more information on IBR visit

As an important side note, in general, student loans cannot be discharged through bankruptcy.

Next week we will continue our discussion of student loans – looking at the current default rates and steps students can take to keep their student loan balances, and therefore their payments, low.

Ryan H. Law, M.S., AFC


Personal Financial Planning Department

Office for Financial Success Director

University of Missouri Center on Economic Education Director


239E Stanley Hall

University of Missouri

Columbia, MO 65211


573.882.9211 (office)

573.884.8389 (fax)


Thursday, September 22, 2011

More liars than golf

Will Rogers once said, “The income tax has made more liars out of the American people than golf has.” I read the following on the website, following a Google search on President Obama’s tax plan.  (Their website is:  .


Taxes on the Wealthy Have Declined Steadily for Decades.   Over the last decade –and really over the last fifty years -- the portion of income paid in taxes by our wealthiest citizens has steadily declined.  In 1961, when Barack Obama was born, the effective rate paid by households with income over $1 million was 43 percent.  Today it is 23 percent.  The richer you are, as Warren Buffett has illustrated, the smaller the percentage of your income you pay.


Being naturally curious and wanting to have something to say when people ask me this question, it became time to do a little research.  The Tax Policy Institute provides analyses on effective rates of taxation.  The data are available at  What do we see for tax year 2002?


Chart 1: Tax year 2002:


First, being visual, we make bar charts that represent the percentage of each income group, defined by adjusted gross income, who pay at the range of effective tax rate listed on the horizontal axis.  In the above chart, for example, we find that in total about 28% of the population paid no taxes, as indicated by the first ‘blue’ bar in the extreme left.  In contrast, those with under $50,000 in adjusted gross income (the ‘red’ bar), 39% paid no income taxes.  As the level of adjusted gross income increases, notice how the distributions move to the right, toward greater effective rates of taxation.   For the greatest income group, in 2002, 10.3% paid between 30% and 35% of their adjusted gross income in taxes and 1.5% paid between 35% and 40% tax rates.


Chart 2: Tax year 2008:


Comparing 2002 to 2008 (Chart 2) , we find that for the greatest income group, 2.2% paid between 30% and 35% of their adjusted gross income in taxes, with a non-measurable percentage paying more than 35%.  Thus, higher income households are paying less in 2008 than in 2002.  But does this confirm the quote?


Looking further, we see that in 2002, 9.1% of the lowest income group (<$50,000) paid their highest tax rates of over 10%.  By 2008, only 6% of the lowest income group paid at the highest category of taxation for the lower income households (10%, or over).  It appears that households across the board are paying less in taxes in 2008 than in 2002. Importantly, we can conclude from both charts that the statement, “The richer you are, as Warren Buffett has illustrated, the smaller the percentage of your income you pay”, is not true, on average.  It may, however, be true for Mr. Buffett but we cannot make policy based on the situation of a few wealthy individuals with large amounts of unearned income.


One more chart, from the Citizens for Tax Justice (2010a), is below.  In it we see that when we divide the country into income quintiles (1/5 of the population in each quintile, as defined by income) a picture emerges.  Notice that for the lowest three quintiles that each quintile’s share of income is greater than their share of all taxes paid.  For the fourth quintile, upper-middle class, their share of taxes paid exactly equals their share of income.  For the upper-income quintile, however, their share of taxes paid is 64.3% while they receive 59.1% of the income.  As such, it appears that the desire for progressivity in our tax system is preserved with higher income households paying a higher proportion of their income in taxes than are lower income households.


Chart 3: Share of all income earned and all taxes paid, by quintile


Source: Citizens for Tax Justice (2010a).

This financial tip does not provide much in the way of a “tip”.  It does, however, try to inform you with regard to the noise around one of the issues we face as a nation.  You, as a taxpayer, have an obligation to pay taxes and we all enjoy benefits from the taxes we pay; such as our roads, schools, parks, and et cetera.  Yet, our nation spends more on our benefits than our nation earns on our tax obligations.  If households continually did this, they would fail.  As a nation, we are coming to grips with the fact that our list of benefits is greater than what our taxes can continue to provide.   If the benefits are worth that much to us, we must increase taxes.  Otherwise, we must decrease expenditures.  This is not quantum physics.  It is, simply, budgeting to live within one’s means. We will make adjustments; probably both with respect to expenditures and taxes.  We must.  Our financial success depends on our freedom to act responsibly.

