Pay Down My Debt

Introducing FICO 9: What This Means for You

Nick Clements Tuesday, August 12, 2014

whatisacreditscore_big5

Yesterday, FICO announced that it will be releasing FICO Score 9.  If you have unpaid medical bills or other collection items, this change will impact you.

What is FICO?

FICO is the most widely used credit score in the country. 90 percent of all credit decisions (mortgages, cards, credit cards, personal loans and more) use the FICO score in some way.

So, when FICO makes a change to its score, we should listen. This score has a big impact, because lenders use it and others (like CreditKarma) are trying to approximate it.

What are they changing?

This change is huge for people with unpaid medical bills and other collection items.

Unpaid medical bills

According to Experian, 64.3 million Americans have a medical collection record on their bureau. In the current world, this can significantly harm their credit score.

If you have an unpaid medical bill, it can be reported to a credit bureau in two ways:

  • The medical service provider can report to the bureau, or
  • A third party debt collection agency that has purchased the debt, or has been contracted to collect the debt, can report it

99.4 percent of cases have been reported by collection agencies. So, if your doctor is calling you to pay – it probably hasn’t been reported to an agency. But, once a collection agency starts calling you, you probably have a negative item on your credit bureau.

The purpose of a credit score is to help lenders understand the likelihood of someone being responsible and paying back on time. There has been a widespread belief that people have been unfairly punished for medical bills. In fact, the CFPB has proven that people have been unfairly punished, in a May 2014 report.

With the new score, FICO is agreeing with the CFPB. Medical collections will now be differentiated from non-medical collections. And people will be “punished less” for medical collections. This makes sense, for three reasons:

  1. The medical system is complex, and many people have been hit with small medical collections that they didn’t even realize they owed. For example, with a small co-pay that ended up with a collection agency.
  2. Historically, many responsible people could not get insurance because they had a pre-existing condition. And, when medical disaster struck, they had no way to pay the medical bills. They tried to be responsible, but couldn’t.
  3. Even with insurance, multiple emergencies in a family can lead to large deductible payments. Doctors and hospitals can quickly turn over bills to collection agencies, resulting in a negative remark on the credit bureau. Even people who are just paying back their medical bills, responsibly, over time can be punished.

This is a big win for the CFPB. Hats off. A government agency has done the math for the industry, and the industry has agreed. This should result in better access to credit, and lower rates on existing credit – once (and if) the changes are accepted by the industry.

Paid Collection Accounts will now be bypassed

Beyond medical bills, many other types of debt can end up on your credit bureau. For example, failure to pay your utility bill, your phone bill, your overdraft or any other type of debt can result in your account being sold to a collection agency. And the agency will usually report the collection account on your bureau. Having these accounts can seriously harm your score.

But, the older the collection item, the less impact it has on your score. I have regularly met people who felt confused. They have recovered and now had money. Should they pay back that five-year-old collection item, or just let it age. They wanted to pay it back, but would receive advice from some people not to do so. Why? Because activity on a collection item could make it appear more recent.

This change removes all ambiguity. If you pay back your collection items, your score will benefit. This is the way it should be.

When will I see the impact

Unfortunately it will take a while. FICO sells its credit score to banks. Whenever a new score is introduced, a bank has to decide whether or not to upgrade. In order to make this decision, they need to do a lot of analysis.

First, they will perform a “retro” analysis. This means they will look at the past few years of their portfolio history, and they will estimate how the portfolio would have performed if the new score was used.

They will then need to build strategies, which includes the cutoff (above what score will they approve accounts), the pricing and the extra rules that they want to build. In my experience, this takes 12 to 18 months (there are so many committees that need to approve this!).

Banks are very eager to “swap in” new customers. So, if previously rejected customers can now be approved, banks will be keen to proceed.

They are less keen to charge people lower interest rates. So, the CFPB needs to watch the banks closely. If people are truly lower risk, they should pay lower prices. But, banks are not eager to reduce pricing.

In Conclusion 

We fully support the changes. Medical bills are being severely punished. And people should not be afraid to pay off collection accounts.

We are realistic: it will be a while before we feel the impact.

And we are rightly skeptical: banks will be happy to approve more people and give more credit. They will be less excited to reduce interest rates.

Got questions? Get in touch via TwitterFacebook, email info@magnifymoney.com or let us know in the comment section below!

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College Students and Recent Grads , Pay Down My Debt

Sample Goodwill Letter to Remove a Late Student Loan Payment from Your Credit Report

Erin Millard Monday, December 15, 2014

Businessman Holding Document At Desk

If you’ve pulled your credit report recently and discovered that there’s been a late payment reported concerning your student loans, you might be wondering what you can do to recover.

Late payments can be damaging to your credit, especially if you stop paying your loans for an extended period of time. We’ve already gone over the repercussions of delinquency and defaulting, but today, we’re going to take a look at another method of repairing your credit report.

What is a Goodwill Letter?

A “goodwill letter” is a simple way to repair your credit report and it can be used for both federal and private loans. The purpose of a goodwill letter is to restore your credit to good standing by having a lender or servicer erase a lateness on your credit report.

Typically, those that have experienced financial hardship due to unexpected circumstances have the most success with goodwill letters. They allow you to take responsibility for your actions and to ask (in a very nice way) if your student loan servicer can empathize with the situation that caused the lateness, and erase it from your report.

It can also be used when you think the late payment is an error – for example, if you were in deferment or forbearance during the time of the late payment, and weren’t required to make any payments during that time, or if you know you’ve never been late on a payment before.

What Makes a Convincing Goodwill Letter?

If you’ve been looking for a goodwill letter that will actually work, we have some tips on what you should include in your letter.

  1. An appreciative tone

It’s important that the entire tone of your letter read as thankful and conscientious. If you were actually late on your payments due to extenuating circumstances, you shouldn’t take an angry tone in your letter, since you were in the wrong.

  1. Take responsibility

You want to be convincing and honest. Take responsibility for the late payment, and explain why it happened. They need to be able to sympathize with you. Saying you just forgot isn’t going to win you any points.

  1. A good recent payment history

Besides sympathy, you want to gain their trust as far as continuing to make payments goes. If your lender sees payments being made on time before and after the period of financial hardship, they might be more willing to give you a break. When you have a pattern of late payments, it’s more difficult to convince them that you’re taking this seriously.

  1. Proof of any errors and relevant documents

If you’re writing about a mistake that occurred, still be friendly in tone, but back up the errors with documentation. You’ll need proof that what you’re saying is true. Unfortunately, errors are often made on credit reports, and it may have been a clerical error on behalf of your servicer. If you have any written correspondence with them, you’ll want to include it.

  1. Simple and to the point

The last thing to keep in mind is to craft a short and simple letter. Get straight to the point while telling your story. The people reviewing your letter don’t want to read an essay, and the easier you make their lives, the better.

A Sample Goodwill Letter

Below is a sample Goodwill Letter template for student loans:

To Whom It May Concern,

Thank you for taking the time out of your day to read this letter. I just pulled my credit report, and discovered that a late payment was reported on [date] for my account [loan account number].

During that time, my mother fell terminally ill, and I was the only one left to care for her. As such, I had to leave my job, and my savings went toward her healthcare expenses. I fell on very rough times after she passed away, and was unable to make my student loan payments.

I realize I made a mistake in falling behind, but up until that point, my payment history with you had been spotless. When I was able to gain employment once again, I quickly resumed paying my student loans, making them a priority.

I’m not proud of this black mark on my record, but it’s the only one I have, and I would be extremely grateful if you could honor this request to remove the lateness from my credit report. It would help me immensely in securing other lines of credit so that I can further improve my credit score.

If the lateness cannot be removed entirely, I would still be appreciative if you could make a goodwill adjustment.

Thank You.

If you’re writing a letter because the lateness on your credit report is inaccurate, then try this letter:

To Whom It May Concern,

Thank you for taking the time to read this letter. I recently pulled my credit report and found that [Loan servicer] reported a late payment regarding my account [loan account number].

I am requesting that this late payment be assessed for accuracy.

I believe this reporting is incorrect because [list the supporting facts you have]. I have included the documentation to prove that I made payments during this time / that my loans were in forbearance/deferment and didn’t require any payments.

Please investigate this matter, and if it is found to be inaccurate, remove the lateness from my credit report.

Thank You.

Make sure you delete the scenarios that don’t apply to you; you want to provide as many personal details as possible. You should also include your name, address, and phone number at the top of the letter, in case your loan servicer needs to reach you immediately.

Where to Send Your Goodwill Letter

Now that your letter is written, you have to send it! This can be done either by fax or by mail. Most student loan servicers have their contact information on their website, but you can also look on your billing statements to see if they specify a different address.

Additionally, you can try calling the credit bureau the lateness was reported to, and see if they can give you the contact information you need.

It’s important to mention that goodwill letters are not a means to immediate success. It often takes several attempts to correspond with servicers and lenders to get them to acknowledge that they received a letter from you.

Your best bet is to get a personal contact at the company that has the power to erase the late payment from your credit report.

If all else fails, try as many different communication methods as possible. Call, mail, fax, live chat (if your servicer offers it), and email them. Several people who have tried this method report that it’s possible to wear your servicer down with a decent amount of requests.

Addresses and Fax Numbers to Try

These addresses and fax numbers were found on the servicer websites directly. Again, it’s worth it to try and call your servicer to get the name of someone there that can help you.

Nelnet

Documents related to deferment, forbearance, repayment plans, or enrollment status changes:

Attn: Enrollment Processing

P.O. Box 82565

Lincoln, NE 68501-2565

Fax: 866-545-9196

My Great Lakes

Great Lakes

P.O. Box 7860

Madison, WI 53707-7860

Fax: 800-375-5288

Sallie Mae

Correspondence Address

Sallie Mae

P.O. Box 3319

Wilmington, DE 19804-4319

Fax: 855-756-0011

Documents to Include With Goodwill Letter

Don’t let your efforts go to waste by forgetting to include documentation with your letter. Here’s a quick checklist of what you should include:

  • The account number for your loan
  • Your name, address, phone number, and email
  • Statements showing proof that you paid (if you’re disputing a late payment)
  • Documentation showing that you’ve paid on time at all other points aside from when you experienced financial hardship
  • Identifying documentation so your servicer knows you sent the request
  • Not necessarily something to “include”, but if you’re mailing anything, you should send it by certified mail with a receipt requested, this way you’ll know if your letter made it.

Resources

If you’re interested in exploring goodwill letters further, and the results that others have had, check out these websites:

  • ed.gov: They cover disputes, what to do about them, and how to go about rectifying them here.
  • gov: If you have loans with a private lender, and your lender has reported you as late when you weren’t, you can file a complaint with the CFPB to see if they can help you.
  • myFico Forums: The forums on myFico are populated with helpful individuals that might be able to give you contact information for certain servicers. There are some people reporting success with goodwill letters, and they are willing to share the letter with others upon request.

It’s worth the time to write a goodwill letter

If you’ve discovered that a late payment has been reported on your credit, and it’s because you fell on hard times, or is inaccurate, it’s worth trying to get it erased. These dings on your credit are there to stay for 7-10 years. That’s a long time, especially if you’re young and hoping to buy a house or a car in the near future. It’s a battle worth fighting.

Get in touch with us on Twitter @Magnify_Money

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College Students and Recent Grads , Pay Down My Debt

18 Options to Refinance a Student Loan

Nick Clements Friday, December 12, 2014

Mixed Race Young Female Agonizing Over Financial Calculations in Her Kitchen.

Are you tired of paying a high interest rate on your student loan debt? Are you looking for ways to refinance your debt at a lower interest rate, but don’t know where to turn?

There is good news: in recent years, the student loan refinancing market has been growing rapidly. Not just with traditional banks, credit unions and finance companies, but even the addition of new businesses that specialize in refinancing student loan debt.

The loan approval rules vary by lender. However, all of the lenders will want:

  • Proof that you can afford your payments. That means you have a job with income that is sufficient to cover your student loan and all of your other expenses.
  • Proof that you are a responsible borrower, with a demonstrated record of on-time payments. For some lenders, that means that they use the traditional FICO, requiring a good score. For other lenders, they may just have some basic rules, like no missed payments, or a certain number of on-time payments required to prove that you are responsible.

If you are in financial difficulty and can’t afford your monthly payments, than a refinance is not the solution. Instead, you should look at options to avoid a default on student loan debt.

If you can afford your monthly payment, but you have been a sloppy payer, than you will likely need to demonstrate responsibility before applying for a refinance.

But, if you can afford your monthly payment and have been responsible with those payments, than a refinance could be possible.

Is it worth it? 

Like any form of debt, your goal with a student loan should be to pay as low an interest rate as possible. Other than a mortgage, you will likely never have a debt as large as your student loan.

If you are able to reduce the interest rate by re-financing, than you should consider the transaction. However, make sure you include the following in any decision:

Is there an origination fee?

Many lenders have no fee, which is great news. If there is an origination fee, you need to make sure that it is worth paying. If you plan on paying off your loan very quickly, than you may not want to pay a fee. But, if you are going to be paying your loan for a long time, a fee may be worth paying.

Is the interest rate fixed or variable?

Variable interest rates will almost always be lower than fixed interest rates. But there is a reason: you end up taking all of the interest rate risk. We are currently at all-time low interest rates. So, we know that interest rates will go up, we just don’t know when. This is a judgment call. Just remember, when rates go up, so do your payments. And, in a higher rate environment, you will not be able to refinance to a better option (because all rates will be going up). We typically recommend fixing the rate as much as possible, unless you know that you can pay off your debt during a short time period. If you think it will take you 20 years to pay off your loan, you don’t want to bet on the next 20 years of interest rates. But, if you think you will pay it off in five years, you may want to take the bet.

