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US Student Debt Levels Are Unprecedented

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US Student Debt Levels Are Unprecedented

The crisis in higher education –a bubble about to burst.


Student Debt And Education Crisis Has Parallels To Housing Crisis

The amount of federal money devoted to student loans and its susceptibility to cause a bubble in the economy is a cause for increasing concern. In 2006, the amount of debt stood at around $100,000. Figures show it has increased by ten times that amount since 2010. It now stands at $1 trillion. In the current economic climate, the level of defaults is rising.

Some economists have drawn parallels with the housing bubble but acknowledge it is not as devastating as that crisis. The employment situation is seen as having a flow-on effect on the bubble by devaluing the worth of having a degree, just as happened in the housing market. Nevertheless, it is having an impact and causing concern for some educational institutions, families and government.

Unprecedented Increase In Debt

The way the education market is structured is feeding the problem. Subsidization is creating more demand, which is now pushing up costs, the opposite of what was originally intended. Unsustainable as it seems, college fees have risen by nearly 955% in the last 30 years. This is six times the rate of inflation.

Some statistics give a bleak picture:

  • In 2015, student loans reached $900,000 compared to $100,000 in 2006
  • $50 billion accrues to the government in profit from student loans, reducing the incentive to change
  • Annual inflation has been over 3% per annum, but college tuition has risen about 7%
  • Student debt has now overtaken credit card debt in the US

The Australian experience sees similar debt problems with their VET FEE system but with little prospect of repayment. Skyrocketing levels of lending are compounded by lending to students who will never qualify. This means the debt will end up being a taxpayer responsibility.
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Must Read: Lower Your Student Loan Payment And Save Money

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Colleges Contributing To Bubble Crisis

The colleges in this situation are as seen as profiteers, given that the sector has a large for-profit sector. Increased spending on amenities by some colleges is seen as a necessity to attract students, but it only adds to the pressure to increase fees.

Some point to the problems that colleges are having, such as over-investment in top-heavy administration and the extent to which they are struggling with the competition from online learning, as other pressures causing fee increases.

Is The Education Bubble Starting To Deflate?

However, some economists think that the bubble is starting to deflate and may not have as great an impact as feared. Admission rates are dropping, especially amongst lower-income sectors. Other factors that are leading to this collapse are the devaluation of the usefulness of some less vocational degrees and the increase in graduate unemployment.

Not all economists think that the education debt situation is a true bubble. They believe that view is short-sighted, and the value of an education is seen in a more long term view. They also point out that the rate of default on student loans is starting to decline, and that employment prospects are still better for graduates than non-graduates.

Government And Colleges Have A Part To Play

Also, some of the factors in the debt crisis that are under government control, such as funding levels, mean that it is not a true bubble. As the loans emanate from the government, laws have been passed to ensure better debt recovery.

Other factors when arguing against a bubble are the tenure situation and other general costs of colleges, as well as the drop in government funding. As these are controllable to some degree, it has been used to negate the argument that there is a bubble.

Education Bubble vs. Long Term Investment

One of the main arguments against the severity of the education bubble is that a degree continues to have value. Most commentators think that it is not in danger of sudden collapse, although in some parts of the debate, that is still open to question.

Some economists see it rather as an over-investment in capacity which will work itself out, albeit with some pain in the education sector. Added to which, some sectors are more vulnerable than others. Of course, the main victim may well be the cultural and social fabric of American society rather than an economic one.

Many research institutions are thought to be the ones that will suffer, which will have long-term consequences for the economy. Comparisons with other countries and their education fees have only served to heighten the belief that the bubble is about to burst in the US.

Already the government is starting to put solutions in place, to head off the severity of the bubble. Overall, the level of student debt is not sustainable, and structural change is needed on the part of the government and colleges. Major social impacts will result if the level of increase in college fees continues.

 

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Report: Biden’s Economic Plans Would Mean 5 Million US Jobs Lost, 10% GDP Drop

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Report: Biden’s Economic Plans Would Mean 5 Million US Jobs Lost, 10% GDP Drop

A Joe Biden presidency would destroy millions of jobs and derail the economic recovery from the coronavirus pandemic. This is according to a new report from the Hoover Institute at Stanford University.

The report says that based on the economic plans laid out by Biden, nearly 5 million Americans would lose their full-time job. Meanwhile, the country’s gross domestic product, the measure of its economic output, would drop by nearly 10% over the next decade.

These losses would trickle down to the average household. The median household income will fall by $6,500 per year by 2030, according to the report.

Derailing Economic Recovery?

