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The Debt & Personal Finance Blog and Magazine

Saturday, September 27, 2008

Losing Track of Student Loans Can Wreak Havoc On Your Personal Finances

While having a big family is a wonderful blessing in and of itself, it’s especially rewarding during tax season. Don’t get me wrong; I value my family infinitely more than a tax refund, but it feels good to know that my commitment to my marriage and children is recognized by our government when tax time rolls around. We had twins last year, so when my husband and I realized that we would get a Child Tax Credit for both of them, we thought that was pretty nice. After deductions, we expected a return in the thousands, so we were happy campers.

During that same time, however, we were dealing with a frustrating issue that did not put smiles on our faces at all. Somehow, when I consolidated my federal student loans, one of them was not included. I didn’t understand how it could have happened, considering how informed the consolidation company was. Loan consolidators do all of the hard work for you - they call you out of the blue, offering to make your life easier by combining your student loans with a great interest rate and anything else you need, including forbearances. As they are explaining everything to you at the speed of light, they list all of your outstanding loans and help you to understand why making one easy monthly payment would ease your anxieties about student loan debt. They’re right; it does. So, I agreed with them and consolidated my loans. They reviewed the information with me again, reading back the information on each smaller loan that would be merged together into the big loan. So, I thought everything was taken care of.

And then we found the one that got away.

Actually, the one that got away found us; once the creditor discovered I had moved and gotten married, they politely called to let me know that I owed them money for a small student loan. It took a while to figure out what happened, but when we did, my heart sank. I was so young and I took out so many small loans while I was in school that I hadn’t been keeping track of them properly. So, when the consolidators did not have their facts and figures right, I should have been able to correct them, but I wasn‘t. I ended up with a defaulted loan because it went unpaid and unnoticed for quite some time. As many young Americans know, having a student loan in default is guaranteed to bring a lot of unwanted phone calls, anxiety, and grief that we did not want. One artist was so encumbered by Sallie Mae that he wrote a song about it:

So, we did everything we had to do to bring that loan back to current status, although it didn't happen until around the time we filed our taxes for the year. Thinking that everything was settled, we filed and waited, only to learn that the creditor had not reported the updated status of the loan, so our entire federal refund would be garnished to settle the debt.

Needless to say, that knocked the wind out of my sail.

Lots of people depend on their federal tax returns each year to cover large expenses or to revive their personal finances. However, outstanding student loans, if they are not current or at least in forbearance, can cause your federal income tax refund to be garnished. Although what we lost was actually enough to pay off the debt and would release us from it, we couldn‘t help but feel blindsided. Our tax preparer told us that we could have appealed the situation, considering that the return was garnished unnecessarily. We decided to just let it go. Although we mourned the loss of our beloved tax return, debt freedom, much like family, is simply too great a commitment to take lightly.

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Thursday, August 07, 2008

The Student Loan Dilemma

The Student Loan DilemmaWhen I decided to go to college I knew that no matter where I went I was going to take out student loans. My parents didn’t have much money to pay for college and I had little to no savings for the occasion. Instead of thinking about money and how much the bill would add up, however, the school advisor was limited to helping me choose a school. After all, I was going to have a college degree in four years so what’s the difference how much my student loans added up to? While there are some kids that have a strong and dedicated desire to be something great like a doctor, lawyer, or dentist, most kids planning for college simply go to get a degree in whatever interests them by their junior year. If you plan on going to graduate school at a hard-to-get-into college then the undergraduate school may matter. If you are going to graduate with your bachelor’s and get a job, I’ve learned the institution really means nothing.

I chose to go away to school in upstate New York where most of my friends were going. I had no clue what I wanted to do but knew that I qualified to have just about everything paid for by my student loan. The majority of the loan was through a private bank while just a minute amount was funded through the government. An even smaller amount was given as a grant that I wouldn’t have to pay back. At 18 years old, I didn’t think twice. I packed up my belongings and headed off to what would become the best four years of my life.

After I graduated college, my loans totaled over $20,000. I slowly paid off the government loan which was around $3,000 and deferred payments on my private loan. Although the rate was pretty good at 4.41% I found it impossible to pay the $390.00 monthly payment with my newly acquired job. I applied for consolidations and was denied multiple times. Since the rate was good everyone I spoke to acted as though the $17,000 should be easy to get rid of. But I didn’t go to school to be a lawyer or doctor, I graduated with a degree in Psychology that I settled on after 3 years of trying to figure out what it was I wanted to do. In fact it seemed as though my college degree was more of a high school diploma and all the places I applied to could care less what I studied, only that I had the degree. Completing 4 years of college showed dedication and an aptitude for learning and that was all anyone seemed to worry about. My job was in sales and I had no idea how I was going to pay back the money I owed.

That was 8 years ago. Today my loan now totals over $19,000. The interest keeps building up and the payment remains at $390 a month, a nearly impossible amount for a person that makes $30,000 a year to afford. Now that I own a home I’m going to try the consolidation process again to see if that will help. After all, isn’t better for me to pay something rather than nothing? It would seem from the $2,000 in interest they’ve made that the answer to that is no.

While going away to college was a great experience, was it really worth the price of a new car? I could have easily got the same degree at a local community college for less than half the price and to be honest most employers could care less where the degree came from.

My answer to this dilemma is a big fat resounding yes.

While many kids may seem like they are just going to college for the sake of it, who are we to make that choice for them? I am happy I was given the chance to decide for myself and will do the same for my children someday. Limiting a child to a local community college when they have aspirations is like telling someone who wants to be a police office they can only be a security guard. Yes, many of them will fail and end up protecting the local mall anyway, but isn’t it worth it to give them a chance?

