The Independent Investor: Think twice Before Co-Signing Student Loan

Sure, we love our kids. Of course we want them to get ahead, so when your son, daughter, or nephew asks for your signature right next to theirs on that private student loan application it is tempting. But before you sign on the dotted line consider this.

When you consent to being a student loan co-signer you are in for the life of the loan. If the student fails to make payments, you must. If they are late, you get the notices, too. Their financial problems will impact your credit score and could haunt you the next time you apply for a car loan, home mortgage, or simply a credit card.

I know that putting aside your emotions is difficult at best in the decision-making process. Yet, you must, because there is real money on the line as well as a multiyear financial commitment. Approach the decision as if the relative were a potential business partner. As such, you must be a fairly good judge of character. Does the person asking for the loan follow through on his or her commitments? Do they have a history of making good, financial decisions or are they the type that just can't seem to save money? How practical are they in life's decisions?

If the answers still indicate a green light, decide how and when they are going to be able to pay back the loan. If your son is insisting on getting an art degree with absolutely no prospects of employment, co-signing a loan with him could be financial suicide. Today, many college grads who have a degree in occupations that are already overemployed, obsolete or pay minimum wages cannot repay their student loans. Just because your relatives are "following their heart" in acquiring a degree is no reason to support that decision financially.

By all means be supportive but at the same time, the best assistance you can give is to explain the realities of the workplace. It is their option to listen and agree or disagree. Do this before the student wracks up thousands of dollars of debt that will follow him or her for the rest of their life and possibly yours.

If after all this, the decision is still a go, then urge the student to first explore a federal student loan, which does not require a co-signer, whereas 90 percent of private student loans do. Federal Stafford Loans for undergrads have a fixed rate of 4.66 percent, if the student loan is taken between July 1 and June 30, 2015. This would be both the student's and your best option.

But if you are still not convinced or the private loan is till the only option than consider also that the amount borrowed is not the amount you will end up repaying. Deferment, forbearance and interest will add a substantial sum to that debt. Remember too that student loans are not subject to bankruptcy laws. It is nearly impossible to have student loans discharged. And don't think you can remover yourself from the loan once the student receives it. Lenders have a whole host of hoops you need to jump through to even consider removing you from the loan.

To be fair, only 7 percent or so of students actually fail to make good on their loans. In most cases, the student pays on time things and things go smoothly. It is only when they miss payments and the bank come to you that your relationship begins to change with the co-signee. It is you who will be the "bad guy" every month in hounding the student to make their payments on time. What was once a warm and affectionate relationship can quickly evolve into something else. Don't let that happen to you.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

The Independent Investor: Could Greece Upset the Applecart?

This week a parliamentary vote to elect a president failed in Greece. National elections have now been called for late January. The outcome could trigger a revolt against an austerity program that has brought years of suffering and pain to the population.

Today, the unemployment rate is about 25 percent in Greece. Its citizens have been living with higher taxes, less goods and services, declining government spending, fewer pension benefits and longer work hours for many years. This unhappy saga was the result of a decadeslong binge of government spending, huge deficits and even higher debt. Detractors and creditors alike say the Greeks have only themselves to blame.

The global financial crisis triggered the end of the party. Since then, the Greek economy has suffered through three distinct recessions. As the economy slid, the viability of the country’s sovereign debt, which was held by the largest banks and financial companies throughout Europe, came into question. European leaders were terrified that the country would declare bankruptcy, renege on that debt and drag down the entire EU financial system with it.

A two-part debt bailout program was put together throughout 2010-2012. Various Eurozone countries, the European Central Bank and the International Monetary Fund (called the Troika) cobbled together a multi-billion dollar package that saved Greece (and the Euro) from economic disaster. In exchange, a severe austerity program, at the Troika's insistence, was forced on Greece and its citizens. Since then the prescribed medicine has improved the outlook for the economy and unemployment. In the meantime, Greek government debt has been quietly shifted from the hands of the banks, (which took losses of 53.5 percent of face value) to those of various governments. At the same time, private investors have been happy to grab up the forced sale of Greek government assets at distressed prices and the financial markets were rejoicing that Greece might actually return to a balanced budget by next year. So where is the fly in this ointment?

What may make bankers happy may not go down well with voters. Unfortunately, a country is made up of people who need to eat, to work, to aspire to the simple basics of life. Greek voters have seen precious few of those good things in life over the past seven years. Prime Minister Antonis Samaras, who has been implementing the austerity program, recently rejected demands by the Troika to raise taxes and cut incomes again in order to insure a balanced budget. As a result, additional bail-out money has been withheld.

Syriza, a left-wing coalition party of disgruntled Greeks, has been gaining ground and now leads the ruling Samaras' New Democracy Party in national polls. If they win in January's elections, they promise to throw out the austerity policies ordered by the Troika altogether. And Greece is not alone in rejecting the demands of outsiders. Populist movements in Spain and Italy are also attracting an increasing number of voters. They are demanding the end to similar measures in their own countries.

