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Are Scholarships Taxable? Here’s Everything You Need to Know

Editorial Note: The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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The cost of higher education can be astronomical for many students, and while there are many ways to pay for college, scholarships and grants are two of the best ways to make it more affordable. If you are awarded a scholarship, whether it’s merit-based or need-based, congratulations! However, the next thing to consider after receiving a grant is your tax liability on the money — not as much fun but nonetheless important.

Some scholarships and fellowships are tax-free, but some are subject to income taxes. We’ll walk you through the ins and outs of scholarship taxation and how to pay taxes on grants that are taxable.

When scholarships are not taxable

There are fellowship or scholarship grants that are tax-free, according to the IRS, and you don’t need to report them as a source of income, when you meet both of the conditions below:

  • You are studying toward a degree at a higher education institution.
  • All the funds you receive are used for qualified education expenses: You either use the money to pay tuition and fees required for enrollment or attendance at the college or university, or cover course-related expenses, such as textbooks, supplies and equipment.

For example, if you receive a $10,000 scholarship and pay it toward the $20,000 tuition, then you won’t owe taxes on the money. However, if your scholarship is $30,000 and you use $20,000 for tuition and cover your rent with $10,000, that $10,000 is taxable income.

Some other types of grants, such as Fulbright grants and need-based grants like a Pell Grant, are also treated as scholarship funds for purposes of determining their tax treatment: They are tax-free if grantees use them to cover qualified education expenses during the time when a grant is awarded.

April Walker, lead manager for Tax Practice and Ethics at the American Institute of CPAs, told MagnifyMoney that it doesn’t matter if a scholarship is granted by your school or sent to you directly from an organization — you follow the same rules above to determine whether it’s taxable or not.

Take a few minutes to complete this IRS questionnaire to determine whether your scholarship money is taxable: Do I Include My Scholarship, Fellowship, or Education Grant as Income on My Tax Return?

When scholarships are taxable

However, grants should be included in your gross income if they are non-qualifying education expenses, meaning they don’t meet the conditions we just talked about.

Using scholarships for incidental expenses

The IRS explains that scholarship or fellowship funds that are used to cover incidental expenses are taxable. Incidental expenses are the money you spend for non-academic activities that are not required as part of your education, such as rent, insurance, transportation and living expenses.

Compensation for services

If students receive a scholarship or fellowship grant that requires them to be a teacher assistant, research assistant or perform other services, the funds are also taxable as salaries. There are exceptions, though. The IRS said grant recipients of the National Health Service Corps Scholarship Program and the Armed Forces Health Professions Scholarship and Financial Assistance Program do not have to include the scholarship funds they receive for service in their gross income.

Similarly, a grant or fellowship awarded to a non-degree-seeking individual to finance a certain research project, a report or a product is taxable, according to tax specialists interviewed by MagnifyMoney. But you could deduct expenses related to the work, such as travel and supplies for research, from your taxable income.

How to pay taxes on scholarships

Students should expect to receive a Form 1098-T that states their tuition and scholarship amounts from their schools by Jan. 31. If your tax-free scholarship or fellowship grant is your only income, you don’t have to file a tax return or report it, however, if part or all of the grant is taxable, then you are required to file a tax return, according to the IRS.

If you file Form 1040, Form 1040A, or Form 1040EZ, include the taxable amount in the total amount reported on the “Wages, salaries, tips” line of your tax return.

If the taxable amount wasn’t reported on Form W-2, enter “SCH” along with the taxable portion in the space to the left of the “Wages, salaries, tips” line. Form W-2 is the form an employer sends to an employee and to the IRS at the end of each year that reports an employee’s annual income and the amount of taxes withheld from their paychecks. Most likely, graduate students who perform teaching or research services at their institutions will receive a W-2.

If you file Form 1040NR or Form 1040NR-EZ, report the taxable amount on the “Scholarship and fellowship grants” line.

Even if you don’t get tax forms, you must pay taxes on your scholarship income that’s subject to income taxes.

In general, the taxable amount of scholarships would be included in the adjusted gross income on the federal return, said Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting. But depending on your state of residence and other incomes you have, you may also have to pay state income tax on your scholarship income, Luscombe said. Some states don’t have an income tax. Many states with an income tax use federal Adjusted Gross Income as the starting point in determining their state taxes, Luscombe said, and if your gross income is higher than your state’s income tax base, you will pay state income tax on your scholarship.

How can I minimize my tax burden from scholarships or fellowships?

Tax tips for students

Tax specialists advised if you’re a student, whether you are a dependent on your parent’s tax return or an independent student, you should keep track of the scholarships you receive and your qualified education expenses to make sure you spend as much of your scholarship as possible on qualified education expenses. Keep an eye out for a 1098-T, and in the case of graduate teaching assistants or research assistants, watch out for a Form W-2 at the end of the year.

If your scholarship doesn’t cover all your tuition and fees, Walker suggested you still keep track of your expenses, as some may qualify for education credits, which we will talk about below.

Tax tips for working professionals

For non-degree-seeking individuals who received a grant for an independent research project, Luscombe said they may want to treat the grant as a business income.

If you are running a business on your own, you’re most likely seen as a sole proprietorship owner for tax purposes. You will have to report business-related income and losses on a Schedule C (Form 1040) each year. Luscombe said grant awardees may claim the fellowship activity as a business activity on Schedule C to deduct the related expenses from their taxable income.

Under the new tax law, pass-through business owners can deduct up to 20% of their qualified business income from a partnership, S corporation or sole proprietorship. Individuals earning $157,500 or less ($315,000 for married couples) are eligible for the fullest deduction.

Luscombe advised those who received a one-off grant during the year keep separate records of all the income and expenses related to it.

Education tax credits

If part or all of your — or your child’s or spouse’s — scholarships are taxable, one of the ways for you to offset education expenses is to claim education tax credits, which reduce the amount of your income tax. There are two types of credits available: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC).

  • American Opportunity Tax Credit: This credit allows a taxpayer an annual maximum credit of $2,500 per undergraduate student of the costs for school or course-related expenses. Luscombe said AOTC is probably the most generous of tax breaks available for undergraduate education. To qualify for the full credit, your income must be $80,000 or less ($160,000 or less for married filing jointly). The credit is phased out for those whose incomes are above the thresholds.
  • The Lifetime Learning Credit: It allows a taxpayer a credit of up to $2,000 per year per tax return. This credit applies to an eligible student’s costs for undergraduate, graduate or professional degree courses. There’s no limit on the number of years you can claim the credit. You must earn $66,000 or less ($132,000 or less for married filing jointly) to qualify for this credit. The credit is phased out for those whose incomes are above the thresholds.
This interactive worksheet from the IRS can help you answer the following question: Am I Eligible to Claim an Education Credit?

To be eligible for either credit, students should receive a Form 1098-T. You also need to complete the Form 8863 and attach it to your tax Form 1040 or its variations. You cannot claim the credit if you are a dependent on someone’s tax return.

You cannot double dip if you qualify for both credits — you must compare options and choose one or the other. You cannot claim either credit if someone else claims you as a dependent on their tax return.

Tax deductions

If you don’t qualify for either credit, you can look into potential tax deductions to reduce your taxable income. There are two deductions that may be applicable: the Tuition and Fees Deduction and the Student Loan Interest Deduction. You can claim these deductions even if you do not itemize your deductions.

The tuition and fees deduction allows you to deduct qualified higher education expenses of up to $4,000 from taxable income per tax return for yourself, your spouse or your child. You need to claim your qualified deduction on Form 8917. You cannot claim this deduction if your filing status is married filing separately or if someone else claims you as a dependent on their tax return. The income threshold for this deduction is the same as that for the AOTC. (Note: This tax break was supposed to expire at the end of 2016, but the Bipartisan Budget Act of 2018 renewed it for tax year 2017. It’s unclear whether it will be continued for tax year 2018.)

Student loan interest deduction: If your income is less than $80,000 ($165,000 if filing a joint return) and you took out a student loan to pay for qualified education expenses for you, your spouse or your dependent, you may reduce your taxable income by up to $2,500 of student loan interest you paid. You cannot claim this deduction if your filing status is married filing separately or if someone else claims you as a dependent. You should receive Form 1098-E, the Student Loan Interest Statement, which can help you figure out your student loan interest deduction.

This interactive worksheet can also help: Can I Claim a Deduction for Student Loan Interest?

You cannot claim the Tuition and Fees Deduction (if it’s available for tax year 2018) if you have claimed an education credit for the same expense, Luscombe said, but you can still claim the Student Loan Interest Deduction.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

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Shen Lu is a writer at MagnifyMoney. You can email Shen Lu at shenlu@magnifymoney.com

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Mortgage

The Importance of Getting Preapproved for a Mortgage

Editorial Note: The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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It’s a challenging time for homebuyers. Demand for housing is on the rise as the economy continues to soar and job opportunities increase. At the same time, housing supply is down in many parts of the country and mortgage rates are at a seven-year-high, averaging at 4.62% for a 30-year fixed loan as of June 18, 2018.

If you can get preapproved for a mortgage before you put in an offer on a home, it will give you an edge, especially if you are in a highly competitive market.

“A preapproval makes your offer stronger and more attractive to the person selling the house,” said Tendayi Kapfidze, chief economist at LendingTree, the parent company of MagnifyMoney.

In this post, we’ll explain what it means to get preapproved for a mortgage, and how you can do it the right way.

What is a mortgage preapproval?

A mortgage preapproval is essentially when a lender looks at some of your financial information, credit history and employment record, and determines you are eligible for a loan of a certain amount.

They will tell you how much you have been preapproved for and also what your mortgage rate will be. At this point, you can choose to lock in your mortgage rate, or wait to compare their offer with preapprovals from other lenders.

