MONEY First-Time Dad

What Millennials Want That Their Boomer Parents Hate

Luke Tepper
Luke looks around for the inflation that has yet to come Taylor Tepper

It is nine letters long, (not legal weed), and causes investors' blood to boil.

Inflation. We really want some inflation. Now, if possible.

Macroeconomic forces are not top of my mind all the time. A couple of weekends ago, for instance, my wife and I played poker and drank beer on our friend’s rooftop patio. Our son Luke, clad in his new miniature gondolier outfit, crawled between our legs as one person after another told us how cute he was. That night Luke held onto one of my fingers while I gave him his midnight feeding. Later my wife and I slipped into his room for a few moments to watch him sleep.

I can tell you that at no point during our perfect summer day did the word inflation pop into our heads. We went to sleep thinking just how lucky we were to have such a beautiful son, rather than dwelling on the fact that we face an inflationary climate that is hostile to the economics of our new family.

We aren’t strangers to what economists call “headwinds.” Mrs. Tepper and I graduated from the same really expensive private college in 2008, just as the nation was mired in the worst recession in 80 years. We attended college (and later graduate school) as state governments across the country drastically cut higher education spending, which meant higher costs, which meant that we incurred a combined six-figures student loan marker. And entering the job market in the teeth of negative economic growth means we’ll be playing catch-up for years and years.

Given all that we (and Americans, generally) have endured since 2008, it might seem strange that I would ask for higher inflation. When the prices of goods rise quickly, the Federal Reserve is apt to raise interest rates. Higher interest rates make it more expensive to purchase a house, or borrow for anything. Don’t I want to own a house? What’s wrong with me?

For a little bit of context, let’s back up and look at where inflation has been over the past six years. If you look at the core price index for personal consumption expenditures (or core PCE), inflation is rising at an annual rate of 1.5%. In fact ever since Lehman Brothers declared bankruptcy it has barely budged over 2%.

inflation...

Even if you look at a broader inflation metric, like the consumer price index, prices have risen at 2.1% or lower for almost two years.

What does this mean?

For one thing, wage growth has stagnated at around 2% since we left school, and job growth, while picking up lately, has been relatively slow. Weak job creation and small pay increases means that people have less money to spend, which means fewer jobs and the cycle goes round and round.

So more economic growth (spurred on by more borrowing and spending) would help alleviate low wage growth, and help us ramp up our weekly paychecks. But it would also do something else. It would help us pay down our student loan debts.

Super low inflation is bad for people who have debt. Right now Americans owe more than $1.1 trillion in student loan debt. That means people our age are receiving raises that aren’t that high and have to confront a record level of debt before their careers really get going. With so much of our take-home pay earmarked for debt service, no wonder housing isn’t a priority, or affordable, for millennials (or the Teppers).

Of course, this kind of talk scares our parents (and rich people), who own bonds and other assets designed to preserve wealth instead of create it. Having already endured years of low interest rates, they really don’t want their bond portfolio to be hit by an inflation jump.

To which I say, tough. Many boomers entered the job market as the economy was expanding and college was affordable. Their children did not.

Luke has this one toy that he loves. It’s a sort-of picture book for infants consisting of a crinkly material, and he loves nothing more than smashing the thing between his hands and feet. In 17 years, he’ll want a car—and then four years of college.

I realize that the costs of these things will rise—prices always rise. It would just be nice if our salaries rose enough to pay for them.

Taylor Tepper is a reporter at Money. His column on being a new dad, a millennial, and (pretty) broke appears weekly. More First-Time Dad:

 

MONEY Debt

Have You Conquered Debt? Tell Us Your Story

Have you gotten rid of a big IOU on your balance sheet, or at least made significant progress toward that end? MONEY wants to hear your digging-out-of-debt stories, to share with and inspire our readers who might be in similar situations.

Use the confidential form below to tell us about it. What kind of debt did you have, and how much? How did you erase it—or what are you currently doing? What advice do you have for other people in your situation? We’re interested in stories about all kinds of debt, from student loans to credit cards to car loans to mortgages.

Please also let us know where you’re from, what you do for a living, and how old you are. We won’t use your story unless we speak with you first.

