Citizens' Issues
Families in the US shoulder heftier burdens as college debt swells

Student debt is putting a strain on students - and their parents. Meanwhile, federal programs to make student loans more affordable won't bring relief to all

It's been a year of eye-popping records for student debt. Outstanding student loan debt surpassed credit card debt, with one government estimate pegging total student loan debt at more than $1 trillion.
 

Such staggering figures drew renewed attention to the fact that rising higher education costs and falling government support for state colleges and universities has burdened individual students and their families with immense debt — all at a time when new graduates face anemic prospects for getting a decent job.
 

Parents Take on Federal Loans for Their Children

 

Increasingly, the debt burden falls on parents, not just students. As we reported with The Chronicle of Higher Education, the federal Parent Plus loan program allows parents to borrow big from the federal government to fund their children's college education when grants, scholarships and federal student loans (which are capped at strict dollar amounts) don't suffice. Borrowers with low income, or even no income at all, can still get the loan so long as they pass a check on their credit history.

 

The Parent Plus program has increasingly been the solution for families coming up short on funds for college — but as we noted, it can be dangerous when families, desperate to give their child the advantages of a costly college education, borrow more than they can handle.
 

College financial aid offices — which typically see their role as merely laying out financial aid options — are often reluctant to advise families on how much is too much to borrow. But some highlight the parent loans by including them in a student's financial aid package in a suggested amount — often the amount needed to cover the "gap" in need. At some schools, that amount can easily reach tens of thousands of dollars for just one year, let alone four. With no check on the borrower's income or ability to repay the loan, many families sink into hopeless debt — which, like all federal student loans, can almost never be eliminated through bankruptcy.

 

Private Student Loan Pains Continue

Private student loans can also saddle generations with debt when parents co-sign on the loans taken out by their children. As we reported, that's what happened to Francisco Reynoso, a California gardener who made just over $21,000 last year. He co-signed on six figures in private student loans for his son. Several months after the younger Reynoso graduated, he died in a car accident, leaving his father mired in grief and debt.

 

Private student loans — which for years had been unregulated — generally carry fewer consumer protections than government loans. If Reynoso's loan had been federal, his debt would have been cancelled upon his son's death. Instead, as we reported, he was left on the hook — unsure of what company to appeal to because his loans had changed hands so many times. (As of this writing, Reynoso's four years of financial uncertainty over his debts are nearing an end. One of his debts was discharged through the bankruptcy process. The other debt has been settled in a confidential agreement with the lender. See our latest story.)

 

Borrowers on the hook for private student loans don't have many places to turn when lenders refuse to grant flexibility. They're not affected by the Obama administration's efforts to help federal student loan borrowers manage loan payments — see below. And, of course, student loans are one of the few debts that generally cannot be shed in bankruptcy. Both the Consumer Financial Protection Bureau and some members of Congress have suggested that this should be changed for private student loans, but the proposal hasn't seen much movement.
 

What the Obama Administration Has Done

This fall, the Obama administration finalized regulations expanding an existing federal program to help struggling borrowers with federal loans. It's worth noting that the measures — said to be a windfall for some borrowers, especially those heading to graduate school — won't be of much help for borrowers who have already fallen behind on their federal student loans. In order to qualify for the current income-based repayment program or the new version, called "Pay As You Earn," borrowers must be current on their loans.

 

As we reported, the Obama administration also recently adopted a crucial reform to help disabled borrowers get their federal student loans forgiven more easily by eliminating some of the red tape. Now, the Education Department has agreed to accept the assessment of the Social Security Administration in determining whether a borrower is disabled and thus eligible for loan forgiveness. Its previous, more dysfunctional system had required a second assessment of disability that kept many borrowers deprived of the benefits to which they were entitled.

 

We've also reported on how throughout this year, the Education Department has continued its seismic shift in the servicing of student loans — steadily transferring more than a million borrowers to private companies with contracts to handle the day-to-day management of federal student loan accounts. As we've reported, the shift will roughly triple the total number of companies handling loans from a year ago, causing confusion for many borrowers caught in the shuffle and making it harder for the government to oversee its servicers.

