I recently got a new cell phone, and after I sent in several pages of documentation, my rebate was mailed in the form of a pre-paid debit card. These financial products and their close cousins pre-paid gift cards are becoming ubiquitous. Gift cards can be purchased at the grocery store and many other places. Pre-paid debit cards are particularly popular with low-income consumers who are unable to open a conventional bank account or get a credit card. But as this New York Times article suggests there are many hidden fees and deductions that make this a very expensive form of banking. Recent credit card reforms passed since Barack Obama became President did not touch the pre-paid debit card market.
It is particularly concerning that some employers—including WalMart—have begun paying employees with prepaid debit cards. This policy must be a boon to the credit card companies, but it is no bargain for the employees.
Tuesday, October 6, 2009
Pre-paid Debit Card Fees Soak Low-income Users
Saturday, October 3, 2009
Bankruptcies Top A Million
The 2005 bankruptcy reform bill had a strong impact when it was first implemented, knocking down the rate of personal bankruptcies in the US to approximately a third of what it had been, but the basic problems of consumerism and easy credit where not touched by the bill. As a result, it was just a matter of time before rates would climb back up, and they have--quite steadily since the introduction of the bill.
Now with the added impact of unemployment and the economic decline, rates have taken off again. As the October 2nd Wall Street Journal article below indicates, we had over a million personal bankruptcies in the first nine months of 2009. A rate that is very close to that just prior to the 2005 bill and one that will likely bring us to 1.4 million bankruptcies by the end of this year.
In addition, the bankruptcy statistics always underestimate the pain by approximately 25 percent. On average, approximately a third of all personal bankruptcies are married couples filing together.
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Personal Bankruptcy Filings Soar
By SARA MURRAY
Consumer bankruptcies topped one million for the first nine months of this year, the highest point since the system was overhauled in 2005.
The number of personal bankruptcy filings for the nine months rose to 1,046,449 as of Sept. 30, the American Bankruptcy Institute, an organization made up of attorneys, accountants and other bankruptcy professionals, said Friday, using data from the National Bankruptcy Research Center. There were 773,810 personal bankruptcy filings for the same time period in 2008.
September's filings reached 124,790, 41% higher than the same month last year.
The 2005 revamp was intended to make it harder for Americans to shed their debts by filing for bankruptcy. In that year, before the law took effect, there were 1.35 million bankruptcy filings in the first nine months.
But a tough economic climate has sent filings soaring again and ABI expects personal bankruptcies to exceed 1.4 million by the end of the year. "Bankruptcy filings continue to climb as consumers look to shelter themselves from the effects of rising unemployment rates and housing debt," the institute's Executive Director Samuel J. Gerdano said.
Write to Sara Murray at sara.murray@wsj.com
Thursday, September 3, 2009
WSJ: Student Debt Grows Dramatically
Students are borrowing dramatically more to pay for college, accelerating a trend that has wide-ranging implications for a generation of young people.
New numbers from the U.S. Education Department show that federal student-loan disbursements—the total amount borrowed by students and received by schools—in the 2008-09 academic year grew about 25% over the previous year, to $75.1 billion. The amount of money students borrow has long been on the rise. But last year far surpassed past increases, which ranged from as low as 1.7% in the 1998-99 school year to almost 17% in 1994-95, according to figures used in President Barack Obama's proposed 2010 budget.
The sharp growth is "definitely above expectations," says Robert Shireman, deputy undersecretary of the Education Department. "But we're also in an economic situation that nobody predicted." The eye-opening increase in borrowing is largely due to the dire economic environment, which is causing more people to seek federal loans, he says.
The new numbers highlight how debt has become commonplace in paying for higher education. Today, two-thirds of college students borrow to pay for college, and their average debt load is $23,186 by the time they graduate, according to an analysis of the government's National Postsecondary Student Aid Study, conducted by financial-aid expert Mark Kantrowitz. Only a dozen years earlier, according to the study, 58% of students borrowed to pay for college, and the average amount borrowed was $13,172.
The ripple effects for today's heavily indebted young people are becoming palpable. A growing body of research suggests that tough loan payments are affecting major life decisions by recent graduates, forcing them to put off traditional milestones—from buying a first home to even marriage and having children.