TIME Education

Elizabeth Warren Slams Mitch McConnell on Student Loans

Yellen Testifies on Monetary Policy
Senator Elizabeth Warren (Democrat of Massachusetts) listens to testimony from Janet L. Yellen on "The Semiannual Monetary Policy Report to the Congress." on Capitol Hill in Washington on July 15, 2014. Ron Sachs—Corbis

Massachusetts Democrat accuses GOP leader of asking students to “dream a little smaller”

Massachusetts Senator Elizabeth Warren publicly took Senate minority leader Mitch McConnell to task Wednesday on her bill to lower interest rates for government student loans, which failed the Senate last month just two votes shy of breaking a Republican filibuster.

“Last week Mitch McConnell was asked about the student loan bill,” Warren told an obviously friendly crowd of 1,000 young progressives gathered in Washington for the Center for American Progress’s Make Progress Summit. “Mitch McConnell actually suggested that the solution for college affordability is for young people to lower their expectations and become more cost conscious, because he said not everyone needs to go to Yale.”

McConnell made the remarks in a town hall meeting last week, when explaining his support of proprietary education—or for-profit schools—as, he said, it increases competition with traditional colleges:

…I think the best short-term solution is for parents to be very cost-conscious in shopping around for higher education alternatives. Not everybody needs to go to Yale. I don’t know about you guys, but I went to a regular ol’ Kentucky college. And some people would say I’ve done okay.

Warren then asked everyone in the room who had student loans and didn’t go to Yale to raise their hands—and the vast majority did. “His vision for America is that no one reaches higher than they can already afford,” Warren scoffed. “Mitch McConnell may think that the solution to the exploding student loan debt is to dream a little smaller. Well, he is wrong… We are going to build a better country than the one Mitch McConnell envisioned.”

Request for comment from McConnell’s campaign wasn’t immediately answered.

Warren then said the only way to fix the situation was to convince two senators to change their minds, an endeavor she asked the students in the room to help with. Because it’s either change their minds, or elect those that don’t “hire armies of lobbyists and lawyers,” she told the roaring crowd, who gave her an ovation.

The Massachusetts Democrat’s remarks came two weeks after she campaigned for Alison Grimes, McConnell’s Democratic challenger in this November’s elections.

MONEY Student Loans

WATCH: Why Illinois is Suing Over Student Loans

Illinois is suing debt consolidation companies for allegedly fraudulent student loan practices.

MONEY

First State Sues Over Student Loan Fraud

The most frustrating part: Legitimate debt relief similar to that offered by bogus debt consolidators is usually available at no cost to borrowers.

+ READ ARTICLE

On Monday, Illinois became the first state to sue so-called debt settlement companies for fraudulent student loan practices. The New York Times reports that two companies, Broadsword Student Advantage and First American Tax Defense, were sued for charging customers for debt assistance they never received.

Debt settlement companies, which consumers pay for help consolidating their loans and decreasing their monthly payments, have long had a reputation for taking advantage of desperate borrowers eager for a quick fix. With Americans now holding $1.2 trillion in outstanding student loans, college grads appear to be an increasingly attractive target.

According to court documents, the typical scam involves offering debtors a variety of services—some non-existent, some that are already offered free through federal programs—in exchange for money up front. First American even made up fake government relief initiatives—like the “Obama Forgiveness Program”— to entice customers, and feigned affiliation with the Department of Education. Rick Cibelli, an Illinois caregiver, told the Times he payed First American $175 over the phone to help pay down his $10,000 of student debt before learning the company’s purported federal connections were false.

The most frustrating part of debt relief fraud is that a legitimate version of the services offered by scammers are usually available at no cost to borrowers. Common student loan scams include offering to consolidate student loan payments (putting multiple loans under one lower monthly fee), debt forgiveness, or lower monthly payments. All of these services are offered free of charge by the Department of Education to eligible borrowers.

Persis Yu, a staff attorney at the National Consumer Law Center’s Loan Borrower Assistance Project, says she’s never seen a loan assistance company offer anything that isn’t already offered by the federal government. “The bottom line is they’re charging you for information you can get for free,” says Yu. In a 2013 report, the National Consumer Law Center found some student loan relief agencies charged up to $1,600, or $20 to $50 a month, for what amounts to filling out a few forms.

