Is the Mexican peso a bellweather for the US election?

Mexican peso

Mexican peso (Photo credit: Wikipedia)

This is just too good to miss–apparently, the more likely it appears that Hillary Clinton will win, the more positive effect on the Mexican peso, so analysts are considering the price of the peso as an indicator of possible election results. The markets hate uncertainty, and Clinton is by far the more known actor.

Warning: an annoying video starts up on this link, so have your finger ready to mute if you wish. Peso story here.

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I fixed Social Security—and you can, too!

Most of us are pretty convinced we could do a better job than our politicians. Personally, after my social policy studies way back when at the University of Chicago, I became less certain that even the best intended people could fix all that much, but it hasn’t stopped me from pontificating. The Republican party is welcome to draft me as their presidential candidate. Although I’m a lifelong Democrat, I couldn’t be any worse or more out of synch than the current nominee. But let’s get back to a program that affects all of us—Social Security.

There are about a million scary articles on how Social Security will run out of money, and my younger clients nearly always have a fear that Social Security won’t be there for them. I’ve been hearing that same song since I, myself, was a graduate student and now that I’m closer to circling distance, it’s still there. In fact, in my lifetime government services to the elderly and disabled have vastly expanded and improved, and that’s a good thing. Sadly, Social Security was only designed to put a floor under old-age retirement (in an era when people still had private employer pensions) and it hasn’t kept up with the real need for a basic guarantee of a decent living standard for those dependent on it as principal or only source of income.

Now you can try your favorite policy solution by going to the University of Pennsylvania’s Wharton School Social Security Policy Simulator. This has several slider buttons you can play with to see what change(s) might make the System solvent, or for how long you can keep it afloat. I chose increasing the payroll tax rate from 12.4% (current) to 14.4%, which I think is pretty minimal, and increasing the taxable maximum income to $400,000+ (in other words, just about everybody). If only they would listen to me, instead of running out of money in 2030, the current scenario, it wouldn’t run out of money until 2070.

I was dismayed that my favorite solution (increase the taxable maximum), didn’t solve things on its own. It just makes no sense to me, and never has, to let the highest earners off the hook as they earn more than $118,500. Those who least need the break get the most benefit. However, I hate the idea of any tax raise as much as any blue (oops, red)  blooded American, so I was dismayed that to make it work, I had to give us a tiny tax uptick. For comparison, take a look at this tax summary of employer social security tax rates in other countries. Plenty of countries pay far more than we do, and many pay less.

It’s important to remember here that the US Social Security system was never set up to be a true annuity program. Roosevelt wanted to cover people immediately–low-earning people like my iron miner grandfather–who had never paid into the system but desperately needed old-age support. Often people (again, like my grandparents) would have been too proud to participate in the system if it had been “welfare” but by pitching it as an entitlement program in which everyone would participate, people bought in. But current contributors have always paid for those before them–so it’s not accurate to say, “I paid in and now I want it back” in the same way as an investment or annuity works.

Unfortunately, not all the options I would implement as dictator are available in the UPenn simulator. What about making Social Security benefit amounts a sliding scale based on income in retirement? (Is Donald Trump collecting Social Security?) What about funding it from general revenue? What about some way to assess the economic impact of better benefits instead of throwing people on the general public welfare system, and bankrupting them before getting them there? What about the impact of immigrants earning and contributing?

Curious what the candidates propose? Of course you can go to their websites for details. Hillary Clinton’s proposals are here and Donald Trump’s are here. That’s right, no link. He doesn’t have anything on his website addressing Social Security (not that I could find, at least).

I do invite you to try out your own solutions on the UPenn simulator. If nothing else, you’ll see that it’s not a quick and easy fix. And if you want to take a look at your own personal retirement situation, check in with me—I’m here to help.

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Financial aid: sorting through student loans

English: A vector image of a mortar board hat.

When I see clients with really big student loans, the money has been used not for college, but for graduate or professional education. Many people will borrow $20,000-$40,000 for college. I view that as an acceptable amount if the person has any reasonable hope of employment after graduation. The rule of thumb is don’t borrow more than you can reasonably expect to make your first year of employment. That way, you’ll end up paying about 10% of your income, and that’s doable if you are at least a little frugal. After all, many people spend that much on a car and pay it off in 5 years.

Where there’s really trouble in River City is when the student has an undergrad loan for that much, and then goes on to graduate school. Getting a masters or PhD in an academic field is pretty chancy unless you’ve carefully researched employment possibilities. Without getting significant aid you’re probably wasting your time and money—we all know how difficult it is to get a job in academia. Even with a free ride, you need to think very carefully about the lost income over the years when you continue to be in school.

If your career really requires an advanced degree, you should first look into whether your employer will foot the bill for at least some of it, whether you can study part time, attend a weekend intensive program, etc. But let’s say you’re determined to pursue a professional degree that pretty much requires full time study (Physical Therapy, Occupational Therapy, prestigious MBA and law school programs, etc.) Let me exclude from this discussion medical school because I must confess I don’t know how even affluent middle class people can pay for it any more. Medical school, particularly an advanced specialty, can cost hundreds of thousands of dollars and unless family is willing to foot the bill, I think young medical students are, under our current system, pretty much faced with career-long debt.

The kinds of loans available to you are going to be quite different from the more favorable ones that you might have had as an undergrad.

Basically, the fun subsidies are over. You’re not going to see that lovely subsidized loan (where the Feds cover your interest while you’re in school) at that 3.76% interest rate. The Ford Unsubsidized Loan (also known as the Stafford loan) is the best deal you can probably get as a graduate student. Interest begins accruing as soon as you take the loan, although payment of interest and principle can be delayed until 6 months after you graduate. And the rate (currently) is 5.31% + a 1.069% origination fee.  The loan limit is $20,500/year.

Do you need more than that, Bunkie? First, explore everything you can to cover other costs—teaching assistantships, a job, choosing a state school, scholarships and awards, and living at home with mom and dad. Your next option is a Direct PLUS loan, where you can borrow up to the cost of attendance (including reasonable living expenses) minus any other loan amounts (like the Ford Unsubsidized). You must have good credit for these loans. The interest rate on this loan is currently 6.31% plus a loan origination fee of 4.276% deducted as dispersed (so you have to borrow more in order to cover the fee).  You can choose a 10 to 25 year (ouch!) repayment plan on these loans.

Once you exhaust these possibilities, you’re into private loans. Some are made directly through the school and some come from private lenders. These are fraught with perils:

  • Are they fixed or variable? The fixed rate can be 5% (usually only if you’re already earning money or have a parent co-signer) up to more than 12% (thanks Sallie Mae). Before you sign for a variable with teaser rates, think about whether you expect interest rates to go up significantly over the term of the loan (yes, probably).
  • Do they require a co-signer? Note to parents: no, no, no. If you don’t know why, we need to talk.
  • Do you have to make payments while in school? Interest?
  • Do they have financial hardship forbearance? This doesn’t mean you get off the hook—it just means they won’t go after you while you’re ill or unemployed—but interest continues to accrue.

 

As you can probably tell by the length of this post, graduate school financial aid (and it’s almost all loans) is really complex and you really need to know what you’re signing before you choose how much, and how to borrow. Please use those research skills you learned in college to understand the different possibilities and traps of these types of loans.

 

Resources:

For more specifics on Federal student loans, comb this site.

More information on the terms and pitfalls of private loans can be researched here.

 

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