When you have a preapproval, a lender is telling you they are almost certainly going to qualify you for a loan. And when you are competing against other buyers for the same home, that document tells the home seller that you are a reliable candidate. It gives them an incentive to go with your offer, because you’ve been preapproved and it’s likely you’re going to be able to get a mortgage without any issues.

A preapproval can also be helpful to you and your real estate agent. The lender will preapprove you for a certain loan amount, so you will know exactly what you can afford. Your real estate agent then has a good idea of what properties to show you based on your affordability and preferences. In fact, some real estate agents will ask if you’ve been preapproved for a mortgage loan before they even agree to take you house hunting.

There is no guarantee that the borrower will get a final approval. There are plenty of things later in the mortgage process that could derail your application, such as a poor home inspection or a home price that is higher than the home’s appraised value.

How to get a preapproved for a home loan

Identify at least three potential lenders.You should plan on getting preapprovals from at least three different lenders to be sure you’re getting the best rate possible. Even a small difference in mortgage rate can add tens of thousands of dollars to your total loan costs, so that’s why we recommend comparing offers to secure the lowest rate possible. Start with your current bank and check offers from a credit union and online lenders as well.

Of course, if you are merely looking to obtain preapproval to bolster your initial offer on a home, it’s fine to get just one lender preapproval. That will be enough to satisfy any home seller or their agent. But once you are really ready to lock in a lender, that’s when it’s crucial to get offers from other lenders as well. Before there is a property attached to your preapproval, Kapfidze said, you can always switch to another lender.

Get your documents ready to go. Many lenders today will ask for documents electronically and you may even be able to upload documents directly through their website. If you get all your documents organized on your computer, you’ll be sure to have them all ready to go. Different lenders ask for different sets of paperwork, but most lenders require the following documents:

  • Your ID
  • Two months of bank statements
  • Verification of employment, usually in the form of your pay stubs from the last 30 days or W-2s from the past two years (1099s for those who are self-employed)
  • Documentation for other sources of income, if applicable
  • Social Security number and address

Expect an answer within 24 hours. Most lenders can process a preapproval within 24 hours if the borrower submits all the paperwork on time, said Doug Crouse, a mortgage loan originator with UMB Bank in Kansas City, Mo. However, that also depends on how quickly lenders move and how timely borrowers provide the needed information. In some cases, the preapproval process could take up to 10 days.

If you are preapproved for a mortgage, a lender will issue a letter stating the estimated loan amount and mortgage rate you qualify for based on your financial conditions. Once you have a preapproval letter in hand, you can start searching for homes within your price range.

How preapprovals impact your credit

Getting preapproved will result in a hard pull on your credit, which could make a minor dent in your score. This shouldn’t deter you from shopping around and comparing multiple offers, however. If you get multiple mortgage applications in a short period of time — 14 to 45 days usually — it will only count as one hard inquiry on your credit file and should not damage your score significantly at at all.

If you’re denied for preapproval, it could be for a number of reasons, such as a low credit score, high debt-to-income ratio or a small down payment, Kapfidze said. According to a recent study by LendingTree, the most common cause of mortgage denials was a tie between the borrower’s credit history and their debt-to-income ratio. Your debt-to-income ratio (DTI) is how lenders determine what percentage of your monthly income is going to be needed to cover your monthly debt obligations, including your potential mortgage payment.

You don’t need perfect credit to get a mortgage. To get the best possible rate, you’ll need a credit score of at least 760, but a credit score of 620 can generally qualify you for a conventional home loan. It will just come with a higher mortgage rate and cost you more money over the lifetime of the loan in interest charges. Do all that you can to improve your credit score before applying for a mortgage.

There are other mortgage options that accept a lower credit score. For instance, someone with a score of 500 may qualify for an FHA loan. We have a list of loan options for borrowers with poor credit here.

Really, the preapproval process is more straightforward than it sounds, and it’s a lot more simple than the actual loan application process — lenders are simply looking for signs indicating that you will be able to repay the loan at this stage.

Preapproval vs. pre-qualification

These terms are often used interchangeably in the mortgage business but they can mean very different things.

Pre-qualification is typically a prerequisite of a preapproval. Lenders may ask prospective borrowers to fill out a pre-qualification form, where a loan officer will gather a few details from you face to face or online, including your income, assets, debts and credit. Based on the preliminary information, they estimate the size of a loan they may qualify you for.

Because at this stage lenders will not verify any information about you, there is typically no hard credit pull required. It’s a good first step in that it helps you gauge how big a home you can afford.

Lenders may issue a pre-qualification letter indicating what your home purchase limit is. If you’re casually shopping for a mortgage or you’re just curious how much you might qualify for, a pre-qualification quote is a good first step for that reason. There’s no risk that you’ll ding your credit score for nothing.

However, pre-qualification is not as serious as a preapproval, and many home sellers will want to see a preapproval when they review your offer. If you’re truly serious about putting a bid on a home, get a mortgage preapproval first.

In a tight housing market, a buyer with proof of preapproval can get a competitive advantage than those who don’t have it — sellers are more likely to take the offer from a buyer who’s preapproved for a loan. This is why preapproval should be done before house hunting.

Benefits of shopping around for mortgage offers

Just like buying anything else, you would want to shop around for a mortgage, because the first offer may not be the best offer.

According to LendingTree’s recent Mortgage Rate Competition Index, borrowers could save 0.62% in interest rate by shopping around. On a 30-year mortgage, a borrower could potentially save $28,890 on a $300,000 loan. That’s almost 10% of the entire loan amount. (Note: MagnifyMoney is owned by LendingTree)

Crouse recommended borrowers check with two or three lenders to make sure they are getting the best deal in rate and costs. Once you’ve shopped around and received quotes from different lenders, then you can go forward with the one that you feel most comfortable with.

Alternatively, you can use this online tool, which will match you with multiple mortgage lenders, to compare quotes before applying for a preapproval.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

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Shen Lu is a writer at MagnifyMoney. You can email Shen Lu at shenlu@magnifymoney.com

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Pay Down My Debt

How to Get Out Of Debt When You Have Bad Credit

Editorial Note: The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

If you are neck-deep in debt, missing payments or carrying balances that are too large to handle, chances are you have poor credit. It can feel as if you’re trapped in a vicious cycle: You need good credit to take advantage of the best deals on debt consolidation loans and balance transfers, which could help you dig out of debt. But because you probably don’t qualify for those offers, you continue to struggle to meet your payments and your credit continues to suffer.

There are countless reasons — some that are beyond your control — that could make it difficult to get out of this debt trap. Medical emergencies, unexpected job loss or the death of a spouse can easily send your finances spiraling. It can certainly feel frustrating and circumscribe to be in this situation.

Despite all this, it’s not impossible to crawl out of the debt hole with bad credit. You have to understand your options and work extra toward the goal. In this guide, we’ll offer tips on how you can still pay off debt with bad credit.

What is considered a “bad” credit score?

Before discussing how to get out of debt with bad credit, let’s first understand how credit scores work and factors that affect your score.

Your credit score is what lenders use to evaluate your risk as a borrower and a low credit score can make you appear as if you are someone who’s not financially responsible.

The most common credit score system used by lenders is provided by the Fair Isaac Corporation, commonly known as FICO®. Since its introduction over 25 years ago, FICO® Scores has become the standard evaluation measure used by 90% of top U.S. financial institutions.

FICO® scores range from 300 to 850. A bad FICO® score typically falls below 580. Currently, 17% of all people fall into this range, according to Experian, one of the three major U.S. credit reporting agencies.

What’s a Bad Credit Score?

Credit Category

Score Range

Excellent

800-850

Very Good

740-799

Good

670-739

Fair

580-669

Bad

<580

There are five factors that make up your credit score. The amount of debt you owe makes up 30% of your score and your payment history makes up 35%. The length of your credit history, new credit inquiries and credit mix respectively make up 15%, 10% and 10%, respectively.

According to this score makeup, a poor credit score can mean that a person has derogatory remarks in their file that include falling behind payments, maxing out his/her credit cards or major financial setbacks, such as a bankruptcy or home foreclosure.

5 ways to pay off debt when you have bad credit

The DIY approach

Call your lenders. Thomas Nitzsche is the communications lead and credit educator at Money Management International, a nonprofit credit counseling company. He told MagnifyMoney that the first step for consumers who are behind their credit card payments is to call their credit card companies — it doesn’t cost money and may lower their interest payments.

Prioritize newer debts first. Nitzsche said you should focus on new debt because a newer debt may impact your credit score more (older debts have already done their damage), particularly if it’s still with the original creditor and not yet in collections (usually before three months past due). At this stage, your account can still be rehabilitated, which can help you improve your credit.

Ask about a hardship repayment plan. Especially if you are in that situation due to significant financial hardships that are out of your control, such as unexpected job loss or medical emergencies, Nitzsche said you should tell the creditor about the situation and ask for a hardship repayment plan — some creditors may allow those consumers to repay their debt within 60 months with lower interest rates before the debt goes to collections.

Ask to settle debts for less than you owe. If you are severely delinquent on debts, call your lender and ask if you can settle the debt for less. This often requires a one-time lump sum payment, so keep that in mind.

Make on-time payments. Lauren G. Lindsay, a financial adviser based in Covington, La., offers the following advice: Make sure you make on-time payments and avoid borrowing even more. “Even if you cannot pay in full, after six months of on-time payments, your credit score will improve,” Lindsay said.

Find extra money. Review your budget to see how much wiggle room you have to put more toward your debt. If you have no extra cash, find ways to bring in additional income.

Prioritize your debts by highest interest rate —Debt avalanche. Make a list of all the debt you owe with the interest rates and minimum payments, and try to target paying off the debts with the highest interest rates first. This is known as the debt avalanche method.

