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1
Mar

Ceiling and Deficit Spending

The U.S. government reached its statutory limit, commonly called the debt ceiling, January 19,2023. The current limit was set by Congress at about  $31.4 trillion in December 2021.1

Janet Yellen, Treasury Secretary, started well-established “extraordinary measures” to allow necessary borrowing for a limited period the same day. While Yellen projects the extension will last until early June, the Congressional Budget Office (CBO) estimates it may last until sometime between July and September. However, the CBO cautions that if April tax revenues fall short of its projections, the Treasury could run out of funds earlier.2–3

Flexibility vs. Fiscal Fights

A debt ceiling was first established in 1917 to give the federal government more flexibility to borrow during World War I. Previously, all borrowing had to be authorized by Congress in very specific terms, which made it difficult for the government to respond to changing needs.4

The modern debt ceiling, which aggregates almost all government debt under one limit, was established in 1939. Since 1960, it has been raised, modified, or suspended 78 times, mostly with little fanfare. That changed in 2011, when a political battle over the ceiling pushed the Treasury so close to the edge that Standard & Poor’s downgraded the credit rating of the U.S. government.5–6

The debt ceiling limits the amount that the U.S. Treasury can borrow to meet financial obligations already authorized by Congress. It does not authorize future spending. However, beginning with the bitter battle of 2011, it has been used as leverage for partisan negotiations over government spending. With the White House and the House of Representatives — which must authorize spending — held by different parties, this year’s negotiations could be particularly difficult.

Potential Consequences

If the debt ceiling is not raised in a timely manner, the U.S. government could default on its financial obligations, resulting in unpaid bills, higher interest rates, and a loss of faith in U.S. government securities that would reverberate throughout the global economy. While it’s unlikely that the current situation will lead to a default,  pushing negotiations close to the edge can be damaging in itself. It was estimated that the 2011 impasse cost U.S. taxpayers $1.3 billion in increased borrowing costs in FY 2011 with additional costs in the following years.7

The Deficit and the Debt

The federal government runs at a deficit when tax revenues are not sufficient to meet spending obligations. Federal spending has outpaced revenue for the last 50 years, except from 1998 to 2001.8 Annual budget deficits add to the national debt.

The current debt of $31.4 trillion is the highest in U.S. history.9 Measuring the debt as a percentage of gross domestic product (GDP) is a better comparison over time.  Economists look at debt held by the public — funds the government has borrowed to meet operational expenses and liabilities, primarily through issuing Treasury securities. Interagency debt — funds borrowed from government accounts such as the Social Security trust funds — is also subject to the limit but does not directly affect the economy or federal budget.

At the end of fiscal year 2022 (September 30, 2022), debt held by the public was equivalent to 97% of GDP. In 2019, before the pandemic, it was 79% of GDP, and  in 2007, before the Great Recession, it  was 35%. Both crises caused a significant increase of the deficit and debt due to lower tax revenues and high spending on government stimulus programs. The last time the debt exceeded current levels was at the end of World War II.10-11

A February 2023 analysis, the CBO projected that the debt will rise steadily over the next decade to 118% of GDP in 2033, which would be the highest percentage  in U.S. history. The driving forces behind this increase would be higher spending on Social Security and Medicare, and rising interest costs (due to increasing debt  and higher rates). If current laws remain unchanged, the debt is projected  to rise even more quickly in the next two decades, reaching 195% of GDP in 2053.12

No Easy Answer

The only way to change this trajectory is to increase revenue, reduce spending, or both. The best scenario would be decades of high GDP growth that increases revenue at current tax rates, but this seems unlikely. The CBO projects real (inflation-adjusted) GDP growth to average a tepid 1.7% annually over the next decade.13 Raising tax rates may be necessary, but that is always a difficult political option.

There is little room to maneuver on the spending side. Only 28% of federal spending is “discretionary,” meaning Congress can set amounts through annual appropriations bills, and almost half of that spending goes to national defense, which few leaders would want to cut in the current global climate. The rest is mandatory spending, including Social Security and Medicare (which will account for nearly 36% of federal spending in  2023) and interest on the national debt.14 While both parties have indicated that Social Security and Medicare are off the table, other mandatory spending could be reduced through Congressional action.

The White House is expected to release  its budget proposal for FY 2024 this month, followed by a counterproposal from House Republicans in April, setting up what is sure to be an intense period of budget negotiations. President Biden and House Speaker Kevin McCarthy have already begun to discuss the debt ceiling issue, and it remains to be seen whether the ceiling can be addressed outside of the budget process or whether it will be caught in the crosshairs. In either case, the ceiling will have to be raised or suspended in order to maintain U.S. government operations.

