No guru is too big to fail

HOWARD R. GOLD
MoneyShow.com
Published Thursday, Oct. 20, 2011

The market has been pretty rough these days for all of us. But some big-name investors are probably doing worse than you are.

William H. Gross, the head of Pimco Total Return Fund and the most illustrious bond investor of our time, is reeling from a big move out of U.S. Treasuries early in the year.

John Paulson, he of the “Greatest Trade Ever,” is anxiously awaiting the end of the month, when he’ll see how many of his investors cash out of his Advantage hedge funds after heavy losses this year.

Both Mr. Gross and Mr. Paulson are big names who’ve had rough patches, and their experience shows how tough it is for even the best to beat the market consistently over long periods - especially if managers make big macro bets on the economy or stray beyond their areas of expertise. (Mr. Paulson’s spokesperson declined my request for comment, and Pimco didn’t respond by deadline.)

Mr. Gross has presided over Pimco Total Return for nearly 25 years. During that time, he built it into the U.S.’s biggest bond fund, with $242.2-billion (U.S.) in assets as of Sept. 30. Forbes estimates his net worth at $2.2-billion.

Mr. Gross has fame as well as fortune, appearing regularly on CNBC, where he is lionized, as well as in the venerable Barron’s Roundtable. He’s also well known for his clever commentaries, which are posted monthly on Pimco’s website.

In his March missive, Mr. Gross explained his big call for this year: He was dumping Treasuries, because of what could happen once the Federal Reserve ended its latest round of quantitative easing.

“Who will buy Treasuries when the Fed doesn’t?” he wrote. “Yields may have to go higher, maybe even much higher, to attract buying interest.”

It seemed plausible at the time. But when the economy weakened and the European debt crisis flared up again, investors did what they did in 2008 - they rushed for the safety of U.S. Treasuries. Amazingly, that occurred even after Standard & Poor’s cut the U.S.’s AAA rating in August.

The flight-to-safety rally drove the yield on the 10-year Treasury note down to a 65-year low of 1.72 per cent on Oct. 4, from around 3.5 per cent in early March - a humongous move, which Pimco shareholders missed. Pimco Total Return, which has beaten its benchmark over every time period since its inception, has been near the bottom of its peer group over the past year.

Mr. Gross admitted to losing sleep over it, and finally, predictably, he threw in the towel. In a piece entitled “Mea Culpa,” Mr. Gross wrote: “This year is a stinker. PIMCO’s centrefielder has lost a few fly balls in the sun.”

“As Europe’s crisis and the U.S. debt-ceiling debacle turned developed economies towards a potential recession, the Total Return Fund had too little risk off and too much risk on,” he continued.

But now, having been too optimistic about the economy, Mr. Gross seems to be going to the other extreme. Pimco started loading up on long-duration Treasuries late this summer, anticipating that the Fed’s Operation Twist would gobble up 30-year T-bonds.

We’ll see if he’s right, but I wonder whether this kind of all-or-nothing bet is really beneficial to investors. Actually I don’t wonder, but I’ll get to that later.

And while we’re talking about macro bets, consider John Paulson. Having started Paulson & Co. with $2-million in 1994, he was little-known until he scored big by shorting subprime mortgages as the housing market crashed.

His funds were up $15-billion in 2007, and he made more than $3-billion personally that year - “believed to be the largest one-year payday in Wall Street history,” The Wall Street Journal wrote.

Paulson & Co., you may recall, was the firm for which Goldman Sachs set up its notorious ABACUS collateralized debt obligation, which allowed him to short handpicked subprime mortgages. Mr. Paulson was never accused of wrongdoing by either the Securities and Exchange Commission or the Senate committee that investigated the deals.

But in the past year, Mr. Paulson has stumbled badly. Though he’s done well until recently with his big investment in gold, through the SPDR Gold Shares ETF (GLD, in which I own a much smaller position than he does), he also loaded up on shares in banks like Citigroup and Bank of America. Bank stocks, of course, have been a disaster as the economy weakened.

He also lost $750-million on Sino-Forest, a Toronto-listed Chinese timber company caught up in an accounting scandal.

He even lost money on Hewlett-Packard stock, which he bought earlier this year. Does he own Netflix Inc. or Research in Motion Ltd., too? Just kidding.