Wednesday, September 14, 2011

Child Care Costs

When I was pregnant with my first child, friends and co-workers asked me if I had my day care arranged.  “What?” zipped through my mind, “I haven’t even had the baby yet.  How can I think about day care at this point?”

Getting into quality, licensed day care can be hard depending on what is available in the area.  Families may need to start working on arrangements before the baby is born.  Not only do families need to plan for the kind of care they will have, but the cost of that care.

Over the years I had seen commercials and advertisements for saving for college.  Banks, financial planners, friends and colleges themselves—all sending the message to start early and save for education.   Education for kids is pushed and talked about, but what I had not heard addressed was the cost of day care.  And I had not saved for that expense at all.

In the first year after our baby was born, we paid over $5,500 for day care with a licensed, in-home provider (which was ten years ago).  When my second child was born and in day care as well, we paid over $12,000 per year for both children.  Although our child care costs are different now, summer programs and before and after school programs are still a large part of our budget. 

For many working families, child care is a must.  In the US, more than 11 million children under age 5 are in child care every week. Brain development is critical in birth through age 5.  Children need to be in a safe setting and in a place that promotes healthy learning and development (whether this is home care or day care).  These early years affect school readiness and learning in the future. 

The National Association of Child Care Resource and Referral Agencies released a report on the costs of child care (2011).  According to the report, in 2010, the average annual cost of full-time care for an infant in a center ranged from $4,650 in Mississippi to $18,200 a year in the District of Columbia.  Care for a 4-year old cost an average of $3,900 to $14,500.

Relative care has costs, as well.  Some people pay family members to watch their children.  Even if families do not have to pay relatives to care for their children, there are still costs involved and someone “pays” for that care in resources, time, etc. The care giver has food, energy and material expenses and is not able to do other things during those times. 

Child care also includes before and after school, summer and nights/evenings care (caregivers may work evening or night shifts or on the weekends and need care at those times).  Families may not think about these times of care, but they affect their budgets.

Many factors affect the cost of day care:

·         Where a person lives

·         The type of childcare

·         The child’s age and the number of children

·         The number of hours per week that the child attends day care

How can families make decisions about child care?  A place to start is to compare different options and see what fits for them.

·         How much is child care in the area? Will the budget cover that?

·         Would it make sense for someone to stay at home and not work outside of the home?

·         What kind of child care does the person want?

·         Are there other options? Such as, part time or flex time at work

·         Has the person talked with friends and others to see what has worked for them?

To look at the pros and cons of different options and average costs for day care, home day care, nanny care, preschool, relative care and staying at home, go to the chart at

To find licensed day care providers and centers, search at

Each community is different, so finding out what resources are available can be very helpful. 

·         What child care options are available to families?

·         Are there resources if families can’t afford quality, licensed care?

·         What types of summer programs are available and accessible to families?

·         Before and after school care?

Economic stress can affect families in different ways and shift how families need or use child care.  A mom shared that her kids’ school district went to a four day week (longer days, but 4 days instead of 5), because the school district did not have funds to continue as they were.  They went to 4 days to save money on buses, energy at the school, etc.  For many families, they now had to find child care for that day off of school.   How did families deal with the extra costs?  Did it open opportunities in the community for someone to offer care on that day?

The care and development of children is critical to families and communities.  Helping families think about child care options and costs can help them find the best place for their children and help them meet their family goals.

For more information on daycare options in your area, visit the Child Care Aware website or call their toll free number at 1-800-424-2246. 

For information on choosing day care, see Missouri Families for article and Q&As on child care



Babycenter. Childcare options: pros, cons and costs. Retrieved September 12, 2011 from


National Association of Child Care Resource & Referral Agencies. (2011). Despite weak economy, child care costs continue to rise: Quality child care is becoming increasingly difficult to afford for working families. Retrieved September 9, 2011 from


Lucy Schrader
HES Associate State Specialist and
Building Strong Families Program Coordinator
University of Missouri Extension
162 Stanley Hall
Columbia, MO  65211


Thursday, September 8, 2011

The Cash Horde

Very few of our readers, perhaps none, were alive in 1929 – the year of the beginning of the Great Depression.  Yet, we always refer to that pivotal point in history as a marker on our historical trail of investment performance.  It is commonly heard that, since 1929, the Standard and Poor’s 500 Index has returned an annual average return of close to 10% per year.  Yet, rarely has it returned 10% per year.  Take recent history, as a close-up example of the volatility that exists in equity ownership.


