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The Pain of Paying Student Loans

Anger, frustration, confusion, and regret – high emotion permeates the nearly 8,500 complaints about student loans posted last year on the Consumer Financial Protection Bureau (CFPB) website.

A college education can pay dividends in the form of higher lifetime earnings and more opportunities, and millions of graduates repay their loans without incident. But many of the one in three borrowers facing extreme difficulty with repayment have legitimate reasons. The job market, while improving, is not robust for recent graduates. And interest rates on student loans are higher than mortgage rates, so the amount of debt accumulated – and the monthly payments – can be substantial.

Borrowers report that lenders and the firms hired by lenders to service customers are often unwilling to renegotiate monthly payments or devise ways to work down the principal. “I wish that with what I know now I never would have gotten these loans for college,” said one borrower’s online complaint.

The CFPB last month requested detailed information from lenders and servicing firms about customers’ options for modifying loans or negotiating more affordable loan payments. Customers receive “very little information or help when they get in trouble,” CFPB said.

Future borrowers beware. Here’s a sampling of the complaints about lenders:
• No flexibility.
• Refinancing may one day be possible – but not now.
• “Bureaucratic nightmare.”

Unfortunately, private lenders are not under the same obligations as the federal government to show flexibility in renegotiating federally funded loans; for example, the government forgives loans for some public workers or offers payment plans that take into account graduates’ incomes for those who don’t earn enough to meet their loan payments.

So before taking out student loans, consult the CFPB consumer guide, which recommends exhausting all federal loans before resorting to private loans.

The issues raised in the complaints detailed below sound similar to subprime borrowers’ experiences with loan servicing firms. …Learn More

Ranking: Top Cities for Successful Aging

With snowstorms hammering the eastern United States, some baby boomers may be looking for a permanent escape when they retire.

Yet Southern cities did not come out on top in the Milken Institute’s new ranking of the Best Cities for Successful Aging, a ranking based on a fairly comprehensive set of factors important to seniors. Take frigid Iowa City, the No. 1 small city: it gets credit for its transportation and the affordability of its assisted living and adult day care services.

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Milken Institute economist Anusuya Chatterjee saw common themes among the top-ranked metro areas.   They tended to have vibrant economies, quality healthcare services, opportunities for intellectual stimulation and active lifestyles, and easy access to amenities like grocery stores, transit, and culture.

University towns often fill these requirements, she said.  Madison, Wisconsin – home of the University of Wisconsin – was the top-ranked large metropolitan area.

Financial considerations also influenced the rankings, such as living costs and the cost of day services for the elderly or assisted living. Convenience amenities have financial implications too – a monthly subway pass is cheaper than owning a car.

The methodology, explained in more detail later, was more rigorous than what’s typically found in city rankings.  Here are other surprising results: …Learn More

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Breaking Up (the Pension) Is Hard to Do

In a divorce, splitting up the pension is trickier than dividing the house.

Divorcing couples and their advisers “who aren’t hip to divorce splitting of retirement plan assets often do it improperly,” said Howard Phillips, a Delray Beach, Florida, actuary and author of “Dividing Retirement Plan Assets in a Divorce.”  He knows, because he values pensions for couples negotiating their divorce settlements and then drafts the order that will be entered into the court.

Dividing a house is easy.  Two realtors pouring over sales of comparable nearby properties can readily agree on a value – once the house is sold, the parties pay the realtor and split the proceeds.  But a pension plan’s value greatly depends on how and when it’s counted and the method used to allocate that value between the spouses.

Phillips explained the basics of how defined benefit plans and defined contribution plans – 401(k)s, 403(b)s, and IRAs – may be handled in a divorce during a recent podcast for the Retirement Income Industry Association.  The following methods for splitting a pension 50/50 have strikingly different outcomes for the participant in the pension plan and for his or her former spouse:

Defined contribution plans:

  • Tracing assets: If one spouse comes to the marriage with $50,000 in a 10-year-old 401(k) account, only contributions made during the marriage – and investment returns on the new contributions – are divided.  If the plan now has $150,000, the amount that’s divided up can vary widely – or it can be zero if no new contributions were made during the marriage. The remaining balance goes to the spouse who started the 401(k) account. …
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Immigrant Flows Impact Social Security

Manuel Carvallo immigrated from Mexico at age 40 and became a U.S. citizen at 51.  The Georgia pension consultant just reached another milestone, accumulating the 10 years of U.S. work experience required to receive a small Social Security pension when he retires.