Result: His Advantage Plus fund was down 47 per cent as of this month, and his Advantage funds have lost a third of their value, or $6-billion, since the beginning of the year, according to The New York Times’ Deal Book. Mr. Paulson is bracing for big redemptions at the end of the month.

“We made a mistake,” he reportedly told investors on a conference call. And he is moving to reduce leverage - another swing in the opposite direction.

Well, at least both billionaires have admitted their errors, which is refreshingly candid on Wall Street ... though Mr. Paulson also took the opportunity to lecture the Occupy Wall Street protesters, who don’t have enough money to lose half of it in the market in a year.

But both men went all in on huge macro bets on the economy. It speaks to overconfidence, even hubris - not surprising when everybody around you calls you a genius all the time.

“People who are entrepreneurs and money managers ... tend to be overconfident in their abilities. When they fail ... you generally don’t know about it,” said Meir Statman, a finance professor at Santa Clara University and one of the leading lights of behavioral finance.

He has written a book, What Investors Really Want, which explains behavioral finance’s key concepts clearly, with down-to-earth examples.

Mr. Statman believes even fund managers with great track records are living on borrowed time. “They have skill and they have luck,” he told me. “There are some periods when luck combines with skill and they wind up looking infallible.” That’s usually around when they crash and burn.

But Mr. Statman actually believes most of their performance is due to luck. “I find myself amazed that those people, knowing what they should know - that most of it is luck - can go on TV and say the market is going to go up or go down. It is supreme overconfidence,” he told me.

I think skill plays a bigger role in it than Mr. Statman does, but anybody - no matter how good their track record - who tries to outguess the markets in a shaky economy like this one is asking for trouble.

Those unhedged macro bets, which both Mr. Gross and Mr. Paulson made, produce plenty of alpha - excess return - when they’re right, and plenty of pain when they’re wrong. That’s why for us mere mortals, diversification is the only way to go, and we should make our “bets” with only what we can afford to lose.

“People expect that gurus are going to be right all the time,” said Mr. Statman. “They jump from guru to guru, but there are no gurus.”

No, there aren’t, and even the gurus themselves are beginning to find that out.

Howard R. Gold is editor at large for MoneyShow.com and a columnist for MarketWatch. You can follow him on Twitter @howardrgold, read more commentary on www.howardrgold.com, and check out his political blog at www.independentagenda.com.

http://www.theglobeandmail.com/globe-investor/investment-ideas/no-guru-is-too-big-to-fail/article2207762/singlepage/#articlecontent

Are you Mr. Market or Mr. Buffett? Rewire yourself to Invest like Mr. Buffett.

Warren Buffett's Investment Advice: Why It's So Hard to Follow

by Carlos Portocarrero on 18 March 2010

A year ago, I wrote a piece called Cash is King: Now What Should I do With It? 

After going through all the responsible options of what I could do with our pile of cash, I added one last one: what if I just threw it in the stock market and tried to double it?

Obviously, the fear of getting stabbed and divorced by my wife told me that this wasn't worth it—the risk was too high.

But you always wonder...what if...?

You'll see that the market had just bottomed out and was on a path to a steady recovery. Maybe it wasn't such a crazy idea to invest that pile of cash after all.

What Would've Happened

The day I published the story, the S&P 500 was at around 814. If I would've invested $10,000 in the S&P, I would've bought just over 12 "shares." Today, those "shares" would be worth $14,238. That's a 42% return in just under a year—an outstanding return.

What this Has to do With Warren Buffett

I've said this before many times: I'm a huge fan of Warren Buffett. I think his mix of intelligence, patience, and quirkiness is admirable. And one of his most famous sayings applies to my whole dilemma of investing (or not investing) my pile of money a year ago:

Be greedy when others are fearful and fearful when others are greedy

Back in March 2009, everyone was scared. From mutual fund managers to your average mom and pop store—we were all scared. No one knew what was going to happen to the economy and the stock market had just annihilated millions of dollars of people's money. It was the perfect time to put Warren Buffett's axiom to the test.

But that's where the problem lies: I was one of the people that was scared. There was no way I was putting all my hard-earned money into a machine that so many were saying was broken and had already cost so many people their life's savings.

And this is why Warren Buffett commands so much respect: he not only talks the talk, he walks the walk. He reacts differently than the rest of us to these situations: he trusts his instincts and doesn't get caught up in the panic that most of us do. And believe me, back then there was quite a bit of panic.