Yu believes that the primary cause of student loan relief fraud is a failure to educate the public about current government options. “There is an information vacuum, which I think is one of the reason why these companies have been successful,” laments Yu. Mark Kantrowitz, publisher of Edvisors.com, agrees. He advocates legislation that would require debt settlement agencies to clearly and conspicuously disclose that the services they offer can be also be obtained for free. “There’s nothing illegal about charging a fee for a free service,” said Kantrowitz “but when it strays into the realm of being misleading about what you’re charging a fee for, that becomes problematic.” Similar legislation already exists for companies that help families file the Free Application for Federal Student Aid (FAFSA).

Luckily, careful borrowers can avoid a scam. Yu says that anyone looking for student loan assistance should contact the servicer of their loan directly to discuss their available options. Any program not referred to them by the loan servicer should be considered highly suspect. Those with older loans granted under the Federal Family Education Loan program should also be careful when speaking to their lender about consolidation because these lenders are not required to disclose government consolidation options.

Unfortunately, outside of your current lender, there are precious few reliable resources for those with student debt. “We have had instances where borrowers who do contact their services don’t get the best information, so it’s incumbent on borrowers to get the best information,” Yu said.

One good resource is the NCLC’s own website, StudentLoanBorrowerAssistance.org, which offers trustworthy advice on loan repayment options, as does Edvisors.com. The Department of Education also offers excellent online materials, like a fact sheet on loan consolidation, including how to apply for a consolidated loan. The same site also explains various term-extension options, including a calculator that will use your income, loan amount, and interest payment to estimate how much you would pay per month and in total under various repayment plans. The Department of Educations also maintains a toll-free number, 1-800-4-FEDAID, that offers loan information.

Public sector workers, or those who meet various other conditions, may be eligible for forgiveness, cancellation, or discharge of their loan. This page explains the various requirements and how to take advantage of any programs you qualify for.

There are also a number of private refinancing options that can lower long-term interest payments. Matt Krupnick of the Hechinger Report writes that companies like Pave and CommonBond offer certain graduates advantages like flexible loans or low-interest payments. Kantrowitz says these loans can be great options for graduates who have good jobs and high credit scores, but are generally unavailable to borrowers struggling to meet their current payments.

Yu also cautions that while private refinancing can mean lower rates, it also means losing many federal protections, like forgiveness in the case of disability or death, or government income-based repayment plans. “If someone is going to consider refinancing, they need to know they will lose their rights under a federal loan,” said Yu. “That will have to be a cost-benefit analysis.”

TIME

Unemployed and in Debt, Young Americans Ask Congress for Help

Five years after the end of the Great Recession, America's young adults are still facing economic challenges.

For many millennials, the future looks bleak. “We don’t just face dreams that are deferred, we face dreams that are destroyed,” Emma Kallaway, executive director of the Oregon Student Association, told the Senate Subcommittee on Economic Policy Wednesday. But if they were hoping for answers from Congress, Kallaway and other young adults across America facing frustrations with student loan debt and the sluggish job market will have to wait.

Senate Democrats convened the subcommittee hearing entitled “Dreams Deferred: Young Workers and Recent Graduates in the U.S. Economy” to highlight youth unemployment and heavy student loan debt after Sen. Elizabeth Warren’s (D-MA) student loan bill stalled in the Senate earlier this month. Warren’s bill would have allowed an estimated 25 million people with long-existing student loan debt to refinance at lower interest rates.

Just 63.4% of youth aged 18-29 are employed, Keith Hall, senior research fellow at George Mason University, reported in his testimony. The unemployment rate of workers under the age of 25 is 13.2%, more than twice the overall rate of unemployment.

As joblessness remains high, the cost of college continues to rise, compounding already hard-to-manage debt levels for many young Americans. Student debt in the U.S. now tops $1.2 trillion, according to Rory O’Sullivan, deputy director of the non-profit group Young Invincibles.

“It sounds like perfect storm in a way,” said subcommittee chair Sen. Jeff Merkley (D-OR) of the snowball effects of the Great Recession on young adults.