Prioritize lowest balances first — Debt snowball. Another popular debt payoff method is the snowball. Order debts by smallest balance owed, to largest balance owed. Pay minimum payments on everything but the smallest balance owed. For that balance, pay as much above the minimum payment as you can afford. Once it’s paid off, take the money you were using for that debt and put it toward the next highest balance, and so on and so forth.

Live within your means. Create a budget and stick to it. “Look at what gets put on credit cards and don’t spend more than you can pay off each month,” Lindsay said. “Your goal is to never carry credit card debt. Also, establish an emergency fund to prevent you from getting back into the debt cycle.”

Debt management plans (DMP)


A debt management plan, or DMP, helps you consolidate payments of unsecured debt, such as credit card payments. DMPs are created for consumers by nonprofit credit counseling agencies. Nitzsche said people seeking DMP for managing debt have an average credit score of about 580. You make one payment through your DMP instead of several payments to different creditors. You may also reduce your payments on interests as your credit counselor may be able to negotiate with your lender for lower rates, monthly payments and fees associated with your debt.

To pick a nonprofit credit counseling agency for quality services, visit the National Foundation for Credit Counseling.

Pros:

  • Before you entering a DMP, you are required to complete a full financial review with a counselor. This helps you assess your finances, and your counselor may even recommend another program that may be better suited for you.
  • You don’t have to deal with multiple monthly payments. A DMP streamlines your debt payment process.
  • It generally takes four to five years to complete a DMP. You may pay your credit card debt more quickly with a DMP than making the minimum payment each month.
  • Your counselor may negotiate better terms for your debts, including lower interest rates. Nitzsche said the average rate his clients get is around 8%.

Cons:

  • While enrolling in a DMP, you may be asked to close your credit cards and you can’t apply for new credit. Your credit score will take a hit if you close credit cards.
  • The credit counseling firm may charge an initial fee for the first session. Enrollment fees are required when you enter a DMP (vary by states; average $33). On top of that, you will pay an ongoing monthly fee (average $24, not to exceed $50).
  • DMPs can help you with certain types of debts, such as credit card debt, personal loans and collection accounts, but not all of them. For instance, they don’t help with payday loans and secured loans, such as a mortgage.

Consolidate your debt with a new loan


When you are climbing a mountain of debt and are having a hard time keeping track of various monthly payments, consolidating your debt may help you make debt more manageable with a lower interest rate. We will walk you through two common debt consolidation options and examine the pros and cons of each — personal loans and home equity loans.

Consolidating with personal loans

A personal loan could be a preferable choice for someone who has less than perfect credit but good enough credit to qualify for a loan at a lower rate than his/her credit card. Personal loans are unsecured loans offering a fixed amount of money at a fixed rate for a fixed amount of time.

A personal loan allows you to transfer your balances into one loan. It will not only reduce the number of payments you have to make every month, but you may also save on interest payments. In general, you will have 24 to 60 months to repay your loan.

Pros:

  • You can pre-qualify for many personal loans without hurting your credit score. This will allow you to shop around for the best rates.
  • A personal loan can help you rebuild credit by adding another line of credit to your file. As long as you make on-time payments, you can expect your credit to improve over time.
  • A personal loan carries an interest rate, which varies by credit score, but is usually lower than credit card interest rates. According to data from the Federal Reserve, the average personal interest loan rate was 10.22% in the first quarter of 2018, compared with the average 15.32% of interest collected on credit card debt.

Cons:

  • You may qualify for personal loans even with poor credit, but you are likely to get higher interest rates.
  • Many lenders charge an origination fee, which is nonrefundable and deducted from your total loan amount before you receive the loan.
  • The loan amount is typically capped at $100,000, which is low compared with some secured loans.

If your credit score may disqualify you for a personal loan, you can choose to bring on a cosigner.

Check out this list of personal loans for bad credit.

Consolidating with a home equity loan

If you own a property and have built up equity in it, a home equity loan could be another option. By taking this loan, you are putting your home up for collateral to borrow money that you can use to pay off your higher interest debt. You may not need excellent credit to qualify because the loan is secured by your home, which makes it less risky for lenders. At the end of the day, they know they can recoup their losses by taking your home. Of course, what’s good for the lender winds up being an added risk for you if you default on your loan.

With a home equity loan, you receive a lump sum of money and pay it back over a fixed period of time at a fixed interest rate. You can borrow a certain percentage of your home equity (the value of your home minus how much you owe on the home). But if you default on your loan, the lender may foreclose on your home.

Pros:

  • Typically, you have five to 15 years to repay the loan; longer terms than personal loans.
  • Home equity loans usually carry lower rates than personal loans. This FICO® chart shows the average APR and monthly payments on home equity loans by credit scores.
  • The loan amount is capped at 85% of the home’s value minus the balance of the current mortgage. It may be larger than what a personal loan.

Cons:

  • Your loan is secured by your home, and you risk losing your home if you can’t make loan payments.
  • Applying for a home equity loan is like securing a mortgage. A home equity comes with closing costs.

Read this guide to on how to choose the right type of debt consolidation.

Settle your debt with a lump-sum payment

If you can’t make your payments that are long overdue, you could try to get your debt resolved for less than what was owed through settlement.

This usually happens only when your debt is in collections and extensively past due. In this situation, you are no longer dealing with your original creditor because your debt is sold to a collection agency. In some cases, however, the original lender may still own the debt and still be open to settling. Just ask.

At this point, you may be able to negotiate with the debt collector to settle the debt for less than what you owe.

There are for-profit debt settlement companies that can sometimes help negotiate with creditors on the money you owe for less than full balance repayment, for a fee. But beware of risks associated with such services. You can easily negotiate with lenders yourself without going through a third-party service. Also, some creditors will refuse to work with these types of companies, so don’t pay for a service before you check with your lender to see if they will entertain discussions with third parties.

Pros:

  • You can possibly settle your debt for less than the balance.
  • You may pay off your debt faster this way than by making the minimum monthly payments.
  • You can avoid bankruptcy.

Cons:

  • Be very wary of debt settlement companies. Many charge expensive fees and are not able to deliver their promises when you can do the same for free. It may end up costing you more money to have their assistance.
  • Often requires a lump-sum cash payment, which you may not be able to afford all at once.
  • Your creditor may refuse to settle.
  • If the debt collection agency forgives $600+, you may have to pay taxes on the amount.

When and How to Settle Credit Card Debt

Last resort: Bankruptcy

This is your last resort. When you are in such a dire financial situation that you absolutely have no way to pay off your debt, bankruptcy could be a viable option for you to start over. Declaring bankruptcy is a legal process through which the borrower can have his/her debt forgiven or restructured.

There are several types of bankruptcy that determine how much and what kind of debt can or will be discharged. Consumers commonly file two types of bankruptcy: Chapter 7 and Chapter 13.

Chapter 7 allows debtors to cover debt by liquidating all their unprotected assets, meaning they have to sell some of their assets to pay off debts. It’s more suitable for those who have little disposable income.

Chapter 13 requires debtors to repay some or all of the money they owe based on how much they expect to earn over three to five years, but they can keep their assets. After the repayment period, the remaining balance will be discharged.

Pros:

  • You can discharge most, if not all of your debt.
  • It will make a serious dent in your credit file, but you can mend your credit score eventually. According to LendingTree’s research within a year of the bankruptcy, 43% of people with a bankruptcy on their credit file had a credit score of 640 or higher. Within two years, 65% have a credit score above 640. (Disclaimer: LendingTree is the parent company of MagnifyMoney.com)

Cons:

  • You may lose some of your assets.
  • Some debt may not qualify for bankruptcy, such as student loans.
  • It may damage your credit score, and the filing can be on your credit report for up to ten years.
  • You could have difficulties taking out any new loans or opening up credit accounts when you are recovering from a bankruptcy. The LendingTree research shows that after five years of a bankruptcy, about 75% of the filers restore their credit scores to levels where they can qualify for loans.
  • You may have to pay substantially more for loans before restoring your credit.

Bottom line

Paying off a great amount of debt with poor credit is not easy and won’t happen overnight. No matter which method you use, having financial discipline is absolutely imperative. Without discipline, none of the solutions we discussed earlier will cure your money woes. If you are not committed to making on-time payments, can’t resist the temptation of spending or keep taking on new debt, you could wind up owing more than ever before. Before you decide to go with a certain plan, compare the costs that come with each option and see if they outweigh the interest cut. If you consider working with a business to tackle your debt, check out the company’s website and make sure it’s legitimate and reputable. You can search the company on Better Business Bureau or the Consumer Financial Protection Bureau, or you can check them out with your state Attorney General to find out if there are consumer complaints about the firm on file.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

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Shen Lu is a writer at MagnifyMoney. You can email Shen Lu at shenlu@magnifymoney.com

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Personal Loans

Stilt Personal Loan Review

Editorial Note: The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

If you are a foreign national living in the United States, you probably experienced the extra hoops that you have to jump through to borrow money from a traditional lender.

Few U.S. financial institutions lend money to expats who have an insufficient credit history, and if they do, foreign citizens often have to make a bigger down payment than U.S. citizens. With first-hand experiences of difficulties of borrowing money in the U.S., Rohit Mittal and Priyank Singh, two Columbia University graduates from India, founded Stilt in 2015, hoping to end the borrowing hassle for fellow expats.

Stilt Personal Loan
APR

7.99%
To
29.99%

Credit Req.