This is why we can't simply "invest like Warren Buffett." You have to have the cash, the brains, and the ability to overcome panic and fear. Forget about picking the right stocks—that's the least of it—the hardest part is not falling for all the hysteria and panic in the air.

The opposite is also true: the next time you see people acting greedy and feeling a little too comfortable with themselves and how much money they're making in the stock market—watch out. Something bad is about to happen.

http://www.wisebread.com/warren-buffetts-investment-advice-why-its-so-hard-to-follow

10 signs your stock will double

Nathan Bell

October 25, 2011 - 11:30AM

Like our fingerprints, we each have a unique investing style. Value investors analyse financial statements and competitive advantages, chartists study share price trends and momentum, while others aimlessly follow strategies that amount to throwing darts at the financial pages.

In my experience stocks with a reasonable chance of doubling over a period of, say, three to five years, have things in common. Let's analyse 10 signs to watch out for.

1. Out of favour. This is potentially a value investor's most financially rewarding situation - a stock that's out of favour and, with any luck, even hated. Many of our most lucrative investments have risen from the depths of despair.

Take Cochlear for example. In 2004 its woes included a change of chief executive, two profit downgrades, and an inquiry into its selling practices by the US Department of Justice - all within a 10-month period. The share price fell below $20, but eventually climbed above $80. Following the recent recall, could it double again?

2. Hidden progress. Often a business's progress will take some time before revealing itself in the financial statements. Macquarie Bank couldn't do a thing right in 2002 according to the media. But an astute understanding of the bank's lucrative management fee model revealed it contained significant underlying growth that almost caused its share price to reach $100. With the market currently fixated on Europe, is Macquarie being underestimated again?

3. New technology. In certain industries companies can generate significant cost savings by introducing new technology. We recommended Cabcharge in 2003 partly because it was improving its operating margins with the implementation of electronic payment systems in taxis. This former market darling has also found itself out of favour recently.

4. Investment in R&D. The benefits of undertaking research and development and investing in specialist skills can take years to manifest themselves. Philip Fisher, in his book Common Stocks and Uncommon Profits, suggests that the best companies to buy are those investing heavily in R&D today to provide the profits of the future. Healthcare device manufacturers such as Cochlear and ResMed are following this path.

5. Industry tailwinds. Many investors have struck gold with resources stocks benefiting from the emergence of China and India as rapidly industrialising nations. That has added significantly to world demand for a wide range of commodities, such as oil and iron ore. The recent falls in prices of resources stocks and commodity prices could provide opportunities.

6. Changes in industry structure or the number of competitors can provide opportunities for the remaining businesses. Coates Hire was one we missed many years ago, when its acquisition of Wreckair removed a competitor and helped consolidate the industry just as the resources and construction boom began.

7. Owner-managers. Then there's the owner-manager effect, with the most successful companies run by business builders with their own money on the line, like Gerry Harvey of Harvey Norman. And then there are the company-men with long and successful track records like Brian McNamee at CSL. Time and again, the stocks that double do so because the company has exceptional management.

8. Insider buying. While a strong leader with a vested interest in performance is a big positive, so is evidence that directors are buying the stock for their own portfolios. While there are many reasons why an insider might sell, there is generally only one reason they buy in meaningful amounts. They believe the stock will go up.

9. Financial strength. Flimsy balance sheets indicate weakness and invite disaster. Leighton used to boast a very strong financial position as it operates in a very cyclical industry. That allowed it to withstand the pressure of lean years and prosper in the fat ones. More recently, though, it was forced to raise capital after writing off assets and using debt to expand overseas.

10. Unrecognised by the market. Finally, look for quality companies that are simply unrecognised. With around 2,000 listed stocks, there will always be opportunities for investors to uncover rough diamonds.

Independent thinking

See? It's that simple. But it isn't really is it? Without genuinely independent thinking and a thorough understanding of the facts as you see them, even finding appropriate stocks is difficult, let alone having the courage to take advantage of opportunities when they present themselves.

But that's what value investing is all about. You have to be ruthless about where you spend your time, but success is all the sweeter when your homework uncovers a gem.

This article contains general investment advice only (under AFSL 282288).
Nathan Bell is research director of Intelligent Investor.

Read more: http://www.brisbanetimes.com.au/business/10-signs-your-stock-will-double-20111025-1mhax.html#ixzz1bmZEuPfP

How to weather the market storm or market volatility

How to weather the storm

Martin Roth

October 26, 2011

Explore your options ... experts suggest an open-minded approach to investment may be the safest course of action. Photo: Michele Mossop

A desire to lessen risk in uncertain times can adversely affect an investor's capacity to earn solid returns.