In the year 2008, the market return was a negative 37%.  Yet, in 2009, it partially rebounded with a positive return of 26.5% followed by a positive return of 15.06% in 2010.  (While this sounds nice, I want to remind everyone that, for every dollar invested in the S&P 500 at the beginning of 2008, they would have had only $0.92 at the end of 2010.  The math is as follows: (1-0.37)*(1+0.265)*(1+0.1506)=0.9170, although the arithmetic average return was a positive 1.14% (((-0.37+0.265+0.1506)/3)=0.0114).


The following chart shows the returns for the Dow Jones Industrial Average for each year from 1929 through 2010.  You will note that it rarely has equaled 10% and has been quite variable from year to year.  Frequently, it has decreased by more than 10% but, more frequently, it has increased by more than 10%.  In fact, it has increased by more than 10% in more than half of the 82 years depicted.


Lately, it seems the market has been much more volatile than usual – especially the four days of August 8 through 11 – and it makes one wonder if, in fact, it has become more volatile for some period of time.  Looking back from mid-November 2007 through September 7, 2011 to observe the daily rate of change in the Standard & Poor’s 500, as well as the standard deviation of returns over the 30 days preceding each day, we are able to make some observations.  (Standard deviation is the accepted measure of volatility in a series of numbers which, in this case, are the daily returns.) 


This is what we observe:



The fall 2008 market collapse is where the range in the Daily Rate of Returns (blue) is the widest.   It is also the time period where the 30-Day Standard Deviation rose to its peak, around 0.0508 (November 7, 2008). As we recall, this was a memorable, though regrettable, time in history.  For a moment, however, observe the far right of the chart.  Today’s political and economic uncertainty is being played out in wider swings in the daily returns to the S&P 500 Index and the 30-Day Standard Deviation has been creeping upward since June.  


Why do we care?


Hindsight is always better than foresight but, had one known in June that the risks from the market were going to increase over the next three months, one could have purchased put options in June.  (Put options allow the purchaser the right sell securities to a buyer at a specified price on a stated future date.  The purchaser hopes the prices of securities fall, thus giving value to the option to sell at a higher price.)  Moreover, if everything else stays equal, options increase in value the greater the volatility of the underlying assets.  In our example, a put option would have increased in value from both the greater volatility and the lower overall price of S&P 500.  Yet, this is not the motivation for this Financial Tip.


The purpose is to try to answer the question of why American businesses are holding so much cash.  Many believe that businesses should invest their cash in plant and equipment, in order to employ more people.  Many believe that the lack of such investments stands in the way of our financial success.  The cash being held by our businesses, however, is acting as an option.  The cash takes on greater value, from both the greater the volatility and the greater uncertainty existing in the economies of both the United States and the World.  Given the lack of direction and bitter divisiveness provided by those we have elected, as well as those who seek our future support, who can blame the businesses?  “We the people” begins our Constitution, “We the people” are still in charge, and “We the people” must direct our energies towards productive activities and more constructive dialogue.  That is not an option. 


-          Rob Weagley


* I thank my son, Daniel, a Ph.D. student at the University of Michigan’s Department of Finance, for the conversation that led to this Financial Tip.  Good things happen when you take a day for trout fishing at Bennett Springs State Park in Central Missouri.


Thursday, September 1, 2011

Time Inconsistency: Today's Actions = Tomorrow's Regrets

Each month the Federal Reserve Bank of St. Louis publishes a newsletter titled Liber8, which is a selection of useful economic information, articles, data, and websites compiled by the librarians of the Federal Reserve Bank of St. Louis Research Library. This month the article is about Time Inconsistency and I thought that it brought up some interesting points, and some points that could be very debatable (particularly the author’s statement about a Federal balanced-budget rule). We encourage your comments and thoughts at


There is a classroom version of Liber8 available for teachers for free at:


To subscribe to their newsletter or for more information and resources, visit their website and archives at


The views expressed are those of the author and do not necessarily reflect the official positions of the Federal Reserve Bank of St. Louis, the Federal Reserve System, the Board of Governors, the University of Missouri, the Personal Financial Planning Department or The Office for Financial Success.


“A budget tells us what we can’t afford, but it doesn’t keep us from buying it.”

—William Feather


Have you ever bought something you really couldn’t afford? You simply swipe your credit card and leave the store with something shiny and new. That instant gratification overpowers any thought of the regret you’ll have when you must start paying off your accumulated debt. Economists call this phenomenon time inconsistency. An individual with time-inconsistent preferences pursues happiness today even if it results in unhappiness tomorrow. Consequently, he will make decisions that do not maximize lifetime satisfaction (i.e., utility).(1) In “econ speak,” a person with time-inconsistent preferences values the present more than the future. Accordingly, he will make decisions with a present bias, choosing what makes him happy in the moment. Thus, time inconsistency can be understood as the inability to consistently follow a good plan over one’s lifetime.


