Month: June 2014

A story of defaulting on student loans

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Anna Moreno, a contributor to The Billfold, writes about what happened when she defaulted on her student loans.

It shows just how easy it is to get into that “I’ll handle it later” mentality, and how easy it is to not get a job and then face down the barrel of enormous student loan debt.

Eventually, after having her wages garnished for a year, Moreno sought out loan rehabilitation and consolidation with the Department of Education, which sounded like a completely reasonable and pleasant process.

But her story is a cautionary tale for all young people out there, even the credit-averse and the good-planners—yes, it can happen to you too.

So when you’re considering taking out student loans, follow my path to success:

1. Have a few roads you can take: that dream job after college didn’t come through? Plan a few other potential jobs with salaries that can get you debt free ASAP.
2. Backup your money: you backup your hard drive, but why don’t you backup your checking account? Work on building up your emergency fund, even if it’s only $100/month during and before college. This could make the different down the road between creditor calls and ramen dinners versus paying off debt and normal food.
3. Line up jobs now: it’s never too early to start looking for a job. Start networking and lining up potential jobs now. Reach into whatever networks you can—parents, friends, friends’ parents, any adults you trust.
4. Budget: find the absolute max you’re required to pay per month, and start budgeting to put that aside. Setup auto-pay so payments go out on-time and in-full, avoiding those pesky creditor calls, late payments, and credit score dings.

Obama admin limits public workers’ ability to discharge student loan debt?

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In 2007, the Public Service Loan Forgiveness program was started to encourage more recent graduates to join the public sector.

The program is unique in that it does the following:

allows public servants (like teachers, law enforcement officials, government workers, public health workers, and more) and employees at 501(c)(3) nonprofits to see the remainder of their federal student loan debt forgiven after 10 years of repayments.

However, according to the Obama administration’s 2015 budget—that has limits.

not necessarily

 

In other words, if you take federal loans to go to a very pricey liberal arts college—you won’t get all of your debt forgiven.

The budget caps that amount at $57,500. So if you still have more than that after 10 years—that’s the limit of what will be forgiven.

The PSLF lets you qualify even if you only make minimum payments (which, if you want to obtain a public sector job and your debt will be forgiven after 10 years, makes simple sense). However, due to interest rates, you may still owe nearly the same amount.

According to Boston.com:

it’s imminently possible for somebody making payments under PSLF to see their debt basically stand still or even increase over the 10 years of payments.

It remains to be seen if the proposal passes. But if it does—the incentive to get rid of student loan debt by becoming a teacher may vanish.

 

Learn from this guy who paid off his student loans in two years

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Paying down student loan debt may seem like a neverending chore.

The monthly payments, the interest charges—it becomes one more bill that seems to never go away.

But one man, Matthew Burr, figured out a way to pay off $74,000 of student loans—in just two years.

His key advice? Start paying them down right away.

If you can, don’t wait for the six-month grace period to end to make payments, advises Burr.

As soon as I got my first check, I made a payment. You’ll pay less interest if you start making payments in a hurry, and it gets you into a routine. If you’re disciplined up front, you’ll be far ahead of everybody else.

He also made multiple payments per month and paid more than the minimum payment per month, but was careful to make sure that his loan allowed that type of repayment (some loans limit the number of payments you can make per month).

Now mind you—the man is not a millionaire. The job he got right after his master’s degree earned $80,000. Instead of upgrading his entire life with a new car and electronics, he put the money right towards his loans, paying them down and cutting out luxuries.

It’s not impossible, folks. If he can do it—so can you.

 

How the federal government protects abusive debt collectors

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With the latest round of student loan reforms, the Obama administration has worked to develop “loan forgiveness programs and efforts to help borrowers reduce payments”.

However, one glaring aspect of student loan debts has not been addressed at all: abusive debt collectors.

These aren’t just employed by loan sharks or private debt companies either. The Department of Education has hired abusive debt collectors to come after student loan debts, with one-tenth of loans in danger of default—nearly $94 billion.

In fact, lenders hired by the Department of Education have been specifically cited for abuse:

In March 2012, Bloomberg reported that three of the companies working for the Department of Education had settled federal or state charges that they’d engaged in abusive debt collection.

When approached, the Department of Education has been anything but helpful:

The GAO report found that the Education Department still does little to oversee student-loan debt collectors, and has done little more than provide “feedback” when alerted to abuses.

The National Consumer Law Center has been trying for two years, through Freedom of Information Act requests, to obtain information from the Department of Education.

But so far, the Obama administration has stonewalled the requests. On Monday, after more than year attempting to peel back the secrecy around the debt collection contracts, NCLC filed a lawsuit demanding that the Department of Education comply with the Freedom of Information Act and release the data.