No credit score required

Minimum Credit Score

Terms

6 to 24

months

Fees

Varies

APPLY NOW Secured

on Stilt Personal Loan’s secure website

Stilt loans are originated by Stilt Inc., NMLS#1641523 (NMLS Consumer Access). Terms and conditions apply. To qualify for a Stilt loan you must reside in an eligible state and meet Stilt's underwriting requirements. Not all borrowers receive the lowest rate. Rates and terms are subject to change at anytime without notice and are subject to state restrictions. Stilt APR's range from 7.99% to 15.99%. For example you could receive a $10,000 loan with a term of 18 months with an APR of 13.00%, the monthly payment will be $614.48. No down payment is required.

 

Stilt personal loan details
 

Fees and penalties

  • Terms: 6 to 24 months
  • APR Range: 7.99% - 29.99%
  • Loan amounts:$1,000 - $25,000
  • Time to Funding: It takes up to 3 business days for you to receive the funds.
  • Hard pull/soft pull: Soft Pull. It will only do a hard pull if you decide to take the loan and sign the loan documents.
  • Origination fee: It varies by state. In Pennsylvania, for instance, the max is $150, or 5% of the loan amount. The exact fee amount will be mentioned in the loan offer and will only be charged if you choose to take the loan
  • Prepayment penalty: None.
  • Late payment fee:$0 to $25, or 5% of the monthly loan payment, whichever is higher. The exact fee depends on respective state licenses, and is disclosed in the promissory note.
  • Other fees:Fees will be charged if there are insufficient funds in your linked bank account, and range from $10 - $35, depending on respective state licenses, and are disclosed in the promissory note.

When making lending decisions, Stilt takes a holistic view of the borrower’s life. Its data models analyze the borrower’s merit by examining nontraditional factors, such as his/her employment potential and financial behavior based on the information provided.

Ultimately, what Stilt looks for in an applicant is the potential for responsible financial behavior. Expats who have high GPAs, high employment potential, solid work experience and show patterns of responsible financial activities may have a greater likelihood to get loan approval and secure a low interest rate — even if they are new to the country and have zero credit.

Borrowing Stilt funds while in college

If you are an international student, you are not eligible for federal student loans in the U.S. But at Stilt, you can apply for a new student loan of up to $5,000. Granted, $5,000 may not cover your full tuition or living expenses while you are in school, but it may help borrowers cover some of the usual start-up costs, such as room and board and food expenses.

College students can borrow as much as $25,000 if they can show proof of an accepted full-time job offer, and they plan to graduate within six months.

Apart from the loan application process, Stilt’s website offers a wealth of advice on issues near and dear to international students and foreign workers, ranging from basic personal finance to the ins and outs on visa requirements. For many newcomers, Silt’s blog and community board could be your one-stop shop to learn to navigate life in the U.S.

Eligibility requirements

  • Minimum credit score: No requirement
  • Minimum credit history: No requirement
  • Maximum debt-to-income ratio: No requirement

Currently, only applicants who physically live in the 12 states where Stilt is licensed to operate are eligible to apply for a loan. You also need a valid U.S. bank account and a phone number.

Your U.S. visa — F-1, OPT, H-1B, L-1, O-1, TN or DACA —must be valid for at least six months. A visitor’s visa will not work.

Stilt also considers those in temporary situations where the expat is waiting for OPT, STEM extension, are on Cap-Gap, or are under H-1B renewals.

Applying for a personal loan from Stilt

The application process is all online. To apply, you will need to enter your requested loan type and amount, the purpose of the loan and your preferred repayment plans.

You can choose a purpose from the 11 options listed in the application, ranging from paying a security deposit on an apartment and living expenses to covering tuition fees and insurance.

While you don’t need a Social Security Number to apply for a Silt loan, you will be asked to fill in the information on the application page. Enter 111-11-1111 if you don’t have one. For those who do have a credit history, their SSN will be included to the file, which may help the borrower get a lower interest rate.

In your profile page, you will be asked to upload your immigration paperwork, financial information and additional documents that could support your case as a trustworthy borrower. If applicable, the things you need to keep handy when you apply for a loan are your: Passport profile page, visa page, U.S. bank account information, I-20, transcripts, resume, job offer letter, four U.S. references and your permanent address in your home country.

Stilt promises to send you a decision in less than one business day.

You will have 6 to 24 months to pay back your loan, but you can also choose to borrow money for a shorter term — 12 months or 18 months.
Pros and cons of an Stilt personal loan

Pros:

Cons:

  • Serves noncitizens. It’s one of the few lenders focused on working with the immigrant community. There are a few personal loans out there that expats without a permanent residency are eligible for, but Stilt is one of the few that doesn’t require a credit history or cosigner.
  • Student-friendly. . Many foreign workers came to the U.S. as international students, but rarely you see a lender lending money to students and allowing them to use the funds to pay tuition. Earnest is another company that offers personal loans to foreign workers in the U.S., but they can’t pay their college tuition with the money.
  • Soft pull. When you apply for a loan, Stilt will do a soft pull if you have a credit history, which won’t impact your credit score. However, when you decide to take the loan and sign the loan documents, Stilt will do a hard pull, which could impact your credit score.
  • Only available in 12 states: If you don’t live in a state where Stilt operates, you need to shop around for a lender that is willing to loan money to non-U.S. citizens.
  • Loan terms are short:You have to repay your debt in two years. This is much shorter than the common term of up to five years that other lenders offer.
  • Origination fee.Compared with some loans that don’t charge origination fees, you may have to spend extra money on origination fees with Stilt loans, depending on your state. Stilt’s origination fee starts at 0% and the max depends on state usury limits.

Who’s the best fit for an Stilt personal loan

The ideal borrowers are foreign nationals who need some financial help to settle down in the U.S. Borrowers don’t need a credit history, a Social Security number, proof of employment or a state ID to be eligible to apply for a loan from Stilt. If they get a loan, it will help them establish credit in their host country. U.S. citizens who have a thin credit file may also consider applying for a Stilt loan if they don’t meet other lenders’ strict underwriting standards.

Expats who’ve lived in the U.S. for a longer time, though, may have obtained a SSN and built some credit. Those borrowers may be able to choose a personal loan from a wider pool of lenders offering lower interest rates, bigger loan amounts or better terms.

Alternative personal loan options

There are not a whole lot of other online personal loan lenders to choose from for noncitizens. We found a few for you to consider.

Earnest

Earnest is another online lender that loan money for nonresidents on work visas, but you will have to have a credit score of at least 660 and proof of a consistent income stream. On the plus side, you’ll avoid origination fees with Earnest.

Earnest
APR

5.49%
To
18.24%

Credit Req.

660

Minimum Credit Score

Terms

36 to 60

months

Fees

No origination fee

LEARN MORE Secured

on LendingTree’s secure website

Instead of offering credit-based loans, Earnest has taken a very nontraditional approach using a merit-based system.... Read More

Lending Club

Lending Club is a peer-to-peer lending platform, which means the funds you receive come from individual or institutional investors who fund the loans for borrowers. LendingClub lends money to non-U.S. citizens with valid, long-term visas.

Lending Club
APR

6.16%
To
35.89%

Credit Req.

600

Minimum Credit Score

Terms

36 or 60

months

Fees

1.00% - 6.00%

LEARN MORE Secured

on LendingTree’s secure website

LendingClub is a great tool for borrowers that can offer competitive interest rates and approvals for people with credit scores as low as 600.... Read More

Upgrade

You may also be eligible for a personal loan with Upgrade, an online lender, if you are an expat with a valid visa in the U.S.

Upgrade
APR

6.87%
To
35.97%

Credit Req.

620

Minimum Credit Score

Terms

36 or 60

months

Fees

1.00% - 6.00%

LEARN MORE Secured

on LendingTree’s secure website

Loans made through Upgrade feature APRs of 6.87%-35.97%. All loans have a 1% to 6% origination fee, which is deducted from the loan proceeds. Lowest rates require Autopay. For example, a $10,000 loan with a 36 month term and a 17.97% APR (which includes a 5% origination fee) has a required monthly payment of $343.28. Upgrade is available in all states except: Connecticut, Colorado, Iowa, Massachusetts, Vermont, West Virginia.

TD Bank

TD Bank is a traditional bank that may consider borrowers who are not U.S. citizens but have full-time jobs and SSNs. TD Bank’s TD Express Loan personal loans from $2,000 to $15,000, and the APR ranges from 8.99% to 15.99%.

TD Express Loan
APR

8.99%
To
15.99%

Credit Req.

680

Minimum Credit Score

Terms

12 to 60

months

Fees

No origination fee

APPLY NOW Secured

on TD Express Loan’s secure website

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

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Shen Lu is a writer at MagnifyMoney. You can email Shen Lu at shenlu@magnifymoney.com

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Buy, Sell, Wait? Solving the Move-up Home Dilemma

Editorial Note: The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Jeff Neal, 33, of Lancaster, Pa., bought a bigger house last year when his wife was pregnant with their third child.

They planned to sell their two-bedroom home first, but the buyer backed out of the deal after the couple made an offer on a four-bedroom house in the same city. Fortunately, Neal’s relatives pooled money and lent him the cash so he could pay off the 30-year mortgage on the first home. As a result, the Neals were able to buy their next home before selling the old one.

Neal, who runs an e-commerce website, eventually became the landlord of his first house for a painful eight months, during which time he drove 35 minutes most weeks between his new house and his old one to make sure things were running properly. The  total cost of maintenance, taxes, insurance and utilities for his old house amounted to more than $9,000. Owing not just money, but gratitude, to generous relatives left Neal feeling even more unsettled.

“It was challenging, nerve-wracking, and stressful,” Neal told MagnifyMoney.

This spring, Neal sold the old house and paid back his relatives. Although he liked the perks of buying before selling — namely a (relatively) relaxing moving experience — he said next time he would try to sell a house before buying anything new.