Let’s return to the shopping example. Even though you know that in the long-run you will have to work more hours and/or sacrifice other fun activities to pay your credit card bill (and the act of paying off that debt does not make you happy), showing off your new purchase maximizes your utility today.


Although this example describes time inconsistency using microeconomics, this concept also applies to macroeconomics. For example, just this summer, the government debated whether to raise the debt ceiling (the legal maximum amount the federal government can borrow) and how to implement policies to reduce future budget deficits. Ultimately, Congress voted to raise the debt ceiling without immediately reducing the deficit. This plan implies the government will neither have to cut spending on current programs nor raise taxes in the short run. The new law is most beneficial to policymakers today: They can continue to provide for their constituents just as before, thereby increasing their chances of re-election. In the long run, however, taxpayers will still have to repay the debt.(2) Thus, raising the debt ceiling will likely make politicians unhappy in the long run because of the political risks associated with increasing taxes and/or cutting government programs.


On the other hand, if Congress had voted to maintain the debt ceiling and reduce the budget deficit, the government would have had to cut current spending, raise taxes, or some combination of the two. Doing so would have made most politicians unhappy in the short run because cutting programs and/or raising taxes could risk their re-election and possibly hinder economic growth. In the long run, maintaining the debt ceiling could have resulted in more sustainable budgeting choices and programs in the future.


So how can individuals and governments maximize lifetime utility in the face of time inconsistency? Rather than making decisions with discretion—that is, selecting a course of action once a situation occurs— economists propose enacting credible rules—that is, mandating a predefined action/plan for a given situation. For our shopping example, a cash-only rule or a credit card with a lower spending limit may have prevented a splurge. In the case of the debt ceiling, a balanced-budget rule (as many state governments have) may have prevented the debt ceiling crisis. Using credible rules (e.g., enforcing a strict personal spending limit or a federal debt ceiling that cannot be raised) forces people to commit to certain actions. As a result, they will act in a more time-consistent manner: Their decisions today will take into account their future happiness.


—By E. Katarina Vermann, Research Analyst


(1)In contrast, a person with time-consistent preferences chooses what makes him happy today and tomorrow. These choices maximize lifetime utility (satisfaction).


(2) The government always has the option of defaulting on its future debt by monetizing the deficit (printing more money) and generating higher inflation. This option would also be suboptimal.


Articles on Time Inconsistency

“Like There’s No Tomorrow: How Economists Think About Procrastination,” by Ray Fisman. SLATE, Thursday, May 15, 2008.

This article discusses specific ways to overcome procrastination (a time-inconsistent behavior).


“Time Inconsistency,” by Greg Mankiw. Random Observations for Students of Economics (blog), Wednesday, April 19, 2006.

This blog post discusses the time inconsistency of government policy and the need for fixed policy rules.


“Rules vs. Discretion: The Wrong Choice Could Open the Floodgates,” by Jason Buol and Mark Vaughan. Federal Reserve Bank of St. Louis Regional Economist, January 2003.

This article discusses (i) how discretionary policy can lead people to make poor choices in expectation of a government bailout and (ii) the need for policy rules to enable the outcome demanded by the public in the short run to be consistent with that desired in the long run.


Free Resources

Resource: “Political Negotiations Also Shaped by Human Psychology,” by Shankar Vedantam. Morning Edition news story (audio), July 28, 2011

Description: A psychological look at the debt-ceiling debate.

Published by: National Public Radio, The Two-Way, NPR’s News Blog



Resource: Budget Hero

Description: An interactive game that allows the user to decide use of tax dollars based on the budget model and forecasts in the Congressional Budget Office “CBO’s 2011 Long-Term Budget Outlook.”

Published by: American Public Media, Minnesota Public Radio



Resource: “Q. & A. on the Debt Ceiling,” by Michael Cooper and Louise Story, New York Times, July 27, 2011

Description: Explains the implications of the debt ceiling and includes explanatory charts and the video “The History of the Debt Limit.”

Published by: New York Times



Ryan H. Law, M.S., AFC


Personal Financial Planning Department

Office for Financial Success Director

University of Missouri Center on Economic Education Director


239E Stanley Hall

University of Missouri

Columbia, MO 65211


573.882.9211 (office)

573.884.8389 (fax)