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Deficit vs. Debt Explained

Posted On: 2005-11-16Length: 31:33

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Good morning everyone it is Wednesday November 16, 2005. This is the Financial Aid Podcast episode 116 and my name is Chris Penn welcome aboard. We have a lot to talk about today; we have some news, a presentation from MASFAA on financial literacy for students, a full tuition scholarship and of course some Podsafe music. Let's jump right in with the news.

Topping the news today; your tax dollars still at work for someone else. That's right. www.insidehighered.com reports that the student aid rate continues according to colleges. The Pell Grant which is one of the few grants that you can get from the Federal Government just by filing your FAFSA has created a fund of hundreds of millions of dollars in Surplus Funding. The House of Representatives is now looking at allocating else where. Originally this fund was set aside to increase the maximum Pell Grant by $50 to pay basically from the current limit of $4,050 to $4, 100. This would be not a huge increase but hey every dollar counts when it comes to Higher Education, especially when it comes to money that you don't have to repay. The House has decided or at least is deliberating right now to take that Pell Grant increase which I believe totals-let's see if there is number on it here; about $ billion or there abouts and pointing else where, pointing it towards other national priorities that are not education related. A number of colleges of course are lobbying Congress to say, "Hey could you kind of keep your hand out of the education money pot?" The education is not a slush fund for all these other different priorities. The money, according to the Congress would be re-directed towards deficit reduction and hurricane relief. The amount of money that they are talking about re-allocating is pretty significant if the additional monies that were allocated because it was actually a percentage of a certain economic figure so it wasn't a hard dollar amount. Apparently this year has been a very good year for taxes. There has been an increase in tax receipts especially from businesses. The money that was made available and planned for by the House for Pell Grant increases that they would not want to move somewhere else would actually be, could be an additional $260 to the Pell Grant. So everyone who gets a Pell Grant could get an increase from the current $4,050 to $4,310 which is pretty significant especially for lower income students or for those students attending places like Community Colleges or State Funded Institutions that $260 could be a real big boom for paying the bills really. In order to prevent Congress specifically the House from taking the Pell Grant Funding excess that they would like to allocate for other things and keeping it in student aid, once again let your representatives know. Go ahead harass them and you can check the show notes for their phone number, you can go to www.House.gov and give them a piece of your mind. One thing that is important to realize is when ever you hear Congress talking about the National Deficit, or the Federal Deficit and the National Debt or the Federal Debt, these are two different terms financially speaking.

I wanted to take a couple of moments to illustrate what they are. The National Deficit and the National Debt, think of this as basically like the credit card of the United States Government. The debt, the National debt is how much we owe totally as a balance on the credit card. The deficit is how much we are running behind this month or this year. Effectively really the National Deficit is equivalent to the monthly bill on the credit card and it contains principle payments but also contains the interest on that and the National debt of course is the total loan balance that we owe. Congress is talking about when they talk about reducing National deficit; this goes to show you how unstable the United States economy actually is when it comes to how much money we are spending. You talking about deficit reduction, everyone is talking about deficit reduction using the money to pay for deficit reduction that's like talking about how to raise money to pay your monthly payment. We are not even addressing how much the whole bill is how to pay off that loan, we are talking about how you can afford your monthly payment and that's on a Federal level on the Government level, that's how much debt we are in as a Nation. They are talking about $354 billion deficit or what ever figure is currently floating around. That's a lot of money. It's so much money it's almost inconceivable. How bad is the debt, how bad is the actual total loan balance that the United States owes? It's about $ 8 trillion give or take a few billion here or there. This is a number that is actually so large that you can't imagine it; you don't see a trillion of anything. To put it into perspective, take a look around, look out a window if you are near a window, you can probably see a house or some houses, or some apartments. Imagine this, imagine there was some calamity and every single house, every single home, apartment, condo duplex, trailer park you name it, and any place that people could live was wiped out; just gone, completely off the map. The amount of money it would take to rebuild all that housing every last one from the ram shackled little place across the street there to the 102 story high rise apartment building, it would cost approximately $10 trillion to replace every single place to live in America. Put it another way, $8 trillion, if you were to start counting out $1 bills , one, two, three, four, five, six, and so on and so forth, it would take your approximately 180,000 years to count out $8 trillion. You wouldn't even scratch the surface. That is how much money the Federal Government is in debt. That is bad because essentially what is happening is we have to find ways of paying the interest on this debt. Just like on a personal lever, if you have a really bad credit card debt you are not even talking about trying to pay it off you are just trying to keep up with the monthly payments, you are just trying to keep up with the interest that is snowballing.

