Wisdom of Rich Dad

As President Obama unveiled the 2013 fiscal year budget, the nation’s financial situation came back into sharp focus. Experts say partisan gridlock in Washington means the budget will probably go nowhere.

Considering this is an election year, however, expect politicians to harp on facts, figures and terms that most Americans weren’t taught in high school. To help out, it’s time to dredge up lots of scary facts to make you pay attention.

Before we get going, a quick primer on the number TRILLION:

• $1 trillion = $1,000 billion or $1,000,000,000,000 (that’s 12 zeros)

• How hard is it to spend a trillion dollars? If you spent one dollar every second, you would have spent a million dollars in 12 days. At that same rate, it would take you 32 years to spend a billion dollars. But it would take you more than 31,000 years to spend a trillion dollars.

• And now, some scary facts about the debt and the deficit — some basics:

• Deficit = money government takes in — money government spends

• 2012 US deficit = $1.33 trillion

• 2013 Proposed budget deficit = $901 billion

• National debt = Total amount borrowed over time to fund the annual deficit

• Current national debt = $15.3 trillion (or $49,030 per every man, woman and child in the US or $135,773 per taxpayer)

OK, let’s get started!

1. The U.S. national debt on Jan. 1, 1791, was just $75 million dollars. Today, the U.S. national debtrises by that amount about once an hour.

2. Our nation began its existence in debt after borrowing money to finance the Revolutionary War. President Andrew Jackson nearly eliminated the debt, calling it a “national curse.” Jackson railed against borrowing, spending and even banks, for that matter, and he tried to eliminate all federal debt. By Jan. 1, 1835, under Jackson, the debt was just $33,733.

3. When World War II ended, the debt equaled 122 percent of GDP (GDP is a measure of the entire economy). In the 1950s and 1960s, the economy grew at an average rate of 4.3 percent a year and the debt gradually declined to 38 percent of GDP in 1970. This year, the Office of Budget and Management expects that the debt will equal nearly 100 percent of GDP.

4. Since 1938, the national debt has increased at an average annual rate of 8.5 percent. The only exceptions to the constant annual increase over the last 62 years were during the administrations of Clinton and Johnson. (Note that this is the rate of growth; the national debt still existed under both presidents.) During the Clinton presidency, debt growth was almost zero. Johnson averaged 3 percent growth of debt for the six years he served (1963-69).

5. When Ronald Reagan took office, the U.S. national debt was just under $1 trillion. When he left office, it was $2.6 trillion. During the eight Regan years, the US moved from being the world’s largest international creditor to the largest debtor nation.

6. The U.S. national debt has more than doubled since the year 2000.

• Under President Bush: At the end of calendar year 2000, the debt stood at $5.629 trillion. Eight years later, the federal debt stood at $9.986 trillion.

• Under President Obama: The debt started at $9.986 trillion and escalated to $15.3 trillion, a 53 percent increase over three years.

7. FY 2013 budget projects a deficit of $901 billion in 2013, representing 5.5 percent of GDP, down from a deficit of $1.33 trillion in FY 2012, which was the fourth consecutive year of more than $1 trillion dollar deficits.

8. The U.S. national debt rises at an average of approximately $3.8 billion per day.

9. The US government now borrows approximately $5 billion every business day.

10. A trillion $10 bills, if they were taped end to end, would wrap around the globe more than 380 times. That amount of money would still not be enough to pay off the U.S. national debt.

11. The debt ceiling is the maximum amount of debt that Congress allows for the government. The current debt ceiling is $16.394 trillion effective Jan. 30, 2012.

12. The U.S. government has to borrow 43 cents of every dollar that it currently spends, four times the rate in 1980.

Could the next bubble to burst be student loans?

The burden is big: U.S. college students borrowed $117 billion in federal student loans last year, and the Consumer Financial Protection Bureau reported earlier this year that debt from student loans exceeds $1 trillion, surpassing credit card debt for the first time.

Tuition and fees at both public and private universities have been steadily increasing and some higher education institutions are cutting financial aid, reducing class offerings or even freezing enrollment at campuses because of state and federal funding shortfalls. California State University, for example, announced in March that it was not accepting new students at 15 of its 23 campuses for the spring 2013 semester and will wait-list all applicants the following Fall after a $750 million funding cut.