U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. The principal value of Treasury securities fluctuates with market conditions. If not held to maturity, they could be worth more or less than the original amount paid. Forecasts are based on current conditions, are subject to change, and may not come to pass.

1, 3, 10, 12–14) Congressional Budget Office, 2023

2, 6, 9) U.S. Treasury, 2023

4–5) Bipartisan Policy Center, 2023

7) U.S. Government Accountability Office, July 23, 2012

8, 11) U.S. Office of Management and Budget, 2023

23
Feb

REAL ID Deadline Extended Again

After years of numerous delays, the U.S. Department of Homeland Security has once again extended the  REAL ID enforcement deadline from May 3, 2023, until May 7,  2025. 1

What is a REAL ID?

A REAL ID is a type of enhanced identification card. The REAL ID Act, passed by Congress in 2005, set minimum security standards for state-issued driver’s licenses and identification cards. Under the Act, residents of every state and territory are required to have a REAL ID-compliant license/identification card, or another acceptable form of identification (such as a passport), in order to:

  • Access federal facilities
  • Board federally regulated commercial aircraft
  • Enter nuclear power plants

When traveling internationally,  you will still need your passport for identification purposes, including travel to Canada or Mexico.  If you are traveling domestically, you will only need to show your REAL ID or another acceptable alternative.

In order for a REAL ID license or identification card to be compliant,  it must have a star marking on the upper portion of the card.  Enhanced Driver’s Licenses that are issued in Michigan, Minnesota,  New York, Vermont and Washington do not have a star marking but are still acceptable alternatives  to REAL ID-compliant cards and will be accepted for official REAL ID purposes.

How Do You Get a REAL ID?

The U.S. Department of Homeland Security (DHS) oversees the enforcement and implementation of the REAL ID Act, but each state’s driver’s licensing agency has its own process for issuing REAL ID-compliant license/identification cards.

In order to obtain a REAL ID, you will need to provide  documentation that shows your:

  • Full legal name, date of birth, proof of lawful presence (e.g., U.S. passport, birth certificate)
  • Social Security Number (Some states may not require physical documentation of your Social Security Number.)
  • Two proofs of address of principal residence (e.g., driver’s license, utility bill)

If you have a name change (e.g., marriage, divorce or court order), you will also need to bring in documentation that demonstrates proof of your name change. States may impose additional requirements, so be sure to contact your state’s driver’s licensing agency for more information.

1)  U.S. Department of Homeland Security, 2023

 

19
Jan

IRS Standard Mileage Rates for 2023

IRS has increased the optional standard mileage rates for computing the deductible costs of operating an automobile for business purposes for 2023. The rates for business use are revised to reflect recent increases in the price of fuel. Standard mileage rates for medical and moving expense purposes remain the same for 2023. The standard mileage rate for computing the deductible costs of operating an automobile for charitable purposes is set by statute and remains unchanged.

For 2023, the standard mileage rates are as follows:

Business use of auto: 65.5 cents per mile (up from 62.5 cents for the period July 1, 2022, to December 31, 2022*) may be deducted if an auto is used for business purposes. If you are an employee, your employer can reimburse you for your business travel expenses using the standard mileage rate. However, if you are an employee and your employer does not reimburse you for your business travel expenses, you cannot currently deduct your unreimbursed travel expenses as miscellaneous itemized deductions.

Charitable use of auto: 14 cents per mile (the same as for 2022) may be deducted if an auto is used to provide services to a charitable organization if you itemize deductions on your income tax return. Your charitable deduction may be limited to certain percentages of your adjusted gross income, depending on the type of charity.

Medical use of auto: 22 cents per mile (the same as for the period July 1, 2022, to December 31, 2022*) may be deducted if an auto is used to obtain medical care (or for other deductible medical reasons) if you itemize deductions on your income tax return. You can deduct only the part of your medical and dental expenses that exceeds 7.5% of the amount of your adjusted gross income.

Moving expense use of auto: 22 cents per mile (the same as for the period July 1, 2022, to December 31, 2022*) may be deducted if an auto is used by a member of the Armed Forces on active duty to move, pursuant to a military order, to a permanent change of station (unless such expenses are reimbursed). The deduction for moving expenses is not currently available for other taxpayers.

*Last year, in a rare mid-year adjustment to the standard mileage rates, the IRS increased the rates for the second half of 2022.

12
Jan

Is the Yield Curve Signaling a Recession?

Long-term bonds generally provide higher yields than short-term bonds because investors demand higher returns to compensate for the risk of lending money over a longer period. Occasionally, however, this relationship flips, and investors are willing to accept lower yields in return for the relative safety of longer-term bonds. This is called a yield curve inversion because a graph showing bond yields in relation to maturity is essentially turned upside down (see chart).

