Personal Finance Advice

You can always tell how a state’s doing financially by looking at the tuition rates at the state run colleges and universities.  With local and state governments having difficulties financing their debt because of recent disruptions in the municipal bond market, a number of states have already started raising tuition fees.

Many families will also find it difficult to finance their child’s higher education with a home equity loan or mortgage.  Much of the wealth built up by the middle class has been lost, as home prices have plummeted in the worst housing slump in generations.

Some institutions have increased the number of grants they offer to help incoming students compensate.  It becomes essential for your child to apply for any and all grants and scholarships for which they might qualify.

Lawmakers are also trying to increase the limit on federal student loans which is capped at $3,500 for first year students.  With tuition costs rapidly outpacing inflation, this limit has been outdated for years.

This can be a drawback for families with low incomes that receive a high amount of financial aid, colleges and universities tend to offer aid packages up to the federal loan limit.  So, if the limit rises, the amount of aid you receive will more than likely fall.

On top of all that many lending institutions have stopped offering student loans all together.  While the Fed has been slashing interest rates since last fall it has had little effect on the rates of student loans which remain relatively high.  Coupled with much tighter lending standards, finding any kind of financing may become a daunting task.

The Fed looks like it’s willing to pull out all the stops during the current financial crisis but despite all that, a tight credit market will continue for some time.  Financial institutions will remain cautious with their capital until the final costs of the sub prime mortgage collapse is fully realized.

The lesson of Bear Stern’s near collapse fresh in their minds, financial institutions are hoarding their cash waiting for the next round of write downs.  Banks are reluctant to enter into long term loans when they might need those funds in the near future to meet margin calls or otherwise suffer Bear’s fate. 

Securitization allowed banks to transform a bundle of illiquid loans into a series of liquid securities tradable on secondary markets.  Demand for any sort of collaterized debt has pretty much dried up, making it difficult for banks to roll over their loans.

Credit can be quite difficult to obtain these days for both individuals and corporations.  Mergers and acquisitions have slowed to a crawl due to lack of financing.  This also has an effect on business spending as many companies are having to delay work on capital projects.

The Fed may have slashed interest rates but mortgage rates still remain relatively high.  Even those with good credit ratings are finding it tough right now.  It’s hurting demand in an already weak housing market and will delay any sort of recovery.

Many analysts are predicting that the tight credit market will most likely continue past the end of this year and into the next.  Even if the economy doesn’t go into a recession, it will slow to a crawl for some time.

The report released by the National Association of Realtors was the first bit of good news the housing market has seen in some time.  Home sales rose for the first time in seven months in the month of February.  Home prices are still falling though, which is a cause for concern.  The median sales price is down 8.2% from a year ago.

While this gives a glimpse that the housing market may soon be bottoming out, it doesn’t mean that sub prime crisis is over yet by a long shot.  All this really does at the moment is give the stock market a reason to rally for another day until the next bit of bad news comes along.

The problems with the banking sector are still there.  Only a week removed from the near bankruptcy of Bear Stearns, the financial sector is still gripped in a major credit crisis.

Many homeowners are still stuck with unwieldy mortgages that are worth more than the price of their homes, so the foreclosure risk remains.  So far, write downs from the sub prime collapse are estimated around $200 billion but many experts are predicting that figure could rise to as high as $500 billion before all is said and done.

While it appears that the Fed is willing to use any tool necessary to instill liquidity in the market, the fact remains that banks have tightened their lending standards considerably.  While the Fed has been slashing interest rates left and right, mortgage rates still remain abnormally high.

So while the slump in the housing market has caused the current troubles in the financial markets, it’s looking more and more likely that the financial markets will constrain a possible rebound in the housing market.