Youth unemployment also affects overall spending in the broader economy because young adults cannot afford to move out of their parents’ house, buy big items like cars and homes, and get married. Taxpayers bear some of that burden. Youth unemployment deprives the federal government of over $4,100 in potential income taxes and Federal Insurance Contributions Act taxes per 18-24 year old every year, and almost $9,900 per 25-34 year old, according to a recent study by Young Invincibles. That translates into an additional $170 of entitlement costs per taxpayer in the federal budget.

If the problem is clear, the solution is not. Witnesses at the hearing variously suggested state disinvestment in higher education, simplifying the federal aid application and repayment process, offering relief for existing borrowers, and holding institutions more accountable for providing affordable, quality credentials to graduating students.

Merkley asked the panel for their opinions on the merits of the “Pay It Forward” Guaranteed College Affordability Act, which would allow students to go to college without paying up front. Instead, students sign a contract to join an income-based repayment plan for a designated period of time after graduation. Several states are considering versions of the grant plan; Oregon signed one into law in 2013.

Although Kallaway and O’Sullivan said the plan would possibly circumvent the debt-to-income trap, both agreed it was not a long term fix. Kallaway believes the solution is to tackle the problem at the root, in high education costs, and not at the repayment level. “More affordable education upfront is what’s right,” Kallaway said. “Federal student loans should not be a form of income for the government.”

Hall believes that student debt and rising tuition are just symptoms of a larger disease. High unemployment numbers aren’t just an issue for young adults, he pointed out. The problem, he said, is a poorly functioning economy. “Until you solve this labor market problem […] this problem is not going away,” he said. “You’re going to have these continuing symptoms.”

MONEY Student Loans

The Real Problem With Rising Student Debt

140625_FF_studentloanrise_1
Alamy

It's not the overall amount of student debt that's worrisome, but how risky this form of financing is.

David Leonhardt of the New York Times has made the surprising case that, despite what you’ve probably heard, enormous student loan burdens are not so common. Here he is citing a new report from the Brookings Institution:

Only 7 percent of young-adult households with education debt have $50,000 or more of it. By contrast, 58 percent of such households have less than $10,000 in debt, and an additional 18 percent have between $10,000 and $20,000.

This story set off a storm of argument and counterargument. Peter Coy at Bloomberg Businessweek has good run-down of the debate about the data here if you want more on what the fuss is about.

But let’s forget about the absolute size of student debt. One thing that’s absolutely clear, as the Awl‘s Choire Sicha says, is that the amount of it has grown very quickly.

…people with college debt saw their debt double, and also the number of those households with debt more than doubled. That is not exactly undermining this supposedly fake narrative of the increase of student debt!

More than a third of households headed by someone under 40 carry student debt now, up from just 14% in 1989. And that may be a big deal even if most debts are relatively small. Why? Because for many people student loan debt is risky.

Let’s be clear. Borrowing to go to college can be an incredibly smart investment: The lifetime return, in terms of extra earnings, from a bachelor’s degree may be as high as 15% year. But that’s an average. Not everyone who borrows to go to college actually gets a plum job, not least because not everyone makes it to a B.A. Leonhardt says this is the real lesson of the Brookings study.

…the Brookings paper does contain a true cause for concern: “Among households with some college but no bachelor’s degree, the incidence of debt increased from 11 to 41 percent.” The average amount of debt among this group also more than doubled over the last two decades. Some members of the group are thriving community-college graduates, but more are college dropouts.

Leonhardt suggests fixing this is mostly about looking at the schools. Far too many colleges are drop-out factories. But I think this also points to a basic structural problem with debt as tool to finance the cost of a college education.

Imagine, instead of a student, that it’s a company that wants to make an investment in its future growth. One way to fund this is to find equity investors (that is, issue stock.) Equity can be an attractive way to get money because the investors bear a lot of the risk—if the company fails to meet its earnings projections, it never has to pay stockholders a dividend. Investors have no recourse but to grumble and hope things get better. The other way to get money is to borrow, by going to the bank or by issuing bonds. That can be a riskier move. Whether earnings come in high or low, the lenders must be paid the agreed upon rate of interest.

Although this is beginning to change, for the most part, students who need extra funding for their college education have only the riskier debt option. If their earnings aren’t what they expect, they still have to carry that loan. In fact, unlike other kinds of debt, student loans so hard if not impossible to restructure in bankruptcy.

