MONEY Debt

Americans Are Taking on More Debt—Again

Is it time to worry?

If the definition of insanity is doing the same thing over and over again and expecting different results, then Americans are starting to look a little batty: The average American’s consumer debt is climbing back to the highest levels since we exited the Great Recession. At the same time, however, mortgage payments are declining thanks to the current low home prices. So should Americans we be worried about the uptrend in consumer debt?

Debt on the rise

According to the Federal Reserve, Americans’ appetite for loans is increasing again. The amount of revolving credit outstanding, which primarily reflects credit card debt, totaled $882.1 billion in November, up from $853.3 a year prior. The amount of student loan debt outstanding has climbed from $1.21 trillion to $1.3 trillion; auto debt outstanding has grown from $866.4 billion to $943.8 billion; and mortgage debt outstanding increased $35 billion between the second and third quarter to $8.13 trillion. As of the third quarter, the Federal Reserve Bank of New York pegs Americans’ total debt at $11.71 trillion.

Those numbers may look great to banks like Wells Fargo WELLS FARGO & COMPANY WFC 0.04% , which rely on rising loan volume to pad earnings, but they should be worrisome to American consumers, because they suggest millions of people are spending more money paying down debt and less money saving for a rainy day or retirement.

Straining balance sheets

In the past year, the amount of revolving debt taken on by consumers has grown by 3.3% — nearly double the rate of growth in the average American’s income. As a result, the percentage of the average American’s disposable income that goes toward paying monthly consumer debt payments — such as credit cards, student loans, and auto loans (but not mortgages) — has increased for seven consecutive quarters to 5.3%.

Although the percentage of disposable income that goes toward consumer debt payments still remains below its prior peaks, the current trend could be worrisome, especially if it ends up mirroring the trend that followed the savings and loan crisis in the early 1990s.

Is this a big deal?

Although Americans are paying a greater share of their disposable income to finance consumer debt than they were a year ago, there’s little evidence to suggest that consumers are anywhere near a tipping point that could cause budgets to buckle, spending to sag, and the U.S. economy to slide. In fact, the bigger picture of household debt is much less worrisome than those consumer debt figures.

The financial obligations ratio — a broad measure that, unlike the debt-service-to-obligations ratio, includes rent payments, home owner’s insurance, and property tax payments — is at its lowest levels since the early 1980s. And the total debt-service ratio, which includes consumer debt andmortgages, stands close to 35-year lows at 9.9%. Thus these more comprehensive measures paint a much prettier picture of the average American’s financial situation than the consumer debt payment ratio alone.

Everything is OK — for now

With lower mortgage payments offsetting higher payments on credit cards, student loans, and auto loans, household debt isn’t likely to sink our economy — at least not yet. However, that could change if home prices inch their way higher and mortgage interest rates start to climb. If that happens, then higher monthly mortgage payments could be cause for concern that the average American’s debt has indeed become a problem again.

TIME Innovation

Five Best Ideas of the Day: February 5

The Aspen Institute is an educational and policy studies organization based in Washington, D.C.

1. Could Blockchain — the secure, encrypted network that powers Bitcoin transactions — be used to build a safer alternate Internet?

By Scott Rosenberg in Backchannel, on Medium

2. One NGO is crowdfunding the fight against human trafficking.

By Leif Coorlim at the CNN Freedom Project

3. High-achieving, low-income students get into selective colleges when they actually apply. Virtual college counselors can make sure they do.

By Bloomberg Philanthropies

4. “Vocal fry” and other patterns in the speech of younger women might signal a change for generations to come.

By Chi Luu in JSTOR Daily

5. Scientists are hoping genetically-modified coral can save the Great Barrier Reef.

By Laura Clark in Smithsonian Magazine

The Aspen Institute is an educational and policy studies organization based in Washington, D.C.

TIME Ideas hosts the world's leading voices, providing commentary and expertise on the most compelling events in news, society, and culture. We welcome outside contributions. To submit a piece, email ideas@time.com.

MONEY Airlines

These Airlines are Offering In-Flight College Classes

Learning in the skies
Dennis Helmar

Your legroom may be shrinking, but at least you can now expand your mind.

Just because you’re on an airplane doesn’t mean your head has to be in the clouds.