The same thing is happening at the Federal level which is a segue way to the Monday T-bill rates. As you know we keep track of the T-bill rates the 81 day T-bill rate, Treasury Bill rate if you're just joining us which is price of the 91 day Treasury Bill as computed by the United States Department of the Treasury. The 91 day R-Bill is a financial instrument for companies and investors to buy and what they are effectively doing is they buy a Treasury Bill at something less than face value, say like .98 cents, and then in 91 days they redeem it for a full $1. In this case it's $997 and you redeem it for $1,000 or there abouts. The Treasury Bill rate is computed from that face value computation and what Treasuries are is essentially this is a way of trying to raise money to pay for the National Debt. It would be the same as if you had a credit card and you sold to people coupons saying, "I need to raise money to pay my credit card bill this month so I'm going to give you a $10 coupon and I'll only charge you $9 for it and then next year I'll pay you back $10. You just hold on to this coupon." In doing this you raise enough money effectively to pay for your credit card bill for this month. That's what T-Bills are effectively. They are financing the National Debt, they are financing the public debt which is why it's called the Public Debt website. The T-bill rate hit 4% on Monday, 4.004% and that is important, that is a big jump, because traditionally what we've been looking at in the last few weeks is it going up by 4/1000 of a percent there abouts each week and this week it took a leap of about almost 12/1000 of a percent. The 91 day T-Bill is important because student loan rates are set on that every calendar year, the last auction of these Treasury Bills in May of each calendar year is the rate plus a margin for which Federal Student loans will be starting at that coming July. If the Federal Student loans were being set at Monday's T-Bill rate, Stafford loans in their grace period would be at 5.7%, Stafford loans in repayment would be 6.3% and PLUS loans would be 7.1%. By comparison at today's rates, the Stafford loans in their grace period are 4.7%, Stafford loans in repayment are 5.3% and PLUS loans are 6.1%. So you are talking about an extra 1% in the rates based on what's going on with the T-Bill. To put that in perspective with student loans let's go to www.studentloanconsolidator.com let's go to the calculator. Let's say you have $30,000 and your Stafford loan is in repayment there at 5.3%,your monthly payment if you consolidate it would be $204 a month, if you didn't consolidate it would be $323 a month. If we go with the new rate, same $30,000 now $338 a month or $221 if you consolidate it, so $338 and $323 the monthly payment would be changing, so it's $338 minus $323, last time I did this by the way, I really screwed up the math so I apologize; talking about $15 more a month.

Now when you think about it, $15 a month okay yeah that's what two fewer trips to Starbucks multiply time 12 months and multiply that times 10 years which is a standard term on any Stafford loan and now you are talking about an extra $1,800. That 1% interest rate bump which doesn't sound like much, an extra $1,800 out of your pocket over the life of the loan. That is a pretty significant amount of money. These interest rates that are climbing are alarming. What does this mean for you? If you have Stafford loans and PLUS loans that are tied to these rates and you are out of school, I've said it before and I'll re-emphasize it again, you need to get those loans consolidated. You need to get them consolidated because consolidation locks in today's interest rates. There has been-if you look at the charts and graphs that are provided in the U.S. Treasury website or if you go to www.studentloanconsolidator.com and look at the interest rate info page, you can see over the last couple of year the T-Bill rate has been making a nice steady march upwards. There is not indication that it will go downward, down but why is this the case? How do we know that it's probably not going to go down? Because T-Bills are used to finance the public debt which is as you ca see is so large that at this point financing it is going to be increasingly difficult the United States Government. In doing so the T-Bill rate, the rates that at which they are offering investors the opportunity to basically get these coupons to pay for the monthly payment are going up especially as the world economy changes and the United States economy changes. The very short version is well, you know it's going to be more expensive to finance that debt and we are going to need a lot more financing for it. So the Department of Treasury will make those T-Bills's more appealing by putting a higher interest rate on them. Downside for students you get hosed on interest rates for Federal Student loans, kind of a weird Macro-Economic picture of how the whole system is kind of put together. And maybe in a future show we will actually spend some time looking at how all this is really inter-related but you almost need a degree in Economics to really get a big picture view. I've been digging through this stuff in the last few days and my head is about to explode. Let's take a break from the Economics and do some Podsafe music. We got a new one Cheryl B. Englehart called "Proof," from the Podsafe Music Network.