Second time’s a charm? Buying a home the second time around sounds easier — you’ve gone through the process before and understand the ups and downs — but the process of juggling two transactions at once can be daunting. You’re both buyer and seller now. The seller in you might want to take advantage of a standout spring real estate market, but the experts we talked to have said that personal circumstances matter more.

May is the best month for home-selling, according to real estate research firm ATTOM Data Solutions. A recent report found that homeowners who cashed out in May received, on average, 5.9% above asking price. June was a close second, with sellers taking home a 5.8% premium. On the flip side, the housing market cools down in the fall and colder months (though homeowners in steamy Miami are reportedly better off selling in January). ATTOM data suggest that October and December are the best months to buy, when sellers received a 1.6% premium on average.

So, buy first or sell first? When is the best time to start the process? MagnifyMoney spoke with real estate experts who analyzed four common scenarios for move-up buyers and listed pros and cons of each.

Selling before buying, timing the market

From a pure economic standpoint, experts said it would be ideal for move-up buyers to sell their homes in the spring, and wait until fall to buy their next house. But real life is often far more complicated. Other factors go into the process of buying besides price, and the stress that comes with two moves may not be worth a better bottom line.

However, for those who can time the market this way, experts said this strategy does work to a homeowner’s advantage. When the two separate transactions are not contingent upon each other, you may enjoy much more freedom and peace of mind than if you sell and buy almost simultaneously.

“When you’re selling and you’re not contingent on the front end, it’s a pretty clean sale and you’re not worried about this other purchase,” said Daren Blomquist, ATTOM’s senior vice president. “On the back end, when you’re actually buying a property, you’re a non-contingent offer, which will put you ahead of the line of a lot of other buyers who are continuing on their home-selling.”

George Ratiu, who leads research for the National Association of Realtors, told MagnifyMoney that those who are in a position to sell in the warmer months and then purchase in the fall months may be working professionals without children. They have a lot more flexibility in timing, as they are not tied to the school calendar.

But there’s an inconvenience factor in delaying the time between when you sell and when you buy. You will have to factor in the housing costs during the gap, as well as the pain of moving more than once.

While such a delay could save you some money, Ratiu cautioned that trying to time the real estate market is about as fruitful as trying to time the financial market — both are unpredictable. Plus, local market conditions can vary from regional or national trends.

“I think trying to time the market is a difficult proposition and one which should take a backseat to a buyer’s circumstances,” Ratiu said.

Selling before buying, but almost simultaneously

In most cases, Blomquist said, move-up home buyers sell their old home first and take the profit from that sale and roll it into the purchase of another home later, but not that much later. The processes happens almost simultaneously because people don’t want to have an interruption in moving, he said.

But because these purchases are typically contingent upon the selling of the old home, three parties are involved in the process, which adds a layer of complication.

“It’s not just you as a buyer qualifying for a loan,” Blomquist said. “It’s another buyer qualifying for a loan on your home. That just multiplies the number of things that could go wrong, that would trip up the sale of the home.”

In hot markets, such as the San Francisco Bay Area, sellers fearful of not being able to find that new house wait longer, exacerbating an already tight inventory. And they have good reason to worry: If it takes longer than you thought to find another home, you risk paying more on intermediary housing expenses.

“You are sitting there without a permanent place to live and that is a risk in and of itself, although I would say that’s a lower risk then taking on two 30-year mortgages at the same time,” Blomquist said.

Buying before selling

This could indeed be a risky proposition for those who buy a new home before selling the old one. Upside: You can take your time moving, which offers a certain level of freedom.

“If the market tanks, you may not get as much profit out of that sale later on,” Blomquist said. “Or if you lose your job, you may not be in a position where you’d want to be owning a home” — much less two homes.

But for those who are close to paying off or have already paid off the mortgage on their first home, the circumstances change pretty dramatically: It’s a lot easier to see that old property as an income generator even if you are not able to sell it right away.

Experts say that people who have this flexibility in their timing and finances are most likely to be retirees. (More on them in a second.)

A bridge loan may tide you over. Younger families like the Neals who buy a house before selling the first, but perhaps lack interest-free financial assistance from relatives, may want to consider a bridge loan. A bridge loan provides the short-term funding required to purchase the new home, buying you time to get your current home ready for sale. Ideally, you would move into your new home, sell your old property, then pay off the loan quickly.

The strategy is not for every real estate buyer because it comes with risks. Plus, bridge loans are not easy to obtain for many. Borrowers in general need to have excellent credit, a low debt-to-income ratio and home equity of 20% or more.

Blomquist said bridge loans work best in tight housing markets where sellers are confident that their first home will sell easily. Read more about bridge loans in this guide.

Hold onto that first home as a rental instead of selling

Retirees who have paid off their first house, and therefore wouldn’t shoulder two mortgages when they buy their next home, may want to hold onto the first home as a rental instead of selling. Or, young professionals moving for a new job where home prices are significantly lower might be able to swing two house payments.

“If you’re able to hold on to that first home, it can become a rental that can generate positive income for you potentially if the numbers work out,” Blomquist said. “And over time, if you own it for another 20 or 30 years, it will likely appreciate in value as well.”

To be sure, not everyone can afford to do this. But if you are able to manage it, a lender will likely count your rental earnings as income, which will also help you to cover the mortgage payment.

However, as we learned in the last recession, home prices don’t always appreciate — sometimes they slide. Maintaining two properties is also no easy task. Ratiu suggested you check your financial goals and time horizon, and think through whether it’s realistic for you to manage all the headaches that may come with renting a residence before deciding to become a landlord.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

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Shen Lu is a writer at MagnifyMoney. You can email Shen Lu at shenlu@magnifymoney.com

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What to Know Before You Sublet Your Apartment This Summer

Editorial Note: The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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We’ve all been there. You landed a summer internship or a new job in a different city, or you have to move into a new house before your lease is up.

Rather than doubling up on rent or losing your deposit, consider a sublease. Leasing your apartment to another tenant allows you to get out of Dodge and keep some cash, but you could find yourself in unwanted — and expensive — legal battles if done improperly.

Here’s how you can manage a sublet legally to avoid unnecessary stress and hassle.

Create a sublease agreement

Even if you find a reliable subtenant, it’s a good idea to get your agreement in writing. You can find sublease samples online. The samples are basic boilerplates where you can put in the amount of rent, due dates and what the security deposit is.

Some people are able to make a profit off a sublease. Some have to take a loss, such as renting for a price lower than the rent they pay, if they are in a rush to find a subtenant. And others take the same amount of rent to break even. It all depends on the specific sublease situation, said John Bartlett, executive director of the Metropolitan Tenants Organization in Chicago, a tenant advocacy group.

“It is best to rent the unit to a trustworthy person,” Bartlett said. “And if that means suffering a small loss, then that is better rather than holding out to get the full rent or renting to someone with a less than stellar rental record.”

To avoid unexpected costs while you’re away, you can add additional clauses to the agreement to make sure your subletter complies with the terms of the lease. A few common examples:

  • Require the subtenant to take responsibility for any damage to the apartment during the stay.
  • The subtenant should keep furniture in good condition, assuming you plan to leave personal items.
  • If you live in a city that has specific recycling requirements, you can ask your subletter to follow those rules to avoid fines.

Ask for a security deposit

If you are subletting your apartment, experts suggested you take at least one month’s rent as a security deposit. You can request more if you think it’s appropriate, but for tenants of rent-stabilized apartments in New York, you can only take one month’s rent as a security deposit by law.

Remove yourself from the lease, if you can

Bartlett said in many leases, the tenant and subletter appear on the same lease contract. As a result, they will be jointly liable for damages or missed payments. That means that the landlord can go after one tenant or both if things go wrong.

If you don’t plan to return to the apartment, Bartlett recommended you try to convince the landlord to take you off the lease and sign a new lease with your subtenant. That would be the ideal situation for you, but the landlord has little incentive to sign a new lease if they can get you, the tenant on record, to pay rent should things go awry with the subtenant, Rozen said. Your landlord may refuse, but it’s worth a try. Sweetening the deal by paying a negotiated fee to your landlord may be worth it, Bartlett said.

Things you should do before subletting your apartment

Subletting means you become the landlord to the subletter, and there’s no contractual relationship between the subletter and your actual landlord, Jennifer Rozen, a New York City tenant lawyer, told MagnifyMoney.

If a subletter fails to pay rent, or damages the apartment, as long as the lease is still in effect, you could still be on the hook for the full rent amount or the damages, tenants’ rights experts said.

Given the potential risks involved in subletting, here’s some homework you need to do before giving your apartment key to your subtenant:

Before you do anything, review your state’s landlord-tenant laws and regulations. Every state has its own sublet laws, so it’s a good idea to understand your rights and obligations as a tenant.

In some places, like Illinois and New York, you have the legal right to sublet as long as the landlord doesn’t reasonably deny it. In New York, requests must be in writing and sent by certified mail with an attached proposed sublease that includes the subletter’s information. The landlord has 10 days to look over your request and ask additional questions, but Rozen says the entire approval process could take as long as two months. In other states, including Iowa and Kansas, you cannot sublet unless your lease permits it.

No laws prohibit subletting, but the subletting procedure may vary greatly based on specific leases. You should see if your lease has restrictions on subletting. If the lease or the state law requires you to contact the landlord and go through a formal process, then you need to abide.

In many states, landlords cannot unreasonably deny a subtenant, but they do want to be involved in a sublease, according to Bartlett.

“They’re not going to want some person that they don’t even know who it is to live in their unit,” Bartlett said.

Once you are clear on your obligations and responsibilities, you can start looking for a subtenant. Experts interviewed by MagnifyMoney strongly advised that you interview your candidate(s) and do your due diligence.