When equity markets become volatile, fearful investors often turn to defensive sectors such as consumer staples including supermarkets, food producers and healthcare, expecting these to hold up well in any economic downturn.

Other investors lean towards shares in companies providing high-dividend yields, believing a solid dividend signals a financially strong corporation.

In the recent highly uncertain investing environment, such strategies continue to have many advocates.

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But some experts warn that investors, in their desire to minimise risk, might in fact end up sacrificing attractive returns.

DEFENSIVES

The chief executive officer of the market data firm Lincoln Indicators, Elio D'Amato, argues that the market has been sold off so heavily that investors risk missing some strong performance if they stick to defensive stocks.

''Many stocks are cheap right now,'' he says. ''This is a great time to be getting excited about the market.

''I know a lot of people want to go to defensives because they are worried about all the volatility. But the current market offers an amazing opportunity for investors who do, I suppose, have to be of stronger stomach. It gives them the chance to pick up stocks that have fallen sharply for no other reason than sympathy with the problems in Europe.''

D'Amato warns more generally against defensive stocks, citing the example of bionic ear pioneer Cochlear, which in September had its shares plunge 20 per cent in a day on news of a product recall.

''Cochlear is a great business,'' he says. ''One would argue that it is a defensive stock. It has a market-leading product that is global. Yet just one problem occurs and the share price gets battered.''

He also urges caution on buying stocks simply because they offer high-dividend yields. ''A lot of people have incorrectly associated high dividends with company safety,'' he says.

''But we saw during the Global Financial Crisis, with the property trusts and the like, that irrational asset values caused significant strain and pressure, and some of those companies just stopped paying dividends altogether.''

The chief market analyst at City Index, Peter Esho, advises investors in the current market environment to adopt a three-pronged strategy.

DIVERSIFY

''Your portfolio should be diversified,'' he says. ''You do not want all your eggs in one basket.

''And there will be big question marks over economic growth for the next five years. We expect to be in a low-growth environment. So you do not want to be buying stocks with high price-earnings multiples, as these have been priced for high growth. In fact, you want to be in businesses that have had their growth prospects discounted by the market - very heavily discounted.''

Third, he advises investors to incorporate some type of insurance mechanism in their portfolios as protection against sharp market falls.

For more sophisticated investors this could even extend to buying derivatives, such as options. For others it means maintaining a strong cash position.

He also cautions against buying stocks simply because they are in traditional defensive sectors.

''A business might be very defensive, like Woolworths,'' he says. ''But it might trade on a price that assumes growth. We find it hard to justify paying a price-earnings multiple of 15 for a company like Woolworths that expects just 4 per cent profit growth next year.''

The head of research at Fat Prophets, Colin Whitehead, says: ''We view the market as pretty historically under-valued.'' In his opinion, defensive stocks do not offer the same capacity to rebound when the market returns to a more reasonable valuation.

However, he expects markets to remain volatile for quite some time and believes that investors will probably need to be ''more nimble'' than they have been in the past. He says: ''Certainly the investors who generate the best returns over the next two years are probably going to be more active, as opposed to the traditional buy-and-hold approach.''

But the senior equities analyst at Morningstar Australasia, James Cooper, continues to believe traditional dividend investing is still a viable strategy.

DEBT-FUELLED GROWTH

''We have had 20 years of debt-fuelled growth,'' Cooper says. ''Now there is all this deleveraging going on and that is going to depress growth for a number of years. People buying growth stocks might be unpleasantly surprised.

''So once the penny begins to drop, investors might start gravitating towards stocks where there is a fairly solid dividend yield that allows them to keep pace with inflation.''

He adds: ''There has been this myth that investing is about capital gain. But at the end of the day it should really be about the return that the company can generate in terms of dividends.

''We are starting to see a return to this more pure form of investing.''

Among individual stocks, D'Amato recommends billing systems provider Hansen Technologies and Tasmanian financial products business MyState, both of which offer attractive dividends and growth prospects.

Esho likes Qantas Airways, which he believes has been heavily oversold and which, he says, is now worth considerably more than its mid-October market capitalisation of $3.5 billion.