Place to Consider a Refinance

  • Alliant Credit Union: In order to qualify, you need to have a bachelor’s degree. The minimum credit score is 700, and you need two years of employment and a minimum income of $40,000. They offer variable interest rates, starting at 6%.
  • Cedar Education Lending: In order to qualify, you need to have graduated from an eligible school. They will look at your credit history, and you must have at least 12 months of demonstrated income. You or your cosigner must make at least $2,000 per month. Fixed rates start at 5.24% and variable rates start at LIBOR + 2.65%.
  • Charter One: (This company is owned by Citizens Bank) To get the best deal, you should have at least a bachelor’s degree. They will look at your credit history, and want to make sure that at least the last three payments on your student loans have been made on time. If you don’t have your degree, you need to have made the last 12 payments (principal and interest) on time. You must make at least $24,000 per year. They offer fixed rates starting at 4.74% and variable rates from 2.30%.
  • Citizens Bank: Under the Citizens brand, the qualification criteria and pricing is the same as Charter One (above).
  • CU Student Loans: You will need to have graduated from an eligible school in order to qualify. You need to make at least $2,000 per month, and they will review your credit history. Variable rates are available, starting at 3.97%
  • CommonBond: You need to have graduated from one of the graduate schools in their network, and have good credit history. Fixed and variable rates are available, with variable rates starting as low as 2.65%.
  • Credit Union Student Choice: This is a program offered by credit unions. The criteria vary by credit union, but you can easily find ways of joining the credit unions before finalizing the refinance.
  • EdVest: They offer refinancing options for private loans used to finance attendance at a Title IV, degree-granting institution. If the loan balance is below $100,000 you need to make at least $30,000 a year. If your balance is above $100,000 you need to make at least $50,000. Fixed rates are available to residents of New Hampshire, and variable rates are available to everyone else – starting at 4.06%.
  • Education Success Loans: You must be out of school for at least 30 months, and you must have a degree. You also need a good credit score, with on-time payment behavior. Variable and fixed loan options are available, with rates starting at 5.24%.
  • Eastman Credit Union: They don’t share much of their criteria publicly. Fixed rates start at 6.5%.
  • IHelp: You need to have 2 years of good credit history, with a DTI (debt-to-income) of less than 45% and annual income of at least $24,000. Fixed rates are available, starting at 6.22%.
  • Mayo Employees Credit Union: You need at least $2,000 of monthly income and a good credit history. Variable rates are available, starting at 4.9%.
  • Pave: This is a crowd-sourced loan. You need at least a 640 credit score, and there is no minimum degree requirement. There are fixed rates, starting at 5.49%.
  • RISLA: You need at least a 680 credit score, and can find fixed interest rates starting at 3.99%.
  • Sofi: You must have a bachelor’s or graduate degree in order to apply, and you must have demonstrated on-time payment behavior. Both fixed and variable rates are available, with rates starting at 2.66% and fixed rates starting at 3.625%.
  • Upstart: You need to have a degree (or be graduating within 6 months). A minimum FICO of 640 is required. Fixed interest rates starting at 6.68%.
  • UW Credit Union: $25,000 minimum income required, with at least 5 years of credit history and a good repayment record. Fixed and variable interest rates are available, with variable rates starting at 3.48% and fixed rates starting at 7.49%.
  • Wells Fargo: As a traditional lender, Wells Fargo will look at credit score and debt burden. They offer both fixed and variable loans, with variable rates starting at 3.75% and fixed rates starting at 725%.

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Pay Down My Debt

Stuck in a Payday Loan Trap? Here Are Ways Out

Nick Clements Wednesday, December 10, 2014

Debt collections_lg

It is all too easy to get stuck in a payday loan. In an emergency, you borrow $150, and only have to pay a $25 fee. You feel incredible relief that you are able to get the necessary cash so quickly. But two weeks pass by fast, and there is no way you can come up with the $150 to pay off the loan. So, you just pay another $25 to extend the loan. And then you keep paying and keep extending. And you never see your balance go down.

Fast forward 12 months, and you have paid $650 in fees, and your balance is still $150. How can this be legal? And how can you get out?

It is legal, and you are not alone. A recent study by the CFPB showed over 80% of people taking out payday loans are unable to pay off their loan when the 14 day term is up. Instead, they get trapped.

Fees, Not Interest (As if there is really a difference)

Payday lenders get away with this because they do not treat your loan as a loan. Rather, it is an advance, and you pay a fee, not interest.

If you borrowed $150 for six months at a 60% interest rate, your monthly payment would be about $30. In six months, you would have paid back $180 to borrow $150. This is still a shockingly high interest rate (60%), but the total cost is dramatically less. Why? Because how you borrowed was structured as a loan, and not an advance. A portion of every payment goes to paying down principal.

The biggest problem with payday loans is that they are basically interest only loans. Every time you make a payment, your balance does not go down. To use fancy language, there is no principal amortization.

A general rule: you never want to get into a situation where you are only paying interest. That is a sure bet way to get stuck in a debt spiral.

How to get out of a payday loan? 

If you are in a mess with a payday lender, you need to ask yourself a difficult question. Why did I end up with a payday lender? The way you answer that question will determine how you get out of the mess.

I have no credit history, no credit cards, no debt and no savings. And then an emergency came up, and I had nowhere to turn.

If that describes you, than you need to do three things:

  1. Build your credit score. The best way to do that is with a secured credit card. Make sure you make your payments on time every month, and that you never charge more than 20% of the available credit. After 6-12 months, you will see an incredible improvement in your score.
  2. Once you have a score above 600, visit your local credit union. They will usually have much cheaper ways for you to borrow. If your payday loan is not paid off already, you can even refinance it at your credit union with a personal loan.
  3. Once your score is above 700, look for even better deals. At a 700 credit score, you can get some of the best deals out there. Those could include low rate credit cards or low rate personal loans.

I just have far too much debt. I can barely afford to get through the month. Just paying the minimum due takes up more than half of my paycheck. And my total debt is more than half my annual income.

If that describes you, than you need to visit a non-profit consumer credit counselor.

Getting a payday loan was a very temporary way to get through the month. But you need to restructure your debt in order to truly fix the problem. That may mean negotiating with your existing creditors. Or, it could mean bankruptcy. A good credit counselor can help you come up with a plan. Make sure you avoid the for-profit counselors, by going to the National Foundation for Credit Counseling.

I don’t have a lot of debt, but it is building. I don’t have a great credit score, but it isn’t awful.

If this describes you, than you are on the brink. You really need to step back and do three things:

  1. Create a budget. If you are going into greater amounts of debt every month, than you need to figure out where your money is going, and how to cut it back. In the short term, that means cutting expenses dramatically. Cut out restaurants and unnecessary travel. In the medium term, you need to come to terms with your fixed costs. Maybe you need to move to a lower rent apartment, or sell your car and pay less each month in car payments.
  2. Focus on your credit score. You want to get a score above 700, and that means making sure you pay every card on time, and you need to work on bringing down those credit card balances.
  3. Find cheaper ways to borrow. Payday loans are some of the most expensive ways to borrow. Think about a local credit union. You can find one at this website: http://www.asmarterchoice.org/ And, in addition to credit unions, you can also find low interest rate credit cards for that future emergency.

Remember that the best form of security is having a couple months of living expenses in an emergency fund as your first line of defense. And a low interest rate credit card (like the 9.99% PenFed Promise) is a great second line of defense. Emergencies happen, and you need to be prepared. The best way to never end up with a payday lender again is to make sure that you have two lines of defense set up.

Every little bit counts

In the meantime, make sure that you put something towards your payday loan every time you renew. Even a small amount can make a big difference. If you have a $150 loan, don’t just renew it. Find an extra $12.50 every two weeks. By doing that, you will make sure you are out of debt in six months. The payday loan company will make it easy to just renew – but make sure you add just a little bit extra to each payment to bring that balance down.

Don’t forget to follow us on Twitter @Magnify_Money and on Facebook.

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College Students and Recent Grads , Pay Down My Debt

How to Get Student Loan Modification and What Qualifies

Erin Millard Monday, December 1, 2014

Student Loan Mod_lg

If you’re one of the many people finding it difficult to pay back your private student loans, Wells Fargo recently released the promising news that they are moving forward on the private student loan modification pilot program they rolled out earlier this year.

What does this mean for borrowers? Two things:

First, it’s fantastic news for the industry in general. Private student loans have lagged behind, offering a limited number of options that are greatly dependent on your lender. In contrast, federal loans offer many benefits for borrowers such as deferment, forbearance, and a large selection of income-based repayment options.

The Consumer Financial Protection Bureau has been critical of bigger banks that haven’t been willing to extend repayment options to borrowers, and the banks have finally listened.

Second, this means that student loan payments are about to become more affordable for a select group of people. Let’s look at what loan modification programs can mean for borrowers.

Which Lenders Are Offering Student Loan Modifications?

Four big lenders are offering more flexible repayment options than they have before to lessen the burden on student loan borrowers.

Wells Fargo

Let’s look at Wells Fargo first. The bank’s recent announcement highlighted some significant changes they’re hoping to make.

The Wall Street Journal has reported that Wells Fargo is offering reduced interest rates as low as 1% to borrowers facing financial hardships. These reductions are temporary or permanent, depending on the situation you’re in (more on that below).

They’re also going to be offering extended repayment terms (by 5 years) come February 2015.

Wells Fargo wants to lower borrower payments to 10%-15% of their total income, and according to the bank, individuals in the pilot program lowered their monthly payment by as much as 31%.

This reduction in interest rate is extremely good news for those with private student loan debt, as the average interest rate on private loans is 10%-12%, much higher than federal loans. By slashing the interest rate, borrowers will pay less over the life of the loan as well. This is a better option as opposed to extending the repayment period, as that typically amounts to more paid with interest accounted for.

Discover

Discover also announced it plans on introducing a similar loan modification program early next year. The details have yet to be disclosed to the public, but they did start offering interest only payments earlier this year to borrowers who were less than 60 days late on their loans.

Discover has mentioned that they are planning on lowering interest rates, and will possibly waive balances for some borrowers that have been hit the hardest.

Discover has also already been making headway in offering more options for borrowers, which include reduced payments, deferment, forbearance, and payment extensions. Offering private student loan borrowers similar benefits that federal borrowers get to enjoy is a step in the right direction.

The great thing about this announcement is that other private lenders who offer flexible repayment options are being mentioned. If these lenders have been offering more repayment options, your lender might be as well.

Sallie Mae

Since 2009, Sallie Mae has been offering 1% interest rates, for sometimes up to two years, to borrowers that were delinquent on their loans.

PNC

Similarly, PNC lowered the interest rates of select borrowers to 0.6%, for as long as 18 months, earlier this year.

This goes to show that private lenders are becoming more and more willing to work with borrowers to give them some breathing room where student loans are concerned. But who can really benefit?

What Are the Qualifying Situations for Loan Modifications?

At this point, these loan modification programs are being targeted to two groups:

  • Those that are behind on payments by 30-119 days
  • Those that are anticipating a loss of income in the future, thereby making it difficult for them to afford the monthly payments

Borrowers who have defaulted on their loans will not qualify for a loan modification. A loan is typically considered to be in default after 120 days have passed with no payments made.

Borrowers in the second group that are anticipating loss of income due to medical reasons, a job loss, or a pay cut, may also apply for consideration. If your income can’t keep up with your payments, and you’ve done all you can to cut your expenses, it’s worth applying.

Wells Fargo currently requires proof of income to assess your situation. As the press release states, they are evaluating borrowers on a case-by-case basis, so don’t be deterred if someone you know has tried to apply and was turned down.

For now, the exact parameters of qualification aren’t available to the public, which is why calling your lender and speaking with them regarding your individual situation is important.

Credit checks are likely to be ordered, but this is mostly for the purpose of seeing what your overall financial situation looks like, including any other debts you may have. Lenders take more than just your score into consideration.

Based on your situation, you’ll either be given a temporary loan modification or a permanent one (if it doesn’t look like your situation will improve).

For other repayment options, such as Discover’s interest-only payments, proof of income typically isn’t required.

Bottom line: you need to be able to show that you’re experiencing financial hardship, and cannot afford your payments on the term you have now.

How is a Loan Modification Different from Forgiveness, Consolidation, or Refinancing?

It’s worth noting that loan modifications are different than forgiveness, consolidation, and refinancing.

Student loan forgiveness means that the entirety of your student loan balance is forgiven, or waived. It’s widely only available to those with federal student loans. Forgiveness is usually granted to those under special circumstances, such as volunteer work, working for a non-profit, working in the medical or law field, or being a teacher in the public sector.

[Read more about repayment plans and student loan forgiveness here.]

There are very few private lenders that offer forgiveness, and if they do offer it, it’s only under dire circumstances. For example, if a borrower dies, or is completely disabled, then their loan balance may be forgiven. For Discover to announce that they’re thinking of waiving loan balances is a huge step as far as private lenders go, but we don’t yet know what it will take to qualify.

A loan modification will not wipe out your student loans completely like forgiveness will.

Loan consolidation is useful for borrowers who are making payments to a number of different lenders, and are having trouble keeping track of it all. You can consolidate both federal and private student loans separately, but you can’t apply for a Direct Consolidation Loan with just private loans. You’d have to consolidate private loans through a private lender. When consolidating, you may be eligible for a longer repayment term, and a lower interest rate, but it’s dependent upon the loans you’re consolidating.

A loan modification means you’re adjusting the repayment terms on one of your loans. It doesn’t mean you’re combining all of your loans into one big loan, like consolidating your loans will do.

When refinancing a student loan, you’re hoping to get a lower interest rate, or a longer repayment term, to make your payments more affordable. Refinancing sounds similar to getting a loan modification, but the difference is that most lenders won’t refinance loans that are delinquent or default. The qualifications for refinancing are also much stricter.

With a loan modification, lenders are looking to work with you. If your credit isn’t the best, or if you’re delinquent (but not in default!), you still have a chance at working something out.

The Takeaway and What to Do

If you’re a borrower struggling to make payments and just squeaking by, or are already a little behind, you should reach out to your lender and ask them what options are available to you.

Bigger lenders such as the four that we mentioned aren’t going to reach out to you and tell you that you’re eligible for a loan modification. They don’t have time to sort through the millions of borrowers that have loans with them.

If you want your student loan payment situation to change, you must take action. The worst that can happen is your lender says no, and you’re back where you started. Don’t wait before it’s too late – as you should already know, having your loans default is the worst thing that you can let happen. Take advantage of the fact that private lenders are opening up their doors to struggling borrowers.

Don’t forget to follow us on Twitter @Magnify_Money and on Facebook.

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College Students and Recent Grads , Pay Down My Debt

Student Loans: Private, Federal, and Alternative Funding

Stefanie O'Connell Tuesday, November 25, 2014

mortar board cash

Student loans have become the bane of existence for millions of young professionals. According to Experian, 40 million Americans now have at least one outstanding student loan, up from 29 million in 2008. The average total balance on those loans has risen from $23,000 to $29,000.

Unfortunately, age 18, when high schoolers blindly excited by the prospect of attending their dream school start taking on those major financial commitments, is not the ideal time to be making life-altering financial decisions. These young adults have little understanding of basic personal finance, let alone the implications of the massive debt loads they’re signing on for. Even parents and professionals going back to school for advanced degrees are getting burned through the often-confusing process.

