New Study Shows that Forgiving Student Loans Isn’t Helping Students
Plus, Ric explains why the fiduciary standard matters in annuity sales and commissions
Announcer: Ric is away the rest of this week. He recorded today's podcast for you before the vice-presidential debate or the most recent events in Israel occurred. Enjoy today's podcast.
Ric Edelman: It's Wednesday, October 2nd. Five million people have had their student loans forgiven so far by President Joe Biden. Now, we can debate the merits of the student loan forgiveness. I've talked about it pretty often here on this podcast. As you know from listening to some of those shows, I strongly oppose the notion of student loan forgiveness for the overwhelming majority of college students, if not all of them, for all kinds of reasons we're not going to get into right now. But I'm not going to do that. I'm going to add on to the argument.
Here's the real sad part of student loan forgiveness. You would think that getting rid of the student debt would solve these people's money problems, right? I mean, that's the whole point of the student loan forgiveness, isn’t it?
President Biden has said that these borrowers owe so much money that they can't afford to buy a house. Many of them are delaying marriage and children. They're struggling to get into jobs that they would really like because they don't pay enough. And so many of them have had their credit records dinged and on and on and on.
So, this would solve the problem, right? Well, apparently not. Studies are now showing that the people who had those student loans. who now don't have to repay them are still under financial stress. Borrowers who were late on payments or even defaulted on their student loan debt are often still dealing with other financial problems, like low credit scores, and other debt, like credit card debt.
And since millions of these people weren't making payments anyway on their student loans, having the loans waived isn't really making any difference in their lives. It's not like they were spending $500 a month, and now they have $500 extra in cash to use. So, the student loan forgiveness isn't really helping. Constantine Yannelis, a finance professor at the University of Chicago, has studied household finance, and he said: “For the typical borrower, the forgiveness is nice, but not life changing.”
His study found that the borrowers simply replace their student loan debt with other forms of debt, half the time being credit card debt. So, what is Joe Biden, or now Kamala Harris, going to do next? Pay off everybody's credit card debt?
This is what too many politicians don't understand. Merely throwing money at something doesn't solve the problem
Hey, I did a podcast recently on the fiduciary standard and how the insurance industry is fighting the new regulation in court. You can listen to that podcast and the link to it's in the show notes in case you missed it.
Mike wrote me the following question based on that podcast.
Mike: I think from a consumer's standpoint, the biggest problem with these products is the lack of understanding that people have. They are easily sold, but not easily understood. I speak from experience. I own several annuities and really have no clue what they are.
Ric Edelman: Yes, Mike, I think you've nailed it. This is exactly the problem. It's not really so much a crisis for the annuity products themselves. The real crisis is with the sales practices associated with annuity products. The products themselves are legitimate in most cases. This is why the regulators allow them to exist.
The issue is how they're marketed. Too often, insurance agents promote these annuities as bigger and better than in fact, they really are. They tend not to disclose sufficiently to have the customer truly comprehend the tax implications, the lack of liquidity, the low returns, the high fees and the alternative opportunities that frankly, in so many cases are superior. Why don't the insurance agents do this?
Well, partly it's lack of training. Partly it's conflict of interest. The insurance agents make much bigger commissions selling annuities than they would, say by earning money selling a mutual fund. And in many cases, it's licensing. The insurance agents are licensed to sell annuities. They're allowed to sell those products, but they aren't licensed to recommend, stocks or bonds or mutual funds or ETFs. So, hey, if I'm a Ford dealer, I'm gonna sell a Ford even if a Chevy's a better product or vice versa.
So, you've got all of these issues and the result is inexperienced individuals are in over their head because you've never bought an annuity before, but the guy selling it to you has sold hundreds of them. He's a lot better at this game than you are. You don't even know what questions to ask, let alone being able to interpret and understand the answers. And as a result, annuity sales often occur when they shouldn't. This is why fiduciary standard on everybody selling everything and why the insurance industry Doesn't like the idea.
You can send me your question as well. Just send it to askric@thetruthayf.com. The link is in the show notes.
I mentioned that we've got a webinar coming up next Wednesday, October 9th, 1 PM Eastern. If you are interested in crypto and the new investment opportunities associated, did you know that you can earn yield from crypto? Did you know that you can borrow money? Posting your crypto as collateral. Did you know that you can make loans to people who want to engage in the crypto marketplace? How do you handle custody for the crypto you own?
I'm going to be joined by Bill Barhydt, the founder & CEO of Abra, who is going to talk with us about all of this. Yield staking, lending custody.
It's going to be a fascinating conversation. You don't want to miss it. If you're an advisor, you get one CE credit. The webinar is free register. Use the link in the show notes. It's next Wednesday at 1:00pm EDT. See you there.
I'm glad you're with me here on The Truth About Your Future. If you like what you're hearing, be sure to follow and subscribe to the show, wherever you get your podcasts, Apple, Spotify, YouTube, and remember to leave a review on Apple podcasts. I read them all. Never miss an episode of The Truth About Your Future. Follow and subscribe on your favorite podcast app.
I'll see you tomorrow.
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Links from today’s show:
8/13 Podcast - Insurance Industry’s Latest Battle Against Consumer Protection: https://www.thetayf.com/blogs/this-weeks-stories/the-insurance-industry-s-latest-battle-against-consumer-protection
10/9 Webinar - Crypto for RIAs: Yield, Staking, Lending and Custody. What’s beyond the ETFs? https://dacfp.com/events/crypto-for-rias-yield-staking-lending-and-custody-whats-beyond-the-etfs/
10/23 Webinar - How to Factor Longevity into Your Financial Planning: https://www.thetayf.com/pages/october-2024-webinar-how-to-factor-longevity-into-your-financial-planning
9/25 Webinar Replay - Unlocking Alpha in Crypto-Equities and Beyond: https://dacfp.com/events/unlocking-alpha-in-crypto-equities-and-beyond
9/20 Webinar Replay - Q4 Crypto Outlook: What You Need to Know Now: https://dacfp.com/events/q4-crypto-outlook-what-you-need-to-know-now
9/11 Webinar Replay – Rates are Poised to Drop, Now What?: https://www.thetayf.com/pages/rates-poised-to-drop-now-what
Become Certified in Blockchain and Digital Assets: https://dacfp.com/certification/
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