The authors of the report lay out a laundry list of changes. These changes include reversing some of President Trump’s 2017 Tax Cuts And Jobs Act, a tax increase on corporations and high-income households and pass through entities, reversing much of the regulatory reform of the past three years as well as setting new environmental standards, and create or expand subsidies for health insurance and renewable energy.

When it comes to renewable energy, the report says that the proposal to cut our nation’s reliance on fossil fuels is “ambitious” and would require cutting electrical use back to levels not seen since 1979.

“These plans are ambitious. Unless people drive a lot less, the electrification of all, or even most, passenger vehicles would increase the per capita demand for electric power by about 25 percent at the same time that more than 70 percent of the baseline supply (i.e., electricity generated from fossil fuels) would be taken off line and another 11 percent (nuclear) would not expand. To put just the 25 percent in perspective: that is the amount of the cumulative increase in electricity generation per person since 1979, which is a period when nuclear and natural gas generation tripled.”

Taxing Wealthy Americans

To pay for most of these “ambitious” plans, Biden has already said he would significantly raise taxes on wealthy Americans. They, he says, include anyone who earns more than $400,000 per year, through higher taxes, an increase in the payroll tax that funds Social Security, and fewer tax deductions. He also plans on raising the corporate tax rate.

The Penn Wharton Budget Model, a nonpartisan group at the University of Pennsylvania’s Wharton School, says nearly 80% of Biden’s proposed tax increases would affect the top 1% of earners in the United States. It will primarily do so through raising the top individual income tax bracket to 39.6% from 37% for those earning more than $400,000 annually.

That means an annual tax increase of nearly $300,000 for households in the top 1%, according to the Tax Policy Center, who say even middle-class families will see a tax increase under Biden’s plan.

Corporations would feel the pinch as Biden said he would raise the corporate tax rate from 21% to 28% on “day one.”

During an interview in September, Biden said, “I’d make the changes on the corporate taxes on day one. And the reason I’d make the changes to corporate taxes, it can raise $1.3 trillion if they just started paying 28% instead of 21%. What are they doing? They’re not hiring more people.”

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Rickards: Stocks Headed Lower, Fed Still Can’t Create Inflation

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Rickards: Stocks Headed Lower, Fed Still Can’t Create Inflation

Jim Rickards, an economist and author of “Currency Wars” recently gave his outlook on the stock market. He also shared why he thinks the Fed can’t seem to create inflation despite printing trillions of dollars.

When asked about the stock market, Rickards said it is completely detached from the economy, believes it will fall even further, and revealed why he calls the S&P 500 the “S&P 6.”

“I recommend lightening up on equities, I think equities have a lot further to fall. There’s been a spectacular rally from March 23 to September 2, we had the shortest bear market and the fastest return to a bull market in history, but it doesn’t mean that this is over with. I call the S&P 500 the “S&P 6” because it really is only 6 companies that are dragging along the other 494 because it’s a cap-weighted index. When you look at Amazon, Apple, Microsoft, Netflix, Facebook and Google – or Alphabet – those six stocks are almost 40% of the weight of the index. So when they go up the index goes up,” said Rickards.

He added, “By the way, the six stocks I mentioned, they are the least affected by the pandemic. So my point is the stock market is completely detached from the economy. It used to be that the stock market was kind of a proxy for the economy, not exactly but to some extent. That’s not true anymore. Those six stocks and others like it, some of the tech names, they’re in a world of their own. The economy is in very bad shape and will remain so.”

No Inflation Soon?

Rickards said anyone who thinks we will have inflation due to the trillions of dollars being printed by the Federal Reserve hasn’t been paying attention to the last 11 years. He said if we didn’t see inflation from all the money printing after the Great Recession, we won’t see it now.

“The idea that money printing causes inflation is just not true. Everyone believes it’s true; the monetarists, the Milton Friedman followers, the Austrian economists, even the neo-Keynesians say “yeah, you print a lot of money you get inflation.” It’s not true. And just for empirical evidence, I don’t say things like this without backing them up, between 2008 and 2014 when they ended QE3 at the time, the Fed expanded its balance sheet by almost $3 trillion, and we never had inflation, serious inflation. You know, 1-1.5%, but we never had serious inflation.”

Wanting V.S. Getting

He said the Fed has tried to reach their target of 2% inflation for eleven years. They were only with only a smattering of success. So Rickards said that saying you want inflation and actually getting it are two different things.

“The whole time, the Fed had a target, eleven years if you want to go all the to the end of expansion in 2019, technically February 2020, eleven years and the Fed never hit their target of 2%, for a couple of months, yes, but not on a sustained basis and certainly nothing above that. So I say it’s a sad day when the Fed wants inflation and can’t get it. And they do want it.”

He said their new monetary policy of targeting 2% will likely be just as unsuccessful as the previous eleven years.