The Free Application For Federal Student Aid, or FAFSA as it’s better known, has more than 100 questions to determine aid eligibility, and a small error or accidental omission can result in being denied Federal funding altogether.

Private Student Loans vs. Federal Student Loans: What to Take Out

Despite the confusing application process however, Federal loans are the best resource for students looking to receive financial aid that they can actually manage. 

Federal student loans are those funded by the government. The interest rates on Federal loans are fixed, making it simple to anticipate and plan for payments come graduation. Private loans on the other hand are offered by banks and have variable interest rates that, generally speaking, far exceed the levels of Federal loans.

Interest rates on Stafford Federal loans are currently 4.66 percent for undergraduates and 6.21 percent for graduate students. Interest rates on student loans from private lender Wells Fargo, however, can range from 3.75-12.29. While paying 3.75 percent interest may sound tempting when compared to 6.21 percent, the private lender’s variable rate can just as soon rise to 12.29, well above the fixed Federal loan rate.

For the most part, private loans require cosigners and credit checks, whereas Federal loans typically don’t subscribe to either of those requirements.

Private students loans also require payments while students are still in school, whereas federal loans generally don’t require repayment until students graduate, leave school, or change their enrollment status to less than half-time.

Finally, Federal student loans are eligible for various programs like loan forgiveness and income based repayment. They can also be postponed in certain situations or retired if a student dies or becomes disabled. Private student loans offer much less flexibility, going so far as to go after the cosigner for the remaining balance if the student succumbs to a tragedy.

Suffice it to say that Federal student loans are by far the better option when funding education and should be maxed out before ever considering a private lender. Federal aid is awarded on a first-come, first-serve basis, so it’s imperative for students to fill out and submit their properly completed FAFSA as soon as possible. If Federal aid alone isn’t enough to cover the cost of education, switching to a more affordable school or program, or researching alternative funding options may be a better choice than resorting to private loans.

Alternative and Supplemental Funding

Too many students discount scholarships when figuring out their educational funding. Unlike loans, scholarships are financial gifts towards education that don’t carry interest and never need to be repaid. Students don’t have to have the best grades or the most need or the most unique talent to qualify either.

While National scholarships, like those awarded by the National Merit Scholarship Corporation and the Coca-Cola Scholars Foundation provide major funding, they also have extremely large competition pools. Looking for state, local, and college specific scholarships are great ways for students to increase their chances of being awarded free funding.

Students should make the most of their varied resources- from their college counselor to the local library to various websites that aggregate available scholarships based on background, interests, abilities, financial need, field of study, and other pertinent information- to see what scholarships best suit them. Fastweb.com, Scholarships.com, and ScholarshipExperts.com are all great starting points for researching and pursuing supplemental scholarship funding.

Loan Repayment: Federal vs. Private

Late and missed payments on student loans can result in credit catastrophe. While Federal student loans aren’t considered in default until the borrower has missed payments for nine months, private loans have varying default windows, some kicking in after just one missed payment. Once default happens, the entire loan amount comes due and the collection agencies come calling. Ignoring either is bad news as student loans are almost impossible to discharge- even in bankruptcy.

If your required monthly payments are more than you can afford to pay, there are plenty of options to look into with your Federal loans- income based repayment, extended repayment plans, even temporary deferment of payment- to name a few. While private loans don’t offer the same flexibility in repayment, the consequences of defaulting are arguably less severe. When you default on a Federal student loan, the government can garnish your wages, social security benefits, and tax refunds. When you default on private student loans however, the lender can go after anyone who co-signed your loan, destroying their credit as well as yours.   If you can’t afford all of your payments, be they private and/or Federal, it’s much better to review your various consolidation and repayment options than to simply default and accept financial ruin.

Before deciding on or signing anything, students must understand the financial implications of their higher education decisions. If not, they may resort to drowning under the crushing weight of student loan debt for the rest of their lives.

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College Students and Recent Grads , Pay Down My Debt

Miss A Student Loan Payment? Where To Find Help And What Happens

Erin Millard Monday, November 24, 2014

Mixed Race Young Female Agonizing Over Financial Calculations in Her Kitchen.

If you’ve missed a student loan payment or are struggling to make payments, you’re not alone. According to the Department of Education, millions of loans are currently delinquent, with many more being sent to collections every day.

What happens when you can’t afford to make a payment, and subsequently miss the due date? If you have federal student loans, at first, you’ll be delinquent. Nine months after you miss a student loan payment, your loans will then enter into default status.

If you have private loans, there’s no “grace period” of delinquency; your loans are immediately in default the day after your payment was due.

While this might sound like bad news, there are ways to recover from delinquency and default. We’re covering what the consequences are, and what options you have to get your loans current again.

What Does Being Delinquent Mean and What Are the Consequences?

Do you remember that promissory note you had to sign every semester when taking out student loans? That note was a binding contract in which you promised to make timely payments on your student loans (among other things). By missing a payment, you are in direct violation of that contract.

The day after your payment is due, you are considered delinquent on your student loans. During your delinquency, your student loan servicer will attempt to get in touch with you in the first 15 days following a missed student loan payment.

Your credit score can also suffer if you don’t make any payments within a certain time. For example, My Great Lakes will report a lateness to the 3 major credit bureaus (Experian, Equifax and TransUnion) once an account is 60 days past due, but Nelnet will wait 90 days. Different servicers have different guidelines for this, so it’s best to call yours directly to ask them for the specifics.

Even if you become current on your loans, the delinquency can remain on your credit report for up to 7 years.

Additionally, you might incur late fees if you don’t make an effort to pay within a set time frame. Late fees vary by lender, and the amount of time passed before getting hit with a late fee also depends on the lender.

While being delinquent isn’t great, it’s not the end of the world. Simply making a payment will bring your loan into repayment again.

But what if you can’t afford that payment?

After nine months of missed payments, your loan will go into default. Nine months is a considerable amount of time to work with your student loan servicer in an attempt to lower your payments, and that’s exactly what you should do.

Steps You Can Take To Get Out of Delinquency

If you’re delinquent on your student loans, the absolute best thing you can do is to get on the phone with your student loan servicer and explain your situation to them. You want them on your side in this process, and most are willing to help you out. Many servicers have information and options on lowering payments directly on their website.

If you can afford to make any sort of payment, do so. This will show your loan servicer that you’re concerned and making every effort to rectify your delinquent status.

The worst thing you can do in this situation is to ignore what’s going on. You have 9 months in which to make things right before going into default, and you want to do everything in your power to make sure you don’t get reach that point.

When speaking with your loan servicer, ask them to review your payment options. Under certain circumstances, you may be eligible for deferment or forbearance. Both will excuse you from having to make any payments for a set amount of time. Interest doesn’t continue to accrue if your loans are in deferment, but it will accrue in forbearance. Typically, forbearance is easier to qualify for than deferment.

If you’re not eligible for either of these options, don’t lose hope. There are several different income-based repayment options out there, including Pay as You Earn, Income-Based Repayment and Income-Contingent Repayment, and your student loan servicer will point you toward the one that makes the most sense for you.

Your number one priority when your student loans are delinquent is to get them current as soon as possible so that they don’t go into default.

What Consequences Does Defaulting On Your Student Loans Have?

If you haven’t been able to make any payments toward your student loans in 9 months, and haven’t reached out to your servicer, then you will end up defaulting on your student loans.

There are serious consequences to defaulting:

  • Some loan holders will require your entire balance to be paid in full. This includes the principal and the interest.
  • You become ineligible for deferment, forbearance, or any repayment programs.
  • You become ineligible for further federal student aid.
  • Your wages can be garnished, plus your tax return can be held to repay your loans.
  • Your credit score will be damaged.
  • You might end up responsible for more than just your loan balance if there are late fees, collection fees, or court fees involved.

These all sound a little scary, don’t they? While defaulting on federal student loans shouldn’t be taken casually, there are ways to improve your situation.

Options for Getting Your Loans Out of Default

In order to get your loans out of default status, you have to make a plan. The unfortunate part is that you have significantly less options than you would in delinquency, and the options you do have require you to be able to make payments.

MyEdDebt.com is a great resource for those looking for more information on getting their loans out of default. The site is run by the Department of Education and highlights its Rehabilitation Program as an option for getting loans out of default.

MyEdDebt

Going through a rehabilitation program is your best chance at redemption. Upon successfully completing the program, all the negative consequences of defaulting will be reversed. That even includes the damage to your credit score (the default will be erased).

Successful completion involves making 9 monthly payments out of 10 months, so it’s important that you can make the payments according to the plan you’re given. You have to make the payments monthly; lump-sum payments or extra payments will not speed up the process.

A debt collector creates your repayment plan during rehabilitation. They’re supposed to work with you to create a manageable repayment plan, though some of them have wrongfully tried to get borrowers to pay back more than they can afford.

[3 Steps to Handle Being Mistreated by a Student Loan Servicer]

StudentLoanBorrowerAssistance.org has highlighted the importance of paying back only what you can reasonably afford, as a new system was put into place this past July. Under this system, the amount you must pay should coincide with what you would be paying under the Income Based Repayment formula. For “not new borrowers” this is generally 15 percent of your discretionary income, but never more than the 10-year Standard Repayment Plan amount. For “new borrowers”, it’s 10 percent of discretionary income.

New borrowers are defined by:

“… (1) no outstanding balance on a Direct Loan or FFEL program loan as of October 1, 2007 or has no outstanding balance on a Direct Loan or FFEL program loan when you obtain a new loan on or after October 1, 2007, and (2) received a disbursement of a Direct Subsidized Loan, Direct Unsubsidized Loan, or student Direct PLUS Loan on or after October 1, 2011, or received a Direct Consolidation Loan based on an application received on or after October 1, 2011. However, you are not considered a new borrower if the Direct Consolidation Loan you receive repays loans that would make you ineligible under part (1) of this definition.”StudentLoans.gov.

[Read more about repayment plans and student loan forgiveness here.]

Once you’ve gone through the rehabilitation program, a lender must purchase your loans in order for them to enter back into standard repayment status. Likewise, only after a lender has purchased your loans will the collection agency ask the credit bureaus to clear your credit report of the default.

Just note that you may only go through the rehabilitation program once. If your loans fall back into default, then you won’t be eligible for the program.

What About Defaulting on Private Student Loans?

Private student loans are a different beast. There’s no delinquency period associated with private loans; as soon as you miss a payment, your loans have defaulted.

Unfortunately, private loans don’t offer the same protection as federal loans do. Therefore, the repayment options associated with federal loans don’t apply for private loans.

Even worse, there aren’t any rehabilitation programs to go through for private loans, unless your lender offers such a program. It’s worth it to ask!

For instance, Discover will report your loan as late to credit bureaus during its monthly account audit, so there isn’t necessarily a time frame to consider. If you missed a payment that was due on the 10th, and their audit is on the 20th, it might take some time to be reported as late. At that time, your loan is also considered to be in default. The good news is that there are no fees associated with their loans, even late fees, which is reflected on their student loans page.

Wells Fargo reports a loan as late after 30 days have passed, and their standard late fee is $28, though this largely depends on the type of loan you have.

For Citizen’s Bank, private student loans are serviced through Firstmark. Their loans are reported as late after being 30 days past due (from the last business day of the month). The loan is considered defaulted after 120 days past due, and late fees (5% of the borrowed amount) are incurred after the loan is 15 days past due.

According to Sallie Mae, depending on the type of loan you have, you’re considered to have defaulted after 6 to 9 months of no payments.

Fortunately, there are some private lenders coming around to the fact that borrowers need help. Wells Fargo is one private lender willing to lend a hand. If you’re having trouble making payments, they offer additional repayment options, and they also have a new loan modification program which can lower your payments temporarily or permanently.

Sallie Mae offers borrowers interest-only payments on certain loans, and they also offer a graduated repayment option on their Smart Option Student Loan.

Discover also offers deferment options to those serving in the military, in public service jobs, or in a residency program.

All lenders encourage borrowers to call if they’re having trouble making payments under their current repayment terms. But you should work under the assumption that once you’re 30 days late it will show up on your credit report, which can stay there for seven years.

The Consumer Financial Protection Bureau has attempted to strip away some of the uncertainty and confusion surrounding student loans, but according to a recent report, the industry remains unchanged. More and more complaints are being received concerning private loans, as borrowers claim they don’t have enough information about the options they have.

The CFPB is encouraging borrowers to use a template that they have available for download to try and negotiate a repayment plan with their lenders. This should be done as soon as you miss a payment, as your private lender will sell your loan to a collection agency after enough time has passed without a payment. They will be more willing to help you than a collection agency will.

As a last resort, you may be able to get your private student loans discharged in bankruptcy. Private loans are slightly easier to get discharged than federal loans. If you’d like to read more about that process, StudentLoanBorrowerAssistance.org has a comprehensive write-up on it.

Final Recap

You want to avoid defaulting on your student loans at all costs, so if you’re delinquent on your loans, get in touch with your loan servicer to figure out the best way to bring your account current. If you’ve already defaulted, check with your loan holder to see if you can enter into a rehabilitation program. If you have private student loans, contact your lender immediately to find out if you can negotiate more manageable repayment terms. These options are available to help you, and there is no shame in taking advantage of them.

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College Students and Recent Grads , Pay Down My Debt

How to Get a Student Loan Forgiven

Kali Hawlk Thursday, November 20, 2014

Students throwing graduation hats

According to a recent CNBC article, 24% of millennials expect to receive forgiveness for their outstanding student loan debt balances. It’s a good thing, then, that the Consumer Financial Protection Bureau estimates that 25 percent of American workers could be eligible for student loan repayment forgiveness programs.

Here’s more good news: there are many ways of taking action to get a student loan forgiven. You can seek out programs that are career-based, meaning they provide aid for those in certain professions. Or you can look into plans based on your income level. Most of these are sponsored by the Federal government in one way or another (though some colleges do assist a select few of the students they graduate).

Those suffering the burden of student loans may qualify for one (or more) of the nine types of forgiveness programs listed below.

Public Service Student Loan Forgiveness

There are many programs available to help mitigate Federal student loan burdens — especially if you’re working in a public service position.

Specifically, employees of the government, non-profit organizations, and other public workers may qualify for the Public Service Loan Forgiveness (PSLF) program. You need to be employed full-time by a public service organization. You also are required to make 120 payments on your loans before being eligible for forgiveness.