A yield curve could apply to any bonds that carry similar risk, but the most studied curve is for U.S. Treasury securities, and the most common focal point is the relationship between the two-year and 10-year Treasury notes. The two-year yield has been higher than the 10-year yield since July 2022, and beginning in late November, the difference has been at levels not seen since 1981. The biggest separation in 2022 came on December 7, when the two-year was 4.26% and the 10-year was 3.42%, a difference of 0.84%. Other short-term Treasuries have also offered higher yields;  the highest yields in early 2023 were for the six-month and one-year Treasury bills.1  (Although Treasuries are often referred to as bonds, maturities up to one year are bills, while maturities of two to 10 years are notes. Only  20- and 30-year Treasuries are officially called bonds.)

Predicting Recessions

An inversion of the two-year and 10-year Treasury notes has preceded each recession over the past 50 years, reliably predicting a recession within the next one to two years.2  A 2018 Federal Reserve study suggested that an inversion of the three-month and 10-year Treasuries may be an even more reliable indicator, predicting a recession within about 12 months.3 The three-month and 10-year Treasuries have been inverted since late October, and in December and early January the difference was often greater than the inversion of the two- and 10-year notes.4

Weakness or Inflation Control?

Yield curve inversions do not cause a recession; rather they indicate a shift  in investor sentiment that may reflect underlying economic weakness. A normal yield curve suggests that investors believe the economy will continue to grow, and that interest rates are likely to rise with the growth. In this scenario, an investor typically would want a premium to tie up capital in long-term bonds and potentially miss out on other opportunities in the future.

Conversely, an inversion suggests that investors see economic challenges that are likely to push interest rates down and typically would rather invest in longer-term bonds at today’s yields. This increases demand for long-term bonds, driving prices up and yields down. (Bond prices and yields move in opposite directions; the more you pay for a bond that pays a given coupon interest rate, the lower the yield will be.)

The current situation is not so simple. The Federal Reserve has rapidly raised the benchmark federal funds rate to combat inflation, increasing it from near 0% in March 2022 to 4.25%–4.50% in December. As the rate for overnight loans within the Federal Reserve System, the funds rate directly affects other short-term rates, which is why yields on short-term Treasuries have increased so rapidly. The fact that 10-year Treasuries have lagged the increase in the funds rate may indeed mean that investors believe a recession is coming. But it could also reflect confidence that the Fed is winning the battle against inflation and will lower rates over the next few years. This is in line with the Fed’s projections, which see the funds rate peaking at 5.0%–5.25% by the end of 2023, and then dropping to 4.0%–4.25% in 2024 and 3.0%–3.25% in 2025.5

Inflation slowed somewhat in October and November, but there is a long way to go  to reach the Fed’s target of 2% inflation  for a healthy economy.6  The fundamental question remains the same as it has been since the Fed launched its aggressive rate increases: Will it require a recession to control inflation, or can it be controlled without shifting the economy into reverse?

Other Indicators and Forecasts

The yield curve is one of many indicators that economists consider when making economic projections. Among the most closely watched are the 10 leading economic indicators published by the Conference Board, with data on employment, interest rates, manufacturing, stock prices, housing, and consumer sentiment. The Leading Economic Index, which includes all 10 indicators, fell for nine consecutive months through November 2022, and Conference Board economists predict a recession beginning around the end of 2022 and lasting until mid-2023.7 Recessions are not officially declared by the National Bureau of Economic Research until they are underway, and the Conference Board view would suggest the United States may already be in a recession.

In The Wall Street Journal’s October 2022 Economic Forecasting Survey, most economists believed the United States would enter a recession within the next  12 months, with an average expectation  of a relatively mild 8-month downturn.8 More recent surveys of economists for the Securities Industry and Financial Markets Association and Wolters Kluwer Blue Chip Economic Indicators also found a consensus for a mild recession in 2023.9–10

For now, the economy appears fairly strong despite high inflation, with a low November unemployment rate of 3.7% and an estimated 3.8% Q4 growth rate for real gross domestic product.11–12 Unfortunately, the indicators and surveys discussed above suggest an economic downturn in the next year or so. This would probably cause some job losses and other temporary financial hardship, but a brief recession may be the necessary price to tame inflation and put the U.S. economy on a more stable track for future growth.

U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. The principal value of Treasury securities fluctuates with market conditions. If not held to maturity, they could be worth more or less than the original amount paid. Forecasts are based on current conditions, are subject to change, and may not happen.