In addition to the usual fare of straight-to-DVD movies that will certainly rot your brain, two airlines have recently begun serving up some smarter in-flight entertainment to their passengers: complimentary audio and video of interesting college lectures.

In December, Jet Blue started streaming recorded lectures from some of the nation’s most elite courses, including marketing classes from University of Pennsylvania’s Wharton School, a Brown University archeology class, and an introduction to guitar and rhythm from the Berklee School of Music. The college lectures are pieces of full courses that are available free through Coursera, a platform for massive open online courses (a.k.a. MOOCs).

Jet Blue also offers video cooking lessons such as “How to brine meats” and “How to read labels on chocolate,” provided by a company called Rouxbe.

On February 1, Virgin America started offering audio and video from the “Great Courses,” a series of recorded lectures from top-shelf professors. Among the talks available: Neil deGrasse Tyson, director of the Hayden Planetarium on “The Inexplicable Universe: Unsolved Mysteries” and David Christian, history professor at Macquarie University in Sydney, Australia, on “What is Big History?”

Both airlines said they would rotate in new lectures every month or two—about how often some college kids attend class.

Gary Leff, a frequent business traveler who blogs at Viewfromthewing.com, says that while he usually works during flights, the college lectures would be at the top of his list for distractions. And he thinks they may be a pleasant surprise for many travelers: “People seem to like the serendipity” of unexpected audio and videos on long flights, he says.

Of course, the free lectures also allow organizations such as the Great Courses and Rouxbe, both of which charge for their entire courses, to market their content to a very captive audience. On the upside for passengers, that likely means other airlines will announce educational content alliances, Leff predicts.

Unfortunately, you won’t get a degree from attending school in the sky. But at least while you’re onboard you can learn something besides the appropriate way to apply an oxygen mask.

MONEY College

17 Life Lessons They Should Teach in College But Don’t

Man standing in classroom staring at chalkboard
Hill Street Studios—Getty Images

Now that I've been out of college for few years, there's a list of courses I wish they taught.

An introduction to brevity: Student turns in an essay, professor deletes every other word and shows them how much better it sounds.

What I wish I knew when I was your age: A group of octogenarians lecture students on their biggest regrets in life.

An introduction to disagreeing with people without sounding like a jerk: Teaches students that equally smart people can disagree with each other. Emphasizes that most of what you think is a product of your upbringing, almost all of which was out of your control.

Sometimes life isn’t fair 101: Twenty percent of the class’s homework is randomly deleted. The other 80% get scholarships for no obvious reason.

Things you were taught but should quickly forget: A group of business owners tells students what theories their business professors taught that are theoretical nonsense and should be disregarded as soon as possible.

An introduction to negotiating with people who are about to rip you off: To be taught by a repentant used-car salesman.

Adult free time 202: A three-month college summer break is replaced with seven days annual vacation, to be taken only with a teacher’s approval. Approval requires three months’ notice and is granted no more than 25% of the time.

Statistics for real people: Regardless of major. And practical statistics, with real-world problems that you’d actually encounter and can solve with a calculator or Excel.

What I wish I knew before I failed: A group of bankrupt business owners share their stories on what not to do.

An examination of the easiest ways to ruin your life: Course has three parts: debt, diet, and exercise.

Public speaking for introverts. Don’t make it optional. No one will get through life without having to do it at least once.

A survey of biases: Students read an old State of the Union address given by a president they disagree with, but told the speech came from a president they admire. After the student glows about how wise the speech is, the true speaker is revealed and the student instantly finds parts of the speech they dislike.

Investing for normal people 101: Makes no mention of alpha, beta, portfolio theory, or derivative pricing. Instead, it emphasizes the importance of low fees, the danger of selling low, and the power thinking long term.

Humility 101: A test is given on a subject the student feels they are experts in. Everyone fails due to ridiculous technicalities they’ve never heard of.

Introduction to grasping reality with both hands: Private university students who try to take out $250,000 in student loans when they’re barely out of puberty are patted on the back and given directions to a high-quality local state university.

Real-life behavioral psychology: Students have to make a major life decision in the middle of taking the most stressful math test they’ve ever had.

Understanding compound interest 101: Students are given one homework assignment on the first day, two on the next day, four on the next, then eight, 16, 32. Once someone points out how absurd this is the professor says, “Yes, it’s completely absurd. Now go invest your money.”