One way to protect yourself as a tenant is to call your potential subletter’s previous landlords to inquire about his/her rent payment history, Bartlett said. Rozen said it’s legal for you to request W-2s, recent pay stubs and credit reports from the prospective subtenant, or recent bank statements if this person is a freelancer or unemployed.

“You definitely shouldn’t get yourself in a situation where you no longer have the right to be in the apartment because you find the sublease, [but] you don’t know whether the person is financially viable,” said Rozen, who has represented hundreds of residential and commercial tenants.

If you want to go forward with a subtenant whose financials are questionable, you could ask him or her to pay upfront the partial or full rent amount for the sublease. “That’s the safest thing to do because the only thing you can do as the tenant of record is pay the rent to avoid getting sued by the landlord, then you have to go after the subtenant,” Rozen said.

What’s the risk of subletting without asking your landlord?

Although it’s best to inform your landlord of the sublease and follow the rules, in reality, many people don’t do that. It’s fine if you don’t get caught, but the consequences could be severe if you do.

In many leases, Bartlett said, there’s a clause stating that the unit is only for the person named on the lease. If the landlord finds out that a tenant has sublet their property while keeping it in the dark, the landlord could terminate the lease and demand that you leave the property. You could be liable for any damages or unpaid rent, experts said.

In New York, if your landlord finds out about a subtenant he or she didn’t approve, or simply doesn’t want the subtenant, the landlord may send you a legal notice requiring you to remove your subletter in 10 days. The landlord cannot directly evict the subtenant without getting you involved. Miss the deadline and your landlord could terminate your lease and try to evict you in housing court, which in turn, removes the subtenant. Or worse: “If you have a legal fee provision in your lease, then the landlord would be entitled to collect their legal fees from you if you go to court … and lose,” Rozen said.

What to do when things go wrong?

When she was in law school, Rozen sublet her apartment, but her subtenant wouldn’t leave the apartment when the lease was up and stopped paying rent.

In that situation, Rozen said the tenant would have to file a claim in court against the subtenant. Such cases often takes months, unless your subtenant voluntarily moves out after the case is filed. In Rozen’s case, her subletter finally left the apartment willingly, but he skipped on two months’ rent and left town. It was too late for Rozen to sue at that point.

“I will never make that mistake again,” Rozen said. “I was a poor law student.”

If your subletter doesn’t pay rent or damages your apartment, Rozen said the first step is to write a demand letter explaining the situation and threatening to sue if they don’t repay the rent or the costs.

If a demand letter doesn’t work, an easy and inexpensive way to handle the situation is to file a small claims lawsuit, which typically doesn’t require hiring an attorney, Rozen said. You could collect up to a few thousand dollars, depending on your state. In New York, for instance, the maximum is $5,000.

Resources for tenants

There are many housing advocacy groups across the country dedicated to helping tenants. When involved in disputes with your landlord or your subletter, you can turn to local organizations for legal advice and assistance. To find your local tenant advocacy groups, check out this Tenant Rights page on the U.S. Department of Housing and Urban Development website.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

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Shen Lu is a writer at MagnifyMoney. You can email Shen Lu at shenlu@magnifymoney.com

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College Students and Recent Grads

Everything You Need to Know About the TEACH Grant

Editorial Note: The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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A March government study found that about 12,000 recipients of the TEACH Grant, a grant for college students who agree to teach needed subjects at lower-income areas, had their grants converted into loans.

This happens sometimes because students didn’t fulfill their service obligations, and other times it was due to minor process errors, according to the U.S. Department Education’s study of the TEACH Grant program.

The report said 63 percent of TEACH Grant recipients who began their teaching service before July 2014 had their grants converted to a loan, either because they had not met the service requirements or the annual certification requirements. When TEACH Grant recipients first received their grants, the study says, 89 percent participants thought they were likely or very likely to meet the service requirements.

Ashley Norwood, consumer and regulatory adviser at American Student Assistance, a nonprofit organization dedicated to helping students complete the financing and repayment of higher education, told MagnifyMoney she has seen more grant recipients face the grant-loan-conversion issue as more students have signed up for the program, and it happened for various reasons.

“I don’t think anyone is all at fault. I think that it’s a combination of errors,” said Norwood.

The program is complicated — the amount of paperwork and procedures required to administer and participate in the TEACH Grant is onerous, she said. Oftentimes, schools don’t offer rigorous upfront counseling about the grant due to a lack of resources or personnel. And on the students’ part, they don’t always stay on top of the service obligations and other requirements they agreed to, Norwood said.

In this guide, we offer expert tips for getting the grant and avoiding the grant-loan conversion. We also provide actionable advice for grant recipients whose grants have been converted to loans.

What is a TEACH grant?

Since 2008, the federal government has been offering TEACH grants to college students who commit to teach in a needed field, like math and science, at a school that serves students from lower-income families.

A student can receive a Teacher Education Assistance for College and Higher Education (TEACH) Grant of up to $4,000 a year, but budget cuts reduced the maximum award in recent years:

  • For any 2017–18 TEACH Grant first disbursed on or after Oct. 1, 2016, and before Oct. 1, 2017, the maximum award was $3,724.
  • For any 2017–18 TEACH Grant first disbursed on or after Oct. 1, 2017, and before Oct. 1, 2018, the maximum award is $3,736.

Recipients must complete coursework needed to begin their career as a qualifying teacher, and must sign an agreement to teach at least four years in an eight-year time frame after graduation. After finishing their program, they must provide an annual certification that they are currently teaching in a high-need field and a low-income school or intend to do so. Those who do not meet the requirements will see their TEACH Grants be converted to unsubsidized loans.

How to get the TEACH grant

Step 1: Do the research

If you are interested in applying for TEACH Grant, you should contact the financial aid office at your school to find out whether your school participates in the TEACH Grant and which courses of study are TEACH Grant-eligible. The financial aid office staff should be able to walk you through the benefits and service requirements.

As of the first quarter of the 2017-18 academic year, 572 higher education institutions participated in the grant, according to the American Association of Colleges for Teacher Education. Schools determine which programs are TEACH Grant-eligible.

It’s not as simple as an English major hoping to teach English after graduation being eligible for the grant. A program of study that’s eligible for the TEACH Grant is a specific program designed to prepare students qualified to teach in a high-need subject. You want to make sure you are enrolled in the right program. It could be an undergraduate, graduate or post-baccalaureate program.

A post-baccalaureate program is not TEACH Grant-eligible if your school also offers a bachelor’s degree in education.

Step 2: Apply

Once you decide to participate in the program and are enrolled in the right program, you will need to apply for a TEACH Grant by completing a FAFSA form.

Step 3: Complete counseling

Then you will need to complete TEACH Grant Initial Counseling, which occurs online and explains the terms and conditions of the TEACH Grant service obligation.

This is an important task because you will learn what exactly you are signing up for during the process. It takes about 20 minutes to complete the counseling, and you will need a FSA ID and your school name for it. You must complete the counseling process every year you receive a TEACH Grant, and you can do so here.

Step 4: Sign the agreement

The last step in the grant application process is completing an Agreement to Serve, a legally binding document that explains the service obligations and conditions of the TEACH Grant, as well as your rights and responsibilities if the grant is converted to a loan. You commit to those terms when signing the Agreement to Serve.

Each year you receive a TEACH Grant, you must sign an Agreement to Serve. A read-only version of the agreement can be accessed here. You can sign the document here. Your school will be notified once you submit your Agreement to Serve.

An additional note

It is important to keep a copy of all of your TEACH Grant paperwork and correspondence with your grant servicer for your records.

What to do while you’re still in school

You only qualify for a grant if your score is in the top 25th percentile on college admissions tests, and you need to maintain a cumulative 3.25 GPA to maintain your eligibility for the funds, according to the American Association of Colleges for Teacher Education. Remember to complete the counseling and the Agreement to Serve each year that you receive a TEACH Grant.

When you’re looking for employment, make sure that you are going to teach full time in a high-need subject in a school serving low-income families.

Experts suggest grant recipients be cognizant that this grant can turn into a loan if you are not careful.

Norwood said if you decide that you are not going to teach or you are not going to serve in a low-income area, you may return the grant, but you have very little time to make that decision. You can cancel the full grant or a portion of it the first day of the school’s payment period or 14 days after your school sends you a notification stating your right to cancel. If you do so during the timeframe, your school will return to the Department of Education your awarded funds, which won’t be converted to a loan.

How to prevent the TEACH grant from turning into a loan

Meet all the service requirements

Once you complete your education, you have to meet all the requirements stated in your Agreement to Serve:

1. You must teach in high-need fields

They are identified by the federal government or a local education agency. Common high-need fields include bilingual education, science, reading specialist, math and foreign language. The subject you teach must be listed within the Teacher Shortage Area Nationwide Listing for the state in which you teach, either when you begin your service or when you sign the Agreement to Serve, according to the Department of Education. The most recent list is here.

Norwood said that it’s fine if teachers bounce around qualifying subjects, but if you teach any of the fields not considered a high-need one, then you’re not performing the required service.

2. You must work full time in qualified fields for at least 4 years

They don’t have to be four consecutive years, but you need to finish your teaching service within eight years of graduating. And more than half of the classes you teach each school year are in high-need fields.

3. You must teach in a school serving low-income families

You must perform the teaching service as a highly qualified teacher (defined by Title IX) at a low-income elementary school, secondary school (public or private) or educational service agency.

Qualified schools are listed in the department’s annual Teacher Cancellation Low-Income Directory. Schools operated by the U.S. Department of the Interior’s Bureau of Indian Education (BIE) or on Indian reservations by Indian tribal groups under contract or grant with the BIE qualify as low-income schools. That list is here.