Chart: Changing Tide of Mexican Immigrants

Millions of immigrants from around the world who work here illegally could get the same opportunity as Carvallo under President Obama’s executive actions on immigration, which propose to give many of them temporary legal work papers and Social Security numbers.  Great uncertainty remains about where U.S. immigration policy is heading as Congress actively seeks to reverse the president’s administrative actions

What is clear is that when undocumented immigrants – farm workers, hotel workers, and household and restaurant staff lacking green cards or other legal status – do pay into Social Security, they often have little prospect of ever receiving benefits.  In 2010, some 3 million such workers with fake or expired Social Security numbers added a $12 billion bonus to the Social Security Trust Fund, the U.S. Social Security Administration estimated. …Learn More

SSA-1099 Tax Forms Are Now Online

Lose your SSA-1099 tax form showing your total Social Security benefits in 2014? Or perhaps you moved and never received it in the mail.

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Last year, more than 156,000 retirees did just that and had to call the U.S. Social Security Administration for a replacement. But help has arrived.

For the first time, retirees can go to the agency’s website to retrieve and print out a duplicate SSA-1099 form.

The SSA-1099, which is mailed in January, provides benefit information necessary for filing an individual’s income taxes. The SSA-1042S, a similar form for immigrants and other non-residents, is also available online. …Learn More

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Investment Managers Are Human Too

Mutual fund managers would seem to possess myriad advantages over the average individual investor: a business degree, a deep understanding of corporate finance, and years of experience.

But you wouldn’t know it based on how their personal portfolios fare.

A new study of mutual fund managers in Sweden found that that they “do not exhibit superior security-picking ability” when managing their personal portfolios, compared with similarly situated private citizens who also invest for themselves.

Using detailed tax and investment information contained in Swedish government data bases, researchers from the University of Notre Dame and Michigan State University were able to link individual fund managers to their personal equity portfolios and returns, which were then compared with the returns of non-experts with similar socioeconomic characteristics, such as education and age.

Based on the risk-adjusted returns for each group, the researchers found that the fund managers’ personal equity portfolios – individual company stocks and also the stock mutual funds they hold – performed no better than the private investors’ equity portfolios. …Learn More

The Impact of Taxing Health Premiums

Excluding the health insurance premiums paid by employers and employees from workers’ taxable earnings is the federal government’s largest single tax expenditure, amounting to some $250 billion a year in lost revenue.

Eliminating the exclusions – as some in Washington have proposed – would sharply increase how much is taken out of workers’ paychecks for payroll taxes and for income taxes. But any such proposal would also put more money in their pockets when they retire by increasing the earnings base on which their Social Security benefits are calculated.

Urban Institute researchers Karen Smith and Eric Toder recently estimated the policy’s impact on workers’ taxes and benefits and found that it varied widely for different income groups and among people born in five different decades, the 1950s through the 1990s.

Their analysis took into account the myriad idiosyncrasies of the U.S. tax code, including a regressive payroll tax, a progressive income tax, Earned Income Tax Credits paid to the lowest-wage workers, and the cap on payroll taxes for the highest earners.  To evaluate the proposals’ impact, the researchers added the premium amounts paid by both the employer and employee to workers’ taxable incomes – just as the deficit reduction proposals would do.

The resulting tax bite would be largest for the middle class.  That’s because middle-income workers are more likely to have employer-provided health insurance than lower-income workers, and their insurance premiums are a larger share of their income than they are for higher-income groups.  Under the proposal, middle-income workers’ federal income and payroll taxes would rise by an amount equal to 3.5 percent of their lifetime earnings. …Learn More

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