For more:

More from The Motley Fool: Warren Buffett Tells You How to Turn $40 into $10 Million

TIME Education

Going Back to School With My Teenage Daughter

college
Getty Images

Zocalo Public Square is a not-for-profit Ideas Exchange that blends live events and humanities journalism.

It wasn't easy for my daughter to have her own college experience while I sat behind her in geography class

Walking into the college classroom on the first day of the semester, the young woman in front of me introduced herself to those sitting around her and smiled. She then looked over at me and said, “Mom, I’m not going to help you with this class. You’re going to have to do this on your own, I’m sorry.” I don’t remember even asking.

Earlier that week, Stephanie—the youngest of my four daughters—and I were sitting in a courtyard at our school, Chandler-Gilbert Community College, when she told me that she was dropping one of her classes and needed to add another. I told her I was taking geography and since she needed that class as well, we could take it together.

She gave me ‘the look’ with a resounding No. Then she changed her mind: Yeah, ok.

There is nothing quite like attending college with your daughter. For all the difficulties of getting your children educated, nothing is more challenging than trying to educate yourself at the same time.

The journey started years ago, when our family was living in North Carolina. I was a stay-at-home mom with hopes of returning to school once Stephanie started kindergarten. Eventually, I wanted to become a teacher. My dream was that my daughters and I could go to school together during the academic year and have family time during the summer.

Then plans changed. Getting divorced and raising four daughters alone is not easy, but I decided to go back to school anyway.

It would be very slow-going—I was behind. Algebra wasn’t even on my high school transcripts. So I found myself in community college, taking middle school math, three levels below the minimum college algebra class required to graduate. But I didn’t give up. I enjoyed it. Going to school became my place to go to invest in myself while still having time for a young family.

At the same time I was taking those math classes, my oldest daughter Amy, an 8th grader, complained about the new teacher in her own math class. Her regular teacher had a medical issue, and Amy was having trouble understanding the substitute, an older man who told long, drawn-out stories that made no sense. So I suggested that we talk to him and see what we could do to help the situation. She agreed.

I had just come from my math class earlier that morning and felt I could handle this. We walked into the room and there was my college math professor sitting at the desk looking up and smiling at both of us. Amy looked mortified. — No! How could this be?

The two of us were taking the same class, which may have been embarrassing to Amy, but I thought it was great. I was happy to be with my girls and be in school.

He proved to be an amazing teacher. He set the two of us up in friendly competition. In the evenings, we would sit together and go over her homework. Amy looked at math as a puzzle and I turned his stories into a method that helped her see how to do the problems.

In her class, he would tell the students that Amy’s mom had gotten an A on her homework—and wondered what Amy could do to beat her mom. He got the class interested in the game. She knew my grades before I did, and it made her feel special. He turned that around and did the same in my class, and students would ask him about my daughter. It was fun. More importantly, we both learned. As a side benefit, it brought us closer.

We later moved to Arizona and Amy signed up for the high school marching band. Erin and Courtney—my other daughters—went to middle school and also signed up for band. Stephanie was in second grade. And I applied to Arizona State University.

Then reality hit.

Marching band for Amy included early morning practices at 6 a.m., Friday night football games and competitions every Saturday all across Arizona. Middle school involved field trips, teacher meetings and homework. Elementary school was filled with more field trips, class parties with baked goods and after-school activities. And I had a full-time job, I never signed up for classes at ASU after being accepted, and college went on the back burner.

The years flew by. One by one, daughters moved out, leaving Stephanie the last one at home. She started taking courses in high school that satisfied college credits. Since I was not working at the time, I decided to go back and finish what I started.

I went to my local community college to learn about my options. Stephanie came with me and together we looked at my transfer credits from North Carolina. Her face dropped when she saw my grades. The adviser and I looked at her and I asked what was wrong. Mockingly she said, “Mom, really? One B? Out of all those A’s? Why?” She couldn’t believe I had received good grades. Apparently my daughters thought I had made up my grades in college to ‘inspire’ them to do well in their classes, since that’s what moms do, you know! So I signed up and dug in.

Graduating with honors with an Associate’s of Arts Degree, Stephanie sat in the audience—she was just four credits short of graduation.