Head to the bottom of page 8 of the program’s FAQ to find a detailed list of job descriptions that qualify. Note that as long as you’re employed by an eligible public service organization, you’re covered. In other words, you probably qualify as a teacher — and you may also qualify if you work in a public school as an administrative staff member.

Getting a Loan Forgiven Based on Income

Another way to get Federal student loans forgiven is to see if you qualify for an income-based program.

According to Sophia Bera, CFP and founder of Gen Y Planning, there are three income-driven programs:

  • Pay As You Earn Repayment Plan (PAYE Plan) – This plan is the newest option for those with student loan debt. It’s designed to help recent students entering the job market for the first time during the recession years, and provides an alternative to the Income-Based Repayment Plan and lower payments. The remaining balances will be forgiven after 20 years of qualifying payments and an interest subsidy. PAYE is only available for federal Direct Loans. Eligibility is often a result of student loans that are higher than a person’s annual discretionary income or makes up a significant portion of his or her annual income. So, $10,000 in student loans with a $60,000 annual salary would like make an individual ineligible for the plan. In addition, individuals are only eligible for the PAYE plan if:
    • He or she is new borrower as of Oct. 1, 2007,
    • Received a disbursement of a Direct Loan on or after Oct. 1, 2011.
  • Income-Based Repayment Plan (IBR Plan) – This is the original plan that was designed to help those who held student loan debt that equaled more than their annual income, or a “significant portion” of annual income. Eligibility includes demonstrating a partial financial hardship. Loans will be forgiven after 25 years of qualifying payments, five years longer than the PAYE plan. Like thee PAYE plan, this IBR also offers an interest subsidy.

Keep in mind: for both IBR and PAYE, your payments are based on your adjust gross income (AGI). If you file joint taxes with a spouse, then your AGI will include your spouse’s income and impact your payments. Read more about taxes and student loans here.

  • Income-Contingent Repayment Plan (ICR Plan) – This plan intends to help those who purposely chose low-income jobs but graduated with high levels of student loan debt. It provides another option for those who can’t qualify for either the Pay As You Earn Plan or the IBR Plan and is open to anyone with eligible federal student loans. Like with the IBR, the monthly payments are based on income and family size, however, the payments will likely be higher than those with IBR or PAYE. The ICR plan also forgives an outstanding balance after 25 years of qualifying payments. The debt discharged is treated as taxable income, so borrowers need to be prepared to pay taxes to the IRS.

While each of these programs has various stipulations, requirements, and limits, they all have one thing in common: they’re designed to help those with low incomes and excessive amounts of student loan debt.

They’re also a little different from the public service programs. While those in public service positions can have student loan debt forgiven after 10 years, these programs forgive loans after 20 or 25 years.

However, like the public service loan forgiveness program, these income-driven programs do require you to pay every payment on time – or you’ll be disqualified from the program. You also may need to pay taxes on the portion of your loans that are forgiven.

Use this calculator to see exactly what will happen with your payments and how much of your student loans may be forgiven.

Student Loan Forgiveness Programs for Professionals

Many student loan forgiveness programs are based on the career you choose after graduation. For those with professional degrees – think doctors, lawyers, and teachers – you have several options when it comes to shedding that student loan debt without paying it out-of-pocket and in full.

Doctors can look into the NIH Loan Repayment Program. This can help repay 25% of a doctor’s student loan balance per year with a $35,000 maximum. That’s limited to doctors conducting research and who meet certain eligibility requirements.

Lawyers can look into Equal Justice Works. This provides a list of law schools that offer loan repayment assistance programs. Afam Onyema graduated from Harvard University and Stanford Law School, and was able to decline corporate law job offers in order to establish a charitable organization thanks to repayment programs.

“I can afford to do this work only because of Stanford Law School’s uniquely generous Loan Repayment Assistance Program (LRAP),” explains Onyema. “The school is systematically paying off and forgiving 85% of my $150,000+ debt.”

Teachers can qualify for PSFL programs, they might also want to look into Teacher Loan Forgiveness. To get into this program, you need to teach at specifically designated elementary and secondary schools for five consecutive years to be eligible.

If you began teaching after 2004, you’re eligible for up to $5,000 in loan forgiveness if you were a “highly qualified” teacher, and you can receive up to $17,500 if you’re a “highly qualified” math or science teacher in a secondary school, or special education teacher.

Other Options

Don’t qualify for any of the above? Don’t despair yet. You have a few more options:

Volunteer programs: These qualify under public service student loan forgiveness: Options include working with AmeriCorps and serving 12 months or volunteering as part of their VISTA program, or joining the Peace Corps.

Enrolling in the military: Some branches of the US military offer student loan forgiveness programs. Stafford and Perkins loans are eligible (among others), and the Army and Navy will “repay the maximum allowed by law for non-prior service active duty enlistments.”

The Army will pay up to $20,000 for Reserve enlistments, and that includes the Army National Guard. If you’re interested in joining the Air Force, that branch can repay up to $10,000 for non-prior service, active duty enlistments.

Both the Air Force and the Navy require a minimum of four years of service. With the Army, the minimum service is three years, and the Army and Navy Reserves and Army and National Guard require six years.

The Pitfalls Associated with Getting a Student Loan Forgiven

If you’re having trouble making your student loan payments on time and in full, it’s worth your time to do some homework and research your options. Getting a student loan forgiven isn’t always the best answer or the only solution, and you need to proceed with caution.

Let’s be clear. “Forgiveness” doesn’t mean you sit back and let someone else take care of 100% of your loan. Nor does it mean getting to completely walk away from the financial responsibilities of borrowing that money in the first place.

You’ll first need to make sure you meet all the qualifications listed out in the fine print. As we’ve seen, that can mean fitting into very specific circumstances and stipulations. And short of drastic action like declaring bankruptcy – which is not the ideal solution – you may not qualify for any of the programs on student loan forgiveness out there.

In fact, even declaring bankruptcy doesn’t always work. According to Leslie Tayne, Esq. of Tayne Law Group, P.C., “Student loans are rarely dischargeable in bankruptcy and getting a student loan forgiven is a very particular process.”

“For Federal student loans, there is a way to get your loan forgiven,” she explains. “The public service forgiveness program may forgive the balance of your loans after 10 years working in a qualified public service job.

“Once your forgiveness is approved, you will not be required to make any more payments on the loan; however it is important to note that you may be subject to a 1099 by the IRS and thus have to pay taxes on the amount forgiven.” As Tayne notes, that could have an even worse affect on your finances.

Bera provided this example: “If you had $100,000 in Federal student loans and [use a forgiveness program], after 25 years of on-time payments the balance on your student loans might be $50,000. If the government forgives this amount, you’ll have to pay the tax on $50,000 of income in addition to your normal salary or wages for that year.”

If someone only makes $40,000 annually and suddenly his or her income increases to $90,000 in a given tax year, they’ll likely owe thousands of dollars to the government.

All this isn’t said to discourage you, but to make sure you’re in tune with the realities of the situation. If you have student loans and want to look into getting involved with a student loan forgiveness program, start by familiarizing yourself with what’s available to you and your situation. Once you’ve done a bit of research you can contact your loan provider to start taking action.

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College Students and Recent Grads , Pay Down My Debt

How to Handle Student Loans in 4 Easy Steps

Cat Alford Wednesday, November 19, 2014

Cat_grad_lg

When I was 18, I was so excited to start college. I carefully packed my clothes into a few different suitcases. I bought a mini fridge. I made sure I had a couple sets of extra long sheets. I contacted my roommate ahead of time. We found out we were in a really unique loft room in an all-girls dorm. It looked so cool, and I was really, really excited.

I was a complete and utter nerd in high school, and it paid off. I received a full-tuition scholarship to Tulane, in New Orleans. All my parents had to do was write a check for $5,000 or so, which covered room and board for the semester. Comparatively, a student who lives in the dorm at Tulane without a tuition scholarship will pay almost $50,000 a year for the privilege today. My parents were thrilled, and they wrote the check right when we arrived on campus and did orientation. 

Of course, a few hours later, my life changed forever.

Move in day at Tulane in 2005 was also the same day the city began evacuating for Hurricane Katrina. I was buying my first semester books in the bookstore with my dad when an announcement came over the loudspeaker. It was time for everyone to get out – really out. As in, leave the city.

Because I am from just outside of New Orleans, having my college plans messed up was actually the least of my family’s worries. A few days later, I found myself in a hotel room just outside of Baton Rouge. My childhood home had 8 feet of water. Tulane closed for the semester. But, most importantly, my parents’ business was completely disrupted, and they had major income losses in addition to the losses in our home.

My First Student Loan

I went to L.S.U. because Tulane closed, and I had to take out my first set of student loans. Everything so was incredibly uncertain at the time that my mom encouraged me to go take out loans.

My parents were busy dealing with the aftermath of the storm, and I had to figure the whole college/loans/new campus logistics out on my own. I don’t remember completing entrance counseling for my loans, although I know I did because they were subsidized federal loans.

I transferred schools again two years later to William and Mary. I never went back to Tulane, and I was still craving that small school atmosphere after two years at a large university that I never meant to go to in the first place.

In order to go to William and Mary as an out-of-state student, though, I had to come up with the cash. I received a generous grant due to our financial circumstances from the storm, my parents helped a little, and I took out the rest in federal loans. Again, I don’t remember doing entrance counseling.

Cat graduationIt wasn’t until I graduated that I learned how to check my credit score and find out how much I had taken out in loans in total. Luckily all my loans were federal loans and the majority was subsidized, which meant that I did not have to pay interest while I was in school.

You would think, though, that as someone who graduated early from one of the best colleges in the country (after transferring twice and experiencing a huge natural disaster) I would know how much money I took out. But I didn’t. Unfortunately, many other students and recent graduates are like me and unaware exactly how their student loans are structured and how repayment works.

Ultimately, I’m not upset that I took out student loans.

They were necessary in order to make my dreams come true. They were necessary to help me escape what had become a very sad situation in my home state. They were there for me when I needed to take one really expensive summer school class so that I could graduate a semester early. And, when I got a grant to do a fully paid for study abroad program, a student loan helped me buy plane tickets so I could see more of Europe while I was there. I don’t regret these decisions or experiences, but what I do regret is not understanding interest rates or the impact of student loans in general.

Learn From My Mistakes

If I had any advice to students going to college today and their parents, it would be as follows:

Step 1: Shop Around For Your Loan

Do not take the first loan that you’re offered. Please shop around. Just like any big investment, going to college deserves your full attention. If you have to fund it with loans, make sure you’re getting the best rates.

Private loans are historically worse for students because may of them require immediate payments, higher interest rates, more fees, and less flexible repayment terms.

Federal loans are the route most students take since those are the most widely accessible through colleges and universities. Although it seems like federal loans are the answer, don’t discount your local banks. If your parents have a good reputation with their local bank, they might be able to secure a lower interest rate than the federal government, but those instances are rare. It’s important to remember, though, that local banks will likely not be able to offer you deferred interest, so you will need to compare interest rates between these private loans and federal loans and weigh the pros and cons to find out the best plan of action for you.

In sum, shop around and know the difference between private and federal loans like the back of your hand. 

Step 2: Pay Attention to the Entrance Counseling

Entrance counseling is there for a reason. It’s typically automated with a quiz that you need to take online and pass to get your loans. The quiz asks questions to make sure you understand terms like deferment, repayment, interest accrual, and forbearance. Could it be better? Yes. Could it be more effective in helping students understand the risks? Yes. However, at a minimum it will explain the benefits and consequences of loans and what’s expected of you during your repayment. Remember, don’t complete entrance counseling until you fully understand everything about your loans. If you get to a section of entrance counseling that does not make sense, put in a call to your school’s financial aid office and ask them to explain the concept. If you don’t understand your interest rate, know your repayment period, or know what to do if you cannot make your payment in the future, ask your student loan counselor these questions.

Step 3: Take Out As Little As Possible

You might think that you’re going to college for engineering but most college students change their majors. In fact, the New York Times reported in 2012 that 80 percent of freshmen at Penn State were unsure about their major.

Maybe you’ll fall in love with acting even though you thought you wanted to go to medical school. Or, perhaps you’ll enjoy psychology and want to pursue being a social worker instead of becoming a business owner.

Either way, it’s important you only take out as much money as you need and work to subsidize other living costs of college, because you won’t know your ability to repay the loans until you start your career.

Just to give you an example, if you take out $26,000 in student loans, (which is about the national average for a four-year public university) at 6.8%, you would pay around $300.00 a month for 10 years to pay it off. You would also pay nearly $10,000 in interest! That $300 a month could be an incredible investment opportunity or a car payment. That $10,000 in interest could go towards a down payment on a house or a great emergency fund. So, before you take out anything extra, put your information in a loan calculator and find out how much money you’ll actually pay in the long run in interest charges. That should inspire you to take out as little as possible.

If all of this sounds daunting, don’t forget to regularly look for scholarships and find unique ones that apply to you. There are scholarships for just about everything whether you were a preemie as a baby or have German ancestry. To find unusual scholarships, click here.

Also, remember it’s okay to feel a little uncomfortable. College students are notorious for living on ramen noodles. Essentially, do whatever you can to take out the least amount of money possible. Your older self will thank you.

Step 4: Research Repayment Options

There are many careers that will offer you loan repayment assistance including teaching in underserved areas and joining the military. Make sure to take the time during your senior year to find places to work that will help you pay back you loans and know if they apply to private loans as well as federal. Sometimes you only have to sign a two or five-year contract to receive that benefit, and trust me, that seems like a long time but it will fly by.

Take Responsibility

Really, the most important takeaway is that you and only you can become educated about your student loans. The financial education system that is currently in place with respect to disseminating information to college students about the loan process is not as effective as it could be. Thus, it is up to you, the college student, to become an adult and start making adult decisions about your money.

Good luck. Remember, student loans can definitely help you follow your dreams like they did for me, but be wise about how much you take out.

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Pay Down My Debt

A Married Couple’s Tricky Dance between Taxes and Student Loans

Matt Becker Thursday, November 13, 2014

The Marriage Penalty

Married couples with student loans face a difficult decision at tax time. You can choose to file jointly, which often leads to a smaller tax bill. Or you can choose to file separately, which often leads to smaller student loan payments.

So which decision will save you the most money? Today we’re going to help you figure out the tricky dance between taxes and student loans.

The married couple’s dilemma

Married couples can choose to file their taxes in one of two ways. They can file jointly and have both of their incomes taxed together. Or they can file separately and have each spouse taxed individually on the income he or she earned.