1, 4) U.S. Treasury, 2023

2)  Financial Times, December 7, 2022

3) Federal Reserve Bank of San Francisco, August 27, 2018

5) Federal Reserve, 2022

6, 11) U.S. Bureau of Labor Statistics, 2022

7)  The Conference Board, December 22, 2022

8)The Wall Street Journal, October 16, 2022

9)  SIFMA, December 2022

10) USA Today, December 15, 2022

12) Federal Reserve Bank of Atlanta, January 5, 2023

9
Dec

Student Loan Repayment Continue to be Challenged

Implementation for repayment of federal student loans has again been delayed by legal
challenges. If the courts have not resolved the issue by June 30, 2023, payments will start 60 days after that.1 The prior moratorium was set to expire on December 31, 2022.

Student loan payments will resume 60 days after the student loan debt relief program is implemented or the lawsuits are  resolved.

Legal challenges lead to increased uncertainty

The latest extension is in response to court rulings that have blocked implementation of the student loan forgiveness program. Under that plan, announced in August 2022, federal student loan borrowers — including graduate students and parents with PLUS Loans — with an adjusted gross income under $125,000 ($250,000 for married couples filing jointly) are eligible for $10,000 in loan forgiveness, with Pell Grant recipients eligible for up to $20,000 in debt relief.2

In November, a federal judge in Texas ruled that the student loan forgiveness program was unlawful. And in a separate lawsuit, a federal appeals court  issued an injunction against the program on behalf of six states — Arkansas, Iowa, Kansas, Missouri, Nebraska, and South Carolina — effectively stopping the Department of Education from accepting more applications and discharging any debt.3

The Biden administration asked the Supreme Court to review the lower court rulings during its current term, and the Supreme Court has agreed to hear the case, with arguments tentatively scheduled for February 2023. In the meantime, the Supreme Court left the injunction blocking the program in place.4

Pandemic-era payment pause continues

There have been nine student loan payment pauses  since the start of the coronavirus pandemic. The first pause came in March 2020 when Congress passed the Coronavirus Aid, Relief, and Economic Security Act. Subsequent payment extensions have come via Presidential executive orders. The latest extension, to most likely sometime after June 2023, will bring the total payment pause to over three years.

Over 45 million Americans owe a collective $1.6 trillion in federal student loans, the largest category of consumer debt behind mortgages. 5To date, more than 26 million people have applied for debt relief under the program; an additional 8 million people who have their income information already on file will qualify automatically for the program.6

1-2) U.S. Department of Education, 2022

3, 6) The Washington Post, November 14, 2022

4) The New York Times, December 1, 2022

5) The New York Times, November 22, 2022

30
Nov

2022-2023 School Year College Cost Data for

The College Board annually releases  new college cost data and trends. Average cost figures of approximately 4,000 colleges across the country are included in the survey.

Average price for tuition, fees, and room and board has increased 46% at public colleges and 30% at private colleges over and above increases in the Consumer Price Index over the past 20 years. The increase  is reflected in the student debt increase.

Here are cost highlights for the 2022-2023 year.1 This year, public colleges have done a better job than private colleges at keeping tuition and fee increases under 2.3%. Note: “Total cost of attendance” includes direct billed costs for tuition, fees, and  room and board, plus indirect costs for books, transportation, and personal expenses.

Public colleges: in-state students

 Tuition and fees increased 1.8% to $10,940
 Room and board increased 3.0% to $12,310
 Average total cost of attendance: $27,940

Public colleges: out-of-state students

Tuition and fees increased 2.2% to $28,240 
Room and board increased 3.0% to $12,310 (same as in-state)      
Average total cost of attendance: $45,240

Private colleges

Tuition and fees increased 3.5% to $39,400
Room and board increased 3.0% to $14,030
Average total cost of attendance: $57,570

Note: Many private colleges are at or approaching $80,000  per year in total costs.

Sticker price vs. net price

The College  Board’s cost figures are based on published college sticker prices. Many families pay less than full sticker price. A net price calculator, available on every college website, can help families see beyond a college’s sticker price. It can be a very useful tool for students who are currently researching and/or applying to colleges.

A net price calculator provides an estimate of how much grant aid a student might be eligible for at a particular college based on the student’s financial information and academic record, giving families an estimate of what their out-of-pocket cost — or net price — will be. The results aren’t a guarantee of grant aid, but they are meant to give as accurate a picture as possible.

FASFA for 2023-2024 year opened on October 1

Planning for college costs should start years before the first year of college. The Free Application for Federal Student Aid (FAFSA) for the 2023-2024 year opened on October 1. It’s important to keep in mind that the 2023-2024 FAFSA will factor in your income information from two years prior, which it will get from your 2021 federal income tax return, but it uses current asset information.2 Your income is the biggest factor in determining financial aid eligibility.

