U.S. News & World Report recently conducted a nationwide survey of college-aged students to learn about their level of financial literacy, the results were alarming to say the least.  The findings show that most high school and/or college students, lack the basic understanding of the two major financial products that they will encounter on campus: credit cards and student loans. 

To help students develop a better understanding of these products, they have created these in-depth guides:

https://creditcards.usnews.com/student#2017-survey

https://loans.usnews.com/student-loans

https://loans.usnews.com/student-loans-consolidation-refinancing

Check out the links to learn more.

Tackling the Student Debt Crisis

In a Yahoo Finance article posted today entitled, "5 Genius Ways Colleges are Tackling the Student Debt Crisis," Mandi Woodruff discusses techniques that several colleges are using to help students understand that student loan debt is real, and will have to be paid off someday.  The hope is that this will ultimately lessen the student debt burden by encouraging students to take out as little debt as possible.

Did you understand anything about loans payments, amortization, etc. (time value of money) before taking your first corporate finance class?  Is it the responsibility of the college or university to teach students about student loan debt?  What do you think colleges and universities should do to encourage students to borrow as little as possible?

How do you think student loan debt will affect this generation?  How will it affect the American economy?

When and how will the Fed raise rates?

Interest rates can't stay at these near zero levels forever and many people both on Wall Street and Main Street, have been paying attention to Janet Yellen's comments regarding when and how she plans to raise rates.  

If you do an Internet search on this topic, you can find a plethora of news, for example:

http://money.cnn.com/2015/04/13/news/economy/federal-reserve-janet-yellen-interest-rate/

http://www.nytimes.com/2015/03/28/business/yellen-says-fed-will-increase-rates-slowly.html?_r=0

http://www.cnbc.com/id/102541816

Understanding a bit about macroeconomics is crucial for investors and finance professionals.  When Yellen does begin raising rates, how do you think this will effect security valuation?  Specifically, what will happen to the price of bonds?  What do you think might happen to stocks?  What about real estate and other assets?  

Will higher interest rates encourage businesses to make investments?  Or will higher rates discourage investment and perhaps increase unemployment?

If you were an investment professional, what advice would you provide to your clients in a rising rate environment?

College Costs Continue to Rise Faster than Inflation

There was an interesting article recently in Bloomberg entitled: College tuition in the U.S. rises faster than inflation, again.  In the article, Bloomberg reports results from a recent study conducted by the College Board.  The study shows the continuation of a trend we have seen for decades.  This year, inflation (measured by the personal consumption expenditures index) was 1.4%, while college tuition and fees rose at a rate above that.  For private nonprofit colleges the average increase was 3.7% and for in-state residents at four-year public schools, costs rose 2.9%.
According to the article, "the good news is that increases this year are smaller than the average for the past five-, 10- and 30-year periods, and more public school students saw no increase at all."  However, student loan debt is rising and most Americans' real incomes haven't grown in over 10 years.  

The Future Role of the Financial Advisor

There was an interesting article recently in the Wall Street Journal on the role and fee structure of financial advice.  See: http://blogs.wsj.com/moneybeat/2014/03/07/the-incredible-shrinking-management-fee/

ETFs have made it so simple to invest (that is, if you believe in efficient markets) that perhaps it is time to reevaluate the percent of assets under management (AUM) fee structure.  I like the idea that in the future, financial advice may involve specialized individuals working together under one roof (financial advisor, accountant, lawyer, etc.). 

It will be interesting to see if WiseBanyan succeeds.

Should the Fed Police Foreign Banks?

An article from Wednesday's Wall Street Journal discusses new rules that will be imposed on some foreign banks with U.S. operations.  These rules will subject them to the same types of capital requirements, debt levels, and annual stress tests, that are now imposed on U.S. banks under Basel III.  The regulation is an effort to prevent further government bailouts and moral hazard when banks become "too big to fail."  The rules are geared toward enforcing better risk management and will require banks to have some "skin in the game," that is, if their legal teams can't figure out a way to sidestep the new rules.  

Foreign banks with U.S. operations must have $10 billion or more in assets in order to be forced to adhere to the Fed's new rules.  The rules will not be imposed until July 2016, which will give the banks' lawyers plenty of time to devise strategies to thwart them.  Perhaps they will move their U.S. operations overseas, or sell off assets so that they come in under the threshold. 

The Fed justifies extending the rules to foreign banks, by saying that foreign banks dealing with American customers must be kept on the same playing field as their U.S. competitors. 

An interesting working paper on minimum capital requirements and their effect on WACC can be found here or here.

Obama's MyRA Plan might lead Horses to Water...but...

At his recent State of the Union Address, President Obama discussed his plan for helping low to middle income Americans save for retirement by creating the MyRA.  Since then, as more details have been revealed, many journalists have written about this savings vehicle, which is slated to be available in the coming months.

A nice summary of the plan, with opinions that I largely agree with, is found here.

Basically, the MyRA will be set up like a Roth IRA.  Roth IRAs allow investors to invest after-tax dollars and withdraw the money in retirement tax-free.  There is no immediate tax benefit for investing today, but your investment will grow tax-free and withdrawals (at age 59 1/2 and older) will be tax-free.  Depending on your current and future tax brackets, Roth IRAs can be the best type of retirement vehicle.

However, the MyRA will have limited investment options.  These accounts will solely invest in government savings bonds, and will be backed by the U.S. government, meaning that savers can never lose their principal investment (protected like with FDIC). Don't be fooled into thinking that because the principal is protected, you will be free of risk.  The MyRA will pay the same variable-interest-rate return offered by the G Fund, the Government Securities Investment Fund in the federal employees’ Thrift Savings Plan.  In 2012, this fund's yield was 1.47%.  Inflation over that same period (as measured by the CPI figures) was 2.08%.  Purchasing power risk is a very real threat to this type of account. 

The MyRA accounts will stay with you when you switch jobs or contribute to the same account from multiple part-time jobs. The MyRA will be free of all administrative fees.  The balance is capped at $15,000 -- this is truly geared toward low to middle income Americans.  After that (or once it has been opened for 30 years), the owner has to roll it over into a Roth IRA (they can do this anytime). 

Contributions can be withdrawn at anytime without penalty. However, anyone who withdraws the interest they earned in the account before age 59 1/2 will be forced to pay taxes on withdrawals and will possibly owe a penalty, just like a Roth IRA.

All in all, I don't really understand how the creation of this new retirement plan will help Americans save.  The tax incentives already exist with Roth IRAs.  Middle and low income Americans are already eligible for these plans.  Guaranteeing the principal and eliminating administrative fees are benefits, but the low return likely makes this a poor investment.  For comparison, the Barclays iShares funds that match the G Fund most similarly are the iShares Barclays 7-10 year T-Bond fund (ARCA:IEF) with an average maturity of 8.38 years, and the 10-20 year T-Bond fund (ARCA:TLH), which has an average maturity of 14.36 years. You can compare these funds' returns to the S&P 500 or any other market proxy to see for yourself how badly it has fared in the long-run.

The returns on the MyRA might be low enough to disappoint investors and discourage them from further saving in general.  Worse yet, by capping the account's value at $15,000 we might give some Americans the idea that $15,000 is savings enough for retirement. 

Can we come up with a better incentive for Americans to start saving for retirement?  Especially younger Americans, for whom Social Security may not exist to help?  What about a government matching program?  Or an incentive to actually go ahead and roll over that $15,000 into another retirement vehicle rather than spending it?

What ideas do you have?