Either one can be beneficial depending on the couple’s specific situation, but there are certain advantages to filing jointly:

  • The combined tax bracket is often lower (though not always),
  • You are allowed certain tax deductions, like the student loan interest deduction, that those filing separately aren’t,
  • You have easier access to certain tax credits, such as the child tax creditdependent care credit and certain education credits.

But there is a potential downside to filing jointly for those with student loans.

Income-driven repayment plans rely largely on (you guessed it!) your income to determine your minimum monthly payment. And since filing jointly will increase your reported income if your spouse is also earning money, your required student loan payment will often increase as well. In some cases, this can add up to a pretty significant cost difference.

Luckily, there are some tools that can help you run the numbers and figure out which tax filing status will save you the most money. Let’s take a look at an example to see how it works.

An example: Meet Joe and Sally

Here’s a simple example that shows how one filing status can save on taxes but cost more on student loans, and vice-versa:

  • Joe and Sally are married with no children.
  • They live in Florida (no state income tax).
  • Joe is making $35,000 per year and has $15,000 of student loan debt with a 6.8% interest rate.
  • Sally is making $75,000 per year and has $60,000 of student loan debt with a 6.8% interest rate.

First, we can estimate Joe and Sally’s tax bill filing jointly vs. filing separately. TurboTax has a tool that makes this pretty easy. Here’s what we get when we plug in their incomes:

  • Filing jointly, Joe and Sally would owe $14,364 in federal taxes.
  • Filing separately, they would owe $15,493.

So they would save just over $1,100 in federal taxes by filing jointly. But how would their student loan payments be affected?

We can use a student loan repayment estimator like the one provided by the office of Federal Student Aid to find out. Here’s what we get when we plug in their numbers and choose the Income-Based Repayment option (IBR):

  • Filing jointly, Joe’s minimum required monthly student loan payment would be $165 and Sally’s would be $661, for a total of $826 per month.
  • Filing separately, Joe’s minimum required monthly student loan payment would be $0 and Sally’s would be $258.

Over the course of a year, Joe and Sally could save $6,816 on their student loan payments by filing separately. Even with the extra taxes they would have to pay, filing separately would save them $5,687 more than filing jointly.

How can you figure out what’s best for your situation?

Every situation is different, and while the simple example above comes out in favor of filing separately, you will need to run your own numbers to figure out what is right for you. Here are some steps that can help you figure it out:

  1. Make a list of your student loans – Write down how much you owe, the interest rate being charged, and the type of each student loan you have. You can find your federal student loans in the NSLDS database and your private student loans by pulling your free credit report.
  2. Estimate your student loan repayment options – Use a student loan repayment estimator like the one provided by the office of Federal Student Aid to estimate your required payments when filing separately vs. filing jointly.
  3. Estimate your federal taxes – Use a tool like TurboTax’s Taxcaster or TaxBrain’s Tax Estimator to estimate your federal tax bill when filing separately vs. filing jointly.
  4. Estimate your state taxes – If you have state income taxes, don’t forget to factor those into your total cost as well.
  5. Be aware of longer term consequences – One route might lead to lower payments today but more interest paid over time. Another route might lead to more of your student loans being forgiven, which could have its own tax implications down the line. Keep those long-term consequences in mind as you make a decision.
  6. Consider steps to lower your AGI – Your eligibility for income-driven student loan repayment plans is dependent on your Adjusted Gross Income (AGI), which is essentially your total income minus certain deductions. You can lower this number, and potentially lower both your tax bill and your required student loan payment, by doing things like contributing to a 401(k) or Health Savings Account.
  7. Keep your bigger financial plan in mind – Remember that these decisions are just part of your overall financial plan. Keep your eyes on your big long-term goals and make your decision based on what helps you reach those goals fastest.

Wondering what to do with your tax return? Savings might be the best place for your new windfall! 

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Balance Transfer , Pay Down My Debt

6 NO FEE 0% Balance Transfer Credit Card Offers – November 2014

Nick Clements Wednesday, November 12, 2014

There are a lot of 0% credit card deals in your mailbox and online, but most of them slap you with a 3 to 4% fee just to make a transfer, and that can seriously eat into your savings.

At MagnifyMoney we like to find deals no one else is showing, and we’ve searched hundreds of balance transfer credit card offers to find the banks and credit unions that ANYONE CAN JOIN nationwide which offer great 0% deals AND no transfer fees. We’ve hand-picked them here.

If one deal doesn’t give you a big enough credit line you can try another bank or credit union for the rest of your debt. With several no fee options it’s not hard to avoid transfer fees even if you have a large balance to deal with.

1. Chase Slate 0% for 15 months, NO FEE

151_card.151_card.Slate_From_ChaseThis deal is easy to find – Chase is one of the biggest banks and makes this deal well known. So it’s worth a shot to see how big of a credit line you get. If it’s not enough, move on to the other options below that are also no fee, but a little bit shorter in length.

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2. Alliant Credit Union 0% for 12 months, NO FEE

logo_alliantAlliant is an easy credit union to work with because you don’t have to be a member to apply and find out if you qualify for the 0% deal.

Just choose ‘not a member’ when you apply and if you are approved you’ll then be able to become a member of the credit union to finish opening your account.

Anyone can become a member of Alliant by making a $10 donation to Foster Care to Success.

If your credit isn’t great, you might not get a 0% rate, so make sure you double check the rate you receive before opening the account.

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3. First Tennessee Bank 0% for 12 months, NO FEE

275_card.275_card.Platinum_Premier_VisaIf you want to apply online for this deal, you’ll need to live in a state where First Tennessee has a branch though. Those states are: Tennessee, Florida, Georgia, Mississippi, North Carolina, and South Carolina.

You need to have an existing First Tennessee account to apply online, but if you don’t have one, you can print out an application and mail it into their office to get a decision. You’ll find a link to the paper application when the online form asks you whether you have an account or not.

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4. Patelco Credit Union 0% for 12 months, NO FEE

patelcoPatelco is a credit union primarily for people who live and work near the San Francisco Bay Area. If you don’t live or work in the area, you can join the Cal State East Bay Alumni Association for $35 at this link. You don’t need to be an alumni of the school to join. This isn’t the cheapest option, so only consider it if you have a big balance you’re trying to move over.

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5. Aspire Credit Union 0% for 6 months , NO FEE

AspireYou don’t have to be a member to apply and get a decision from Aspire. Once you do, Aspire is easy to join – just check that you want to join the American Consumer Council (free) while filling out your membership application online.

Make sure you apply for the regular ‘Platinum’ card, and not the ‘Platinum Rewards’ card, which doesn’t offer the introductory deal.

Go to site

6. ELFCU 0% for 6 months, NO FEE

To become a member and apply, you’ll just need to join TruDirection, a financial literacy organization. It costs just $5 and you can join as part of the application process.elfcu

Go to site

Are these the best deals for you?

If you can pay off your debt within the 0% period, then yes, a no fee 0% deal is your absolute best bet. And if you can’t, you can hope that other 0% deals will be around to switch again.

But if you’re unsure, you might want to consider…

  • A deal that has a longer period before the rate goes up. In that case, a balance transfer fee could be worth it to lock in a 0% rate for longer.
  • Or, a card with a rate a little above 0% that could lock you into a low rate even longer.

The good news is we can figure it out for you.

Our handy, free balance transfer tool lets you input how much debt you have, and how much of a monthly payment you can afford. It will run the numbers to show you which offers will save you the most for the longest period of time.

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The savings from just one balance transfer can be substantial.

Let’s say you have $5,000 in credit card debt, you’re paying 18% in interest, and can afford to pay $200 a month on it. Here’s what you can save with a 0% deal:

  • 18%: It will take 32 months to pay off, with $1,312 in interest paid.
  • 0% for 12 months: You’ll pay it off in 28 months, with just $502 in interest, saving you $810 in cash. That even assumes your rate goes back up to 18% after 12 months!

But your rate doesn’t have to go up after 12 months. If you pay everything on time and maintain good credit, there’s a great chance you’ll be able to shop around and find another bank willing to offer you 0% interest again, letting you pay it off even faster.

Before you do any balance transfer though, make sure you follow these 6 golden rules of balance transfer success:

  • Never use the card for spending. You are only ready to do a balance transfer once you’ve gotten your budget in order and are no longer spending more than you earn. This card should never be used for new purchases, as it’s possible you’ll get charged a higher rate on those purchases.
  • Have a plan for the end of the promotional period. Make sure you set a reminder on your phone calendar about a month or so before your promotional period ends so you can shop around for a low rate from another bank.
  • Don’t try to transfer debt between two cards of the same bank. It won’t work. Balance transfer deals are meant to ‘steal’ your balance from a competing bank, not lower your rate from the same bank. So if you have a Chase Freedom with a high rate, don’t apply for another Chase card like a Chase Slate and expect you can transfer the balance. Apply for one from another bank.
  • Get that transfer done within 60 days. Otherwise your promotional deal may expire unused.
  • Never use a card at an ATM. You should never use the card for spending, and getting cash is incredibly expensive. Just don’t do it with this or any credit card.
  • Always pay on time. If you pay more than 30 days late your credit will be hurt, your rate may go up, and you may find it harder to find good deals in the future. Only do balance transfers if you’re ready to pay at least the minimum due on time, every time.

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College Students and Recent Grads , Pay Down My Debt

3 Steps to Handle Being Mistreated by a Student Loan Servicer

Kelly Harry Tuesday, November 11, 2014

mortar board cash

A college diploma no longer promises a guaranteed path to success. A harsh reality that hits after the excitement of finally completing college dwindles down and the pressure to find a good paying job sets in. Deciding on whether or not you should embark on an extended vacation after four grueling years of study should be a no brainer, but the reality of student loan repayment quickly extinguishes any thoughts of lying on a beach.

Borrowers know that time is of the essence. The six-month grace period post-graduation is crucial in building a solid financial future. However, some borrowers aren’t able to find a job within that six-month time span, and if they do, their entry-level pay may barely cover living expenses. The last thing borrowers need in times of financial hardship is maltreatment by their student loan servicer. In fact, servicers are required by law to work with struggling borrowers, yet some do the complete opposite.

The alarming part of all this is that a majority of borrowers aren’t even aware of the fact that they’re being mistreated. In fact, in the midst of supervising for compliance with federal consumer financial laws, the Consumer Financial Protection Bureau (CFPB) found that one or more student loan servicers were:

  • Allocating payments to maximize late fees
  • Misrepresenting minimum payments
  • Charging illegal late fees
  • Failing to provide accurate tax information
  • Misleading consumers about bankruptcy protections
  • And abusing the ever-popular debt collection calls to consumers at illegal times.

If you believe that you’re a victim of mistreatment by your student loan servicer then you’ve already started the three-step process.

Step 1: Identify problems

You have successfully identified your issue and are ready to start the resolution process.

Step 2: Gather relevant evidence

Just saying that you have an issue isn’t enough; you need relevant proof to support your claims. Relevant evidence includes:

  • Promissory Notes that outline the any agreements made between you and your loan servicer
  • Bills
  • Canceled checks
  • Correspondence between you on your loan servicer via phone, email or snail mail

Step 3: Make Contact

Now that you’ve identified your problem and gathered relevant evidence to support your case, you can now contact your loan servicer. If you’re not sure who your loan servicer is, you can find out at http://www.nslds.ed.gov. Prior to making contact with your servicer keep the following tips in mind:

  • Take detailed notes of all conversations and be sure to follow up in writing so there is a physical record of what has been said and done.
  • Request a copy of your customer service history. Some loan servicers make available copies of the notes that customer service representatives make on their accounts.
  • When you speak with someone on the phone, take down the representative’s name, when the call took place, and what was said.
  • Save the originals of all receipts, bills, letters, and e-mails regarding your account. Be sure to provide copies of the originals if you are asked for them. Send letters via certified mail, with return receipt requested.
  • No matter how frustrating the situation, always be polite and courteous.
  • Request for a response at a reasonable times, and be sure to tell the customer service representative how you can be reached.

Problem not solved?

To be sure that you’ve done everything in your power to resolve your student loan problem take this self-resolution test.

For Federal Student loans: If after completing the self-resolution test you find that you are in need of further assistance, contact the Federal Student Aid Ombudsman Group to request a consultation. They will collect information about your case and offer assistance in identifying a suitable resolution.

For Private Student Loans: The Consumer Financial Protection Bureau recently started accepting student loan complaints. They will forward your issue to the company, provide you with a tracking number and keep you updated on the status of your complaint.

Need more help?

Although there is little recourse for private student loan issues, you can still get help with federal student loans through the Federal Student Aid’s Myeddebt.com. Through this portal, you can get information on how much you owe on your defaulted federal student loans, your payment history, and options for resolving your issues. You can also access forms to request a hearing, review, or discharge of your debt, as well as forms to submit a complaint.

Ignoring your own debt won’t make it go away, so do yourself a favor and seek help as soon as possible.

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Pay Down My Debt

How to Make a Payment to a Collection Agency Without Getting Ripped Off

Nick Clements Tuesday, November 4, 2014

Debt collections_lg

So, you have reached an agreement with a debt collection agency, and you are now ready to make a payment. Before you give them your account number or write a check, make sure you protect yourself. Once a debt collection agency has your account number, they can (and sometimes do) use that information to take more money from your account. But with the right precautions, you can protect yourself.

You may be asking yourself: is this legal? Can a collection agency really just take money from your account, even if you don’t give them permission? Unfortunately, the debt collection industry is a dark and murky place. Agencies regularly try to blur the lines of legality, and their sole objective is to get as much of your money as possible. Although there are a few exceptions, most collection agencies are incredibly small and scrappy. When the New York Times did a story on the industry, they referred to it as a dark and lucrative world. If you really want a glimpse of the world inhabited by debt collectors, listen to the PlanetMoney podcast entitled Spreadsheets, Ex-cons and a Karate Studio: Life at the Bottom of the Debt Business. The title alone should give you a sense of the people running these agencies. Just because something isn’t legal doesn’t mean they won’t do it.

How to avoid being ripped off

Here are the ways you should never make a payment:

  1. Do not sign up for an electronic payment, which requires you to disclose your routing number and account number. By doing that, you give the agency access to your checking account. If they take more money than you agreed to, it will become your word versus their word. And, if you owe the debt and have the money, it could be difficult to defend yourself.
  2. Do not write a personal check. Your routing number and account number are written at the bottom of your checks, and a devious collector could use that information to extract funds from your account.
  3. Do not pay with your debit card. Again, this makes it easy for the agency to process payments electronically.