He also recommends office real estate investment trusts such as Commonwealth Property Office Fund and Dexus Property Group, which offer good dividends and are trading at a discount to their valuations.

Read more: http://www.smh.com.au/money/investing/how-to-weather-the-storm-20111025-1mgrv.html#ixzz1bmNKqzas

Tips on how to invest during turbulent times

Tuesday October 25, 2011

Singular Vision - By Teoh Kok Lin

STOCK markets around the world lately gave investors that sinking feeling again, weighed down by deepening woes of Europe's sovereign debts, an anemic US economy and new fears of a sharp economic slowdown in China.

Many investors sold shares to hold more cash, despite cash earning very little interest. In Singapore for example, six months USD fixed deposits of less than US$1mil earns zero interest in some banks.

In the United States, 10-year Treasury bonds are yielding 2.1% per annum; despite misery returns, many investors prefer the safety of US Treasuries during crisis times, while waiting for policymakers to act boldly and markets to stabilise.

At the same time, we see many economists and other pundits offer a whole host of predictions about today's global financial predicaments. The many predictions range from the slightly hopeful to the pessimistic, right down to the disastrous and absurd.

Does it sound familiar? Did we not hear many such predictions during the 2008/2009 global financial crisis? Who should we listen to? What should one do?

No doubt in hindsight, a few forecasts will be correct; and as the dust settles, many extreme predictions will also likely be forgotten. Yet for investors today, separating much of the “noise” from facts is one of the more tricky parts of steering through these very challenging times.

Fundamentals and valuation takes a back seat during a crisis

Volatile stock markets today are driven by latest positive or negative news flow affecting sentiment. Uncertainties during a crisis causes investment risks to spike, stock investors tend to sell first and ask questions later; fundamentals and stock valuation typically takes a back seat in the short term.

No doubt many investors worry about negative impact to a company's fundamentals in difficult times. For example, a manufacturing company's stock with a present price earning (PE) multiple of six times can change drastically to 60 times PE if earnings were to collapse 90% because of a global financial crisis.

Similarly, a property company's price to book value discount of 60% can easily drop to 30% if asset value is marked down by half in troubled times. Monitoring, reassessments and analysis of a company's financial progress is obviously important during tumultuous times.

Share prices of companies (even those with good fundamentals) may continue to fall indiscriminately, due to many reasons such as panic selling, fund redemption and repatriation. Investors should tread cautiously, even if stock prices may appear to be at very attractive levels.

I relate a challenging experience from the last global stock market plunge. In 2008, I invested in the largest luxury watch distributor and retailer in China (at that time 210 stores and sales amounting to 5.5 billion yuan a year or about 30% market share).

This Hong Kong listed Chinese company sells luxury watches (such as Omega, Longines, Bvlgari) from global brand owners Swatch group of Switzerland and LVMH of France (both by the way are also 9.1% and 6.3% shareholders of this Chinese company respectively).

As the US sub-prime mortgage crisis deepens by end-July 2008, many stocks around the world plunged. This company's shares similarly dropped from HK$2 to HK$1.50 in a matter of weeks.

We vigorously reassessed the company's fundamentals, including visits to retail outlets in China and Hong Kong. The result was an affirmation of our conviction to invest in the company for the long-term, despite short-term price weakness.

By late September 2008, we decided to purchase more shares when valuation proved so attractive at HK$1.15 per share (at a PE multiple of eight times).

Unfortunately, as the global financial crisis worsened, the company's shares continued to plunge and bottomed to a low of HK$0.51 by Nov 26, 2008.

This stock eventually recovered back to HK$2 per share (by June 1, 2009) and went on to exceed HK$5 per share by late 2010. The company's share prices recovered partly because Asian equities rebounded quickly in 2009, but also reached new highs because the company's fundamentals continue to improve with strong sales (+49%), profitability (+26%) and expansions (+140 stores to 350 stores) from 2008 to 2010.

A lesson if you will that during a crisis, one should be prepared for short-term (weeks and months) stock market volatility.

It is essential for bargain hunters to have long-term holding power, good understanding of company fundamentals and strong conviction on a company's prospect. In the long-term, we know fundamentals and valuation does matter.

How does one invest during a time of crisis?

My approaches to investing in turbulent times are:

Search for and invest (when valuations are attractive) in well managed companies that will not only survive but emerge stronger from crisis times;

Be prepared to stomach stock market volatility in the months ahead;

Have a longer term investment horizon (perhaps two to three years); once this crisis dissipates, reap the rewards as stock markets recover.

