Is a College Degree Worth What It Costs?

PIMCO bond fund legend Bill Gross grabbed the spotlight a few weeks ago when he questioned the value of a college education in today’s economy. In “School Daze, School Daze, Good Old Golden Rule Days,” he wrote, “College was great as long as the jobs were there.” Gross also described the liberal arts education as a “four-year vacation interrupted by periodic bouts of cramming or Google plagiarizing.” That’s not something parents wanted to read as they packed up their cars to take this year’s incoming freshmen class to college.

The facts Gross offers to lay the foundation for his thesis include: College tuition has increased at a rate 6% higher than the general rate of inflation for the past 25 years, making it four times as expensive relative to other goods and services as it was in 1985. Also, the average college graduate now leaves school with $24,000 of debt. College graduates, he reasons, “can no longer assume that a four year degree will be the golden ticket to a good job in a global economy that cares little for their social networking skills and more about what their labor is worth on the global marketplace.”

Certainly, we all know college graduates who are struggling to find employment. And we all know students who are in college who, for whatever reason, would be better served elsewhere. However, it seems a bit of an overreaction to let the current job market, influenced by a confluence of unprecedented market events, dictate how we prepare the next generation of thinkers to compete in global marketplace. Surely, the goal at the end of a college education is meaningful employment, but higher education cannot be governed by the economy alone.  The business leaders I have interviewed typically recommend a college education for today's young people.

What do you think?

Is Now a Good Time for Wealth Transfers?

Our ever changing tax laws seem perpetually riddled with sunset clauses. And that makes estate planning opportunities fleeting. For instance, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRA), increased the federal gift tax exclusion to $5 million. Accordingly, you can make $5 million in gifts in your lifetime without paying a gift tax. However, the TRA is scheduled to sunset at the end of 2012. Post-sunset, the federal gift tax exclusion will revert to its previous lower level of just $1 million. Therefore, if you have been considering making large gifts to your children or grandchildren, it may be advantageous to move those assets before the end of next year.

Also on the estate planning radar screen is the fact that Standard & Poor’s recent downgrade of long-term credit rating for U.S. Treasury debt from AAA to AA+ may cause an increase in the safe harbor interest rates for intra-family debt transactions. These so-called Applicable Federal Rates (AFRs) are currently near historic lows -- and that obviously works to your advantage when making lifetime transfers of business interests or property to your children or grandchildren. We’ll keep a watchful eye on interest rates so we can effectively guide your estate planning decisions.

If you want to discuss how to take advantage of the increased gift tax exclusion under the TRA or how a potential increase in AFRs might impact your estate planning, you should consult your attorney, accountant, or wealth manager.

The Truth about the Downgrade and the Downturn

After a period of growth and semi-stability where many hoped that the worst of the market volatility was behind us, last month we experienced dramatic downturns not seen since the dark days of 2008. Some will blame the Dow’s freefall on Standard & Poor’s decision to downgrade U.S. Government debt from its AAA to a lesser AA+ credit rating. (See the “S&P Downgrades the U.S.: Five Things” for details.)

While the downgrade is unprecedented, in my view, it is not responsible for the profound market volatility we’re experiencing. More likely, the steep decline reflects the market’s broader frustration with the difficulty our elected officials had striking a debt ceiling compromise and the fact that Washington’s solution is a temporary fix. Congress and the President ultimately agreed to a budget cut of $2.1 trillion, half of the figure initially debated.

Standard & Poor’s has grabbed all the headlines, but it’s important to note that the other two major credit agencies, Moody’s and Fitch, elected not to downgrade U.S Treasuries. Although sticking with their top rating of Aaa, Moody's Investors Service did assign a negative outlook on United States government bonds on August 2. The firm noted that it could take “further action if: (1) there is a weakening in fiscal discipline in the coming year; (2) further fiscal consolidation measures are not adopted in 2013; (3) the economic outlook deteriorates significantly; or (4) there is an appreciable rise in the US government's funding costs over and above what is currently expected.”

Regardless of being on a kind of watch list, U.S. debt still remains among the world's safest investments. In fact, we’ve seen a rally in the Treasury market with the traditional “flight to quality” that occurs when we experience dramatic market downturns. It’s also worth noting that the downgrade to AA+ does not apply to short-term Treasury securities. Accordingly, money market funds, which generally hold a lot of short-term Treasury securities, should be unaffected by the downgrade. There may be long-term negatives, however. China and other foreign countries could demand a higher interest rate to hold U.S. debt. Additionally, consumers could face higher rates for mortgages, car loans, and student loans. Stay tuned.

A Moment to Reflect on 9/11

I am sure the hearts and minds of every American reflected with great sadness on the events that took place ten years ago.  Our thoughts and prayers go out to everyone who lost a loved one on 9/11 or as a result of the terrorist attacks on America.

As I was reflecting on 9/11, I wanted to share two articles and one video that are worth reading and seeing.  The articles are written by Peggy Noonan--one on the five year anniversary of 9/11 and the other on the ten year anniversary.  They are:

     The Sounds that Still Echo from 9/11

     We'll Never Get Over It, Nor Should We

To watch the video click on this link for an eight minute video on the World Trade Center Memorial.

God Bless You and God Bless America!

The Numbers are Staggering

Following Standard & Poor’s downgrade of U.S. debt during the week of August 10th, investors pulled $40.3 billion out of long-term mutual funds of all types, according to the Investment Company Institute (ICI). Put in perspective, the outflow of $40.3 billion was roughly 25 percent more than was pulled out in the previous four weeks combined and more than double the $17.0 billion pulled out the previous week. Since, May 1, according to the ICI, investors have pulled out more than $85 billion.

The extreme volatility of the last few weeks not withstanding, the economic recovery continues to follow an atypical course. Generally, the more significant a market downturn is, the stronger the rebound. Yet, although the economy contracted about 4% during the “Great Recession,” the worst since the Great Depression, this recovery has been lackluster. In fact, growth is running at about half the expected speed due to tight credit conditions, a depressed housing market and a pervasive lack of consumer and corporate confidence. Unsure whether better days are around the corner or further down the road, investors have been focused on capital preservation and the search for decent yield.

If the “Super Congress” makes essential budget cuts and positive signs like strong corporate earnings and robust exports continue, we’ll see a real improvement in investors’ confidence. That optimism will move steadily from Main Street to Wall Street and give our recovery the boost it needs. In the meantime, diversification and investment discipline will continue to be the best policy in this environment.