Class Discussion: The 1% and the Income Gap

Posted on November 4, 2011 by ajkeown

Lately, if you’ve been watching the news coverage of the Occupy Wall Street movement or listening to the political debate, there has been quite a bit of talk about the income gap between those in the top 1%  and the rest of the population.  What they’re really talking about is the increased dispersion of household income – those in the upper end earning more, and those at the bottom earning less.

In a free market system, this is not a problem that’s easy to solve.  But rather than solve it, let’s take a look at it and try to understand what’s been happening.  In October the  Congressional Budget Office (CBO), a nonpartisan group took a look at the increasing concentration of income in the United States.  The report, which was made at the request of one republican and one democrat, examined changes in the distribution of household income between 1979 and 2007 and is titled, “Trends in the Distribution of Household Income Between 1979 and 2007.”

An NPR blog “Planet Money” looked at these results in their recent blog, “Why Has Income Gone Up So Much For the Top 1 Percent?”  They concluded that in addition to an increase in investment and business profits, it was because their jobs pay more they they used to.  They refer to this as “labor income” and their blog goes on to examine possible reasons why “labor income” has increased so dramatically.

How well have the top 1% done on a relative basis?  The results presented in the CBO report summary state, “For the 1 percent of the population with the highest income, average real after-tax household income grew by 275 percent between 1979 and 2007,” and “for others in the 20 percent of the population with the highest income (those in the 81st through 99th percentiles), average real after-tax household income grew by 65 percent over that period, much faster than it did for the remaining 80 percent of the population, but not nearly as fast as for the top 1 percent.”

Planet Money also looked at the income gap worldwide in their blog, “The Gap Between Rich and Poor Is Increasing In Lots of Countries. Why?” and in that blog pointed out three possible answers.  Interesting to think about.  Try to come up with three possible answers of your own before you look at their blog.

Class Discussion:

  1. How do you feel about the inceasing income gap? Be prepared to discuss this in class.
  2. Looking at the CBO report, what drives growing earnings and income disparities? Be prepared to discuss this in class.
  3. How do you think you stack up income-wise relative to others across the globe?  Now go to the “Global Rich List” website and see how you rank.  Are you surprised?  Be prepared to discuss this in class.
Posted in Ch. 1, Financial Planning Process, Ch. 2, Measuring Financial Health and Making a Plan, Personal Finance In The News | Tagged , , , , | Leave a comment

Finance in the News: The Debit Card User Fee, Part 3 – Bank of America Backs Down

Posted on November 3, 2011 by ajkeown

Teaching Tip:  There’s an excellent All Things Considered podcast from NPR titled “BofA Cancels Plans for Debit Card Fee” that you can assign before class.

After the other banks didn’t join in and in response to consumer outrage and threats to take their business elsewhere, the Bank of America has backed down on its planned $5 debit card fee.

In an earlier blog entry we examined this debit card fee right after it was announced. Unfortunately, the banks may try to recapture this lost revenue in other forms.  It’s like whack-a-mole, if they can’t raise the money with a debit card fee, they’ll most likely find another way to raise the money – perhaps lowering what they pay on deposits, raising the minimum checking account balance, or eliminating free checking accounts. What all this means is that you’ll have to watch closely to make sure your fees don’t go up, and if they do, you’ll have to make a decision whether or not to stay with your bank.  Possible ways banks could make up the lost revenue include:

  • Late fees
  • Credit card interest rate increases
  • Lower deposit rates
  • Charges for paper statements

Discussion questions:

  1. Credit unions are an alternative to big banks.  Read the article, “Fed-up Bank Patrons Flee to Credit Unions” from the Detroit News and the article “NAFCU: Want to Avoid Bank Fees? Join a Credit Union” from Business Wire  – why are credit unions a good alternative to banks?
  2. Do you regularly check your banks statements – carefully looking at the deposits, credits and debits?  Maybe you should start.
Posted in Ch. 5, Cash Management, Personal Finance In The News | Tagged , , | Leave a comment

