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- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
I’m lucky. Unlike so many college students, I didn’t take out any student loans. Thanks to help from my mother, along with working my way through college, I was able to foot the bill. Granted, I didn’t go to a mega-expensive school like Harvard or another Ivy League or private college, but I did receive my undergraduate degree from 60 Minutes Executive Editor Bill Owens’ alma mater, Towson University, so I believe my (and my mother’s) money was well-spent.
But a university education is getting more and more expensive, with tuition rates at all-time highs. Parents are also being counseled by some advisors to save for their own retirement instead of putting their kids through college, so student loans have become increasingly more common. To avoid such costs, however, one advisor who teaches financial planning to college students told me that more students are choosing cheaper online courses, which threatens the existence of brick-and-mortar colleges. Then there’s the recent research that questions whether a college education is even worth it.
Massachusetts Sen. Elizabeth Warren, one of today’s boldest consumer advocates, recently issued a warning on the Senate floor that student debt in the United States “is a quiet but growing crisis.” Today’s graduates, she said, collectively carry “more than $1 trillion in debt—more than all the outstanding credit card debt in the whole country.”
As Warren pointed out in her mid-May remarks, in less than two months, if Washington sits on its hands and does nothing, the interest rates on new student loans will double. That’s right, double. “So far,” she said, “this Congress has done nothing—nothing—to address this problem.” But Warren, being no shrinking violet, introduced in mid-May the Bank on Students Loan Fairness Act, which would allow students who are eligible for federally subsidized Stafford loans to borrow at the same rate that big banks get through the Federal Reserve discount window.
As it stands now, a big bank can get a loan through the Federal Reserve discount window at a rate of about 0.75%, Warren said, whereas starting this summer “a student who is trying to get a loan to go to college will pay almost 7%.”
In other words, she continued, “the federal government is going to charge students interest rates that are nine times higher than the rates for the biggest banks—the same banks that destroyed millions of jobs and nearly broke this economy.”
For one year, under Warren’s bill, the Federal Reserve would make funds available to the Department of Education to make loans to students at the same low rate offered to the big banks. “This will give students relief from high interest rates while giving Congress time to find a long-term solution,” Warren said.
Warren's bill would be a departure from past practices, and is unlike two other bills introduced the same week as hers. As analysts at Washington Analysis noted, the other two bills—one introduced by House Education Committee Chairman John Kline, R-Minn., and Rep. Virginia Foxx, R-N.C., and the other introduced by House and Senate Democrats—support their “long-held view that federal Stafford student loan rates will shift from their current historically low fixed rate of 3.4% to a market-based interest rate” before the July 1 expiration of the current rate.
The analysts see a “growing consensus” among lawmakers to move to a “market-based rate with a maximum limit of some kind.”
Kline and Foxx’s bill pegs subsidized and unsubsidized Stafford loan rates to the 10-year Treasury rate plus 2.5%, while graduate student loans would be pegged at the 10-year rate plus 4.5%. The Washington Analysis analysts noted that the bill would cap interest rates for undergraduate and graduate loans at 8.5% and 10.5%, respectively. “For a Republican-sponsored bill,” the analysts said, “this was a significant concession to Democrats.” However, “both parties appear to be making good-faith efforts to complete a market-based student loan bill before the July 1 deadline.”
Consistent with this view, the analysts continued, the bill introduced by a group of House and Senate Democrats would peg federal loan rates each year to the 91-day Treasury bill rate, plus an additional percentage to be determined by the education secretary. Subsidized Stafford rates would be capped at 6.8%, while unsubsidized Stafford and graduate student loans would be capped at 8.25%. The bill would also allow existing borrowers with high fixed-rate federal loans to refinance into new variable-rate loans.
In his budget request to Congress, President Obama also proposed shifting the current fixed-rate approach to one that is market-based, though the proposal does not specify details regarding the underlying reference rate, the analysts said. However, “this approach coincides with a recent similar proposal from Republican Senators Lamar Alexander, R-Tenn., Tom Coburn, R-Okla., and Richard Burr , R-N.C., that would set the rate at 3% above the 10-year Treasury rate.”
The analysts pointed out that a market-based student loan interest rate is not unprecedented, as the rate was market-based from 1992 until 2005, though it was capped at 9% and 8.25% during different periods. “In 2006, the rate was set at 6.8%, before being lowered to 3.4% in 2007.” But in order to extend the current 3.4% fixed rate for one year, Congress would need to find a $6 billion offset, something the analysts say is unlikely at this point. “A floating interest rate, on the other hand, has a very different budgetary impact, with the market-based student loan bills all scored as reducing spending, though those savings can vary widely depending on the specific parameters.”
A floating interest rate, with some ceiling to appease Democrats, is quickly becoming the policy consensus, the analysts said. “The question is whether Congress can push through such a structural change in the fewer than three months remaining before the deadline. Ultimately, we believe the cost savings are compelling enough and the president’s support influential enough that Congress will agree on a market-rate proposal.”
Whatever the outcome, Ron Rhoades, assistant professor and chairman of the financial planning program at Alfred State College, sees a macroeconomic trend brewing in that brick-and-mortar colleges are being threatened by what he calls “massive online open courses” being awarded by established universities and colleges.
Rhoades wondered, “Will brick-and-mortar colleges survive” as greater acceptance of online courses takes hold? “Will student demand for the ‘residential college’ experience substantially decline over the next decade, perhaps by 50%, as students can take college courses for credit—at far less expense—from their own home?”
Yet another long-term trend, Rhoades said, has been states’ dwindling support for higher education. How might students’ increased use of online courses “affect our research universities—long a substantial driver of innovation and economic growth in the United States?”
Recent research by the New York Federal Reserve also noted that the massive $1 trillion that’s owed in student debt is impeding U.S. economic growth in that young college graduates are unable to afford to buy a home—and, more importantly, don’t qualify for a loan because of how much they owe.
The research found that the number of student borrowers is approaching 40 million nationally. That includes more than 40% of 25-year-olds, whose average balance on their loans has reached $25,000. Nearly 6.7 million of all student borrowers, or 17%, are delinquent on their payments three months or more, the research found.
One option, of course, is plowing money into a 529 college savings plan, if you can afford it. Joseph Hurley, founder of SavingForCollege.com, noted that while “government loan programs have helped make college degrees possible for millions of students, the easy access to loans has created a student loan crisis and many graduates struggle to repay their debt.”
Advisors, he said, “can help their clients avoid such situations by suggesting they set aside significant sums in 529 plans.” Many families “who are not financially prepared for college have to scramble when it comes time to comparing financial aid offers, selecting a college and paying the bills. Families with funds in 529 plans can focus on which school is right for the child and not necessarily which one offers the best financial aid package.”
Like other parents, I want my sons to get the best education they can—but I don’t want them to be saddled with debt for years after they’ve graduated or to take care of me when I’m older because I’ve spent all my retirement money on their education. As Sen. Warren said, Congress needs to find a “long-term solution” to ensure that an affordable college education is within everybody’s reach.