Also, the rising levels of borrowing may ironically be contributing to the accelerating cost of college, say some college-finance experts. Loans can give colleges an artificial sense of a family's ability to pay tuition. To some extent, that false sense of security gets built into the assumptions schools make when setting prices, say experts. The idea is that as prices rise, families borrow more and more, spurring prices to rise further, which in turn requires more borrowing. Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers, says this phenomenon is playing a role in why tuition grows at about twice the rate of inflation. "Instead of imposing tougher choices" on college costs, he says, it's "easier to raise prices...because this additional loan amount is made available."
These and other impacts are likely to continue to spiral for future generations of tuition payers, college finance experts say. It is unclear whether we have seen the worst of it. Mr. Kantrowitz predicts the rate of increase will slow to 12% for the 2009-10 school year due mainly to what he expects to be a rebounding economy. On the other hand, Mark Zandi, chief economist for Moody's Economy.com, says he thinks unemployment rates will be at least as high as they are now, and housing prices will fall further, making it difficult for families to borrow against home equity.
"Growth in student lending can remain very strong, at least through the next school year," Mr. Zandi predicts.
The total borrowing limit for dependent undergraduates who take out federal Stafford loans—the most popular federal aid program—grew to $31,000 this past school year from $23,000. Raised limits in federal loans may have siphoned some borrowing away from riskier—and costlier—private loans, which are now harder to get due to the retrenchment of that business. The move away from these risky loans may be one bright spot in an otherwise frenzied student credit environment, Mr. Kantrowitz says.
Still, students cringe when they think of what they will owe by the time they graduate. Kordi Solo, a senior majoring in journalism at Central Michigan University, expects to owe about $60,000 in student loans by the time she graduates in the spring. She had hoped to owe much less, but her father, a construction worker, has been out of work since last fall. She worries about the ramifications that debt will have on her future—whether it is being able to afford health insurance or qualifying for future loans.
Zack Leshetz, a 30-year-old lawyer in Fort Lauderdale, Fla., has $175,000 in student loans from his seven years in college and law school. Lately he has had his eye on the real-estate market. "Everyone says that it's a great time to buy a house," he says. But that is not an option right now, he says, thanks to $800 a month in payments—and another chunk of student loans in forbearance, which means payments are halted while interest accrues. "I find myself living paycheck to paycheck," he says.
He has also been engaged since March, but has held off on marriage. "There's no way I can pay for a dream wedding, or even just a regular wedding," Mr. Leshetz says. "I feel like I'm putting my entire life on hold."
"There are no guarantees about how easily you'll be able to pay off your student loans," says Lauren Asher, president of the Institute for College Access and Success.
These students' experiences are mirrored in research by Mathew Greenwald & Associates Inc. for investment-management firm AllianceBernstein LP. In a 2006 survey of 1,508 graduates under age 35, 39% of college graduates say it will take them more than 10 years to pay off their household's education-related debt. The survey says that this has caused a delay in certain key "rites of passage" associated with adulthood. Forty-four percent of respondents said they delayed buying a house because of their student loans, while 28% delayed having children.
"Loans have gone from being the exception to being the norm for most students," says Mr. Nassirian. He laments that, rather than fixing the problem of sticker price, policy makers typically tweak student-aid programs to make it easier for students and families to continue to borrow more.
Attacking the problem of cost is thorny because it is politically difficult to get all the interested parties -- which include federal and state governments, foundations and private institutions—to agree. "There are so many stakeholders, different explanations at different schools as to what's happening with cost, that it becomes politically dicey," says Christine Lindstrom, higher-education program director for U.S. Public Interest Research Group, which advocates for consumers. Also, colleges can be big employers in congressional districts, making it challenging for politicians who represent them to also take them on. "You're not going to win friends if you're alienating them," she says.
Some Republicans made attempts at controlling tuition increases when they held the majority in Congress. Rep. Howard P. "Buck" McKeon of California championed legislation in 2003 that would have penalized colleges for raising tuition too much by taking away federal subsidies. Though the bill died, he plans to continue pursuing the issue in the upcoming Congress, a spokeswoman says.
Some recent graduates say they wish they had known more about the consequences of debt before taking it on. Lillian Russell graduated from law school at the University of Pittsburgh last year with $181,000 in debt from her seven years in school. She has spent much of the past year looking for work. In recent weeks, she found a job clerking at a small law office. While she settles into her job, she has deferred payments on most of her federal loans, though interest continues to accrue.