The federal government under the Obama administration is protecting abusive debt collectors when students and Americans have a right to know what’s going on. Hopefully, they choose to be more open about their practices soon.

Australia refinances government student loans, women hardest hit?

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Until now, Australian higher education students have been able to obtain government student loans at quite the discount—“with no interest payments other than those needed to keep pace with inflation”.

However, the government has changed the interest rate to around 4.5 percent, so that interest is pegged to the 10-year Treasury bond rate.

What does this mean?

Higher debt and more money to repay.

According to the Tertiary Education Union, “the new arrangements have a built-in bias against graduates with carer responsibilities, which will mainly be women”.

Essentially, if you take time off work to have a child, debt will be accruing during that time at a higher interest rate and you’ll be less prepared to pay it back because of wages not earned during that time.

The link seems tenuous, but the fact remains: the Australian government cannot support lending money at record rates to a citizenry accruing record debt.

What not to do when buying a new home

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Buying a new home is both an exciting and stressful part of life.

You may think you’re prepared for this arduous process, only to have it all fall apart at the last second.

One of the flashpoints of conflict in purchasing a new home that few are aware of is loan pre-approval.

Being pre-approved for a home loan is crucial to the process if you’re financing your home (which you most likely will be).

However, pre-approval is not exactly what you think it is.  Pre-approval:

does not mean the process is over — you don’t actually have the loan yet at that point. At the final underwriting review just before the closing, your financial situation needs to be at least as good, if not better, than when you were approved for the home loan.

Remember that—you’ve been pre-approved, but that doesn’t mean you’re in the clear.

In fact, if you finance purchases during the time in between pre-approval and purchasing a home—such as a new car loan or a credit card—you can damage your credit score and alter your eligibility for a loan.

Lay low if you were pre-approved for a loan, and if you have any revolving credit accounts, this would be a good time to pay them down and increase your credit score. Taking on new debt during the process of purchasing a home just might lose your dream home.

not quite

Be careful about investing in debt

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One of the more attractive investments in recent years has been in forms of debt, such as bonds.

Many bonds can be stable assets. But others, such as “high yield” bonds or “junk” bonds, can come with many unforeseen consequences for your portfolio:

be careful with high yield. Understand the risks. For instance, when does the company need to refinance? Can it cover future debt service costs? Does it have any interest rate risk exposure? Are you getting compensated for the risk through the return expected?

Sure, the highs are high if you purchase this risky debt and sell at the right time. But if you’re trying to build a steady portfolio, high yield bonds should not be in consideration.

California voters: pay down our debt!

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A poll conducted by USC and the LA Times of California voters shows that voters support paying down the state’s debt with reserve funds, over tax cuts and increasing the emergency fund.

Surprisingly, this was the least popular option:

Fourteen percent said the money should be used to cover the cost of pensions and healthcare for public workers, where the state has faced substantial shortfalls.

This goes to show that voters are increasingly aware of the enormous debts that California has rung up over the past few years. Lawmakers propose using a portion of all tax revenues for a variety of purposes, including debt, long-term costs, and a reserve fund to guard against recessions. The proposed amendment will reach the California ballot in November.

How to manage debt in old age

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When you think “debt”, you think a broke college student on a ramen noodle diet.

However, increasingly, more folks in their 50s and 60s or even older are finding themselves deeper in debt.

If your mortgage is paid off and you choose to take out a new mortgage on a new house, you may find yourself in debt through your golden years.

When applying for a 30-year loan later in life, you may be looking at a reality where you will be passing that home (and the loan) onto your heirs when you die.

Also, if you decide to go back to school, be careful about taking on student loan debt. You’ll want to carefully evaluate the value of your education or re-training and weigh it against the desire to go back to school.

Ideally, once you retire, you will choose to scale back on expenses while still maintaining an enjoyable way of life.

How do you consolidate your debt?

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Credit card debt is a consistently uphill battle—a Sisyphean task where you feel like once you’re almost to the top, you slide back down the hill again.

Combined with other debts, or multiple credit card, the task becomes even tougher.

There’s a difference between debt consolidation, debt consolidation agencies, and credit counseling.

Credit counseling involves talking you through your debt or talking with your creditors about your debt. The process takes your debt, consolidates it into one monthly payment, and allows you to pay through them.

Debt consolidation agencies are essentially credit counselors. But there is an actual definition for debt consolidation that none of these folks do.

Debt consolidation is “one new loan that will pay off all your existing debt, put you on a fixed monthly payment with a set plan for when the debt will be gone.”

Gone are the days where you’d go to the bank or to a credit union to get a debt consolidation loan. Now, they’re mostly offered by peer-to-peer agencies.

There are many scams, however:

“There are sites out there that look very professional and they typically promise money with very little in terms of credit standards,” Detweiler says.”

Such sites are usually just outlets to obtain your personal information, so do your homework beforehand.