1) College Board, Trends in College Pricing and Student Aid 2022

2) U.S. Department of Education, 2022

3
Nov

What Does a Strong Dollar Mean for the U.S. Economy?

In late September 2022, the U.S. dollar hit  a 20-year high in an index that measures  its value against six major currencies: the euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish krona, and the Swiss franc. At the same time, a broader inflation-adjusted index that captures a basket of 26 foreign currencies reached its highest level since 1985. Both indexes eased slightly but remained near their highs in October.1–2

Intuitively, it might seem that a strong dollar is good for the U.S. economy, but the effects are mixed in the context of other domestic and global pressures.

World Standard

The U.S. dollar is the world’s reserve currency. About 40% of global financial transactions are executed in dollars, with or without U.S. involvement.3As such, foreign governments, global financial institutions, and multinational companies all hold dollars, providing a level of demand regardless of other forces.

Demand for the dollar tends to increase during difficult times as investors seek stability and security.  Despite high inflation and recession predictions, the U.S. economy remains the strongest in the world.4 Other countries are battling inflation, too, and the strong dollar is making their battles more difficult. The United States recovered more quickly from the pandemic recession, putting it in a better position to weather inflationary pressures.

The Federal Reserve’s aggressive policy to combat inflation by raising interest rates has driven demand for the dollar even higher because of the appealing rates on dollar-denominated assets such as U.S. Treasury securities. Some other central banks have begun to raise rates as well — to fight inflation and offer better yields on their own securities. But the strength of the U.S. economy allows the Fed to push rates higher and faster,  which is likely to maintain the dollar’s advantage for some time.

Exports and Imports

The strong dollar makes imported goods cheaper and exported goods more expensive. Cheaper imports are generally good for consumers and for companies that use foreign-manufactured supplies, but they can undercut domestic sales by U.S. producers.

At the same time, the strong dollar effectively raises prices for goods that U.S. companies sell in foreign markets, making it more difficult to compete and reducing the value of foreign purchases. For example, a U.S. company that sells 10,000 euros worth of goods to  a foreign buyer would receive less revenue when a euro buys fewer dollars. Some experts are concerned that the strong dollar will dampen the post-pandemic rebound in U.S. manufacturing.5 More broadly, the ballooning trade deficit cuts into U.S. gross domestic product (GDP), which includes imports as a negative input and exports as a positive input.

Overseas Exposure

Generally, large multinational companies have the most exposure to risk from currency imbalances, and the stock market has shown signs of a shift from large companies — which have dominated the market since before the pandemic — to smaller companies that may be more nimble and less dependent on overseas sales. The S&P SmallCap 600 index has outperformed the S&P 500 index through late October; if the trend continues through the end of the year, it would be the first time since 2016 that small caps have eclipsed large caps.6 The S&P MidCap 400 index has done even better. In the current bear market, however, better performance means lower losses; all three indexes have had double-digit losses through October 2022.7

Global Pain

A weak currency can be a boon for a country by making its exports more competitive. But with the world economy weakening, other countries are not reaping those benefits, while paying more on debt and imported essentials such as food and fuel that are traded in dollars. The Fed is focused on domestic concerns, but it is effectively exporting inflation while trying to control it at home, and global economic pain could ultimately spread to the U.S. economy.8

Slowing the Dollar

In the near term, the Fed’s aggressive rate hikes may reduce domestic demand for foreign goods, reducing the trade deficit and weakening the dollar. The advance Q3 2022 GDP estimate showed the trade gap closing, but it’s unclear if the trend will last.9

In the longer term, as inflation eases in the United States, the Fed will likely take its foot off the gas pedal and ultimately bring rates down. This would allow other central banks to catch up if they choose to do so and would make foreign currencies and securities more appealing. Lower oil prices (denominated  in dollars) and/or any reduction in world tensions — such as a slowdown in the Russia-Ukraine war — might also help reduce demand for dollars.

The dynamics of these factors are complex, and it may take time for any of them to unfold. In the meantime, the strong dollar is a sign of U.S. economic strength, and it would not be wise to place too much emphasis on it for long-term investment decisions. However, this could be a great time for an overseas vacation.

U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. The principal value of Treasury securities fluctuates with market conditions. If not held to maturity, they could  be worth more or less than the original  amount paid.

All investments are subject to market volatility and loss of principal. Investing internationally carries additional risks such as differences in financial reporting, currency exchange risk, and economic and political risk unique to the specific country. This may result in greater share price volatility. Shares, when sold, may be worth more or less than their original cost. The value of a foreign investment, measured in U.S. dollars, could decrease because of unfavorable changes in currency exchange rates.