(music)

"Proof," from Cheryl B. Englehart new from the Podsafe Music Network. I want to offer one more thing on the whole public debt and things like that it's very important as citizens in the United States to-or any country really because every country uses similar accounting methods and things like that it's very important to understand, the basics of how finance works. Not only on a personal level but on a National level too because when you hear politician talking about things and spewing words out of their mouths, generally speaking most politician don't have a command of even the basics of how the Government that they are running works. So when you hear people talking on the news or on press conferences or whatever it's important to have this basic understanding so you can tell whether they are lying or not basically and if they are you can tell how badly they are lying how badly they are attempting to deceive people who presume don't know any better. The main stream media of course has a difficult time reducing stuff like this down to 30 second sound bytes because it really can't be-that's why one of the reasons podcasting is so important. It took me about six and a half minutes to go through the whole public debt public deficit thing and I apologize if it bored you, but it's important. It is so important to understand how our government works because ultimately we're the ones as citizens we get left holding the bag if the government screw up, if the people we elect screw up. Try doing some reading on this stuff, it can get interesting in spots if you find something that catches your eye if you want to know how something in specific works and how you as a citizen can be more effective in basically calling out politician and saying, "Hey you know what you just said on the news, that's a load a bull that is a load of malarkey and I'm not voting for you because you apparently have no idea of what you are talking about." It's important.

Speaking of personal finance, I wanted to do a feature presentation today from one of our student loan counselors here, Brooke Rickard went to the MASFAA, Massachusetts Association of Student Financial Aid Administrators, the MASFAA Conference about two weeks ago now and we sent a bunch of our loan counselors there to learn all sorts of different stuff about financial aid and things. Brooke went to a very interesting session on Personal Finance and Financial Literacy. What she did was a nice recap of the session around six and half minutes so here is Brooke's presentation to the Student Loan Network here in the office of her experience at the Financial Literacy segment at MASFAA.

BROOKE: Mines really light and basically filled with fun facts. Basically at MAFSAA I attended the seminar that was presented by American Student Assistance which is agency that we actually refer some of our default leads too if they are under 7,500 of course. The title is called, "New Concepts in Debt Management and Default Prevention." Basically we start oft the seminar by just talking about why it's so important now for students to be successful in their pursuit of their education. We came with the conclusion that it's so expensive to go to school now and it's just a positive approach. From the Colleges and Universities perspective, they want their students to be successful because they see it that eventually they are going to contribute back to their school once they do leave and continue on with their career. Right ASA is actually conducting a study to see if it's actually the successful students that repay their student loans. Some key terms that I learned during the seminar were how companies actually measure their success. The two terms are called Co-hard Default rate and Triggery. Basically the Co-hard Default rate is the percentage of schools borrower who enters repayment but default within the first year of repayment and the Triggery is the entire loan portfolio that goes into default within that fiscal year.

So those were some fun facts. How can we as borrowers prevent going into default and the most obvious answer is financial literacy. Some fun facts for you is that a non-profit organization called "Jump Start Coalition," which basically focuses on issues for high school students researched to find out only 15% of high school students take a basic personal finance course which is pretty sad. Seeing that is so important to build the basics of personal financing and 65% of these students that do take these classes actually failed the exam. And then 6.1 only receive a grade C or better. At the college level 74% of students begin college with credit cards and then the average balance of undergraduate students who have these credit cards is $2,169 with an average number being four cards. That's ridiculous for a student.