In fall 2012, we both transferred to Arizona State. I chose to attend the Walter Cronkite School of Journalism and Mass Communication and Stephanie chose to be a photography major at the Herberger Institute. But when Stephanie visited Cronkite and saw pictures on the wall by photojournalism students, she decided to change majors.

As a mother, I tried to stay out of her way, planning my classes on a Monday-Wednesday schedule after finding her classes were on Tuesdays and Thursdays. She needed to have her own college experience.

But at the same time, there were moments when my daughter and I were peers. We laughed and cried during midterms and final exams. We rolled our eyes at difficult professors and homework assignments that made no sense. I also felt better connected to my other daughters and their educational experiences.

Stephanie took the fall semester off this year and spent time in Oregon and New York visiting two of her sisters. She plans to start at ASU again this January, and she should graduate next fall, having studied photography, journalism, and art history. Her goals are to get a master’s in anthropology and to work for National Geographic.

Graduation should come this spring semester for me, as there is one core class I need in order to finish. Stephanie and I have become each other’s biggest supporters and I couldn’t be more proud of all of our accomplishments. My daughter Courtney graduates this spring as well. Erin was the winner, having already graduated, but 2015 is our year!

Sandy Balazic is a single mom, a mini-doxie fan, an in-depth reporter for Cronkite News, an intern for NBC Sports Radio 1060AM and a soon-to-be graduate of the Walter Cronkite School of Journalism and Mass Communication at Arizona State University. She wrote this for Zocalo Public Square.

TIME Ideas hosts the world's leading voices, providing commentary and expertise on the most compelling events in news, society, and culture. We welcome outside contributions. To submit a piece, email ideas@time.com.

TIME Companies

Amazon Just Took a Huge Shot at College Bookstores

Inside An Amazon.com Distribution Center On Cyber Monday
Bloomberg—Bloomberg via Getty Images An employee loads a truck with boxes to be shipped at the Amazon.com Inc. distribution center in Phoenix, Arizona, U.S. on Monday, Nov. 26, 2012.

Amazon is setting its sights on the lucrative college bookstore market

Amazon is matriculating.

The e-commerce giant has inked deals with three major universities to run websites selling all sorts of college students’ delectables, including textbooks, college-themed apparel and ramen noodles, the Wall Street Journal reports. Students at Purdue University, the University of Massachusetts Amherst and the University of California Davis can use the new co-branded website to place orders.

The campus initiative gives unlimited next-day on-campus delivery to Amazon Student Prime members (quicker than the two-day delivery for regular Amazon Prime customers). Also as a part of the deal, Amazon will set up new package distribution centers at each partner school.

Amazon is aiming at a coveted market that spends $10.3 billion every year at college bookstores. Barnes & Noble is currently a major supplier for college bookstores, selling $1.75 billion in its college division in its 2014 fiscal year. Follett Corporation is also a major player in the space.

“College campuses are an opportunity for us,” said Ripley MacDonald, director of Amazon student programs. “We hope students like it and continue being Amazon customers.”

[WSJ]

MONEY 529 plans

Why Obama Wants to Tax College Savings

U.S. President Barack Obama delivers his State of the Union address to a joint session of Congress on Capitol Hill in Washington, January 20, 2015.
Mandel Ngan—Reuters

In this week's State of the Union address, the president proposed ending a popular tax break on 529 plans. Here's what's behind that pitch.

In his State of the Union address Tuesday, President Obama promised to make college more affordable for low- and middle-income families. But one way he would pay for that would be to make college more expensive for millions of upper-income Americans.

The president proposed ending a key tax break on state 529 college savings plans. Today, the money you invest in a 529 plan isn’t deductible on your federal taxes (34 states and the District of Columbia give you a break on state taxes), but your savings grow tax-deferred, and you won’t owe any taxes on your earnings when you withdraw that money to pay for higher education expenses, including tuition, room and board, and books. Under Obama’s plan, those investment profits would be taxable, even if the money went toward college.

President Obama says he’d use the estimated $2 billion in additional tax revenues to raise the American Opportunity tax credit, which is a $2,500 write-off targeted at low- and middle-income families paying tuition bills. The administration points out that 529 plans disproportionately benefit higher-income households.

In essence, Obama is proposing making college more expensive for an estimated 2 million mostly upper-income families to ease the tuition burden for more than 8.5 million low- and middle-income families.

