2013 Graduates and Their Student Loans

The Wall Street Journal Blog had an interesting post I encourage you to read.

Here are a couple points they noted about student loans in America:

  • According to figures released Thursday from the Federal Reserve Bank of New York, the amount of education loans outstanding nationwide, which has increased every quarter since the New York Fed began tracking these figures in 2003, rose $33 billion to $1.027 trillion.
  • The share of student-loan balances that were 90 or more days overdue rose to 11.8% from 10.9%, even as delinquencies on other debts dropped.
  • Student-loan balances have roughly tripled since 2004, and roughly 9% of all consumer debt is now student loans, up from 3% a decade ago.

The post talks about recent graduates and the fact that their student loan payments are about to begin.

They also had a set of questions at the end of the post designed especially for 2013 graduates. Here are two of those questions:

How much do you plan to pay toward your loan per month?

When do you anticipate that you’ll be done paying off your loans?

Great questions.

How would you answer those two questions?

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Borrowing Money to Invest: Wise or Foolish?

Lots of people drag their student loans (and other debt) out because they believe they can make more money investing their cash rather than using their cash to pay off debt.

Here’s an example. My post on buying your next car with cash got lots of feedback on LinkedIn. Some of the comments were people supporting my view that buying your next car with cash is smart. Some supported the view that using debt is a better option. Here is a comment in the second category:

“You should generally not pay cash for a car unless the interest rate you would pay for financing is higher than the interest rate you would make investing the cash. I just bought a car with 1.9% interest. I put down 20% (to keep my DTI ratio at a certain level) and financed the rest. I easily had the money to pay for the car in cash but choose to keep my cash in my investments where I earn a lot more than 1.9% a year.”

At the essence of this thought process is the assumption that borrowing money at a lower rate than you can invest the money is wise. Lots of people subscribe to this view of money and debt. Partly because it can work. Partly because it sounds smart. (I have a theory though that many of the people that use this as their rationale for buying cars with debt have almost no money or investments.)

Here’s my question.

If someone offered to loan you $500,000 at 3% interest for two years would you do it?

The principal and interest would be due in a balloon payment at the end of two years. You can invest the money in anything you want. You have two full years to earn more than 3% on the money and pocket the profit.

Would that be wise or foolish? Would you do it?

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Saying No to Co-Signing Student Loans

Co-signing a student loan for your child sounds innocent and noble in the beginning. But co-signing oftentimes goes terribly wrong and can ruin you financially as well as tear relationships apart.

A Huffington Post reader wrote this note to Steve Rhode (the Get Out of Debt Guy) to ask his advice:

“Dear Steve,

Our daughter went to an expensive private college, she was unable to secure loans on her own and my husband co-signed for her federal student loan, she has since graduated but has only recently been able to secure a full time position.

She is very delinquent on all of her student loans. My husband’s company has downsized due to the weak economy and he has been reduced to part time. He is 65 years old and will be started his Social Security benefits soon.

Can the collection agency handling this student loan go after his Social Security benefits since he is the co-signer on this federal student loan?”

Here is the first part of Steve’s response:

“Here is the bit about cosigning everyone needs to understand. As a cosigner you have 100% of the risk and liability and 0% of the benefit. The reason the lender asks for a cosigner is so they can go after someone with better credit when the other person defaults.

If someone asks you to cosign, always say no.”

I agree. Just say no. Here is the rest of Steve’s answer.

I talk more about the facts of co-signing a student loan here.

You will be surprised what could happen.

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You Make Good Money: Has it All Disappeared?

How much of the money you made over the last 5 or 10 years do you still have? By money (at least in this context) I am referring to your net worth – the sum of all your assets minus all your debts.

Your net worth is a good measure of how strong you are financially. And as Dave Ramsey says, “your most powerful wealth-building tool is your income”. This is especially true in the first part of your working life. It sets the stage for moving eventually to where your investments begin providing you a nice income.

Here is a quick exercise to see how you are doing. Add up your income over the last 5 years. Then determine your net worth. (Click here for my post on how to determine your net worth.) Then look at your net worth as a percentage of your income over the last 5 years.

As an example, let’s say your income over the last five years totals $250,000. And your net worth today is about $100,000. That means your net worth is equal to 40% of your combined five years of income.

You have managed to hang on to (by saving, investments, paying down debt, etc.) 40% of the money that you earned over the last five years.

Try that exercise real quick and see what your percentage is. It might surprise you!

I’ll talk more about this concept in future posts.

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Have You Tried to Pay Extra on Your Student Loans?

Trying to make extra principal payments on your student loans is amazingly difficult. And I say difficult because the loan processors almost always mess up the application of those additional principal payments to your loan balance.

Almost every other lender of any sort (credit cards, auto loans, or mortgages) can handle an extra principal payment effortlessly and accurately. But not student private or federal student loan processors. For some unexplained reason they can’t handle such a very basic transaction… and you need to be on your toes as a result.