4. You must provide your TEACH Grant servicer with documentation of service performance process

Within 120 days of completing the education for which you received a TEACH Grant, you must tell your TEACH Grant servicer in writing that you are working as a full-time teacher (or that you plan to do so), according to the terms and conditions of the TEACH Grant service obligation.

Complete the annual certification

Every year, you have to offer your grant servicer paperwork documenting your teaching service. You can obtain the required form from your servicer. The paperwork must be signed off by the chief administrative officer or an authorized official at the school where you taught for the year being certified. The official must confirm you performed qualified service in the right school and more than half of your classes were in high-need fields.

If you have completed your education but are not employed in a qualifying teaching position, you must notify your grant servicer at least once each year that you still intend to satisfy your service obligation.

Your TEACH Grant servicer is supposed to contact you periodically to confirm your intent to satisfy your obligation, but experts said you need to be on top of providing annual information. Take it upon yourself to make regular contact with your servicer, particularly if you don’t start your qualified service immediately after finishing your education.

At the latest, you should start your qualified teaching service four years after completing the program where you received the TEACH Grant, Norwood said.

If you don’t meet any of the service requirements, your grant will be converted to a direct unsubsidized loan. Read more about conditions that convert a TEACH Grant to a loan here.

Common problems

Norwood said many people encountered issues because they didn’t get the right paperwork to keep the servicer updated of their progress, possibly because they didn’t keep their address up-to-date with their servicer. It could also be that they didn’t complete the form correctly or missed the deadline to submit their annual certification.

“If I had a piece of advice, I would say just to students to make sure they really pay attention to what they’re signing, and open mail from the Department of Education or a servicer as soon as it comes,” Norwood said. “Don’t ignore it.”

A staff member at the American Federation of Teachers spoke on background that sometimes the grant is converted to a loan because the recipient made a minor error in their paperwork, but there is no appeal process with the servicer, and so the teacher can’t correct it.

Because the servicer is very particular and exact about details, the American Federation of Teachers advises educators to carefully review all the forms they send to the servicer.

What to do if you feel you your grant is wrongly converted to a loan

The Department of Education contracts servicers to handle the TEACH Grant, and FedLoan Servicing currently services TEACH Grants. It monitors the process to make sure recipients do everything correctly and, after you complete the paperwork certifying that you’ve met all the qualifications, you send over the documentation. In the event that a grant must convert to a loan, FedLoan Servicing will execute it, apply interest retroactively and begin loan servicing.

If you think you have done everything correctly and met all the requirements but your grant is converted to a loan, experts suggest you engage with your grant servicer first.

Norwood advised grant recipients in this situation to reach out to the people whom you have been working with on the grant. If that doesn’t work, you can then seek help from the servicer’s ombudsman, an impartial mediator who will take a look at the situation, identify problems and help settle the issue, Norwood said.

If FedLoan Servicing’s ombudsman can’t help solve the problem, you can then file a dispute with the Federal Student Aid Ombudsman Group with the education department. The ombudsman is established as a neutral party to help fix problems that include grant-loan conversion.

You can reach the ombudsman online, by phone at (877) 557-2575, or at:
Office of the Ombudsman
U.S. Department of Education
830 First Street NE, Mail Stop 5144
Washington, D.C. 20201-5144

Depending on specific situations, Norwood said issues caused by recipients, such as missing a deadline, may not get much sympathy. But if processing errors occurred on either side, there may be some leeway there, and a loan may revert back to a grant, Norwood said.

How to repay a TEACH grant that converted to a loan

If the grant converts to a loan, you will be given the opportunity to pay the interest that accrued before it capitalizes.

“If you can make extra payments,” Norwood said, “I would make extra payments to help pay down that interest.”

But if you can’t, interest capitalizes when the loan enters repayment at the end of a 6-month grace period, which starts the day after your grant is converted to a loan.

Norwood advises you make sure to get on a repayment plan that works for you. If you have other federal loans in your name, you may consolidate them.

Interest rates

The loan servicer will retroactively apply interest, which accrues from the time you received your first grant, as if you signed a loan instead of received a grant.

For instance, if you signed the agreement in September 2013, it would be subject to the interest rate applied to unsubsidized direct loans disbursed in September 2013. The servicer will calculate your outstanding interest as if it had accrued over the last five years.

If the grant is wrongly converted to a loan, Norwood suggests the recipient still make payments, because you could always get refunded later.

You can also ask for the loan to be placed in forbearance while your case is being investigated by the Department of Education. This way, you can put off making payments until you’ve received a resolution. If the grant was indeed wrongly converted to a loan, Norwood said you won’t need to get a refund because you haven’t paid anything upfront. But if the loan doesn’t revert back to a grant, you at least paid the interest that accrued during the forbearance.

Repayment plans

The repayment plans for a student loan converted from a TEACH Grant are the same for all other federal loans. You can go with the standard repayment plan, graduated plan or income-driven plan, among others. Your loan servicer will be FedLoan Servicing.

Consolidate and refinance

You can consolidate the loan with other eligible federal loans, but there’s no refinancing option in the federal loan program. However, you could refinance with a private lender, Norwood said. Just remember you will lose all of the federal benefits such as Public Service Loan Forgiveness, deferment, forbearance and income-driven repayment plans if you are out of the federal student loan system.

This article may include links to SimpleTuition, a subsidiary of LendingTree, MagnifyMoney’s parent company.

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As China and U.S. Up the Ante, When Should Americans Worry About a Trade War?

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The story was originally published on April 4, 2018.

Update: Trade dispute between the United States and China escalated for the second time this week as President Donald Trump threatened late Thursday to add tariffs on additional $100 billion in Chinese goods, a week after announcing tariffs on $50 billion in Chinese imports.

Trump said the new tariffs were a response to China’s “unfair retaliation” of announcing its intention to impose 25% tariffs on $50 billion worth of U.S. exports. China was answering the Office of the U.S. Trade Representative’s (USTR) Tuesday plan to impose 25% tariffs on 1,300 products imported from China.

“If the U.S. persists in unilateralism and trade protectionism despite opposition from China and the international community, China will fight to the end and hit back resolutely,” a spokesperson for the Chinese Ministry of Commerce said in a statement Friday in Beijing.

The U.S. imports $479 billion worth of goods from China, its largest trading partner. If the announced U.S. tariffs on $150 billion in Chinese products were to be implemented, nearly a third of Chinese imports would be affected.

The Trump administration was first to the punch. On Tuesday evening, it proposed a plan to slap 25% tariffs on 1,300 products imported from China. The products range from industrial supplies, machinery and raw materials to consumer goods, such as dishwashers and automobile parts, according to the Office of the U.S. Trade Representative (USTR).

In retaliation, China immediately announced its intention to impose 25% tariffs on $50 billion worth of U.S. exports. The list included soybeans, airplanes and automobiles, as trade experts had expected earlier.

China and the U.S. have been swapping tariff threats for the past few weeks. Neither country has imposed this week’s newly announced taxes yet, but it’s certainly a game of global trade “chicken” that has the whole world watching.

“This is very nerve-racking,” said Sherman Robinson, a nonresident senior fellow at the Peterson Institute for International Economics, a nonpartisan, nonprofit think tank in Washington D.C.. “The U.S. has basically gone rogue in the world trading system, and the Chinese are simply reacting to what the U.S. is doing.”

How did we get here?

President Donald Trump has been tough on trade since he was on the campaign trail as a presidential candidate and has had China in his crosshairs for a while, arguing the country hasn’t been playing fair on trade. Many critics agree that China has in some ways stymied growth in U.S. industries, and supporters of the new tariffs hope it will force China to play fairer on trade.

Trump made good on his campaign promise to rein in trade by announcing sanctions on steel and aluminum imported from China in early March. Later in the month, he threatened to impose 25% tariffs on $50 billion worth of Chinese industrial goods. At the time, the list of products impacted wasn’t released. Until now.

In turn, the Chinese Ministry of Commerce announced it would impose higher duties on $3 billion worth of 128 U.S. products exported to China, including fresh and dried fruits, pork, wine, seamless steel pipes and recycled aluminum, in response to the steel and aluminum sanctions. China imposed these tariffs on Monday.

Where Americans will feel the sting

Eventually, consumers will begin to feel the impact in indirect ways. For starters, the stock market plunged Wednesday morning in response to the newest tariff announcements (but later rebounded). And eventually, consumers may see higher prices on goods that are made using Chinese-sourced parts, experts say.

U.S. tariffs on Chinese imports will raise the prices of the resources used to produce final products for U.S. manufacturers and producers, which will eventually get passed along to American consumers in the form of higher prices, explained Mark Perry, an economics policy scholar at the American Enterprise Institute and professor of finance and business economics at the University of Michigan-Flint.

In addition, many jobs may be at risk in both countries, as sales and profits would decline as the cost of goods and services rise, Perry said.

This time around, China —  America’s third-largest export market, and the second largest market for U.S. exported agricultural products — is targeting U.S.-exported aircrafts and agricultural products such as soybeans, which could have a much larger-scale effect on the U.S. economy.

“It’s going to hit right up in the Midwest, where all our soybeans are produced,” Robinson said. “It’s going to hit Seattle, where our airplanes are produced and all over the industry in the Midwest and East.”

Consequently, farmers, automakers, Boeing and their suppliers could lose business, Robinson said, and workers could lose jobs.

Perry said for General Motors alone, the new steel and aluminum prices would increase their cost by about $1 billion annually in materials because everything they buy contains steel and aluminum. If automakers have to pay more for the raw materials, then cars and trucks might become more expensive, he said.