A Question of Fairness

This proposal—which is already facing Republican opposition in Congress—is based on concerns about the fairness of the 529 tax breaks that have been widely discussed among education-related think tanks and experts of all political leanings for years.

In all, federal taxpayers spend more on educational tax breaks than they do on popular financial aid programs such as Pell grants, noted a 2013 report by the Reimagining Aid Design and Delivery (RADD) Consortium for Higher Education Tax Reform. Not only are all the education tax breaks confusing and hard to collect, “students from families with the least financial need receive the most tax-based aid,” the report noted.

In theory, 529 plans aren’t just for the rich. Anybody can open one of these tax-protected colleges savings account for a child or for themselves. You can choose either a prepaid tuition plan, which lets you buy tuition credits ahead of time, or a college savings plan, which lets you set money aside for a future college student.

That tax break that the president wants to eliminate has been a key to 529 plans’ popularity. Since President George W. Bush signed the 529 tax exemption into law in 2001, families have opened nearly 12 million new 529 accounts and have socked away almost $250 billion for college.

And states have been marketing the savings programs. In 2012, the GAO found that 14 states offered matching grants to encourage low-income families to save. Some states even offered 529 brochures to new parents leaving the hospital.

Despite these efforts, very few low- or middle-income families have managed to save very much in 529s. In 2012, more than 97% of families had no special college savings account, according to a Government Accountability Office report. (The large number of accounts may be due to some families opening separate accounts for each child and parent.)

One reason for the low participation: Many still don’t know about 529s. Of parents who say they’re planning to send their kids to college, 49% don’t even know what a 529 plan is, Sallie Mae found in its annual “How America Pays For College” report.

Another factor: Low and middle-income families pay comparatively low taxes, so the tax break is not much of a lure to lock up money for one purpose. Families can take money out of 529s to spend on non-college expenses, but they’ll have to pay regular income taxes, plus an extra 10% penalty, on any earnings.

As a result, 529 investors tend to be wealthy. Families with 529s earned a median annual income of $142,400 and reported a median of $413,500 in financial assets, according to the GAO. About half of families with 529s (or similar Coverdell accounts) had an income above $150,000 in 2010.

And, in part because high earners typically owe higher taxes, the wealthy reaped large tax breaks from using 529s. In 2012, the GAO found that Americans who made less than $100,000 withdrew a median $7,491 from their 529s, saving just $561 on their taxes. But Americans who earned more than $150,000 withdrew a median $18,039, saving $3,132 in taxes.

In place of the tax break at withdrawal, Obama wants to expand the American Opportunity Tax Credit, which is currently phased out for families earning more than $180,000 a year.

The administration would like to expand the write-off to more students, such as those who attend college part-time. “It’s targeted in such a way that it will be most impactful to the students who need the assistance the most,” says Cecilia Muñoz, White House domestic policy director.

What Changes You’ll Really See

What does this all mean for you: Not much, at least for the near term.

If you’ve already got money in a 529, don’t worry. The president’s plan wouldn’t be retroactive. It would repeal the tax break on earnings only for future contributions.

And if you’re planning to start saving for college, there’s probably not much to worry about either. Republicans, who control both houses of Congress, have come out in opposition to the proposal. “You don’t produce a healthy economy and an educated workforce by raising taxes on college savings,” Brendan Buck, a spokesman for Rep. Paul Ryan, R-Wis., told the Wall Street Journal.

That means there probably won’t be extra money in the budget for much additional financial aid for low- and middle-income families. So you may as well start saving for tuition bills. Here’s how to find the best 529 plan for you.

Correction: An earlier version of this story misstated the proportion of new tax revenues that would come from families earning above $250,000 if Obama’s proposal was enacted. The reference has been removed.

 

TIME Innovation

Five Best Ideas of the Day: January 21

The Aspen Institute is an educational and policy studies organization based in Washington, D.C.

1. China’s scramble to lock up resources in Africa has forced it to act more like a conventional superpower.

By Richard Javad Heydarian in Medium

2. Adaptive learning technology can give educators tools to keep kids who learn differently from falling through the cracks.

By Susan D’Auria and Ashley Mucha at Knewton

3. 2015 might be the year America starts to get online identity right.