The new federal agency, the Consumer Financial Protection Bureau, said some interesting things in this article. Here is a quote from the article:

“In the ombudsman’s annual report, released Wednesday, Chopra detailed the problems that borrowers have trying to pay down their private loans, and how a seemingly intentionally confusing system often holds borrowers hostage. In the end this takes a toll on their credit score—and on their ability to buy a home or anything else with borrowed money.

“Repaying a student loan should be simple,” CFPB director Richard Cordray said in a statement. “When servicers process payments to maximize fees and penalties they undermine the trust of their customers. Student loan borrowers deserve better; they deserve transparency and accountability.”

I’ll talk about the interesting focus of this new government agency in a future post (private loans vs. federal loans), but for now I just want to encourage you to be all over the details of how every single payment you make on your student loans are recorded.

Especially when you are aggressively paying extra in order to get your student loan out of your life.

Knowledge is key. Know the facts… because your loan servicer might not!

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Grandma Has Student Loans

One of the dangers of student loans is they can easily live a long, long life. They can hang around for a lifetime if you don’t attack them aggressively in the beginning.

A growing portion of the student loans outstanding today are to people 60 or older. There are lots of reasons for the shift. Maybe the biggest one is that if you have trouble paying your student loans back you end up using deferment, forbearance and other means to try to deal with the problem. But that usually just increases the amount you owe because the interest accrues each day and is added to the principal.

Then an older person can find themselves with an ever growing student loan balance and unable to make the payments.

Here is a quote from an article by Annamaria Andriotis, at Smartmoney.com titled Grandma’s new financial problem: college debt, about what can happen next.

“According to government data, compiled by the Treasury Department at the request of SmartMoney.com, the federal government is withholding money from a rapidly growing number of Social Security recipients who have fallen behind on federal student loans. From January through August 6, the government reduced the size of roughly 115,000 retirees’ Social Security checks on those grounds. That’s nearly double the pace of the department’s enforcement in 2011; it’s up from around 60,000 cases in all of 2007 and just 6 cases in 2000.

… This is going to catch an awful lot of people off guard and wreak havoc on their financial lives,” says Sheryl Garrett, a financial planner in Eureka Springs, Ark.”

Please give some serious thought to paying your student loans off aggressively so you have zero risk of this happening to you (or your kids).

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Making Money and Having Money: Two Different Things

People tend to confuse the concept of making money and having money.

Here is a quote from a great book The Millionaire Next Door, by Thomas J. Stanley, Ph.D., & William D. Danko, Ph.D.:

“Most people have it all wrong about wealth in America. Wealth is not the same as income. If you make a good income each year and spend it all, you are not getting wealthier. You are just living high. Wealth is what you accumulate, not what you spend.”

One of the traps people fall into with their student loans is trying to get the lowest monthly payment possible. What that usually ends up doing is making it easier to spend money on “stuff” rather than on paying off your student loans.

A low student loan payment is a wealth destroyer rather than a wealth builder.

Here’s an important question for you: Do you have a net worth or a NOT worth? Your net worth is the difference between your assets and your liabilities. It’s a reflection of how well you are creating real financial value in your life.

What is your personal net worth? Read this post and determine what your net worth is.

Creating a strong net worth is a critical part of winning financially in life. Paying your student loans off as fast as humanly possible will help you build a net worth you can be proud of.

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The Monthly Budget: Boring but Powerful

Living on a budget won’t make you sexy. It won’t turn you into Mr. or Ms. Personality. (Unless you are an accountant/CPA like me.) :-)

But it will help you get out of debt.

And it will help you avoid the financial mediocrity trap that so many of your friends are falling into.

Dave Ramsey’s approach to budgeting is one of my favorites. His book, The Total Money Makeover, provides you the information to make monthly budgeting a part of your approach to maturing as an adult (and freeing up more cash to put against your debt).

As Dave often says, having a budget will make you feel like you got a raise.

It’s almost impossible to get a handle on your money, and start paying your student loans down faster, without making a monthly budget a part of your life.

Grab Dave Ramsey’s book, The Total Money Makeover. It is one of the smartest purchases I have ever made. My bank account is soooooooo glad I bought it.

I bet it will do the same for you and your bank account.

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Getting Creative About Paying Off Your Student Loans

Talk about getting creative in trying to pay your student loans off! Here is a guy who is thinking outside the box for sure.

“Determined to pay off the remaining $30,000, Kasher, 23, quit his job working as an operations manager at a central Pennsylvania-based logistics firm and embarked on a new endeavor. He launched his project, paidtorun.com, and aims to run through the U.S. with sponsorship from local companies and individuals. Kasher plans to run 1,000 miles total between this month and March 3, 2014 and will wear any T-shirts or other attire that a company sends him with their logos and branding.”

Here is the article about Jason at Mainstreet.com.

I am not suggesting you do something as wild as Jason. But I would encourage you to take a couple minutes for a quick brainstorming session.

Pull out a piece of paper and quickly write down 20 ways to create some extra cash to pay against your student loan balance. For this exercise, don’t worry about whether the ideas are practical or even doable.

Just get creative for a few minutes. Maybe 3 or 4 of the ideas can help you get your student loans paid off quickly.

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