I am not surprised. My experiences during the debt crisis during the 1980s in Latin America convinced me that the Troika's austerity measures raised the risk of increasing social unrest in the Southern nations of Europe. Similar measures levied by the IMF in South America ushered in what is now called "the lost decade." Austerity there did little to improve economic conditions but fostered countless coups and social revolutions, untold poverty and misery.

Today, while the European Union is struggling to avoid falling back into recession, these populous uprisings are at best inconvenient and possibly the harbinger of something that could be infinitely worst. The ECB's plans in January to usher in a U.S.-style program of quantitative easing, I suspect, has been stopped in its tracks, until events in Greece are clarified. If things come undone in Greece, there is a real possibility that the Greeks could bolt the EU for good. And if they exit and survive, what would stop others from doing the same?

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

The Independent Investor: IRA Distribution Time

Information abounds on why and when you should contribute to a tax-deferred savings plan such as an Individual Retirement Account (IRA). Less is known about what happens in retirement when you have to take money out of these plans. For those who turned 70 1/2 years or older in 2014, pay attention, because it's distribution time.

The original idea behind tax-deferred savings was to provide Americans a tax break in order to encourage us to save towards retirement. Individuals could stash away money tax-free while they were working and then take it out again once they retired, when they were presumably earning less and at a lower tax rate. The government determined that once you reached 70 1/2 you have until April 1 of the next tax year to take your first distribution.  If you are older than that, you only have until the end of the year.

Officially, it's called a Required Minimum Distribution (RMD) and applies to all employee sponsored retirement plans. That includes profit-sharing plans, 401(K) plans, Self Employed Persons IRAs (SEPS), SARSEPS and SIMPLE IRAs, as well as contributory or traditional IRAs. The individual owner of each plan is responsible for computing the MRD and taking it from their accounts. There are stiff IRS penalties (of up to 50 percent of the total MRD) levied on those who fail to comply.

The RMD is calculated by taking the total amount of money and securities in each IRA, or other tax-deferred plan, as of Dec. 31 of the prior year and dividing it by a life expectancy factor that the Internal Revenue Service publishes in tables. The document, Publication 590, Individual Retirement Arrangements, can be easily accessed over the internet. As an example, let's say at the end of last year your IRA was worth $100,000. You are 72 years old. Looking up the life expectancy ratio in the IRS table for that age, which is 15.5, you divide your $100,000 by 15.5. Your RMD for this year would be $6,451.61 (100,000/15.5 = 6,451.61).

Remember that you must compute your RMD for every tax-deferred account you own. However, you can withdraw your entire distribution from just one account if you like. You can always withdraw more than the MRD from your accounts, but remember that whatever you withdraw is taxed at your tax bracket. If you make an error and withdraw too much in one year, it cannot be applied to the following year. And before you ask, no, you can't roll the RMD over into another tax-deferred savings account.

What happens if you forget or for some reason you cannot take your RMD in the year it is required? You might be able to avoid the 50 percent penalty if you can establish that the shortfall in distributions was the result of a reasonable error and that you have taken steps to remedy the situation. You must fill out Form 5329 and attach a letter of explanation asking the IRS that the penalty be waived.

For those who have an Inherited IRA, you too may have to take a RMD before the end of the year. The calculations and rules are somewhat different. Generally, if you have received the inheritance this year, as the beneficiary, you have the choice of taking one lump sum, taking the entire amount within five years or spreading out the distributions over the course of your life expectancy, starting no later than one year following the former owner's death. The IRS produces a table for use by beneficiaries in Publication 590 as well.

Many retirees have a hard time remembering to take their MRD each year. It is a good idea to ask your money manager or your accountant to handle the distribution or at least to remind you each year when the RMD is due. The last thing you want to do is give back to the IRS half your hard-earned savings each year.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

The Independent Investor: Election Investors Ignored

Last weekend Japan held "snap" elections, which gave Prime Minister Shinzo Abe the mandate to continue his pro-growth economic policies.  No one outside Japan seemed to care. The Nikkei stock market index fell 1.6 percent and traders moved on. That may prove to be a big mistake.

Granted, given the precipitous decline in the price of oil and the calamity it is causing in Russia (well-covered in last week's columns), investors may be forgiven for focusing on other more immediate concerns. Still, I believe that now that Abe has a clear mandate to continue his pro-reform, economic policies, Japan's prospects for next year have been elevated considerably. And don't forget that Japan is by far the greatest beneficiary of those falling oil prices.

Japan is technically in recession at the moment. GDP over the last two quarters was dismal. And the third quarter 1.9 percent decline shocked observers, who were actually expecting a rise. Economists pointed to a national sales tax hike that hurt economic growth. Back in April, the sales tax was increased from 5 percent to 8 percent, which hurt consumer spending.  After the election, Abe announced that another hike in the sales tax (to 10 percent) would be delayed, if not suspended.