“So now they’ve come up with a new monetary policy, they’ve sort of given up on the money printing thing. They say they’re going to just let the economy run hot, we’re not going to worry about money supply as much, we’re basically going to let unemployment drop, and let inflation go, if it goes above 2% we’re going to let it stay there for a while. So the below 2% and the above 2% kind of average 2%, and that’s new. Here’s the problem. You can say it, you can take a vote and make it your policy, it doesn’t mean you can make it happen. They failed for eleven years, why do they think they can succeed now?”

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Biden’s Tax Plan Rates Can Reach 62% in Some States

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Tax Rate - words on puzzle-Biden's Tax Plan Rates-ss-featured

Democrat candidate Joe Biden’s tax plan rates can reach 62% in some states. California, New Jersey, and New York City taxpayers with incomes of $400,000 a year are facing huge tax rates.  Combining state and local statutory income taxes, they could be on the hook for 60% or more. Currently, the highest earners in California and New York City pay about 40%. If Biden wins, they will have to prepare for effective state and federal tax rates of around 53%.

RELATED: Report: Biden Would Raise Taxes As Much As $6.6 Trillion, Trump Plans All Tax Cuts

The $400,000 dividing line

Under the Democrats’ plan, Americans earning less than $400,000 would get tax cuts on average. Biden spared low and medium-income earners from increased tax rates. He also proposed increasing tax credits for these income brackets. 

Jared Walczak of the Tax Foundation said that those earning over 400k will get the squeeze. Californians face combined state and federal rates of 62.6% under the Biden plan. In New Jersey, high earners face 60% while New Yorkers can go up to 58.2%. For New York City’s top income dwellers, the combined city, state, and federal income tax rate would be over 62%.

In reality, few taxpayers pay the full statutory rates. This does not include deductions, credits, offsets, loopholes, and other sources of income. While the top statutory rate is 37%, the effective rate is actually 26.8%. Biden’s camp clarified that effective rates, not statutory, are what’s important.

Under Biden’s plan, the effective tax rate for the top 1% would increase from 26.8% to 39.8%. This is according to research done by the Tax Policy Center. That means top earners in California and New York City would pay state and federal tax rates of around 53%.  Today, they pay around 40% that they pay as effective rates.

Also, if the Democrats win the Senate, they can remove the $10,000 cap on state and local tax deductions. The combined state and local tax rates for top earners could be even lower.

Official Tax Rates Are Higher

Despite the adjustments, the official combined rates would remain at around 60%. These rates will be the highest since 1990 and exceed Obama administration rates.

The main source of the increase in Biden’s plan is the top marginal tax rate hike, from 37% to 39.6%. The other driver is the added payroll tax of 12.4% for those making more than $400,000 a year. Employees and employers will split this tax. All in all, Biden’s tax plan would feature the highest federal rate of 49.338%.

Jared Walczak of the Tax Foundation said that rates could increase further. He said that since employers usually pass on taxes to employees. As such, the combined rate would be higher. This would amount to over 65% in California, 62.9% in New Jersey, and 64.7% in New York. But, some states are deliberating whether to raise state taxes on high earners as well. Local legislators want tax increases to fund billions in budget gaps.

Walczak noted that “These rates would be the highest in about 3½ decades. He added that they are “imposed on a broader tax base than was in place previously.”

Biden’s Campaign Promise: Raise Taxes on the Rich

The American Enterprise Institute (AEI) estimated Biden’s tax plans can raise $2.8 trillion. This covers the period between 2021 through 2030. A separate study from the Urban-Brookings Tax Policy Center (TPC) says it’s closer to $2.4 trillion.

Biden wants high earners to fund stimulus activity for recovery efforts. His opponent, incumbent President Donald Trump doesn’t want increases. He warned that any increase can derail economic recovery and scare companies. 

Other proposals from the Democrat target corporations. This includes increasing corporate tax rates from 21% to 28%. Biden has also proposed increasing taxes U.S. corporations pay on foreign earnings. He also wants mega-companies to pay a minimum of 15% on corporate income taxes. The basis will come from financial statements.

Voters will have the final word. The passage of these proposals will take more than Biden winning over Trump. It will also need Democrat majorities in both Congress and Senate. At present, the Senate looks to maintain its Republican majority. Even if Dems manage to get the majority, expect the margins to be razor-thin.

Watch this as CNBC’s Squawk Box tells how Joe Biden’s tax plan could lead to a combined rate of 62% for high earners:

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Do you agree with Biden’s tax the rich proposals? Let us know what you think about his measures should he win the elections. Share your thoughts and ideas on where taxes should go in the comments section below.

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