 

In the past year, the new consumer watchdog agency, the Consumer Financial Protection Bureau, began wielding new regulatory power over private student loans. The CFPB has published a number of reports detailing abuses in the private loan market and has been taking all manner of student-loan complaints from consumers.

 

We'll continue covering student loan stories in the new year. So if you or someone you know has a story about any of the issues mentioned above — from borrowing to servicing to the loan relief programs — share them with us. Or if you work in financial aid or at a student loan company, sign up to be one of our experts.

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RBI Financial Stability report: Lessons in financial planning

There is a lot that needs to be done in financial education and financial planning. Volatility and undesirable speculation in the equity market needs to be reined in so that investors could have more faith in equity market. Also, investors need to be moved to investments like Gold ETFs in order to reduce the import bill of gold

The Reserve Bank of India ( RBI) has come out with its Financial Stability report. The report talks in details about the risks which the financial system in India and also gives an overview of the way things have been shaping up in the Indian economy in general. However, the most interesting aspect of the report is that it provides a good insight into Indian household’s saving and investment behavior which can be used as a tool by financial planners. Let us look at some such interesting aspects:
 

Gold has been the most reliable asset for Indian household: This may be disappointing news for those who suggest equity as an investment option for long-term wealth creation (including me). However, the reality is that gold has become the most preferred investment option in the post crisis period for investors. The RBI report says that post 2008 crisis, gold has been one asset which has consistently giving returns that has beaten inflation comprehensively.
 

The RBI report says, “Gold prices have increased the most in comparison with other assets and are significantly above the movement in the WPI (wholesale price index) as at end September 2012. Residential house prices have also beaten the upward movement in the WPI. The movement in the BSE Sensex was only slightly higher than the WPI during June 2008 and September 2012. On a year-on-year basis, gold offered the highest returns among asset classes for majority of the years after the global financial crisis”.
 

The chart below shows that gold return has been the best among asset classes which are real estate, Sensex, gold and bank deposits.
 


The RBI report also shows that the attempt to rein gold import has failed in spite of the increase in the government duty. The report says, “Earlier this year, the government duties on the import of gold were hiked. This measure, inter alia, appears to have significantly dampened demand for gold in the June 2012 quarter. However, demand in the September 2012 quarter picked up significantly and was higher than the average of the last five years (September 2007 to June 2012)’.
 

Indian household preference for physical savings increasing over financial savings:  Post 2008, there has been a general shift from financial savings to physical savings. The RBI report says, “Financial savings of the household sector declined to a two decade low of 7.8% of the GDP (gross domestic product) in 2011-12 from 9.3% in 2010-11 and 12.2% in 2009-10.Even in absolute terms, financial savings fell from Rs7.9 trillion in 2009-10 to RS6.9 trillion in 2011- 12”. This is reflected in the chart below, as well.
 


The RBI report also provides an explanation for this shift in the saving behavior when it says, “A number of possibilities could explain the fall in financial savings. Inflation has been high during the past few years. Consequently, real return on financial assets has been very low. Households seem to have shifted their savings from assets earning low real rates to assets perceived as inflation-proof.”
 

Lessons Learnt: There is a lot that needs to be done in the financial education and financial planning space. In place of physical gold, investors need to move to investments like Gold ETFs (exchange traded funds). This will reduce burden on the import bill of gold. Additionally, volatility and undesirable speculation in the equity market needs to be reined in so that investors could have more faith in equity market. The Securities and Exchange Board of India needs to put stricter control for companies in equity market and need to have a re-look at pricing of equity shares during an IPO (initial public offer).
 

(Vivek Sharma has worked for 17 years in the stock market, debt market and banking. He is a post graduate in Economics and MBA in Finance. He writes on personal finance and economics and is invited as an expert on personal finance shows.)

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COMMENTS

Nilesh KAMERKAR

4 years ago

Gold prices have been appreciating in the past 10 years; and they have doubled in past 3 years. It has become fashionable to include some gold in the portfolio. This inclusion of ‘some gold’ is mostly because of the Financial Planner’s desire to look knowledgeable / intelligent in the eyes of his client.