In Asia, macroeconomic fundamentals likely will remain resilient as many Asian economies have strong foreign currency reserves, coupled with more fiscal and monetary policy options to support growth.

China is also likely to withstand any fallout from Europe better than most would think. China's economy is still growing at a strong 9.1% gross domestic product growth for the third quarter of 2011; speculations about China's economy crashing may be somewhat premature at this stage.

Similarly, I think many established Asian companies have sufficient resources be it cash, borrowing powers or human capital, to emerge out of these turbulent times faster and stronger than before.

I believe with increasingly attractive valuation, the investing risk-reward equation (potential downside risk versus long term return prospects) favors Asian equities in the long run. I have confidence investing in Asia's fundamentals and Asian companies for many more years ahead.

Teoh Kok Lin is the founder and chief investment officer of Singular Asset Management Sdn Bhd

Twice as many millionaires in Malaysia over last 18 months

Tuesday October 25, 2011

PETALING JAYA: The number of millionaires has almost doubled in Malaysia over the last 18 months, the Wall Street Journal (WSJ) reported.

Citing a report released this week by international financial firm Credit Suisse Group, WSJ wrote that since early 2010, Malaysia added 19,000 new millionaires, bringing its total to 39,000.

Comparatively, the number in Indonesia increased by 52,000 to 112,000, while the number of Singaporeans worth over US$1mil (RM3.15mil) is 183,000, triple what it was a year ago.

The growth spurt of the nouveau riche has been attributed to the weakening US dollar and stingy pockets.

Compared with the Credit Suisse numbers from early last year, these three countries alone have produced close to 190,000 new millionaires since the beginning of 2010.

However, this figure still fell short of the 212,000 new millionaires in China.

“Much of the rise is just a reflection of the weakening dollar, which makes the Singapore dollar- and rupiah-denominated riches look more impressive when translated into US dollars,” WSJ reported.

“Otherwise, it can be attributed to growing savings, stock and property prices.”

Credit Suisse defines wealth as a person's financial and real estate assets minus their debt.

(Networth = Financial Asset + Real Estate Asset - Debt)

The report also said that the average Singaporean was wealthier in comparison to the rest of the world, with the average household wealth at US$285,000 (RM897,000).

This makes them the fifth wealthiest people in the world after Switzerland, Australia, Norway and France.

Average household wealth in Indonesia, on the other hand, hovered at only around US$12,000 (RM37,771).

“Strong currencies, rising property prices, climbing commodity prices and healthy stock markets have helped the region but the real secret to Southeast Asia's success may be how stingy money makers are here,”WSJ noted.

“Average household debt, which offsets much of savings and investments in Western countries, is very low in the region.

“It is only 13% of total assets in Singapore and 2.5% of total assets in Indonesia.”

http://thestar.com.my/news/story.asp?file=/2011/10/25/nation/9768085&sec=nation

Two out of five Americans with federal student debt can't make monthly payments and either defer, default or are delinquent

By Ben Steverman - Oct 22, 2011

Student Loan Debt Leads to Confusion, Protests and Defaults

Photograph by Stan Honda/AFP/Getty Images

Source: Photograph by Stan Honda/AFP/Getty Images

William Prince, of Rosenberg, Texas, knows just how inescapable student loans can be. The 52-year-old father of two started paying off $51,000 in college debt 15 years ago and now owes $57,000. "I don't expect to pay these loans off in my lifetime," he says. Prince, a criminal justice major who works in private security, had to defer payments during three bouts of unemployment, and the accumulated interest left him deeper in debt.
Americans now owe about $950 billion in student loans —more than their total credit-card debt. The weight of those IOUs is a frequent refrain for Occupy Wall Street protestors and their online supporters. On the "We Are the 99 Percent" Tumblr blog, which features hundreds of pictures of people holding handwritten signs describing their desperate financial situations, student loan concerns exceed those about children, unemployment, and health care, according to an analysis by Mike Konczal, a fellow with the nonprofit Roosevelt Institute.
Desperation may have something to do with that outcry. Two out of five Americans with federal student debt can't make monthly payments and either defer, default or are delinquent, according to Mark Kantrowitz, publisher of Fastweb.com, a free scholarship-matching service, and FinAid.org, a source of student financial aid information. Although the laws are gradually changing, student debtors' odds are still grim. The best means they have of one day growing free of those debts is to know the system.