Economists Atif Mian and Amir Sufi, whose book on the mortgage crisis, House of Debt, I recently wrote about, say that households need more equity-like ways to finance essential investments. For mortgages, they’d like to see a new kind of loan that indexed payments to local housing prices, so that in the event of a real estate crash the lender shared some of the downside. Mian and Sufi make a similar proposal for student debt. They’d link the principal value of the loan to the unemployment rate for college grads, so that if unemployment goes up the debt burden goes down.

The economists prefer this to the better known idea of basing loan repayments on income. The Obama administration has recently expanded one such program for people with federal student loans. Mian and Sufi worry that linking payments to individual income can create a perverse incentive to earn less. But income based repayment may help address the risk faced by people who start college but don’t graduate, since they may struggle financially even when college grads as a group are doing well. In any case, both ideas are steps toward making college financing more equity-like.

Of course, America actually has a long experience of making an equity investment in college educations. State universities’ subsidized tuitions are taxpayers’ bet on students’ future earnings. The ones who don’t graduate, or don’t land a high-paying job, or who decide to do something socially useful but poorly paid, aren’t stuck with the huge bills their private-school peers may have. But the ones who do well end up paying the state back part of their upside—in taxes. In recent years, though, states have been spending less per student on colleges, and rising public college tuitions have contributed to the spread of debt. For today’s students, that’s been a step into a riskier world.

MONEY College

Student Loan Rates Rise Next Week. Don’t Freak Out—Yet

College students walking on campus
"OMG, Kimmy, I am so relieved that the student loan rate increase will not impact my beer budget." Tetra Images—Alamy

While new loans will cost more, the difference in monthly payment won't be significant.

Interest rates on federal student loans are set to rise—again—this July 1, following a nearly half a percentage point bump on Staffords last year.

But before you cue the outrage, consider this: The hike isn’t likely to increase students’ or parents’ borrowing costs in any drastic way, at least not in the short term. Here’s everything you need to know about the upcoming rate jump.

What’s happening

Interest rates on undergraduate Stafford loans taken out after July 1 will climb to 4.66% from last year’s 3.86%. That goes for both subsidized and unsubsidized loans.

Loans for graduate students and parents of college students had higher interest rates to begin with, and will rise too. Unsubsidized Stafford loans for graduate students will now cost 6.21%, up from last year’s 5.41%. And rates on direct PLUS loans, offered both to parents of college students and to graduate students, will rise to 7.21% from 6.41%.

Keep in mind, none of these rate increases apply to loans disbursed in previous years.

Why it’s happening

The story starts last summer, when Congress came up against a major dilemma over student loan rates.

Under existing legislation, rates on undergraduate Stafford loans were set to double in 2013, from 3.4% to 6.8%. To prevent that from happening, Congress—after some partisan squabbling—passed legislation pegging federal student loan rates to yields on 10-year Treasury notes, with direct loan rates resetting every year on July 1.

That’s the system we’re on now; so if you’re unhappy about the increase in interest rates, you have bond yields to blame.

Why you shouldn’t panic—yet

The size of your loan ultimately will determine how much the new rate hike affects you. But experts say that it’s unlikely to have a meaningful impact on most borrowers.

Consider two different undergraduate Stafford loans of $5,500, the max a dependent freshman can take out. One was taken out last year at the 3.86% interest rate and another taken out this year at the higher 4.66%. In a 10-year repayment period, you’ll only pay about $3 more per month on the loan taken out this year.

So, does it make a difference? Sure, but probably not enough of a difference to stop a student from borrowing to attend school.

“[Government] tinkering with interest rates does not affect who enrolls in college or who graduates college,” says Mark Kantrowitz, senior vice president of Edvisors, an organization that helps students and families plan how to pay for college.

So no, you don’t need to freak out about the interest rate increase this year. But before you get too comfortable, bear in mind that it’s very likely rates will rise in the future, and perhaps even over the four or so years that you or your child is in school. “Given that we’re in a period of very low interest rates right now, there’s nowhere for rates to go but up,” says Kantrowitz. The Congressional Budget Office predicts that rates on Stafford loans will be at 7.7% by 2018.

Fortunately, rates can’t rise infinitely: Congress agreed last year to cap undergraduate Stafford loans at 8.25%, graduate Stafford loans at 9.5%, and PLUS loans at 10.5%.