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Saturday, February 23, 2008

No News Is Good News: Fico® Score Holds At 803

My FICO® credit score was updated recently:

Updated Chart of My FICO Credit Score - February 23, 2008: 803 - sideways

For the fourth month in a row, my score has moved sideways, which is just fine with me since I'm happy with my score. I'm expecting a small increase soon, since I recently paid off my student loan debt. I doubt I'll get more than a 5 point bump, but that's OK. I paid off my education loans because of the 8% interest I was being charged and not for any credit score benefit that may result.

For those of you who are paying down student loans, I've recorded one of the sweetest things you will ever hear over the phone. Click here to listen to the MP3.

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Thursday, January 24, 2008

Hey, Student Loan: Bye-Bye, and Thanks for The Memories

My student loan statement for 2007 arrived from the U.S. Department of Education (ED) earlier today. As I reviewed the numbers, I reached a section of the document that actually made me somewhat sick to my stomach. Here it is:

student loan statement

The sickening part, you ask? Since I began repaying this loan, I've paid nearly as much money in interest as I have on the principal. That's enough to make anyone queasy. This truth didn't bother me too much in the past, but it does now. A lot. I'm just too old to be paying this kinda' interest. For 2007, I paid close to $650 in interest on my student loan debt.

This situation is my fault really. When I started repaying this loan, I wasn't making that much money, so I wanted the installment amount to be a low as possible. Thankfully, the good folks at William D. Ford have an "income contingent" repayment option which allows the borrower to set their monthly payment amount to a figure that's commensurate with their salary. My payment was set to $109.11 per month, which has been very manageable over the years, especially with the added tax deduction. Income contingent is great for your budget in the short term, but devastating for your finances in the long. Paying such a small amount each month is a great way to get nowhere fast. I should have gotten off income contingent a while ago.

I thought about contacting ED to get myself off the income contingent plan and onto a plan more compatible with my current financial status. I thought about this for a while and eventually came to the conclusion that this option wouldn't give me any real satisfaction. I realized that the only way I was going to feel like I've improved my financial life would be to get rid of my student loan debt as fast as possible.

0% offer from Bank of AmericaMy next idea was to take advantage of one of the 0% balance transfer checks that I often receive via snail mail, offers from credit card companies with which I already have an account. In fact, today I got one from Bank of America, and it fit the bill nicely. The balance on my student loan debt is a little over $11,500 (I called for a payoff quote), and this particular Bank of America account has a credit limit that's close to $13,000. All I would have had to do was sign the check, mail it to ED, and the debt would have been transferred to my card. I would have paid no interest on the debt until January 2009. I wouldn't have waited that long to pay it down to zero, however; I would have paid the card off within 4 to 5 months.

This idea soured real fast when I realized that my credit score would have taken a pretty big hit as a result of this debt transfer maneuver, especially because this card would have been close to "maxed out" for a while.

I then decided to just payoff the debt with good old fashioned cash, a decision I'm going to stick with. In a few minutes, I'm going to make arrangements with my bank to transfer the cash, and, in about 12 days or so, the cancer that is my student loan debt will be expunged from my life forever.

The decision to pay cash wasn't an easy one. Very recently, I dipped into my puny savings account to payoff my car note, so another incursion into my savings account is going to leave me with a very wimpy emergency fund. The prospect of being 100% free from paying interest, however, is just too tantalizing for me to resist, so I'm doing it. I'll have to tighten my belt for some months, but that's OK, for I've learned to love the idea of making small sacrifices in order to realize "big picture" goals.



Saturday, January 05, 2008

No More Car Payments

For some months now, I had been thinking of dumping some cash into a certificate of deposit (CD) because the Fed is currently in a cycle of cutting interest rates. The Fed has been cutting since mid-September of last year, and when the Fed cuts the benchmark Fed Funds Target Rate, yields on CD's and money market accounts drop as well. About 3 months ago, when I first got the urge to invest in a CD, the annual percentage yield (APY) on a 12 month CD at my credit union was 4.16%. Today, the yield is 3.6%, and since the Fed will be lowering rates some more, the yield will only head south in the coming months.

But then I thought about my car loan, on which I'm paying an even 6.00% annual percentage rate (APR). Does it make sense to invest in a CD paying less than 4% APY, when I'm paying 6% APR on my car loan? No, not really, especially because a car is a depreciating asset. The resale value of my car holds up very, very well, which I was able to verify by checking out prices on eBay Motors, and looking up estimates on Kelly Blue Book and NADA for the same make and model. But a car that's accumulating miles in the Northeast USA, where there's plenty of car-corroding salt and sand, will always depreciate over time, so my baby is still losing value, though at a relatively slow pace. So, despite the pleasant fact that the realistic value of my ride was higher than the balance on my car note, it became very clear to me (don't you just love clarity?) that the right thing to do was use my spare cash to payoff the loan, and invest in a CD later.

paid! mine!So, last Wednesday, I logged onto the Capital One website to get a payoff quote for my auto loan. On Thursday morning, I visited my local post office and mailed, via overnight express, a check for a tad over $9,000. Today, I was able to login to the Capital One site and confirm that the payment was received. Yahoo. Feels pretty good: I own a great car, and I no longer have car payments (I was paying around $349 per month.)

Actually, if the interest-rate environment isn't looking good in a few months, I may opt to payoff my student loan instead of getting a CD. I would need another $10,000 or so to pull that off, so it won't be an easy decision. The only positive thing about student loan debt: the interest is tax deductible (at least it has been; it may not be anymore since my balance is relatively low now.) I think the urge to payoff my student loan will increase as the months pass, because it's now the only debt I have where I am paying interest, and I'm really tired of paying interest!

Will my car loan payoff boost my credit score? Maybe a little. I'll report back as soon as my FICO score is updated.

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