Eroded Borrowers' Rights

There are very few ways to reduce or renegotiate education debt; unlike credit-card debt, few can do this via bankruptcy. "There has been a steady erosion in rights for student loan borrowers," says Deanne Loonin, an attorney at the National Consumer Law Center. Activists and some congressional Democrats argue that Congress should again allow borrowers to discharge student debts in normal bankruptcy — a right lost in a 2005 law. They also ask for better supervision and limits on debt collection. Such improvements could be years away, if they ever take place.
For federally backed loans, the situation is better, though still far from perfect. The government can seize wages, tax refunds, earned income tax credits and even Social Security. One of Loonin’s clients, an 84-year-old man, once took out a student loan for a relative; the payments now amount to about 40 percent of his Social Security checks, leaving him with a bit more than $750 each month.
The federal government is taking steps that could make the debt burden more manageable. A provision in the 2010 health-care reform law pushed private lenders out of the business of issuing federally guaranteed loans. The 2010 Dodd-Frank financial reform law puts the new Consumer Financial Protection Board in charge of collecting better data and regulating private student lenders. The new agency also is planning to launch an online tool — a "student debt assistant"— to help debtors learn more about their options.

Income-Based Repayment

One option introduced in 2009 is income-based repayment. It allows borrowers to repay federal loans as a percentage of the prior year's adjusted gross income, capped at 15 percent. (If a borrower's circumstance changes from the prior year, he or she can request recalculation.) Under so-called IBR, all federal loans are forgiven after 25 years — 10 years for those in nonprofit or public service jobs. A 2010 change in the law means that for borrowing that begins in 2014, payments are capped at 10 percent of income and all debts are forgiven after 20 years.
Because no payments are required on income below 150 percent of the poverty line, income-based repayment is helpful for such borrowers as 28-year-old Jennifer Sandella. She earns so little that she doesn’t need to pay anything on her $45,000 in graduate school loans. For a single person, 150 percent of the poverty line is $16,335; for a family of three, it's $27,795.
Two years after the program was introduced, few borrowers know about IBR. Only about 1 percent of federal borrowers —out of the 10 percent who could benefit — are enrolled, Kantrowitz estimates. The U.S. Department of Education has been offering information about IBR on its website, through customer-service representatives, and to students when they exit school. It now plans to contact current borrowers to inform them about the program, says spokeswoman Sara Gast.
The program has drawbacks. Persons with private loans, such as Prince, aren’t eligible. And any unpaid interest is added to debt until loans are eventually forgiven. "I'm still accruing interest at a phenomenal rate," Sandella says. If she never manages to pay her loans off and her debt is forgiven after the 25-year mark, the amount forgiven will be taxed as income, perhaps triggering a big bill from the IRS.

Few Options for Private Borrowers

Those with private loans have little leverage when negotiating with their lenders. Student loans can be forgiven in bankruptcy only if debtors take lenders to court and prove an “undue hardship” — a legal step taken by merely 0.1 percent of eligible debtors. Of those, about half got relief, according to a 2011 analysis by Harvard Law student Jason Iuliano. The Consumer Bankers Association, which represents private lenders, said in a statement: “Banks work with borrowers experiencing financial hardship on private student loans” by, for example, allowing borrowers to temporarily suspend payments.
The best way to avoid being trapped by debt is to restrain it from the start. Students need to "shop around for schools to limit how much they need to borrow,” says Lauren Asher, president of the Institute for College Access & Success, a nonprofit advocacy organization that runs the Project on Student Debt. Regulators and colleges could do much more to steer young students toward more manageable debt loads, she says. “Inadequate information and aggressive marketing tactics can have an effect on people,” Asher adds, noting that many students take on private loans even though they are eligible for less-risky federal loans. Dependent students can borrow up to $5,500 in federal loans as college freshmen, while their parents can borrow up to the total cost of attendance, minus other aid.
Colleges are required to provide counseling to student borrowers when they exit school. They "are always looking for ways to do it better," says Terry Hartle, senior vice president for government and public affairs at the American Council on Education. But it's not clear how much of that counseling sinks in. Says Hartle: "I'm afraid an awful lot of college students only learn how much they've borrowed when they begin repayment."

http://www.bloomberg.com/news/2011-10-21/student-loan-debt-leads-to-confusion-protests-and-many-defaults.html