"I wish I had considered the long-term impacts of what I was getting into," Ms. Russell says. When she entered school, "the idea was I'd take out the loans, get a job, and pay it back," she says.
It seemed straightforward. But as the economy has soured, "I feel like it's shifted a lot of my life goals," says Ms. Russell, from buying a house to starting a family. "I'm really concerned about handling this obligation while taking on new ones."
Write to Anne Marie Chaker at anne-marie.chaker@wsj.com
Saturday, March 7, 2009
Mortgages Drifting in the Tide
On March 5th the New York Times printed this graphic showing the percentage of loans in default for various types of mortgages—ranging from conventional “prime” mortgages to “subprime”—as a function of the current ratio of all the mortgages on the home to the value of the home. The dancing waves at the 100%-level separate the houses that are “underwater”—valued at less than the amount owed on the mortgage—from those that have equity beyond the value of the loan.
The graphic is based on data from November 2008 to January 2009, and it accompanied an opinion piece by John D. Geanakoplos and Susan P. Koniak arguing that the best plan for solving the mortgage crisis would not be the interest payment reductions proposed by the Obama administration but reductions of principle. The argument proposed by Geanakoplos and Koniak is more radical but has merit, but I am struck by the orderliness of the graphic and the underlying debate about choice and personal responsibility hidden within it.
The axes of the graph are arranged in an unusual fashion so that those most underwater can be shown at the bottom of the graph. Four lines indicating different types of mortgages stream down from the upper left-hand corner, the point that represents a paid-off mortgage. The lines taper off to the right as they fall, as if they are blowing in a gentle breeze or slowly drifting in the tide. As the line moves to the right, more people are in default on their loans. The prime mortgage line hangs fairly tightly to the left. Even when their loans represent over 200% of the value of their homes only 4% of these homeowners are in default. In most cases, these borrowers had good credit ratings and a down payments when they bought their houses, and the overwhelming majority have maintained their good records.
But the subprime mortgage line on the far right is the most interesting. For some, these loans and the banking institutions who offered them are the source of our recent economic problems. The banks sold shady and deceptive loans to people how could not afford them, and the drifting line on the right is the result. High levels of defaults that caused the foreclosures, that caused the banking meltdown, that cause the stock market crash, that caused the layoffs, etc, etc. But look more closely at the subprime line. At the very worst point on the lowest point, people whose homes are worth less than half the value of their loans are defaulting at a rate of approximately 12%. A high rate, indeed, but flip it over. More than eight-eight percent of all people in these desperate circumstances are paying there mortgages on time.
The bankers would say borrowers who default on their loans are the ones who bear the responsibility for failure. These homeowners signed on the bottom line and then welched on their promises to pay. The subprime mortgage industry (many representatives of which have now gone out of business) argued that, had they not introduced these subprime mortgages to the public, many people would be denied the benefits of homeownership. Look at the 88% who are still in homes and still paying.
But this right-most line begs the question, at what cost? Is it fair for the majority to benefit at such a severe cost to the other 12%? Are these good enough odds? As it turns out, the answer is no. These mortgages were fragile enough that when bundled together into securities investments, they eventually fell apart. It turns out that subprime loans are a bad bet. Unable to weather a down-turn in real estate prices. Eight-eight percent may sound good, but it is not good enough.
Sunday, February 22, 2009
More Adventures in Debt
Buying gas today, I noticed a sticker on the pump: “Now you can prepay with your credit card at the pump.” All self service pumps are designed to accept credit cards, so why would you prepay a fixed amount of money rather than just swiping your card and pumping? My guess is more people are bumping up against their credit limits. They know they have just a little room left on the card, so they want more control over the amount they spend. Rather than having to watch the mounting total and time the shutoff to the desired expenditure, prepaying guarantees that you hit the right amount. Furthermore, some people with just a small amount of juice left on their cards or who risk the possibility of having the purchase denied might rather prepay, wait to see whether the purchase is approved, and then either pump with confidence or move on.
As mentioned in my previous post, “Pay with Two Credit Cards,” in today’s economy, merchants need to make special accommodations for the growing number of people in trouble with debt.