MONEY Kids and Money

The Secret To Raising Financially Independent Kids

What parents can do from the get-go to help their children prosper later in life.

It’s the secret fear of every American parent: failure to launch.

What if, despite your best efforts, your adult kids just aren’t able to sustain themselves financially?

The idea used to give Andy Byron the cold sweats. With a whopping five kids, the 57-year-old financial planner from Pleasanton, Calif. wanted no part of “delayed adults” hanging out in his basement well into their thirties.

So he and his wife turned their household into a virtual factory for churning out financially independent kids. The eldest girl, 29, is an English language teacher. The 26-year-old twin boys work for Apple and PricewaterhouseCoopers, respectively. Their 22-year-old son scored a paid summer internship with medical device manufacturer Stryker Corp, with an eye toward a career in medical sales.

The 19-year-old daughter, a college sophomore in the fall, is combining her studies with a paid summer internship and a part-time accounting job during the school year.

So what’s their secret sauce?

“Start early, be consistent, and make sure they know what their responsibilities are,” Byron says.

As soon as they were 16 or 17, the parents told their kids that they had to get jobs, and would be on their own after graduation. As a result, the three oldest are out of the house and get no more monthly cash from the bank of Mom and Dad; the younger two will follow suit soon.

While the Byron clan appears to have figured it all out, it’s no easy task to nudge kids from the nest. Among people in their 40s and 50s who have adult kids, a stunning 73% report lending financial help over the previous year, according to Pew Research Center, a Washington-based think tank.

Are the successful launches of the 27% due to thoughtful, years-long projects to educate kids about handling finances? Or are they product of tough love, throwing adult kids into the deep end of the pool in order to force them to swim?

“They are more the result of financial education, and talking about money, which ranks right up there with sex as a taboo subject,” says Sally Koslow, author of the book Slouching Toward Adulthood.

For those with children who have yet to launch, there is plenty of time left on the clock. Here is how to prep kids for true financial independence, during college and the critical years that follow:

Do Your Part

If you don’t want your kids financially hanging on, do whatever you can to help them graduate from college debt-free. Seven out of 10 college grads last year had outstanding loans, at an average debt of $29,400, according to the advocacy group Project On Student Debt. To help them avoid indentured servitude, start saving as soon as they’re in swaddling clothes.

Andy Byron and his wife contributed at least $50 a month, and often much more, into 529 college-savings plans for each one of their five kids—”as soon as each child had a Social Security number,” he says.

Byron supplemented that aggressive strategy by “strongly suggesting” the kids go to public, in-state universities. The payoff: All the Byron grads have emerged from their college years free of student debt.

Related: How Much Do I Have to Save for College?

Draft a Wingman

The popular HBO series Girls was premised on a key event: Lena Dunham’s character getting financially cut off by her parents.

That can be excruciating for everyone involved, but necessary nonetheless. “Parents get so emotionally involved,” says Matt Curfman, a vice president with financial advisers Richmond Brothers in Jackson, Mich. “That’s why I tell them, ‘If you need me to jump in and help, even if I end up being the bad guy, I’m happy to do so.’”

It doesn’t have to be done in one fell swoop, Curfman notes. If your adult kid runs into financial trouble, write down a concrete plan to help with a certain amount of dollars for a certain number of months—”but that’s it.”

Become a Part-Time Professor

Kids get plenty of calculus and chemistry in high school and college, but personal finance? Not so much.

That’s where parents can make themselves a critical resource. For 24-year-old Annie-Rose Strasser, home instruction was what set her on the path to become the financially independent young adult she is now. Strasser has a full-time job as a journalist in Washington and lives in her own apartment. “I never learned personal finance when I was in school—401(k)s, saving, balancing a budget: I learned it all from my parents,” she says.

Paired with that informal home-study was the early expectation that Strasser would put herself to work as soon as she was able. A constant stream of it—at summer camps, at office jobs, at paid internships—helped set the table for her successful launch.

“My parents aren’t the kind of people who would say, ‘Go off and explore yourself,’” she laughs. “Instead, they put a lot of stock in the idea of finding a career, saving money—and being extremely financially responsible.”

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