The S&P 500 index is an unmanaged group of securities that is considered to be representative of the U.S. stock market in general. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Past performance is not a guarantee of future results. Actual results will vary.

1) MarketWatch, October 19, 2022 (U.S. Dollar index)

2) Federal Reserve, 2022 (Real Broad Dollar index)

3, 8) The New York Times, September 26, 2022

4, 6) The Wall Street Journal, October 17, 2022

5) The Wall Street Journal, October 9, 2022

7) S&P Dow Jones Indices, 2022

9) U.S. Bureau of Economic Analysis, 2022

29
Sep

FAFSA Opens October 1or 2023-2024 School Year

College Students can start filing the Free Application for Federal Student Aid (FAFSA) for the next academic year October 1, 2022. The FAFSA is a prerequisite for federal student loans, grants, and work-study, and may be required by colleges before they distribute their own institutional aid to students.

Some tips for filing  FAFSA

  • The fastest and easiest way to submit the FAFSA is online at https://studentaid.gov/. The site contains resources and tools to help complete the form, including a list of the documents and information need to file it. The online FAFSA allows your tax data to be directly imported from the IRS, which speeds up the overall process and reduces errors. The FAFSA can also be filed in paper form, but it will take much longer for the government to process it.
  • You and your child will each need to obtain an FSA ID (federal student aid ID), which can be completed  online. Instructions for completing the application are provided. The FSA ID can be used each  year.
  • The earlier you file the application the sooner it can be processed. The federal aid programs operate on a first-come, first-served basis. Colleges typically have a priority filing date for both incoming and returning students; the priority filing date can be found in the financial aid section of a college’s website. You should submit the FAFSA before that date.
  • Students must submit the FAFSA every year to be eligible for financial aid (along with any other college-specific financial aid form that may be required,  such as the CSS Profile). Any colleges you list on the FAFSA will also get a copy of the report.
  • There is no cost to submit the FAFSA.

Calculating financial need for the FAFSA

The FAFSA looks at a family’s income, assets, and household information to calculate a family’s financial need. This figure is known as the expected family contribution, or EFC. All financial aid packages are built around this number.

FAFSA uses information in  your tax return from two years earlier to determine your income. This year is often referred to as the “base year” or the “prior-prior year.” For example, the 2023-2024 FAFSA  will use income information in  your 2021 tax return, so 2021 would be the base year or prior-prior year.

FAFSA uses the current value of your and your child’s assets. Assets that not counted do not need to be listed on the FAFSA. These include home equity in a primary residence, retirement accounts (e.g., 401k, IRA), annuities, and cash-value life insurance. Student assets are weighted more heavily than parent assets; students must contribute 20% of their assets vs. 5.6% for parents.

Your EFC remains constant, no matter which college your child attends. The difference between your EFC and a college’s cost of attendance equals your child’s financial need. Your child’s financial need will be different at every school.

After your EFC is calculated, the financial aid administrator at your child’s school will attempt to create an aid package to meet your child’s financial need by offering a combination of loans, grants, scholarships, and work-study. Colleges are not obligated to meet 100% of your child’s financial need. You are responsible for paying the difference between the cost and the amount of the package. Colleges often advertise on their website and brochures whether they meet “100% of demonstrated need.”

Two (2) reasons for many applicants to File the FAFSA even if your child is unlikely to qualify for aid.

First, all students attending college at least half time are eligible for unsubsidized federal student loans, regardless of financial need or income level. (“Unsubsidized” means the borrower, rather than the federal government, pays the interest that accrues during school, the grace period, and any deferment periods after graduation.) If you want your child to be eligible for this federal loan, you’ll need  to submit the FAFSA. Your child won’t be locked in to taking out the loan. If you submit the FAFSA and then decide your child doesn’t need the student loan, your child can decline it through the college’s financial aid portal before the start of the  school year.

Second, colleges typically require the FAFSA when distributing their own need-based aid, and in some cases as a prerequisite  for merit aid. So, filing the FAFSA can give your child the broadest opportunity to be eligible for college-based aid. Similarly, many private scholarship sources may want to see the results of the FAFSA.

Next year’s FAFSA will change

Changes are coming to the 2024-2025 FAFSA, which will be available October 1, 2023. These changes are being implemented a year later than originally planned. One notable modification is the term “expected family contribution,” or EFC, will be replaced by “student aid index,” or SAI, to better reflect what this number is supposed to represent — a measure of aid eligibility and not a definite amount of what families will pay. Other important changes are that parents with multiple children in college at the same time will no longer receive a discount in the form of a divided SAI; income protection allowances for both parents and students will be increased; and cash support to students and other types of income will no longer have to be reported on the FAFSA, including funds from a grandparent-owned 529 plan.