Finance in the News, Class Discussion, & Video: Changes Come to Student Loans

Posted on November 2, 2011 by ajkeown

Teaching Tip:  There are a couple excellent videos you can show in class that do a great job of explaining the changes in the student loan program.  One, done by ABC News runs about three and a hlaf minutes, while the other from PBS Newshour goes about 10 minutes.  Both are great.  The ABC News video is titled “Student Loan Forgiveness: Obama’s Debt Solutions,” while the one from PBS Newshour is titled “Obama’s Student Loan Relief Plan: How Helpful Would it Be?”

As total student loans approach $1 trillion, our government has made efforts to ease some of the pressure those with student loans.  In front of an audience made up of college students in Denver, Colorado, President Obama presented a new “Pay As You Earn” plan. The new plan would speed up the timeline for an already-approved loan repayment plan that lowers monthly federal student loan payments for Americans whose burden of debt is disproportionate to their earning abilities.

As you might expect, any time there are changes in a program, there is some confusion.  For example, are all student loans, both public and private covered?  What if you graduated in 2011 or earlier, will you qualify for the program? Let’s face it, when it comes to federal regulations, nothing is simple.  Fortunately, a New York Times article titled “Clearing Up Some Confusion About the New Federal Student Loan Rules” does a good job of explaining some of the detail.  There’s also a White House fact sheet that explains this program.

Discussion questions:

  1. Do you think this is a good program?  Be prepared to discuss this in class.
  2. Will this program help those who took out private student loans? Be prepared to discuss this in class.
  3. Why have student loans grown as much as they have? What do you think can be done?  Be prepared to share your views with your class.
Posted in Ch. 7, Consumer Loans | Tagged , , | Leave a comment

Finance in the News & Teaching Video: Student Debt Will Top $1 Trillion By the End of The Year

Posted on November 1, 2011 by ajkeown

Teaching Tip:  CBS News has a video of the article “The Crushing Impact of Student Debt” available online (http://www.cbsnews.com/8301-18563_162-20126148/the-crushing-impact-of-student-debt/).  The video is only about two and a half minutes long and is a good way to begin a class discussion.

Finance in the News & Class Discussion: According to USA Today’s recent article “Student Loans Outstanding Will Exceed $1 Trillion this Year,” drives home the fact that by the end of the year, the size of student loans outstanding will cross the $1 trillion mark.  That’s an attention grabbing headline. It’s hard to get a grasp on how much $1 trillion actually is, but to put it in some perspective, it’s more than Americans owe on credit cards.

As you probably already know, the cost of education has been going up dramatically in recent years, and with it, the amount of student loans has also climbed.  As shown in the graph in the USA Today article, student loans have doubled over the past 10 years, and that’s after taking inflation into account.

An accompanying article in USA Today, “For-profit Colleges Focus of Student Loan Issue,” looks at for-profit colleges like the University of Phoenix and DeVry University because about half of all federal student loan defaults occur at for-profit schools, while only about 10% of college students go to those universities.

Discussion questions:

  1. The article “For-profit colleges focus of student loan issue” has a graph of default rates on federal student loans by state.  Where does yiour state rank and why do you think Arizona leads the country in student loan defaults?  Be prepared to discuss this in class.
  2. What experiences have you had with student loans?  If you have student loans, are you concerned you won’t be able to pay them back? Be prepared to discuss this in class.
  3. When is a student loan considered in default?
Posted in Ch. 7, Consumer Loans | Tagged , , , | Leave a comment

Finance in the News: The Debit Card User Fee, Part 2

Posted on October 16, 2011 by ajkeown

Teaching Tip:  This is the second of two “Finance in the News” write-ups dealing with debit cards.  These assignments can be presented together or following each other.