President Obama wants to overhaul the college education system and proposed a new financial aid program during his State of the Union address in January, saying higher education isn’t a luxury. Rather, Obama says “It’s an economic imperative that every family in America should be able to afford.” In a recent speech at the University of Michigan, he told students that colleges were being put on notice. At the heart of the problem: “If you can’t stop tuition from going up, then the funding you get from taxpayers each year will go down,” he says.

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These days it is more important than ever to maintain a good credit score. Whether you’re planning to buy a home, finance a new vehicle or even sign up for a new mobile calling plan, your credit score will follow you almost everywhere you go. While most of us know the basics of how our credit scores and reports work, and how to build, improve or repair our scores, you may be surprised at some of the things that can have a negative effect on your credit score.

Closing an Older Credit Card

It is not uncommon for individuals to have credit cards that may be 10, 15 or even 20 years old. These cards were probably one of, if not the first credit cards you ever signed up for. With credit cards companies constantly looking for new incentives to coerce us to sign up for more cards, these older cards most likely don’t offer much more than the bare bones, when it comes to rewards or options. Since most people would rather earn rewards points or cash back with their credit purchases, older, less practical cards, probably end up at the back of your wallet or the bottom of your purse collecting dust.

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Graduating from college with thousands of dollars in loans is a heavy burden. But take heart: A loan-forgiveness program can lighten the load. Note, however, that most programs cover only federal student loans. And if the program does not involve a work requirement, the amount forgiven is generally considered taxable income.

1 Sign up for the income-based repayment plan. For borrowers with high debt relative to income, monthly payments are reduced, and any remaining debt is forgiven after 25 years. The Obama administration has proposed shortening the time frame to 20 years.

2 Work in a public-service job. Any remaining debt will be forgiven after you have worked full-time in public service for ten years and made 120 payments, beginning on or after October 1, 2007. You benefit only if your payments have been reduced through an income-linked repayment plan. Student loans must be made through the federal Direct Loan program — as opposed to private lenders, such as Sallie Mae — but you can get around this restriction by consolidating your loans into the Direct Loan program. For details on both income-based repayment and public-service loan forgiveness go to www.ibrinfo.org

3 Work in an underserved area. If you enter a profession such as teaching, health services, social work or clinical research, you could qualify for loan forgiveness through one of several programs. But before you make a years-long commitment, be sure the program has the resources to make good on its promise.

4 Work at a national service organization. A stint in AmeriCorps or its member organizations, including Vista, makes you eligible to receive a Segal AmeriCorps Education Award, worth up to $5,350 in 2010. You can use the award to pay for further education or to repay your student loans. The Peace Corps also rewards you for service by canceling up to 70% of federal Perkins loans.

For more information, go to www.finaid.org/loans/forgiveness.phtml.

My son took out a Sallie Mae loan for college expenses. To my astonishment, I found out that I was a co-signer. I don’t recall ever co-signing the student loan documents. Sallie Mae says I have to repay the loan and that I am completely responsible for it. It sends me a statement every month and is now threatening collection action. They have not asked my son for a single penny. Although the loan is only for $6,000, shouldn’t Sallie Mae try to collect from my son first before going after me?
– John Juice

Dear John,
I think your first step is to review the loan documents. Sallie Mae didn’t dream this stuff up. They’re contacting you for a reason. If you don’t have ready access to the loan documents, I’d suggest contacting the Office of the Consumer Advocate at Sallie Mae.

Without specifically referencing you, I discussed the issues surrounding the loan with Patricia Christel, a spokeswoman at Sallie Mae. Her assistance was invaluable in helping me to frame this reply.

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The stock market experienced its biggest loss in over a month, falling 140 points, or 1.1%.

What spooked investors? Standard & Poor’s (S&P) downgraded the US debt outlook from stable to negative.

The reasoning behind the S&P’s downgrade is the growing debt crisis in America. As The Wall Street Journal reports, the US deficit is expected to grow from $1.5 trillion to $1.65 trillion this year and now comprises 10 percent of total US economic output.

The rating firm cited the budget gridlock and lack of faith in the government’s ability to reach a deal to substantially lower the deficit as reasons for the downgrade, “The outlook reflects our view of the increased risk that the political negotiations over when and how to address both the medium- and long-term challenges will persist until at least after the national elections in 2012.”

Currently, the US is the only one of 19 countries to have a negative outlook for their debt while enjoying an AAA rating. This move is substantial, and while the US still retains its AAA rating, over 50 percent of countries that S&P downgrade to negative eventually lose their AAA credit rating.

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