17
Aug

Highlights of the Inflation Reduction Act High

The Inflation Reduction Act, signed into law on August 16, 2022, includes healthcare and energy-related provisions, a new corporate alternative minimum tax,  and an excise tax on certain corporate stock buybacks. Additional funding is also provided to the IRS. Some significant provisions in the Act are discussed below.

Medicare

The legislation authorizes the Department of Health and Human Services to negotiate Medicare prices for certain high-priced, single-source drugs. However, only 10 of the most expensive drugs will be chosen initially, and the negotiated prices will not take effect until 2026. For each of the following years, more negotiated drugs will be added.

Starting in 2025, a $2,000 annual cap (adjusted for inflation) will apply to out-of-pocket costs for Medicare Part D prescription drugs.

Deductibles will not apply to covered insulin products under Medicare Part D or under Part B for insulin furnished through durable medical equipment until 2023,  . Also, the applicable copayment amount for covered insulin products will be capped at $35 for a one-month supply.

Health Insurance

Starting in 2023, a high-deductible health plan can provide that the deductible does not apply to selected insulin products.

Affordable Care Act subsidies (scheduled to expire at the end of 2022) that improved affordability and reduced health insurance premiums have been extended through 2025. Indexing of percentage contribution rates used in determining a taxpayer’s required share of premiums is delayed until after 2025, preventing more significant premium increases. Additionally, those with household incomes higher than 400% of the federal poverty line remain eligible for the premium tax credit through 2025.

Energy-Related Tax Credits

Many current energy-related tax credits have been modified and extended, and a few new credits have been added. Many of the credits are available to businesses, and others are available to individuals. The following two credits are substantial revisions and extensions of an existing tax credit for electric vehicles.

Starting in 2023, a tax credit of up to $7,500 is available for the purchase of new clean electric vehicles meeting certain requirements. The credit is not available for vehicles with a manufacturer’s suggested retail price higher than $80,000 for sports utility vehicles and pickups, $55,000 for other vehicles. The credit is not available if the modified adjusted gross income (MAGI) of the purchaser exceeds $150,000 ($300,000 for joint filers and surviving spouses, $225,000 for heads of household). Starting in 2024, an individual can elect to transfer the credit to the dealer as payment for the vehicle.

Similarly, a tax credit of up to $4,000 is available for the purchase of certain previously owned clean electric vehicles from a dealer. The credit is not available for vehicles with a sales price exceeding $25,000. The credit is not available if the purchaser’s MAGI exceed $75,000 ($150,000 for joint filers and surviving spouses, $75,000 for heads of household). An individual can elect to transfer the credit to the dealer as payment for the vehicle.

Corporate Alternative Minimum Tax

For taxable years beginning after December 31, 2022, a new 15% alternative minimum tax (AMT) will apply to corporations (other than an S corporation, regulated investment company, or a real estate investment trust) with an average annual adjusted financial statement income more than $1 billion.

Adjusted financial statement income means the net income or loss of the taxpayer set forth in the corporation’s financial statement (often referred to as book income), with certain adjustments. If regular tax exceeds the tentative AMT, the excess amount can be carried forward as a credit against the AMT in future years.

Excise Tax on Repurchase of Stock

For corporate stock repurchases after December 31, 2022, a new 1% excise tax will be imposed on the value of a covered corporation’s stock repurchases during the taxable year.

A covered corporation means any domestic corporation whose stock is traded on an established securities market. However, the excise tax does not apply: (1) to a repurchase that is part of a nontaxable reorganization, (2) with respect to certain contributions of stock to an employer-sponsored retirement plan or employee stock ownership plan, (3) if the total value of stock repurchased during the year does not exceed $1 million, (4) to a repurchase by a securities dealer in the ordinary course of business, (5) to repurchases by a regulated investment company or a real estate investment trust, or (6) to the extent the repurchase is treated as a dividend for income tax purposes.

Increased Funding for the IRS

Substantial additional funds are provided to the IRS to help fund operations and business systems modernization and to improve enforcement of tax laws.

5
Aug

Are we in a Recession?