In Chapter 5 we discussed debit cards and how to use them, but with the recent changes in costs, there are more questions, so how should you use your debit card?  This is the question of the hour since the Bank of America is adding a $5 monthly fee if you use your debit card to make purchases and the Sun Trust Banks and Citigroup are making similar moves.  After all, these banking charges definitely add up – $60 per year for your debit card in addition to your other bank charges.  For example, according to the Bank of America’s “Checking Accounts website,” the cost of an eBanking account where you choose to make all your deposits and withdrawals electronically or at their ATMs runs about $9 a month.  Add that $108 to the $60 debit card yearly fee and you’re looking at $168 in just banking fees.

Given this new $5 charge, just how should you use your debit card and what can you do to keep your costs under control?  A recent Wall Street Journal article, “How Debit-Card Fees Ruin Banking Relationships,” looks at these questions and provides several rules for managing your debit card including:

– Picking the right kind of financial partner

– Carrying  some cash

– Concentrating your financial services in one institution

– Paying off your cards

SmartMoney also has some useful tips in its article “How to Cut Bank Fees.”  Take a few minutes to look at these articles and think about how you are using your debit card.  Will you be making any changes?

Discussion questions:

1.  According to the WSJ article, how much does the average checking account cost to maintain each year?  Are you surprised?  Be prepared to discuss this and whether you feel the bank charges are justified in class.

2. Develop a strategy for lowering your bank fees and include in that proposed strategy what all your banking costs are at present, what your strategy is for reducing them, and how much you will save over a year.  Be prepared to present this in class.

Posted in Uncategorized | Leave a comment

Finance in the News: The Debit Card User Fee, Part 1

Posted on October 16, 2011 by ajkeown

Teaching Tip:  This is the first of two “Finance in the News” write-ups dealing with debit cards.  They can be used together or in a series for class discussions or assignments – either aimed at creating class discussion or as assignments to be handed in.

In Chapter 5 we looked at debit cards in some length.  As you’ll recall, there are a lot of advantages to using debit cards, and they are used a lot – but the costs of using them are about to change for many debit card holders.

Unintended consequences – that’s what economists call it when you do one thing, and as a result something else that you didn’t plan on happens. For example let’s look at a recent Federal Reserve Board ruling in June, 2011, that capped the debit card fees that businesses pay at 24 cents for an average debit card transaction (which is about $38), down from a current average charge of 44 cents. This is described in two articles, one in the Wall Street Journal, <a href=”http://online.wsj.com/article/SB10001424052970204138204576600800330404330.html?KEYWORDS=Bank+of+America+debit+card+5″Banks Plan New Fees for Using Debit Cards,”and one on Bloomberg.com, “BofA Plans $5 Monthly Fee for Some Debit Cards.”

For retailers this is a major victory, their fees are now cut dramatically.  For banks, it is a major loss of revenue – in fact, it amounts to an estimated loss of $6.6 billion per year in revenue. For the consumer, not much will change, but there is always hope that the cost savings will be passed on to them – but in reality, there is little likelihood of that happening.

What was the unintended consequence of this cap on debit card fees? While retailers gained, consumers lost, as banks countered their lost revenue from the capping of the retail debit card fees with monthly fees for consumer debit card usage.  At the end of September, the Bank of America announced that they were going to charge a $5 monthly fee on some debit cards.  Right now it appears that the fee won’t be charged for customers who only use the cards to withdraw cash from ATMs or who have premium Bank of America accounts.

When does all this take place?  The new fee will go into effect in early 2012, but it was most likely announced now to coincide with the Durbin amendment to the Dodd-Frank financial reform act.  This amendment, that lowers the cap on debit card fees, goes into effect on October 1st.

Discussion Questions

1.  If your debit card had a $5 monthly fee, would you continue to keep it? Be prepared to discuss this in class.

2.  Do you have a debit card, and if you do how often do you use it?  Do you use it primarily to get cash from ATMs, or do you use it to make purchases?  Be prepared to discuss this in class.