There is no methodology to determine whether gold is undervalued or overvalued at current prices as an asset; it gets included purely because of the fallacy to extrapolate past returns into the future. When the advice to invest in gold is expressed as asset allocation it gives it a guise of scientific approach towards financial planning. – But it still remains a speculation on gold prices.

Similarly, if prices of sand, stone and pebbles keep on rising for the next 10 years at a faster pace, then rest assured, financial planners would recommend some allocation to sand, stone and pebbles too.

For an average investor, cash, debt and equity would suffice for asset allocation and would work well from financial planning standpoint. But, it is the craving of individuals to try and benefit from current fads which sets them up for disappointing results. The financial planner’s / advisor’s role must be limited to discouraging clients from allocating money to gold rather than conveniently adding fuel to fire.

SEBI rejects 149 consent pleas; 16 from Reliance group

These include applications of RIL itself, as also various group companies and that of RIL Chairman Mukesh Ambani's close aide Manoj Modi, India Infoline and HSBC Investdirect Securities

Mumbai: Indian Market regulator Securities and Exchange Board of India (SEBI) has rejected as many as 149 consent applications, finding them unsuitable for settlement through payment of charges, including 16 from various entities related to Reliance Industries group, reports PTI.

 

These include applications of Reliance Industries Ltd (RIL) itself, as also various group companies and that of RIL Chairman Mukesh Ambani's close aide Manoj Modi.

 

The other applications include those from brokerage firms India Infoline and HSBC Investdirect Securities and from entities in a case involving Bank of Rajasthan.

 

Under SEBI's consent mechanism, companies can seek to settle cases with the market regulator after payment of certain charges and disgorgement of any ill-gotten gains.

 

However, in May 2012 SEBI tightened the regulations for settlement through consent framework. Following that, many cases including some of those related to insider trading, can't be settled through this mechanism.

 

In a status report, SEBI has said that 149 consent applications have been rejected as they are not found to be in consonance with the revised guidelines and the proceedings in these cases will continue in accordance with law.

 

These include 13 applications from various entities in a case involving alleged violation of SEBI regulations for 'Prohibition of fraudulent and unfair trade practices' in a matter of RIL's erstwhile subsidiary Reliance Petroleum Ltd.

 

Besides, there are three applications related to alleged violation of 'Prohibition of Insider Trading Regulations' in the matter of another erstwhile RIL group company - Indian Petrochemicals Corp Ltd (IPCL) - which used to be a government-owned company and was later acquired by Mukesh Ambani-led group as part of a disinvestment exercise.

 

Both the companies, Reliance Petroleum and IPCL, used to be separately listed entities, but were later acquired by RIL and got delisted from the stock exchanges.

 

SEBI has also rejected consent applications of entities such as GMR Holdings Pvt Ltd, Edserve Softsystems Ltd, PMJ Properties, Garuda Plant Products Ltd and EPC Industries Ltd.

Others included Splash Media & Infra Ltd, Transglobal Securities, JMD Telefilms Industries Ltd, Chemo Pharma & Laboratories Ltd and Shree Consultations & Services Pvt Ltd, Chemo Pharma & Laboratories Ltd.

The market regulator said these rejected applications are related to alleged violations of 'Prohibition of Insider Trading Regulations', 'Substantial Acquisition of Shares and Takeovers' and 'Stock brokers and Sub-brokers' norms.

SEBI said HSBC Investdirect Securities's application is related to alleged violation of 'Prohibition of Insider Trading Regulations' in the matter of Adani Exports Ltd, while that of GMR Holdings is related to alleged violation of 'Substantial Acquisition of Shares and Takeovers'.

Besides, it has rejected consent application of India Infoline Ltd for alleged violation of clauses related to 'Stock Brokers and Sub-Brokers' in the matter of Pyramid Saimira Theatre Ltd.

SEBI has also rejected consent pleas of Saurabh Tayal, Sanjay Kumar Tayal, Navin Kumar Tayal, Pravin Kumar Tayal and Sovotex Textiles for alleged violation of 'Prohibition of Fraudulent and Unfair Trade Practices' in the matter of erstwhile Bank of Rajasthan.

The regulator said pending proceedings in these cases will continue in accordance with law.

"The rejection of consent application, however, shall not prejudice the pending proceedings in any manner," SEBI noted.

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