So, what should you do?

  1. Consider opening an account that is used solely for making payments to the collection agency. You should ensure that it is an account that charges no overdraft or NSF fees – so if a debt collection agency tries to take money that is not there, you will not have any issues. Our favorite account is Bluebird, by American Express. There is no minimum balance requirement, no monthly fee, no overdraft fees and you have free access to bill pay and checks. You can easily add money at your local Wal-Mart. With Bluebird, you can make sure that you only put money onto the account that you are willing to give to an agency. Bluebird is not the only free account, and you can find more on our checking account page.
  2. You can purchase a money order or a certified check. These payment methods will not reveal your account information.

Regardless of how you pay, make sure:

  1. You keep a paper trail of your payments. It will ultimately become your word against the collection agency, and the only proof is paperwork. So, make sure you have a file and store all of your history in it.
  2. If you make a settlement agreement with your agency, you get it in writing. The last thing you want is for them to come back and ask for more money.
  3. If you run into difficulties, immediately complain to the CFPB. Don’t wait. The agency deals with collection agency issues every day, and they can help you receive a speedy resolution.

Now, we are not saying that all collection agencies are evil or have the intent to break the law. We are just saying that there is an elevated risk, and you can easily defend yourself. If something bad happens, it can be very painful. At worst, a dubious collection agency cleans out your checking account. You may win the money back in the end, but being without cash can be very difficult. Avoid the risks by planning ahead when you make a payment to a collection agency.

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Pay Down My Debt

In Debt and Pregnant. Now What?

Cat Alford Tuesday, October 28, 2014

Cat_pregnant_lg

I got pregnant when my husband and I were nearly $300,000 in debt.

Although it sounds crazy, I did it on purpose (both accumulating debt and getting pregnant that is.)

I wish I could say I had a super fancy Bentley parked in my driveway to have something to show for that high number, but really it’s all in our brains (which have lately been fried due to intense sleep deprivation.) To clarify, what I mean to say is all of our debt is student loan debt.

Sometimes people will say that education debt is “good debt,” and if that’s the case then we have really, really good debt. Our $300,000 student loan debt includes two master’s degrees – one for each of us – and three years of my husband’s medical school tuition. Unfortunately for us, we’ll probably be tacking on another $50,000 to it before he graduates from medical school in 2016, bringing the total number up to $350,000 and possibly even $400,000 since it’s actively accruing interest (fun right?)

Of course, my husband and I don’t actually believe that student loan debt is good debt. For most people, student loan debt cannot be discharged in bankruptcy (although according to U.S. News, in rare cases it actually can.) So, that means most people will have to pay back every penny of their student loans even if they encounter significant hardships. Basically, not only is our $300,000 of student loan debt burdensome, it’s downright scary.

Yet, being in debt didn’t stop me from actively trying to get pregnant, and it shouldn’t stop you if you have the three traits below.

1. Financial Discipline

Even if you have significant debt, I believe it’s fine to make big life choices like buying a house or having a child as long as you have financial discipline. You need to be the type of person who is acutely aware of their debt, not someone who is too scared to look at the number. If you can face your debt head on and have the ability to stick to a detailed financial plan, you can definitely make room for some of life’s biggest changes liking bringing adorable, stinky babies into the world.

Financially disciplined people track spending, create budgets, understand their cash flow, and do not live paycheck to paycheck. Their student loan payments are just another line on their budget that they carefully pay attention to and try to tackle each and every month.

For some people, like Kirsten at Indebted Mom, biology plays a factor into the decision to have children as well. Although Kirsten has significant student loan debt like I do, she was not willing to risk the possibility of not being able to have children due to her age. “It would have been nice to pay off debt first, but if we’d waited to pay off all our student loans, I probably wouldn’t have been able to have children,” says Kirsten. In order to tackle her high student debt, Kirsten remains employed as an aerospace engineer and makes extra money on the side through online writing jobs.

2. Extreme Hustle 

When my husband and I decided we wanted to start our family, we knew that we needed to create a large savings account for our baby. Between hospital costs, baby gear, and other necessities, we knew babies were expensive. Thinking of a worst case scenario where would have to reach our $4,000 out of pocket max for our health insurance policy, we decided to save $10,000, which would hopefully leave some money left over to start a college fund.

Of course, with my husband being a student, the only real way to create $10,000 out of thin air was for me to hustle. I was already bringing in extra money from online writing jobs, but I decided to double my efforts. I took on new clients, e-mailed people tirelessly asking if they had work, and spent many, many nights staying up until one or two o’clock in the morning doing extra work. Every time I got a PayPal deposit from one of my new clients, I moved it right over to my Smarty Pig high yield savings account for our future baby.

[You can see the latest high rate savings account deals here]

Of course, the joke was on us. I got pregnant just a few months later, and much to our surprise, we found out we were having twins. We used every penny of that $10,000 savings since both of our children spent time in the NICU. I was so glad I had that savings account; otherwise, we would probably be in credit card debt right now too.

Of course, if you are in debt, there is the obvious option to wait to have children or not have children at all. Many people, like Kali Hawlk of Common Sense Millennial, decided not to have children, saving them hundreds of thousands of dollars in child rearing expenses over the course of two decades. This is certainly something to consider if you are in significant debt and are not equipped with the income or the tools to successfully handle paying off your debt and raising children at the same time.

Kali explains that, “If you can’t take care of yourself financially, you aren’t prepared to adequately provide what a child deserves,” and I agree with her. Children don’t need every toy or baby gadget on the Earth to be happy, but they do need basic necessities like food and a roof over their heads, monthly bills that can come into jeopardy if you are unable to make regular payments on your debt.

3. Ability to Handle Adversity

As anyone will tell you when he or she is dealing with large amounts of debt, there’s no such thing as a nice, linear payoff schedule. Life happens, things come up, and often you have to make hard decisions about just how much debt you want to pay off each and every month.

For us, the biggest shock of course was finding out we were having two babies, not one. To me, at 26 years old, I felt like I could handle one baby. I felt like my income, the funds I saved, and my general life experience meant I could be a good mother to one baby. However, the day I found out there were two, I spent an hour sobbing in the shower that night. Simply put, I was terrified. I was scared of everything like losing one or both of them since the pregnancy automatically became high risk. I was also worried how I was going to afford both of them with my husband still in school, and of course, I had tons of vain thoughts about how my small frame was going to carry two kids as long as possible throughout the pregnancy.

But, like all the other times in my life when I handled unexpected events, I pulled myself together and continued to work on a plan. I knew that if I could just work a little bit harder, not only could I be self-employed but I could also cut out the significant childcare expenses that two children bring by staying home with them myself.

That, of course, is exactly what I did. My boy/girl twins are 7 months old now, and I have been self-employed for almost a year. It hasn’t been without its difficult moments, that’s for sure, but because of hard work, financial discipline, and planning, we’re still on track to pay down our debt and ensure our children have everything they need to grow up happily and healthily.

You Have Nine Months to Prepare

If you are in debt and pregnant, there’s nothing stopping you from using this time to get your finances organized and develop a plan. The best thing you can do is, of course, reduce your expenses and raise your income. Trust me, I know it’s challenging to ask for a raise or take on extra work when you’re hugely pregnant, exhausted, and have to pee all the time. I’ve been there. But, your children are worth it. Their safety and security is worth it.

Essentially, if I can do it, you can do it. Take the steps now to work on developing the three qualities I mentioned above: discipline, hustle, and handling adversity. Luckily for you, children bring immense joy and happiness, and you’ll find having them is the best decision you’ve ever made – with or without your debt.

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Pay Down My Debt

The Reality of Six-Figure Debt on an Actor’s Salary

Stefanie O'Connell Thursday, October 23, 2014

 

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By Stefanie O’Connell, TheBrokeAndBeautifulLife.com

Freddy Arsenault is a Broadway actor with six figures of student loan debt, thanks to the MFA acting program at NYU’s Tisch School of the Arts. Among actors, Arsenault is one of the “lucky ones”. According to Actors Equity Association, the professional theatre actors union, fewer than 15 percent of due paying members are able to secure work in any given week and only 17,000 of 40,000 members work in a given year. Of those jobs, only a select few carry the prestige and paycheck of a Broadway show.

Even with his success though, Arsenault doesn’t have the luxury of sitting back and “living the dream”. In fact, to keep up with the cost of New York City living and his student loan payments, Arsenault also works as a real estate agent. By continually supplementing his acting income, Arsenault has been able to contribute $800 a month to his $165,000 student loan bill since graduating in 2008. Thanks to interest, however, his monthly contributions haven’t even made a dent in the amount he owes, which still stands at $165,000.

Arsenault’s story is a powerful reality check for actors, artists, freelancers, and young people everywhere who suffer from the misconception that all of their financial woes will dissolve when they “make it”. Even the “dream job” can’t serve as a panacea for fiscal hardship or erase the need for a well-constructed financial plan.

What Happens When You Don’t Pay Up?

A 2014 poll by American Theatre Magazine revealed that 17 percent of artists are paying nothing towards their student loan bills each month- perhaps operating under the flawed assumption that the big career opportunity, should it ever arrive, will serve as the answer to their five or six figure debt. Unfortunately, this policy of postponement and willful ignorance can prove quite damaging.

If you become delinquent on your loan repayment for more than 90 days, your lender(s) will report your tardiness to the credit bureaus, nose-diving your credit score by as much as 100 points. Letting that delinquency fester will only result in further consequences- like default. At that point your loans are likely to be turned over to a collections agency and your entire balance will become due immediately. If you thought $800 monthly payments were rough, try coming up with 80 grand on the spot!

Taking Back Control

Rather than dealing with debt collectors and struggling to raise five or six figures overnight to repay your student loans like some kind of Mafioso, confront your bills head on by putting a realistic plan in place.

Start by calling each lender and negotiating. Asking for reduced interest rates or lower monthly payments is a far better strategy than letting the bills stack up in the corner and keeping fingers crossed for overnight stardom and millions.

The trouble many artists run into in the construction of a debt repayment plan is finding an amount to contribute towards their debt that will actually fit within their budget. The American Theatre Magazine poll found that 67 percent of the 500 artists surveyed made less than $25,000 (if anything) from theatrical endeavors in 2013. Without a livable or reliable source of income, it’s a struggle for these artists just to get through the month, let alone make a dent in six-figure debt.

For these individuals, the Income Based Repayment program might provide a sustainable solution. The IBR program limits monthly payments to 15 percent of disposable income and extends the repayment term to 20 or 25 years. To qualify for the program, individuals must prove “partial financial hardship”, i.e. evidence that minimum payments on federal loans are more than 15 percent of their income each month- not a problem for most artists. After 20 to 25 years of making payments using the IBR program, any remaining debt is forgiven (though taxes must be paid on that amount).

Unfortunately, the IBR plan is only available for Federal loans and the extended pay back period means paying a lot more in interest over the life of the loan. Artists using IBR payments are likely to find that their contributions barely cover the interest each month and don’t even touch the principal. In other words, despite their payback efforts, the total amount owed will continue to increase each month.

Diversifying Income Streams

As an alternative, artists and other low wage earners might want to consider implementing Arsenault’s approach- diversifying income streams to make more money.

That doesn’t just mean “survival jobbing” as a waiter to get to the next paycheck. It means establishing a substantial and reliable stream of additional income to cover basic living expenses, make significant contributions to debt payoff, and save for future financial goals.

Of 7,093 theatre graduates surveyed by the Strategic National Arts Alumni Project between 2011 and 2013, 10 percent said they left the field because of debt and 26.9 percent left because of higher pay in other fields.

Committing to earning enough money to fund expenses, debt pay off, and savings breaks artists free of the short-term, stress inducing cycle of living paycheck to paycheck and gives them long-term financial sustainability- making “burnout” significantly less likely.

People go into the arts to do what they love, but the strain of student loan debt addressed with short-term, band-aid strategies can quickly turn that joy into depression and resentment. Tackling debt head on with a viable long-term strategy is not only empowering financially, but also freeing artistically in that it allows for the continued pursuit of passion.

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Pay Down My Debt

3 Ridiculously Simple Methods to Pay Off Debt

LaTisha Styles Tuesday, October 21, 2014

sick credit

By LaTisha Styles, YoungFinances.com

This year I finally paid off over $22,000 of credit card debt. It took a lot of discipline and sacrifice; more than I thought I had when I started my pay off debt journey. Whenever I see stories of debt payoff, I always wonder, “How did you accumulate that much debt?” You might be thinking the same. Here’s my story.

When I reached the age of 18, I headed off to college, like most high school graduates. It was the first time in a few years that I did not have a job. I started working at the age of 15, at McDonalds, then later at a local grocery store. However, when I went to college, I was under the impression that I could survive on my scholarships and the money my parents promised to send me each month.

I quickly learned that I wanted more. I wanted to be able to go out with my friends, spend money on clothing, and eat more than the three square meals that were offered at my college. As I was thinking about all of the ways I could make more money, I walked by a display table on campus with a stack of free t-shirts. I slowed, listening for the catch, and a representative quickly accosted me. She offered me a free t-shirt if I completed the credit card registration form. I had never owned a credit card before but I thought, “What do I have to lose?” So I signed up and took my free t-shirt.

A few weeks later, I received a credit card in the mail with a $750 limit. Woo hoo! I was shocked. I knew I would need a job to pay the bill so I walked to a local day care and applied for a job. With my experience, I was quickly employed part time as an after hours daycare attendant.

Each weekday I would go to classes and then to work, and each weekend I would go to the mall. At first I paid each bill in full. It was fun to feel like an adult, managing my own money properly. But after a few months, my shopping got out of hand and I started paying the minimum payment. Fast forward a few years, I had multiple credit cards, all close to the limit, and I was still only paying the minimum payment.

After an ugly phone call with a particularly aggressive creditor left me in tears, I decided to get out of debt and pay everything off. In the meantime, the economy began a downward spiral. I no longer had an income and I was having a hard time just making the minimum payments. I decided to turn to a credit counseling service that helped me set a three-year plan to pay off all of my debt.