A common definition is that a recession occurs when there are two consecutive quarters of declining in gross domestic product (GDP). The GDP is the total of all the goods and services produced in a country. The National Bureau of Economic Research (NBER) determines when the United States (U.S.) is in a recession. It is a private nonpartisan organization that began dating business cycles in 1929. The committee, which was formed in 1978, includes eight economists who specialize in macroeconomic and business cycle research.1 The NBER defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” The committee looks at the big picture and makes exceptions as appropriate. For example, the economic decline of March and April 2020 was so extreme that it was declared a recession even though it lasted only two months.2

The committee studies a range  of monthly economic data, with special emphasis on six indicators: personal income, consumer spending, wholesale-retail sales, industrial production, and two measures of employment. Because official data is typically reported with a delay of a month or two — and patterns may be clear only in hindsight — it generally takes some time before the committee can identify a peak or trough. Some short recessions (including the 2020 downturn) were over by the time they were officially announced.3

Public Opinion
Consumer sentiment is a significant factor. It is a powerful factor in consumer spending. Consumer spending is a substantial part of GDP. An early July poll, 58% of Americans said they thought the U.S. economy was in a recession, up from 53% in June and 48% in May.4 Yet many economic indicators, notably employment,  remain strong. The current situation is unusual, and there is little consensus among economists as to whether a recession has begun or may be coming soon.5

GDP
Real (inflation-adjusted) GDP dropped at an annual rate of 1.6% in the first quarter of 2022 and by 0.9% in the second quarter.6

Since 1948, the U.S. economy has never experienced two consecutive quarters of negative GDP growth without a recession being declared. However, the current situation could be an exception, due to  the strong employment market and some anomalies in the GDP data.7

Negative first-quarter GDP was largely due to a record U.S. trade deficit, as businesses and consumers bought more imported goods to satisfy demand. This was a sign of economic strength rather than weakness. Consumer spending and business investment — the  two most important components of GDP — both increased for the quarter.8

Initial second-quarter GDP data showed a strong positive trade balance but slower growth in consumer spending, with an increase in spending on services and a decrease in spending on goods. The biggest negative factors were  a slowdown in residential construction  and a substantial cutback in growth of business inventories.9 Although inventory reductions can precede a recession, it’s too early to tell whether they signal trouble or are simply a return to more appropriate levels.10 Economists may not know whether the economy is contracting until there is additional monthly data.7

Employment

Economic data has been mixed recently. Consumer spending declined in May when adjusted for inflation, but bounced back in June.11 Retail sales were strong in June, but manufacturing output dropped for a second month.12 The strongest and most consistent data has been employment. The economy added 372,000 jobs in June, the third consecutive month of gains in that range. Total nonfarm employment is now just 0.3% below the pre-pandemic level, and private-sector employment is actually higher (offset by losses in government employment).13

The unemployment rate has been 3.6%  for four straight months, essentially the same as before the pandemic (3.5%),  which was the lowest rate since 1969.9 Initial unemployment claims ticked up slightly in mid-July but remained near historic lows.14  In the 12 recessions since World War II, the unemployment rate has always risen, with a median increase of 3.5 percentage points.16

With employment at such high levels, it may be questionable to characterize the current economic situation as a recession. However, the employment market could change, and recessions can be driven by fear as well as by fundamental economic weakness.

Inflation
The fear factor is inflation which ran at an annual rate of 9.1% in June, the highest since 1981.17 Wages have increased, but not enough to make up for the erosion of spending power, making many consumers more cautious despite the strong job market.18 If consumer spending slows significantly, a recession is certainly possible, even if it is not already under way.  Inflation has forced the Federal Reserve to raise interest rates aggressively, with a 0.50% increase in the benchmark federal funds rate in May, followed by 0.75% increases in June and July.18 It takes time for the effect of higher rates to filter through the economy, and it remains to be seen whether there will be a  “soft landing” or a  more jarring stop that throws the economy into a recession.

Among the factors driving inflation are: Covid-19, Russian Invasion of Ukraine, supply chain disruptions, CARES ACTs 1, 2 and 3, fewer homes for sale than buyers, limited supply of semiconductors .

Unfortunately, no one knows the future, and economic forecasts vary significantly. Forecast range from remote chance of a recession to an imminent downturn with a moderate recession in 2023.19 If that turns out to be the case, or if a recession arrives sooner, it’s important to remember that recessions are generally short-lived, lasting an average of just 10 months since World War II. By contrast, economic expansions have lasted 64 months.20 To put it simply: The good times typically last longer than the bad.

Projections are based on current conditions, are subject to change, and may not happen.

1-3) National Bureau of Economic Research, 2021

4)  Investor’s Business Daily, July 12, 2022

5) The Wall Street Journal, July 17, 2022

6) U.S. Bureau of Labor Statistics, 2022

7-8) MarketWatch, July 5, 2022

6,9,11,21) U.S. Bureau of Economic Analysis, 2022

10) The Wall Street Journal, July 28, 2022

12) Reuters, July 15, 2022

13–14, 17–18) U.S. Bureau of Labor Statistics, 2022

15) The Wall Street Journal, July 14, 2022

16) The Wall Street Journal, July 4, 2022

19)  Federal Reserve, 2022

20) The New York Times, July 1, 2022