Oh my goodness I was the worst offender.

A great quote that she mentioned from the University of Indiana ad ministry is that they lose more students to credit card debt than they actually do to academic failure. At the college level they looked at the importance of exit counseling which is basically sitting down with a financial aid officer and going over your rights and responsibilities to your student loan debt and what your monthly payments would be looking like and how much you've accumulated over the course of your going to school there. And Penn State University conducted a seven year study on the actual effectiveness exit and repaying student loans and they actually found that there are no statistically difference in repayment habits who receive this exit and entrance counseling. However, Texas A&M did their own study and they found that it's actually the more successful students that-it's actually the more you succeed in your academics that you are less likely to default on those student loans. At the end of the seminar we were just all talking about what can we do as arms of society to educate ourselves on personal finances and people are saying, well in this program student government association, resident's halls, career center. I think it really for me personally-I think it's so important to teach children at a young age to be fiscally responsible. I think now a lot of the states in New England are starting a secondary curriculum to incorporate that, those types of classes like learning the stock market, what's a checking account, what's a banking account, and stuff like that. I think it's important to stress that at a young age and I think eventually it will prevent them from defaulting on their student loans. That's about it.

MALE SPEAKER: Did they come up with any recommendations for the current generation?

BROOKE: What?

MALE SPEAKER: Did they come up with any recommendations for the current generation the folks who are already ankle deep?

BROOKE: No. [laughter] we were just talking about the future.

MALE SPEAKER: I was talking to ASA during lunch and they really do a good job of letting their students know.

BROOKE: Yes.

MALE SPEAKER: Letting their borrowers know you have 280 days before you actually go into default. There's consolidation, there's deferment, there's forbearance there is so much you can do and no one knows about a lot of it because you've already graduated, there are parties to go to and you breeze through it or you go through it online really fast and look through it and before you know, 280 days later you're in default.

BROOKE: It's really amazing because I was talking-during the seminar she was telling that they actually get a report to let the agency know that's holding the loans when they actually withdraw or graduate and they will call them and let them know their options and what can we do to help, do you need to do a graduated plan forbearance so it's immediate. So really there is no reason why these people do default but it does happen.

MALE SPEAKER: (inaudible)

BROOKE: That's right.

MALE SPEAKER: Hopefully ... into default, ... how high it has to be.

BROOKE: It was a really great seminar and she ended it telling a really funny story from the luncheon, I guess you guys had a guest speaker Liz Walker talking to you about the pizza delivery guy coming and how her son went to the door, and she's like pay for the pizza here's the money she gave him a $20 and the pizza was like $10 and he didn't come back with any change and its just kids really don't have a concept of money now a days and that is why I think it's so important to stress that because it will carry on in the future. That's it.

FEMALE SPEAKER: Thanks Brooke.

BROOKE: You're welcome.

CHRIS PENN: Thank you Brooke for sharing all that information and it's very helpful It's important-like I said the financial literacy aspect critical to getting things done in your personal life and also understanding what's going on in the big picture. All right let's do one more piece of Podsafe music and I think we are actually going to have to call it a show. I was going to do a scholarship update today but I guess I'll have to put it off until tomorrow because we had a lot to talk about today. Let's do the heat, "The Greatest Christmas Song Ever Written," by American Heartbreak.

(music)

That was "The Greatest Christmas Song Ever Written," by American Heartbreak new from the Podsafe Music Network. That is going to do it for today's show we are out of time just about here. Reminders the Ipod Nano give away is December 1, 2005 so if you have not entered to win you can do so at www.financialaidpodcast.com or apply for any Student Loan Network product and you will be automatically entered to win. Feedback, comments and questions send them to financialaidpodcast@gmail.com audio feedback is also more than welcome as well. If you like the show and you want to share it with a friend, directions for getting them subscribed are also at the website at www.financialaidpodcast.com. Let's see is that it? I think that is just about it, so folks tomorrow we'll see with a scholarship update that we were going to do today and some other good stuff as always. Until next time stay tuned, stay subscribed and we'll see you soon take care.

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