Christmas Time and Student Loan Debt: Creative Gift Giving is the Secret

Tuition.io wrote a fun, but enlightening blog post about how to deal with gift giving time when you have student loans (and maybe some really big student loans).

The post is titled How to Have a Great Ho-Ho-Ho When You Owe-Owe-Owe!

They set out some great ideas and did it in a fun way. Check it out here.

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Two Examples of Going Blindly into Student Debt

One of the great ironies of student debt is that it is so closely tied to getting an education… yet very few people with student loans are educated about how this form of debt really works. Weird!

Young people are going to college to learn and grow yet in many cases they are oblivious to the debt they are taking on in the process.

Here is a quote from an article titled Student loans: Lessons learned, choosing a major, and overcoming regrets  on the web site of KTAR, The Voice of Arizona.

‘’Kasey was proud, hopeful, and ready to begin her dream career. But unfortunately for Kasey, things weren’t exactly what they seemed.

What Kasey didn’t know was that she had borrowed nearly $80,000 for her degree. She didn’t realize that interest accrued while she was in school either, which came as quite as a surprise. Upon graduation, the interest on Kasey’s student loans capitalized, leaving her just under $100,000 in debt. And, even after making over $17,000 in payments over the last three years, Kasey still owes around $95,000.”

Student loans are too dangerous a form of debt to ignore like this. The dollars are so big and it is so easy to borrow the money that you can’t go into this process uneducated. And I’m willing to bet that the vast majority of people are borrowing on student loans with the same blindness that this quote reveals.

Here is another quote along the same lines from the article.

“Also like Kasey, Richard wasn’t fully aware how much he was borrowing at the time.

“I realized I spent too much while trying to gather all my separate loans together for my consolidation,” says Richard. “To be perfectly honest, I really didn’t have ANY idea that I had amassed six figures in school loans. When I got my MINIMUM monthly payment quote from Nelnet, I couldn’t believe what I had done.”

Richard blames his high debt load on a handful of factors that he didn’t recognize until it was far too late.”

Parents, if you have decided that debt is OK for your child, at least encourage (or force) them into becoming an expert in how student loans really work and how they will be paid back. Think how sad it would be to turn the pride and accomplishment of college into pain and suffering after college if they are allowed to go blindly into a huge debt mess.

And if you are in school now and borrowing money, make a commitment not to be ignorant about how student debt works. Don’t be the person a writer quotes for their article in the future about the ever growing student loan mess.

If you are going to go to school to get an education, don’t neglect the education about the debt. Better yet don’t borrow. :-)

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Are You in the Income Based Repayment Plan?

If you are in the Income Based Repayment Plan (IBR), I would like to ask you to do a little homework about your financial situation and the potential damage you might be doing to yourself in IBR.

IBR provides a fairly small monthly payment if you have a large student loan relative to your income. It helps you when you are in a tough spot financially. The problem is it can also tempt you to get into the program when you have large student loans even when you are making pretty good money.

Question #1 – Are you in IBR because you are experiencing a serious income problem?

IBR can be a great way to address a temporary financial crisis. If you cannot make the normal monthly payment on your student loan, IBR can reduce the payment to a level that is manageable. It can basically buy you some time while you are working on getting your income back up. On the other hand, if you are making pretty good money but you have a large student loan balance, you may just be making your debt problem worse by being in IBR.

Question #2 – Is your monthly payment in IBR covering the monthly interest?

Look up how much interest is due on your loans each month. If your monthly payment is less than that amount, you are basically digging yourself a deeper hole every single month. The amount of principal plus interest due on your loans is going up every month. That’s a recipe for disaster if you allow it to go on for long.

IBR can be a blessing or a curse. It all depends on your current situation and whether you have a well thought out plan for getting the debt paid off.

Don’t go into IBR without knowing how it works. You need a plan that takes into account the reality of your current situation and how you plan to eventually get your student loans paid off.

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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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Buying Your Next Car with Cash

I bought my first car with cash back in 1999. I can’t tell you how proud I was to finally buy a car without borrowing the money to do it. (And I still have that car today. It just crossed the 240,000 mile mark!)

Here are two important questions to ask yourself.

Do you think it is possible to own a car without having a car note?

Have you set a goal to buy your next car with cash?

Your answers to those two questions can have a big impact on your financial future. Not so much because of the dollars involved. But more because of the impact it can have on your whole approach to money, debt and mature decision making.

Saving money and buying a car with that money is smart. It turns the table to saving money before the purchase rather than paying for it for years after the purchase. It breaks the cycle of always having a car note in your life.

It reinforces the principle that it is unwise to buy things you can’t afford. (And having to borrow money to buy a car is a sign that you really can’t afford that car.)

Resolving to buy your next car by writing a check for it will change your life! And you will be so proud of yourself for doing it.

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