“If it hits fast, there will probably be macro shots, you’ll have repercussions with stock markets and you may have layoffs,” Robinson said. “If it’s slow, then there’s time for adjustment. You’ll see people lose jobs, but there will be time for the labor market to adjust.”

Experts had long predicted that China would target U.S. agriculture products and airplanes. But the Trump administration’s decision not to target everyday consumer products imported from China, such as textiles, garments and shoes, was a surprise.

The likely reason is that the Trump administration has been careful not to do anything that would directly hurt consumers, Robinson said. Another reason could be that hitting the apparel industry could hurt the first daughter and adviser to the president, Ivanka Trump, who owns a namesake clothing line, Robinson said.

“Her imports of her clothing line would not be affected by the U.S. tariffs [Trump announced Tuesday],” Robinson said.

‘The ball is really in the U.S. court. They’re the ones who started this.’

Robinson explained that a trade war usually starts out with just a few sectors and then escalates to include other sectors as well. He said whether there will be a full-blown trade war is mostly depended upon what the U.S. does, because the rest of the world has to decide how to react to the U.S. efforts.

If we moved toward a widespread trade war, the most extreme result could be that the U.S. decides to withdraw from the world’s trading system, cutting both exports and imports, Robinson said. And if the rest of the world holds firm to the rules-based trading system in the World Trade Organization, which Trump scorns, and all the other multilateral and bilateral agreements that they’re pursuing, then it would mostly hurt the U.S., he added.

And American consumers would ultimately pay the price.

“It would damage the structure of the U.S. employment if it’s done rapidly. It would undoubtedly cause some kind of a recession,” Robinson said. “If it’s done slowly over time, it means a major change in the structure of production, basically away from tradable goods to non-tradable goods. We become a nation of services workers, hamburger flippers.”

This would be the opposite of the stated goal of the USTR and Department of Commerce, which is to bring industries back to the U.S.

China’s Foreign Ministry spokesperson Geng Shuang said in a Wednesday press conference that China is open to further dialogue.

“We hope that the U.S. side could have a clear understanding of the current situation, remain level-headed, listen to its business community and general public, discard unilateralism and trade protectionism as soon as possible, and work with China to resolve trade disputes through dialogue and consultation,” said Geng.

“It may be that now having up the ante, everyone will step back and behave like adults,” Robinson said. “But the ball is really in the U.S. court. They’re the ones who started this.”

If history is any indicator, there is no winner in a tit-for-tat trade war, experts say.

“There’s a long history of previous attempts at trying to impose tariffs and protectionism,” Perry said. “We have mountains of evidence that this has never worked out in favor of the country imposing protectionism, but it’s like seems like an economic lesson that we never really learn.”

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Acting Director of the CFPB Asks Congress to Limit the Consumer Agency’s Power

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In Mick Mulvaney’s first report to Congress, released on April 2, the Consumer Financial Protection Bureau’s acting director didn’t just highlight the consumer watchdog’s past work but also included recommendations for Congress to limit its power.

In the report’s introduction letter, Mulvaney requested that Congress:

  1. Fund the Bureau through Congressional appropriations;
  2. Require legislative approval of major Bureau rules;
  3. Ensure that the Director answers to the President in the exercise of executive authority; and
  4. Create an independent Inspector General for the Bureau.

“The Bureau is far too powerful, with precious little oversight of its activities,” said Mulvaney. The power wielded by the Director of the Bureau, he added, “could all too easily be used to harm consumers, destroy businesses, or arbitrarily remake American financial markets.”

What’s at stake?

The CFPB is a U.S. government agency responsible for establishing consumer protection regulations and regulating key parts of the financial sector, such as the mortgage and debt collection industries. It was established in the wake of the 2008 financial crisis as a centerpiece of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The agency has zealously targeted bad actors in the financial industry since its creation, reclaiming nearly $12 billion for more than 29 million consumers. Its latest high-profile actions included fining Wells Fargo in the unauthorized accounts scandal and creating new rules around payday lending. It has also rolled out new regulations in the mortgage, credit card, debt collection and prepaid card sectors.

The Trump administration and Republicans have long sought to curtail the CFPB’s power as part of a broader effort to lighten federal regulation over financial institutions.

While Mulvaney has been trying to dismantle the CFPB in various ways since Trump appointed him last November, consumer rights groups see his report to Congress as a significant action because he is formally recommending rules to undercut the agency and strip away its tools to carry out its mission.

If implemented, the recommendations would effectively stop the CFPB from protecting consumers in the future, consumer rights groups say.

“It’s another example of his effort to hamstring the bureau, to undermine its mission, to turn it into an agency that has the interest of financial predators at heart, rather than the consumers that it was statutorily created to protect,” said Rebecca Borné, senior policy counsel at Center for Responsible Lending, a nonprofit, nonpartisan organization based in Washington, D.C.

A closer look at Mulvaney’s recommendations

1. Funding

How it is now: Right now, the CFPB receives funding through the Federal Reserve. Under its former director Richard Cordray, the CFPB requested $602 million in funding for fiscal year 2017, below the funding cap of $646 billion.

The proposed change: Fund the bureau through Congressional appropriations.

In the past, CFPB’s funding requests have always been fulfilled by the Federal Reserve, and below the cap set by the Fed. But now Mulvaney wants the consumer bureau’s budget controlled by Congress.

Congress is known for being heavily dependent on campaign contributions from the financial sector, according to The Center for Responsive Politics, a nonpartisan, independent and nonprofit research group tracking money in U.S. politics. Borné explained that the statute that created the bureau, Dodd-Frank, intentionally made the agency’s funding independent so that it would not be subject to the political winds of Congress and vulnerable to the financial industry lobbying it.

So the question is: How much money would Congress budget for the CFPB? No one knows for sure, but consumer advocates have serious concerns about putting the agency’s funding in the hands of Congress. Mike Litt, consumer campaign director with the U.S. Public Interest Research Group, a nonpartisan consumer advocacy organization, thinks that “they would likely starve the agency to death so that it would not be able to do its job.”

In January, Mulvaney requested $0 in quarterly funding from the Federal Reserve, saying it would make do with dipping into its reserve funds. Litt said Mulvaney’s proposal for Congress to control the agency’s funding is much more problematic.

“It’s one thing to have a you know a director who is against the agency’s mission to request zero dollars for its operations for the next year,” Litt said. “It’s a whole [other] level to remove the agency’s independent funding forever.”

2. Rulemaking

How it is now: The CFPB creates and enforces federal consumer financial laws on its own. Before establishing a final regulation, the CFPB publishes proposals to address an issue and invites the public to comment.

The proposed change: Require legislative approval of major bureau rules. 

Litt said this would make the CFPB not just the only banking regulator, but also the only agency across the board where Congress would be in control of approving major rules.

“It runs counter to the way that administrative agencies in this country work and have worked for many years, which is Congress delegates authority and the agencies pass rules,” Borné said.

Mulvaney didn’t lay out specific reasons for making this recommendation, but it falls in line with his overarching argument that the bureau has too little oversight.

“This would just make it that much harder for a new rule even being issued in the first place and that is new territory that is dangerous,” Litt said. “It means major new consumer protections wouldn’t even see the light of day.”

3. Director’s role

How it is now: Dodd-Frank requires that the head of the CFPB be appointed by the president and confirmed by the Senate, but works independently from the president. The director serves a 5-year term and can only be removed from office due to “inefficiency, neglect of duty or malfeasance in office.”

The proposed change: Make the director answer to the president. The president can remove the director without cause.

Borné said the CFPB director role was created to be independent to make sure he or she acts based on what data show, rather than what the president says.

If implemented, Litt said Mulvaney’s proposal would mean that the president can fire the director for no reason, which takes the effectiveness away from the head of the CFPB.

“Even a director who believes in the agency’s mission might think twice because they know that the president could fire them without cause,” Litt said.

But supporters of this proposal think the CFPB has too much concentrated power in its single-director structure.

Peter J. Wallison, senior fellow in Financial Policy Studies at the American Enterprise Institute,  a nonpartisan public policy research institute, called the structure a “major — even historic — break with the past,” when Congress created multi-headed and bipartisan bodies to head other federal agencies.

“Because the director of the CFPB cannot be changed by the president, this powerful agency is insulated from the results of the electoral process that puts a president in office,” Wallison wrote on a February analysis.

4. Independent inspector general

How it is now: The Federal Reserve’s Office of Inspector General oversees the CFPB.

The proposed change: Create an independent inspector general for the bureau.

Borné said this is an unnecessary proposal because there is already an inspector general for the CFPB from the Fed, which was carefully designed by Dodd-Frank, Borné said.

“It’s hard to say for sure based off of a one-line recommendation in this report but likely the point of that recommendation is to replace the current Inspector General for the CFPB with one that is appointed by the president, which would then serve to undermine the independence of the agency,” Litt said.

But supporters say an independent inspector general would provide greater transparency and accountability at the bureau. Sen. Rob Portman, R-Ohio, introduced similar legislation last year to create a dedicated, Senate-confirmed Inspector General for the CFPB.

What’s next?

Congress would have to pass legislation implementing Mulvaney’s recommendations.

Mulvaney is due to testify before Congress next week. From there, it remains to be seen whether Congress will act on his suggestions.

Experts say that consumers have voiced support for a strong independent consumer bureau, which have helped fend off attacks on the CFPB in the past few years. A 2017 Center for Responsible Lending poll, conducted jointly by Republican- and Democrat-aligned firms, found that 73 percent of Americans of different political affiliations supported the CFPB.

As long as consumers continue to speak up, experts say they are hopeful that members of Congress will respect the will of their constituents to keep the independent structure.

“At the end of the day, reining in Wall Street, ensuring a fair competitive marketplace is not a left issue or right issue,” Litt said. “It’s a big guy, little guy issue.”

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