By Alex Howard in Tech Republic

4. Changing a long-standing rule prohibiting sororities from hosting parties could reverse the power imbalance that underlies campus sexual assault.

By Michael Kimmel in Time

5. Ominous headlines notwithstanding, offline fraud and scams are still more costly to individuals and the government than cybercrime.

By Benjamin Dean in the Conversation

The Aspen Institute is an educational and policy studies organization based in Washington, D.C.

TIME Ideas hosts the world's leading voices, providing commentary and expertise on the most compelling events in news, society, and culture. We welcome outside contributions. To submit a piece, email ideas@time.com.

MONEY The Economy

The 2015 State of the Union Address In Under 2 Minutes

President Barack Obama highlighted the recovering economy as well as proposals for free community college, increasing trade with Cuba, and building more infrastructure.

MONEY College

The Problem With Obama’s “Free Community College” Proposal

US President Barack Obama speaks on new proposals for higher education accessibility at Pellissippi State Community College in Knoxville, Tennessee on January 9, 2015. Looking on are US Vice President Joe Biden and his wife Jill Biden.
Mandel Ngan—AFP/Getty Images US President Barack Obama speaks on new proposals for higher education accessibility at Pellissippi State Community College in Knoxville, Tennessee on January 9, 2015. Looking on are US Vice President Joe Biden and his wife Jill Biden.

President Obama's free college plan won't actually raise the number of college graduates without improvements in the way community colleges help students succeed, say two education researchers.

President Obama’s ambitious proposal to make community college tuition free would certainly make enrolling in college more affordable. It may also induce students to stay there longer.

However, reducing costs for students on its own is unlikely to significantly increase the number of students who finish degrees. Consider: Of all of the students who enrolled in public community college for the first time in the fall of 2003, only one-quarter earned any kind of certificate or associate’s degree within six years. Another 12% earned a bachelor’s degree within that six-year period.

If we want to significantly improve educational outcomes, we need to both make college more affordable so more students can enroll, and make the reforms needed to ensure community college students can succeed in their courses, complete their programs, and graduate within a reasonable amount of time.

President Obama’s plan would certainly make community college more affordable. Even for the 40% of community college students whose tuition is already covered by federal and state aid, other expenses (food, transportation, books, etc.) often present insurmountable hurdles. If grants are awarded to eligible students on top of free tuition, as President Obama proposes, then many of these affordability issues would be addressed.

But the Tennessee and Chicago free tuition policies that inspired President Obama also address the broader barriers to success. The affordability improvements in those communities are one part of larger reforms designed to dramatically boost the success of community college students by providing close monitoring of student progress, careful alignment of courses to transfer and job requirements, clearer and more coherent programs of study, and help for students to make better choices about what to study.

Such reforms, many features of which have also been enacted in the City University of New York’s Accelerated Studies in Associate Programs (ASAP), have doubled the graduation rate for participants. But at a cost: ASAP costs 60% more per student than the standard CUNY program.

Laudably, President Obama’s proposal does try to address quality. It includes requirements that community colleges “adopt promising and evidence-based institutional reforms to improve student outcomes.” But his plan does not provide colleges with additional resources to help them in these efforts.

In fact, it is possible that his plan could reduce the money community colleges are able to spend on improving outcomes.

The White House estimates that the free tuition program would cost $6 billion a year. But that money would simply replace the tuition students were already paying, not increase colleges’ revenue. States would be required to pay for one-quarter of this tuition subsidy. Some may raise that money by decreasing the direct subsidies they give colleges now, which currently cover approximately two-thirds of the cost of educating each student.

Despite these obstacles, the president’s proposal opens the door to a broader discussion of a comprehensive strategy for community colleges that emphasizes both affordability and performance.

Community colleges are the launchpad for opportunity for all Americans, enrolling almost half of the nation’s undergraduates. They are especially crucial for those who have, traditionally, been excluded from other kinds of higher education.

For these millions of students seeking brighter futures at community colleges, we need bold and transformative change and renewed public investment to ensure they have college options that are both affordable and of high quality.

Thomas Bailey is director of the Community College Research Center at Teachers College, Columbia University and co-author of the forthcoming Redesigning America’s Community Colleges (Harvard University Press, 2015).

Judith Scott-Clayton is a senior research associate at the Community College Research Center at Teachers College, Columbia University.

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