While I used a credit counseling service, there may be another way for you to get out of debt. Here are three methods that you can use if you want to pay off your debt:

1) Go with a Credit Counseling Service

I was deep in debt and my credit score was shot after missing consecutive payments. The credit counseling service contacted my creditors, negotiated interest rates, and managed my monthly payments. For this, I paid them a small monthly fee. They negotiated the interest rate to zero percent on the majority of my cards. They also negotiated fee concessions and served as my contact for those creditors. I used a non-profit credit counseling service that was recommended to me by a friend. They had offices in my city and I was able to sit down with a counselor. However, it is important to research the firm before you begin to do business with them. A worthy credit counseling service will be transparent with you. Expect statements from them and monitor statements from your creditors. If you are looking for a reputable credit counseling service, check the reviews at the Better Business Bureau to determine the credibility of the business.

2) Use a Balance Transfer Card

If you have a strong credit score (typically 700 or higher) then why not try a balance transfer?

You can use MagnifyMoney’s balance transfer comparison tool to find the offers that suit you best. Look for upfront balance transfer fees and the details on monthly minimum payments.

Make sure to understand the difference between a 0% promotional offer, like the Chase Slate for 15 months and the PenFed Promise Visa for 48 months at 4.99% with no fee While Chase may seem like a better offer initially, it will likely require you to roll over your debt to another promotional offer at the end of 15 months, unless you can pay it all off before the end of month 15.

Sometimes, a creditor will approve and open a new card for you but only give you a small credit line; enough to cover a portion of your requested balance transfer.

If this happens, you can look to do multiple balance transfers. However, if you use this method, be sure you are determined to pay off your debt. There is no reason to have new cards if you continue to spend beyond your means. And don’t spend on the card you used to complete the balance transfer! In fact, go ahead and lock it away as soon as you complete the transfer so you aren’t even tempted.

Say you have $10,000 of debt with Discover at a 21% interest rate. You apply for the Chase Slate 0% balance transfer offer for 15 months with no fee. Chase approves you, but only for $4,000. You can first call Chase and request a higher line of credit to move the entire balance over. Chase may agree to only raise it by another $2,000 leaving you with $4,000 left at Discover.

Next, you can apply for another balance transfer offer like Santander Sphere Visa at 0% for 24 months with a 4% fee to move the entire debt to a zero percent or low interest rate promotional offer.

Remember to mark your calendar for the month before your promotional period ends. If you haven’t paid down your debt, then shop around for other balance transfer offers to keep the interest rates low and help you save time and money on your debt repayment.

Confused about how to actually complete the balance transfer process? Then read this step-by-step guide.

3) Borrow the Balance from a Peer

Peer-to-Peer lending is an additional way to raise money to pay off your debt. If you have a good to excellent credit score, you can apply and crowdsource your funds. You may have many different lenders willing to lend at different interest rates. But if your current interest rate is higher on your credit cards, and you can get a lower interest rate via a peer-to-peer lending platform like Lending Club or Prosper, then this choice may work for you. The payback terms are typically three years, but each loan is different and will depend on the individual lender. Rates are determined by the proprietary system developed by the lending platform and will vary.

You can compare different personal loan offers here.

Paying down debt is a journey but it doesn’t need to leave you feeling completely hopeless. Reach out for help and figure out the best way to get yourself back to being financially healthy.

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Pay Down My Debt

When to Cut Off Your Boomerang Kid

Erin Lowry Tuesday, October 21, 2014

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Ah, the Bank of Mom and Dad. An institution that usually requires no formal application, charges little to no interest and doesn’t care about your credit history. Unfortunately, giving out zero percent interest loans to children leaves far too many parents in a financial bind.

During a recent financial empowerment seminar, a woman in the audience asked our team if she should borrow from her IRA to help out her adult kids.

To side step a delicate question, I asked when she planned on retiring instead of her age.

“Maybe five years,” she responded.

“Then I wouldn’t recommend stealing from your retirement fund to support your kids,” I told her. “Just remind them, if you don’t have the money to support yourself in retirement, they’ll need to be supporting you.”

It may sound controversial, because parents want to help their children through all stages of life. Unfortunately, the support needs to move from financial to emotional for many American families.

As a team, we often encounter parents asking how they can support their adult children while saving, paying down debt and prepping for retirement.

For many families, they simply can’t do it all. In fact, they need to evaluate when to cut their kids off.

Communicate

A child returning home after college, or not leaving at 18, is an incredibly common phenomenon. But that doesn’t mean it should occur without a discussion. Parents allowing a child back in the home need to sit down and have a serious conversation with each other and then their offspring.

“Communication has to be clear as to what financial support will be provided and for how long,” explains Shannon Ryan, CFP, author and founder of The Heavy Purse.

“In most cases I have seen, parents have allowed the children to become dependent.  When the parents become frustrated with the situation they loose site of the role they played to create this predicament.  It is more painful to sit down and make a plan at this point but that is what needs to be done” says Ryan.

Charge rent

Charging rent not only helps parents cover the increased cost of a boomerang kid, but it teaches little Johnny or Susie how to budget. Knowing rent will be due can also motivate a kid to get a job.

If parents don’t actually need the extra cash to help the family make it through the month, then charging rent can be a parental 401(k). Once it’s time for Johnny or Susie to move out, mom and dad can hand over all the rent as a nice little nest egg to get independent life started.

Rent too harsh? Insistent on some contributions

Once children are capable of getting their own full-time jobs, it’s time for them to begin breaking away from the nest. Parents looking to provide support may offer to allow a child to live at home rent free, but ask the child to only cover the extra groceries and increase cost in utilities bills.

If a child is struggling to find employment, insist he or she help with chores around the house, cook meals and contribute to the home running smoothly.

Try to help a child understand finding a job should be his or her full-time job. Days should be spent filling out applications and going on interviews, not binge watching TV and playing video games. A bachelor’s degree doesn’t mean you’re above working at Starbucks, Target or the local bookshop.

Don’t rob your retirement fund

Men and women nearing retirement shouldn’t feel obligated to rob their savings for the future in order to help an adult child get through a rough patch today.

“Cutting your children financially off can be an incredibly tricky situation and one I believe that should be generally handled on a case by case basis. With that being said, there comes a point where parents need to make sure not to hinder their own retirement plans to help their children,” says John Schmoll Jr, founder of FrugalRules.com.

“That may seem harsh, but will only shortchange you in the end and likely not be the best long-term solution for your children. Instead, look for other ways you can help out your children that won’t require huge financial outlay on your part,” explains Schmoll.

Parents must remember children can take out student loans for college and personal loans or low APR credit cards for emergencies. They have the luxury of time to pay down debt. There are no loans for retirement.

Use their time at home as a financial bootcamp

Instead of just bailing your children out, consider their time at home an opportunity to provide teachable moments about how to handle their finances.

Take the time to assess your child’s situation

Of course there are always exceptions to the rules.

“In the rare case of disability or loss of job when the child is doing everything they can, I would support the parents stepping in if it does not cost them their retirement,” says Ryan. “If the parents are not in a financial place to help then maybe they can help their children find the resources or social programs that could.”

Sometimes, kids need a little bit longer to grow into their adult selves.

Holly Johnson, founder of Club Thrifty, reflects on her own journey to maturity.

“I actually moved out when I was 18 but moved back in from 19 to 22ish,” shares Johnson.  “My parents took me in during that especially hard time in my life and I’m eternally grateful.”

Johnson recalls how she took sometime to grow into her own, but her parents provided a road map by serving as strong role models and continuing to show her love and support.

“I hope to show my kids the same kind of patience if they are slow to grow up once they reach adulthood,” says Johnson.  “Because of my parent’s generosity, I am able to support them now when they need it.”

And sometimes an adult child needs to come after hitting a rough patch. Perhaps it’s job loss, divorce, or another monumental life circumstance, which forces a child in his or her 30s, 40s or 50s to return home. Just remember to have a conversation about expectations before a child of any age sets up camp at home for months or years.

There is no one size fits all advice

Each family needs to assess their own situation both financial and emotional. Parents, just try to find a way to help your child without permanently damaging your ability to retire. The solution may include going to a financial planner to help you navigate through impending financial issues.

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Pay Down My Debt

Avoid Debt by Not Having Children

Kali Hawlk Monday, October 20, 2014

Kali_lg

By Kali Hawlk, CommonSenseMillennial.com

Every time someone asks, “so when are you having kids?” I have two reactions. First, I cringe. Second, I feel grateful that I’m a woman living in 2014 where having children feels more like an actual choice than it ever has before.

I’m one of those millennial women who has zero interest in adding children to my family. My husband and I are happy, fulfilled, and satisfied with life in a household that consists of the two of us and some four-legged family members. We don’t feel like anything is missing. Our family is perfect to us.

The Choice to Not Have Children

To those with children, or to those who one day want them, my general response to kids (“no thank you”) often comes across as hostile or aggressive toward their way of life. That’s not my intention in declining to participate, and I feel like this is important to try to explain.

Having children is simply not an experience that appeals to me in any capacity. There has never been a time in my life when I’ve thought, “maybe I’ll give that a try someday.” A mother is not a state of being I’ve ever identified with. That doesn’t mean I spend time questioning the choices of those who do identify with motherhood and are happy to acquire the title of parent.

Far from feeling negatively about children, I just don’t feel anything at all. I don’t spend time thinking about the issue one way or the other (until someone presses me about it and then makes assumptions about me, my relationship, and my quality of life based on my answers). And I don’t hate kids. I like or dislike children on the same basis I like or dislike adults: their individual personalities.

The only thing I hate is that to have or not have kids is even a debate. You either want them or you don’t, and the only opinion you should get worked up about is your own. Having children is an intensely personal decision, and it is not a choice that should be judged by others either way.

Now that we’ve clarified that I’m not some sort of kid-hating jerk who thinks everyone with kids is somehow wrong, let’s move on to the more controversial points of the post.

The Financial Issues with Having Children

Because I feel completely unemotional about the idea of having children, the only issue that captures my attention is the practical matters involved. However you may feel about kids and having them for yourself, no one can deny the financial facts: kids don’t come cheap.

The US Department of Agriculture recently released research that indicated raising a child to the age of 18 would cost the average American middle class family $245,000. That’s a quarter of a million dollars just to get a child to the legal start of adulthood; the figure doesn’t even touch higher education costs. And that’s the average, meaning many families are paying far more.

When I ran my own information to calculate the average cost of my family having kids, I nearly fell out of my chair. This calculator from Baby Center says I’ll spend a whopping $319,422 to raise a kid to the age of 18 and pay for that kid’s public college education.

This number is particularly painful to me as it is far, far more than the total gross income I’ve made since I graduated college at 21 and entered the full-time workforce. (I’m approaching my 25th birthday now, and if you feel that’s young for having kids, keep in mind I live in the South and know many people younger than I am with multiple children.)

Combine this financial responsibility with all of the other financial goals Gen Y is working towards, and something becomes immediately, painfully obvious: if you want to avoid debt and save more, skip the kids.

The Cost of Children Makes It Difficult for Average Families to Achieve Financial Success

The average American household’s median income is about $51,000 per year, pre-tax. Even assuming that was post tax, the average yearly cost of raising a child, about $13,000, takes up a quarter of annual income.

That doesn’t leave much room for achieving a number of financial goals that you must hit in order to achieve financial security and independence. It’s difficult to gather up enough money for a down payment on a home, build an emergency fund with three to six months’ worth of expenses at a minimum, contribute a little something to your retirement down the road — all after accounting for the cost of kids.

Note that I said difficult, and not impossible. Many families do manage it — but many more simply can’t because of the financial burden associated with children. It may be enough of a struggle to make it from paycheck to paycheck, let alone add cash to different savings buckets and investments for the future.

[Be sure your savings account is earning more than 0.01% in interest. Compare rates here.]

Without the financial drain of children, my husband and I were able to purchase a home, build up an emergency fund, create a separate savings fund for international travel (what we personally prioritize and find necessary for a fulfilling life), and invest nearly half of our income so we can achieve our financial goal of retiring early to pursue our passions full-time. Adding kids to the mix would have made our version of financial success impossible.

We were able to do all of the above on a comfortable yet firmly lower-middle-class income; we’re above the average of $51,000 but below six figures. We would have not only struggled to get on track for our financial goals, but would’ve flat-out struggled financially.

Just adding one kid-related expense would start straining the cash we have available in our current budget for discretionary spending (which does not include cash available for bills and savings). Daycare for one child in our area is more than the mortgage payment on our home. Adding more costs would mean slashing the amount we could put into savings, and the total cost of kids per month and year would drive us awfully close to not being able to save or invest anything at all.

Should just one thing go wrong, our previously debt-free lives would be completely disrupted. Without money going to savings to handle financial emergencies, we’d be pushed into debt and hard pressed to find a way to dig ourselves out.

Financial Losses Are More Than Just Expenses

Adding children to the mix in my personal situation would also hinder my ability to earn an income and financially contribute to my family. Although I know women who do an amazing job of working stressful jobs from home while caring for multiple children — and am endlessly impressed by their ability to do so — I wouldn’t be able to do the same.

My business is extremely important to me, and I value the freedom and energy I currently have to devote to growing and expanding it. I couldn’t even get passed a pregnancy without losing income: as someone who’s self-employed, I don’t receive employer benefits to cover a stretch of leave. If I don’t work, I don’t get paid.

Many other women are in the same camp as I am, and either unable or unwilling to give up their ability to earn money. Complicating the situation is the fact that the United States is one of the worst countries in the world for providing paid family leave. In fact, we rank right at the bottom of the list with countries like Liberia, Suriname, and Papua New Guinea.

Many companies aren’t obligated to provide paid maternity leave (much less paternity leave), which leaves many working women no choice but to go without an income in the weeks they must spend recovering and caring for a newborn.

Moms are still at an earning disadvantage even after those initial weeks and months. As Erin Lowry explains in a piece for AOL’s Daily Finance, “on the financial side, non-moms have the advantage” because they’re more likely to earn more than women with children. There shouldn’t be a debate around whether that’s fair; it’s obviously not. But it’s another financial strike against choosing to have children, especially when women already struggle to secure equal pay for equal work.

So in counting the financial downsides to children, we must consider not only the expenses but also the opportunity costs to women who value their ability to work and earn income.

Avoid Debt by Not Having Children

I have plenty of personal reasons for not being interested in having children. My husband and I are on the same page, and our goals and our plans just don’t account for kids.

I’m glad this is not a financial issue I need to account for. Without children, we’re financially successful and ahead of most of our peers. We’re on track to achieve all our biggest financial goals — and many of them, like financial independence, in less than 10 years.

Add kids to the mix, and things start going financially bad awfully quick. We’d go from saving and investing the majority of our income to living paycheck to paycheck hoping we never experience an unexpected financial need at best and struggling with growing piles of debt at worst.

Dealing with debt? Consider a personal loan or a balance transfer to slash interest rates.