Posted in Ch. 5, Cash Management, Personal Finance In The News | Tagged , | Leave a comment

Personal Finance in the News & Class Assignment: 30-Year Mortgage Rates Fall Below 4%

Posted on October 12, 2011 by ajkeown

In Chapter 8 we discuss home buying and taking out a mortgage, and we use the techniques we developed in Chapter 3 to calculate our mortgage payments.  As we learned in those chapters, how large your mortgage payments are depends upon how much you borrow and what the interest rate on your loan is.

Today, home mortgage interest rates are about as low as they have ever been.  In fact, since the Federal Home Loan Mortgage Corporation (FHLMC), better known as Freddie Mac which is the government sponsored agency that works to encourage more mortgage lending, began tracking mortgage rates back in 1971, they have never fallen below 4% – that is until October 2011.  As CNN Money reported on October 6th in an article “30-year Mortgage Rates Fall Below 4% for First Time,” the interest rate on 30-year fixed-rate mortgages fell to a record 3.94%.  Even more amazing was that the 15-year fixed rate mortgage fell to 3.26%.

How low are interest rates on 30-year home mortgages relative to what they have been in the past?  If you look at the figures provided in the article “Mortgage Rates Plunge Beyond Expectations” from Market Watch, you’ll see that they were around 7.7% in 1971 before climbing to above 15 percent in 1981-82, and have fallen rather steadily since then, beginning in 2011 to a bit below 5%.

What does that mean for your monthly payments?  As you can see in the Market Watch table, it means a lot.  Unfortunately, as pointed out in The Wall Street Journal article, “Mortgage Rates Fall Below 4%,” many borrowers simply can’t refinance because they either don’t have enough equity (since the value of many houses have declined) or they can’t meet the lending standards.

Discussion Questions:

  1. In August 1979 the average interest rate for a 30-year fixed-rate mortgage was 11.2%, in October 2011 it was 3.94%, if you borrowed $300,000, what would your monthly mortgage payments be?
  2. Do these low mortgage interest rates mean that you should refinance now?  The title of a recent Wall Street Journal article, “Refinance Now? Maybe Not,” suggests not.  What is the reason for holding off on refinancing given in that article?
Posted in Ch. 3, Time Value of Money, Ch. 8, Home and Auto | Tagged , , , | Leave a comment

Class Discussion: An Insurance Policy Against….

Posted on October 11, 2011 by ajkeown

In Chapter 9 we look at health insurance, and in Chapter 10 we look at property and liability insurance – in both chapters we look at not only what you need, but what you don’t need.  But there are some types of insurance policies that we don’t even mention. Did you know that you could get an insurance policy to cover just about anything?  In
 fact, after Proctor & Gamble signed the Pittsburgh Steelers’ star strong safety Troy Polamalu to do commercials for Head & Shoulders shampoo, Proctor & Gamble took out a $1 million insurance policy that would pay off if Troy lost more than 60% of his hair in an accident.  That’s not the only weird insurance policy out there – America Ferrera, the actress who played Ugly Betty had her smile insured for $10 million by Aquafresh, while Mariah Carey had her legs insured for a reported $1 billion (that’s right, $1,000,000,000) by Gillette.

You might think that because you aren’t a celebrity there isn’t an unusual insurance policy that you can buy, or that someone might try to sell you – you’re wrong.  A recent Wall Street Journal article, “Don’t Buy Too Much Insurance!” looked at a number of new types of insurance policies that are being heavily marketed today.

They include:

  • Juvenile Life Insurance
  • Tuition-Protection Insurance
  • Identity-Theft Insurance
  • Payment-Protection Insurance
  • Cancer and Critical-Illness Insurance
  • Divorce Insurance

The article also looks at:

  • Term Life Insurance
  • Disability Insurance
  • Umbrella Liability Coverage
  • Earthquake and Flood Insurance

Do you have any of the above policies?  Buying insurance probably isn’t even on your radar yet, but someday, probably sooner than you think, it will be and knowing what you need and what you don’t need will prove to be quite important.  It just might save you money.