Readers may recall the "three arrows" of Abe's plan. They are: radical monetary easing (well over a $1 trillion so far in asset purchases), extra public spending ($17 billion plus) and a much-needed program of structural reforms. The last arrow is probably the most difficult and yet to be accomplished. Abe will need all the support of a renewed voter mandate to accomplish these changes. It is the main reason the snap election was called in the first place.

Take unemployment, for example. Although unemployment is only 3.5 percent in Japan, those numbers can be deceiving. The country's labor structure is antiquated. A decades-old labor coalition between the government, unions and corporations shelter most workers from market forces. For example, there is a de facto ban on firing and dismissals can be thrown out of court if they do not meet with "social approval." Employment in Japan, in many ways is part and parcel of the country's welfare system.

Obviously, Japanese companies are at a severe disadvantage in this globally competitive environment. Corporations have resorted to hiring more low-paid workers with little job protection as an alternative. These "irregulars" now make up two-fifths of the labor market. They are not members of the unions and therefore fall outside the unions' ironclad agreements protecting their members. As a result of this system, even the most unproductive workers remain employed.

Reform would require Abe to scrap the old system and institute things like severance pay, equal pay for equal work and an overhaul of Japan's short duration, low unemployment compensation system.  In addition, the concept of free trade must be introduced. The end of Japan's post-WWII protectionism must be tackled. This won't make him popular among many domestic entities. Japanese farmers, for example, benefit from import duties that are so high that the Japanese consumer spends an average 14 percent of household budgets on food, compared to American consumers who pay 6 percent.

The battle to achieve these reforms will be formidable. Pressure groups that have gained economic and political power in postwar Japan will not give in easily. Although the general public agrees that reform is necessary to "save Japan from itself," the devil will be in the details.

Within Japan, there is an understandably cynical attitude over Abe's chances of successfully addressing these and other structural issues. Too many politicians in the past have tried and failed. What, they say, makes Abe any different?

It could be his heritage. He is the son and grandson of politicians and tradition counts in that country. On his mother's side, his grandfather was a war criminal, who later established Japan's Democratic Party. He served as prime minster from 1957-1960.

But it could also be his generation. He is both the first post-war candidate to hold office and the youngest Japanese leader in history. He appeals to both sides of the political spectrum and can inspire, motivate and lead. He has, in my opinion, the best chance to steer Japan in a new direction.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

The Independent Investor: Is Russian Bear Back In His Cave?

Ukraine had been the topic on everyone's lips for over six months. Today, nary a word is written about Russian's plan to annex that nation. You can thank declining oil prices for that.

While most of the West rejoices over the recent precipitous drop in the price of oil, the story is quite different for the largest producer of fossil fuel energy, Mother Russia. That's right, Russia, and not Saudi Arabia, leads the world in energy production. As such, Russia depends on energy for 16 percent of its gross domestic product, 52 percent of total federal revenues and 70 percent of all exports. And that was in 2012. Since then the numbers are even higher.

As the price of energy continues to decline, so does the Russian currency, the ruble. It has dropped by 26 percent in the last year and just today fell another 1.3 percent. In the first half of this year alone, the Russian economy contracted by over 10 percent and that was before the brunt of the oil decline occurred. Russian officials estimated they will lose $90-100 billion a year based on oil's decline.

Officially, the Russian Economic Ministry cut its forecast for GDP in 2015 from 1.2  percent to minus-0.8. The Russian people are going to feel that bite with real incomes falling by 2.8 percent. This will be the country's first recession since 2009. At the same time, the inflation rate is expected to rise from 7.5 percent to 9 percent. In an effort to combat rising inflation their central bank is hiking interest rates at the same time to almost 10.5 percent, further hurting economic growth.

 Earlier in the year, the prospects for the Russian economy were already looking fairly anemic, thanks to Putin's adventurism in Crimea. In retaliation, U.S. and European sanctions have now begun to bite. By Russian forecasts, those sanctions will cost the country $40 billion this year. They have also effectively closed off global capital markets to Russian banks and corporations. As a result, investment has dropped off a cliff as uncertainty, combined with a lack of security, has devastated corporate Russia

On Dec. 4, Putin addressed his government ministers and parliament with a mix of sophisticated economic plans to liberalize the economy and good old-fashioned nationalism that would have made Hitler proud. Of course, he blamed the West for everything from Russia's current economic woes to annexing Crimea and Ukraine.

It was interesting that he barely mentioned the continuing war in Eastern Ukraine. It appears that the declining oil price has damaged Putin's plans far more than the economic sanctions instituted by the West. Was it a fortuitous coincidence that energy prices started to decline this year just as Vladimir Putin began to marshal his forces for a move into Ukraine?

Readers should remember that the Kingdom of Saudi Arabia, which is getting the blame for not supporting oil prices, is a key U.S. ally. What better way to hamstring Russian adventurism than to hit them where it really hurts via oil? Notice, too, that both the administration and Congress has been silent about this recent energy rout, although theoretically, declining oil prices hurts our burgeoning shale industry and American efforts at energy independence.

I say let the oil price fall until it doesn't. Let the markets determine the fair value of energy and hopefully, in the meantime, bankrupt the Russian bear.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.