The ugly financial picture isn’t the only reason we don’t want kids and won’t have them. But it’s a reality that other millennials need to think about and plan carefully for if they do want children. There’s never a “right” time for kids and I’ve been told by grouchy parents that advising others make sure the financial stars are in alignment before reproducing is not realistic.

But, if kids are a part of the long-term plan for you, I still believe it’s worth your time and effort to give the financial issues some thought. If you can’t take care of yourself financially, you aren’t prepared to adequately provide what a child deserves. Ensure you can meet your own basic needs first, then have an emergency fund and at least a little bit invested in retirement accounts for your future before taking on the financial responsibilities associated with having kids.

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Pay Down My Debt

5 Steps to Prepare for a Child While in Debt

Matt Becker Thursday, October 9, 2014

Young couple calculating their domestic bills

By Matt Becker, MomAndDadMoney.com

Money was the thing I worried about most before our first son was born, and my work as a financial planner with other parents tells me that I’m not alone. There are a lot of new financial responsibilities that come with starting a family and it can be hard to figure out what needs to be done, how much it will cost, and how to prioritize it all.

If you have debt, all of those questions can be even scarier. Debt can feel suffocating, and many of the parents I work with want to get rid of it as fast as possible.

But while getting to debt-free is a fantastic and admirable goal, I usually encourage new parents to pump the brakes a little bit.

Before you go into full-on debt attack mode, there are a few steps you can take that will not only make it easier to pay off your debt, but will give your family more financial security in the meantime.

Step 1: Find some big wins

Freeing up room in your budget is almost always the first step towards reaching any of your financial goals. Whether you want to pay off debt or save for the future, you’re going to need some free cash in order to make it happen.

The quickest way to do this is to focus on what I like to call “big wins”. A big win is simply a one-time effort that reduces or eliminates a regular bill, saving you money month-after-month without requiring any ongoing effort.

Here are some examples of big wins:

  •  Negotiating your cable bill. Or maybe even cutting it completely.
  •  Finding a lower-cost cell phone plan (check out companies like Republic Wireless and Ting).
  •  Finding a bank that doesn’t charge you ridiculous fees, and maybe even pays a little  interest, such as Internet-only banks Bank of Internet or GE Capital.
  •  If you really want to go big, you could downsize your home or trade in your car for a less  expensive model. Those are the kinds of decisions that could save you hundreds of  thousands of dollars over your lifetime.

With just a few one-time efforts, you could find yourself with a couple hundred dollars extra per month. Then it’s time to put that money to work.

Step 2: Build a cushion

No matter what kind of debt you have and what the interest rates are, it can be a good idea to put at least a small amount of money into a savings account before going into full-on debt attack mode.

The reasoning is pretty simple: having a baby is going to change your life in a lot of ways, and the reality is that it will take you some time to adjust. In the meantime, there are going to be expenses you didn’t plan for and having a little bit of savings will allow you to handle them with cash instead of putting them on a credit card.

That simple habit of handling the unexpected with cash instead of debt is possibly the biggest key to not only getting out of debt, but staying out of debt. And it’s a big mindset change, so the sooner you can start, the better.

The easiest way to build your savings cushion is to take some of the money you’ve saved with your big wins and set up an automatic transfer that sends it from your checking account to a savings account on the same day every month. With that consistent progress, it won’t be long before you have $500 to 1,000 dollars saved up, which should be enough to handle most unexpected expenses that come your way.

Step 3: Protect yourself

One of the best things you can do for your growing family is ensure that they will have the financial resources they need no matter what happens to you. Generally this means getting two things in place: insurance and wills.

I have to admit, I love insurance. No, it’s not the most exciting topic in the world. But when it’s done right it’s the best way I know to protect my family financially from some of life’s worst-case scenarios.

Here are the big types of insurance to consider as you start your family: Health

  •  Life
  •  Disability
  •  Liability

Writing wills is one of the most morbid topics in all of personal finance, but for new parents it’s also one of the most important. More than anything else, a will allows you to name guardians for your children, ensuring that they will be in good hands no matter what.

Step 4: Test drive 

This is a tip I give to all expectant parents, whether they have debt or not, mostly because it can help make sure that having a baby doesn’t send you into even more debt.

A few months before the baby gets here, estimate how much the baby will cost you on a monthly basis (babycenter has a good tool for this) and start putting that amount into a savings account. This will do two big things for you:

It will let you practice living on your baby budget before you actually have to do it.

It will help you build up that savings cushion we talked about in Step 2.

The combination of practice and savings cushion will make the whole adjustment easier, less stressful, and less likely to lead to more debt.

Step 5: Attack that debt!

Finally! After all of that we’re finally ready to start attacking that debt!

With those other pieces in place, you can send extra money towards your debt without the prospect of one financial mishap messing up your progress. You have a little cushion, you have the worst-case scenarios handled, and you have some practice living on a tighter budget. Now you can crush that debt with confidence!

There are two schools of thought when it comes to which debts to pay off first.

One is called the “debt snowball” and encourages you to pay your debts in order of balance, with the lower balance debts being paid first. Proponents of this method say that the motivation of quickly paying off individual debts makes it more likely that you will keep going.

The other is called the “debt avalanche” and encourages you to pay your debts in order of interest rate, with the highest interest rates being paid first. This is the approach that will save you the most money, as long as you stick with it.

No matter which approach you take, make it automatic just like you did with your savings cushion. Putting those extra payments on auto-pay will make sure that you’re attacking that debt consistently month-after-month and getting to debt-free as fast as possible.

Did you have debt when you were starting your family? What did you do to make it easier?

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Pay Down My Debt

4 Biggest Debt Temptations and How to Avoid Them

Kali Hawlk Wednesday, October 8, 2014

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By Kali Hawlk, CommonSenseMillennial.com

Trendy outfits. Stylish furniture. Fancy vacations. Latest and greatest tech tools and gadgets. New cars. Bigger homes. This list of things people want and can’t get enough of could go on and on — because the temptation to spend money we don’t have is everywhere in our consumer-driven society.

We’re tempted to buy ourselves a little happiness with a new shirt, a fun piece of decor for our living space, or a snazzy smartphone case (that we somehow see as better than the other three we own but don’t use).

We treat ourselves with expensive coffee drinks, over-complicated cocktails, and meals that someone else prepared. We work hard, so we deserve it.

We want to keep up with the Joneses, or at least our peers. We don’t like feeling left out and owning less can often feel like amounting to less.

The temptation to spend isn’t difficult to explain, but that doesn’t mean it’s justified or no big deal. Here’s the problem: spending temptations, when left unchecked, lead straight to debt temptations.

When a Little Extra Spending Turns into a Whole Lot of Debt

Will a $4 latte that you buy on occasion after a rough day at work put you in the poorhouse? Unlikely. The problem occurs when you consistently make the mistake of spending just a little too much money — a little too much more than you actually have in your checking account to cover. “A little extra spending” quickly evolves into a financial mess when you charge purchases to your credit card and don’t pay that balance off in full.

“Not paying attention to where your money is going is what leads people into debt,” explains Sam Farrington, founder of SoundMind Financial Planning and member of XY Planning Network. Failing to track your spending or keep a budget leaves you more susceptible to overspending and living above your means.

As the old adage goes, you can’t manage what you don’t measure. Measure your money so you know you’re living in your means and not spending more money than you actually have.

The Number One Debt Temptation

You’d think that saying “don’t spend more money that you have” would be one of the most intuitive personal finance fundamentals out there. But many people find this exceedingly difficult, thanks to the top debt temptation: credit.

Lines of credit — usually associated with credit cards when we talk about debt — enable you to literally spend more money that you have access to via cash (in something like a checking or savings account). “The reality is that the credit card temptation will become your biggest financial snare down the road once the balance becomes unmanageable,” says R. Joseph Ritter, Jr. CFP® of Zacchaeus Financial Counseling, Inc.

It’s incredibly easy to open a credit card account, charge a purchase on the card, and forget about it until about four months later when your balance is steadily accruing interest. And just like that, you’re in debt.

Debt Temptation Intensifies When Credit Card Companies Sweeten the Deal

Credit cards may serve as an even bigger temptation when they’re rewards credit cards. Users may feel like they’re getting an amazing deal by opening up credit cards to get discounts, free items, statement credits, and points for fun and exciting experiences like travel.

According to Dennis M. Breier, president at Fairwater Wealth Management, “one of the biggest debt temptations, especially for young professionals, is putting vacations or large purchases on credit cards in order to get the points.”

While things like travel hacking — which involves taking advantage of credit card signup bonuses to earn massive amounts of reward points to score free airfare and hotel stays — can be beneficial, the temptation to go beyond your normal, everyday spending chasing after those points can be too much for some.

That’s where savvy consumerism abruptly ends and financial trouble begins. It’s tempting to open — and use — more credit cards than you need. It’s justified because you got a free airline ticket, right? Not when you had to spend $3,000 you didn’t have to score a flight that retailed for $300.

“Many young people will book a trip or buy something expensive with their card to get rewards points because it sounds smart. However, they won’t immediately pay this debt back,” says Breier. The temptation to use the card to feel “rewarded” is strong, and it can quickly leave you with a mass of credit card debt if you don’t have a plan to manage and pay your balances in full and on time each month.

Debt Temptations Go Beyond Plastic

Credit cards aren’t the only kind debt temptation out there — although they may be the easiest to give in to. Other types of credit, like auto loans, lure many into financial situations they can’t afford to get out of.

“Two of the biggest temptations include relying on credit cards and buying a car,” says Ritter. “Although the monthly payment makes a new car seem affordable and the new car smell is tempting, in the long run you will spend a lot less money on cars by buying a car that is several years old.”

Mark and Lauren Greutman, money management experts at MarkandLauraG.com, agree and also suggest buying used. “New cars depreciate by 20 percent right after driving off the lot,” they explain. “If you want a new looking car, I suggest buying a two year old car that was previously leased. You will get that new car feeling, but without that hefty depreciation.”

Avoiding Debt Temptation by Using Credit Cards the Right Way

Buying a used car instead of a brand new one is a simple and easy fix when it comes to avoiding debt temptation in our vehicles. Figuring out how to use and manage credit cards properly, however, is a bigger challenge for many.

Michelle Black, author and credit expert at HOPE4USA.com, believes that improper attitudes towards credit card usage serve as the biggest trigger to overwhelming debt. She suggests that, even though you may have a larger line of credit than you do cash balance in the bank, you need to think of your credit in the same way you would cash.

“Credit cards should be treated just like your bank account: if you don’t have the money to pay off the bill right that moment then you should not use your credit card to make the purchase,” explains Black. “Resolve to never revolve a credit card balance from month to month,” she advises consumers. “Your wallet and your credit scores will thank you.”

Black also wisely points out that just because credit cards can lead us into debt temptation, we shouldn’t label all credit cards as “bad.”

“The cash and carry crowd will lead you to believe that the only way to achieve true freedom from debt is to avoid credit cards all together,” she says. “However, that is not only bad advice it is also insulting. If you develop true financial discipline then it is no harder to avoid overspending on a credit card than it is to avoid overspending the funds in your bank account.”

This is where financial education and literacy become critical. Credit cards — and other financial products that allow us to borrow money for a period of time — can be useful tools when we understand how they work and how to use them to our advantage.

It’s important that we can identify our debt temptations. But it’s just as important to realize that we’re not fated to give in to them. With the right knowledge and information, we can make empowered financial decisions to avoid temptation while making the most of powerful financial tools available to us.

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Pay Down My Debt

How to Win the Debt Repayment Game

Erin Lowry Wednesday, May 21, 2014

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Debt: one of the most vulgar of four letter words. Okay, maybe your parents wouldn’t wash your mouth out with soap for uttering it, but here at MagnifyMoney it’s a word we hope is prefaced with “I used to have” or “I don’t have any.”

Except this isn’t the case for nearly half of Americans.

According to our recent survey, 42.4% of Americans carry credit card debt with the average amount being a startling $10,902. This equates to average payments of $408 per month towards credit card debt.

You’d think with those steep monthly payments, the debt would be paid off in about two years. Unfortunately, that isn’t how debt repayments work. Monthly payments end up being primarily put towards interest with just a tiny amount of the principle debt being chipped away. 75.7% of those surveyed were paying higher than 15% interest rates on their debt meaning it could take years to decades of making minimum payments for them to crawl out of the red.

Fortunately, there are ways to leverage your existing credit card debt to your advantage.

That’s right. You can use debt to make the banks fight over you. Just think about it as being on any reality TV show where contestants compete for love. Except you aren’t elbowing other indebted individuals in the face, the banks are brawling for you to give them a rose.

In financial terms, it’s called a balance transfer.

With a balance transfer, you move your debt from Bank A to get an offer from Bank B. Bank B might give you a 0% interest rate for 18 months, which means all your payments are paying down the principle debt you owe. This can not only take years off your repayment strategy, but save you hundreds to thousands of dollars.

Why does Bank B want your debt? Because they’re counting on you tripping up and falling into one of their traps, so you’ll end up paying interest. If you follow our rules and stay strategic, then you can beat them at their own game.

There is one caveat: you need excellent credit. If you have a credit score of 750 or above, then you can use our Balance Transfer tool to see which option is best fit for your debt. Remember: you can’t transfer debt from one card to another with the same financial institution. If your original debt is with Chase, then you’ll need to find another option for your balance transfer.

What if you don’t have excellent credit?

Balance transfers are often exclusively reserved for people with credit scores in the 700s. If you haven’t quite reached that level of financial health, you can still utilize a personal loan to borrow money or help refinance existing debt.

Personal loans have far less traps and temptations than borrowing on a credit card. They also provide fixed interest rates, which means you don’t have to worry about your interest rate suddenly getting hiked up like you do with a credit card.

You can go through the process of seeing if a personal loan is the right fit for you without a hard inquiry on your credit score (hard inquiries make your score drop a few points).

Explore your personal loan options here.

Dealing with a credit score below 600?

You can try applying for a personal loan with One Main if your score is at least 550, but you should focus on taking steps for increasing your credit score.

Never fear, we’ve laid out six simple steps for building credit here.

What happens after debt repayment?

Once you fight your way into the black, it’s important that you assess the behaviors that put you in the red to begin with. Sometimes extenuating circumstances, such as medical emergencies, suddenly flip our lives upside down. Other times, an innate need to keep up with the Jonses can push us to live outside of our means. Identifying your road to debt and learning how to stay out of the red can be just as important as the process of paying it down.

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