None of the policies listed in the first set of bulleted policies are recommended, while all of the policies in the second set are.  After reading the article be sure to check out the links to SmartMoney guides for all the recommended policies.  You can never know too much about the insurance policy you are thinking of buying.

Class Discussion

1.  Pick one of the types of policies that are not recommended, and read about it in The Wall Street Journal article.  Google the policy and then read about it on one of the websites that sells it.  Be prepared to discuss in class how insurance companies market these types of policies and whether or not you should or would consider buying one of these policies.

Posted in Ch. 9, Life and Health Insurance, Ch.10, Property and Liability Insurance, Uncategorized | Tagged , , | Leave a comment

Class Discussion: Taxes – questions and answers

Posted on October 7, 2011 by ajkeown

Teaching Tip:  One of the difficulties in presenting the material in Chapter 4, Tax Planning and Strategies comes from the fact that the tax material is often changing. Presently the tax code is a big part of the current political debate with conflicting facts often presented by the different candidates.  This is an assignment that can be made before class, or alternatively, you could just as easily present this material in class and develop the discussion as it is presented.  In addition, an alternative assignment is to have your students choose any of the questions listed below and provide a short written response to them relying on the information in the linked article.

When you look at the current political debates, one thing is clear – no one really likes the current personal tax code.  To justify their positions, various politicians present different and conflicting figures about who pays what in the way of taxes.

After listening to the politicians and the pundits you may have several questions such as:

Have taxes kept up with wealth?

Who doesn’t pay federal taxes?

Do rich people pay a lower tax rate?

Who really benefits from tax breaks?

Why do boats get tax breaks?

On October 5th The Washington Post ran an article titled, “Answers To Key Questions About Taxes,” which answer these questions through a series of very informative graphs.  For example when examining the question “Do rich people pay a lower tax rate?” The Washington Post presents the answer through eight different graphs.  It starts by looking at what share of income is received by the five quintiles of tax payers, then looking at what percent of total tax revenue comes from each of the different quintiles and so forth.  The end result is that you have a much better understanding of who pays what in the way of taxes.

Check out the article “Answers To Key Questions About Taxes.”  You will find that the graph explanations are simple, straightforward and easy to read and understand.  Not a bad way to go when you are trying to wrap your brain around topics that can easily be contorted to fit the current political dialogue.

Discussion questions:

  1. What did you learn that surprised you about our current tax code?  Be prepared to discuss this in class.
Posted in Ch. 4, Tax Planning | Tagged , | Leave a comment

Class Discussion: Women and Retirement

Posted on October 4, 2011 by ajkeown

You may not think much about it now, but you don’t want to be penniless when you’re 65. As you know from Chapter 1, one of the purposes of your personal finance course and  of this textbook is to help you plan for retirement.  A strong financial plan will help you look at the costs of retirement and develop a plan that allows you to live a life of retirement ease.

In addition to thinking about and planning for your future retirement, in Chapter 18 we discuss the special circumstances and difficulties that women face in retirement planning.  In general, women earn less money, are less likely to have pensions, qualify for less income from Social Security because they generally earn less over their lifetime, and they live longer than men. As a result, planning for their financial independence, in particular during their retirement years, is more difficult for women than it is for men.

A recent Money Matters video from ABC News, “Retirement Investing for Women” deals with many of the reasons why retirement finances are more difficult for women.  While women tend to adjust to retirement more easily and are happier, women also have a much more difficult time when planning for their financial future.

Discussion Questions

  1. Look at your parents and grandparents, do you feel that this video accurately portrays how they relate to retirement?  Be prepared to give examples and discuss these examples in class.
Posted in Ch. 1, Financial Planning Process, Ch.16, Retirement Planning | Tagged , , , | Leave a comment