Category Archives: Borrowing

Repair or Replace?

Leave a reply

My Subaru is in the shop.  My beloved 2012 Outback with 107,000 miles on it.  I took it in Friday for a scheduled service (a major service, which was already going to come with a four digit repair bill), and they discovered a few more things on the verge of failure.  It’s going to be expensive.  Expensive enough that it made me think about whether it was worth fixing, or if it would make more sense to replace the car.

Ultimately, I decided to make the repairs, despite the price tag.  My Subaru is paid off.  And while a nice new car sounds appealing to my senses, it is not appealing to my wallet, especially with car loan interest rates looming around 7% or higher.  And even to replace my Subaru with a car of equivalent age and mileage would cost more than twice the cost of the repair.  Although I originally bought the Subaru used, I know it has been well taken care of for at least the last six years.  The tires on it will be good for a couple more years.  It’s already set up with a trailer hitch and wiring to be able to tow my little camper.  So I’ll have a big outlay of cash for the big repairs now, but then my car should be good to go for another 100,000 miles.  Or at least until I retire and my needs change.  If I were to buy a new car now, it likely wouldn’t even be paid off before I retire.

A really huge car repair bill can give you pause.  Especially when it’s an older car with a lot of miles.  It would have been easy for me to walk away and start searching for a replacement.  But the reality is that my old Subaru is of more value to me than it is to anyone else.  And for about a year’s worth of car payments (or hopefully less), my old Subie will be ready to roll for a lot longer.

Would you repair or replace?

 

What’s Up With My Student Loans?

Leave a reply

Federal student loans are in a bit of a state of chaos right now.  After a three year pause, interest started accruing again on September 1st, and payments are starting this month for anyone who was in repayment before the pandemic, and also for anyone who stopped attending school from March 2020 through April 2023.  That is a LOT of student loan borrowers.  All going into repayment at exactly the same time.

To keep things extra confusing, a lot of borrowers have had their loans shuffled around to a different loan servicer (the company that handles the management and collection of the debt) during the pause.  Several of the old familiar loan servicers, including Great Lakes, AES, and Navient (AKA Sallie Mae), have gotten out of the federal loan servicing business.  There are several new players in the federal loan servicing space including Maximus, Aspire, Ascendium, and bunch of other companies I hadn’t heard of before recently.  So we have new servicers at a time when millions of borrowers are entering repayment for the first time.

I’ve heard from several currently enrolled students that their in-school deferments have not yet processed for this year.  And that doesn’t surprise me at all.  The loan servicers are without question overwhelmed.  And the in-school deferments are not their top priority right now.  But I do have confidence that the servicers will eventually get these deferments processed retroactively to the start of the fall semester.  So if you are in school and receive notice that you have a payment due, what should you do?  I can’t believe I’m saying this, but you should ignore it.  The school has sent your enrollment verification.  The loan servicer has access to it.  And the deferment will eventually be processed.  If there is a mis-labeled missed payment jammed in there, there are protections in place so you will not suffer any consequences for this “missed payment.”  So, believe it or not, you should ignore it.

I’ve heard reports that wait times to get through to a loan servicer on the phone are hours long.  And nobody wants to be on hold for that long.  So what can you do to make sure everything is in order?  There are several things you can do that don’t involve calling the loan servicer.

  1. First you should make sure you know who your loan servicer is, just in case it changed during the pause.  You can always find this information at http://studentaid.gov in the “My Aid” section.
  2. If you have not yet established an online account with your loan servicer’s web portal, you should do so.  This portal should be able to provide the most up-to-date information about your student loan account.  This will be much more efficient than trying to get through to a human on the phone.
  3. If you have general questions about repayment plan options or repayment strategies, there are options outside your loan servicer.  You can reach out to the financial aid office at your school.  If you are a law school graduate, you can also get help from AccessConnex.
  4. If you have specific questions about your student loan, you may be doomed to wait on hold to talk to your loan servicer, but this should be a last resort after you try to work through options on their web portal.

This is a less than ideal time to be a student loan borrower.  The system is not working at its best.  But your school’s financial aid office will always be your ally in working through the process.

Lessons from My Father

Leave a reply

I’ve been away a lot lately.  I haven’t really been in my office and I haven’t written a Moneywise Tip in quite a while.  Sometimes family responsibilities have to take priority over other things. And that has been my situation as my father arrived at the final weeks of a long illness and then passed away.

My father was a teacher by trade (German and French), and he was always teaching something to someone, whether in the classroom or not.  While he never succeeded in teaching me to speak German (much to his dismay), he did manage to teach me quite a bit about money over the years.

My dad grew up poor.  He was born during the Great Depression, and after his parents divorced he lived with his father in a one room cabin without electricity.  Because he knew what it was like not to have money, he was very careful with it once he actually had some (after 4 years in the U.S. Navy and working his way through college on the G.I. Bill).

I remember always receiving an allowance as a child.  That is how I learned about how to receive a regular paycheck and that more money didn’t come around until the next payday.  My dad was paid every two weeks, so my allowance came every two weeks.  So I had to get used to saving and budgeting.  As I grew older and took on more responsibilities in the house, my allowance grew to reflect that.  I learned that more work yields more money.

My dad helped me start a savings account when I was young.  I remember a program in my elementary school where students all started savings accounts together and brought deposits to school for regular savings.  But I didn’t participate because I already had my savings account, and it was growing whenever I had some extra allowance or some birthday or Christmas money.  Over the years I learned the value of having some extra cash stashed away in case of emergency or for a purchase that required saving ahead.  And now I still have an automatic transfer to savings set up right after every pay day.

My dad also taught me about loans.  My sister and I were desperate to have a television in the bedroom we shared.  But the 12 inch black and white TV we dreamed of was more than $40, which may as well have been a million dollars for two elementary age kids in the 1970’s.  But my dad loaned us the money.  He kept a ledger of the amount we owed, and we paid it back over time, in dribs and drabs.  I remember at one point handing my dad a small box full of pennies to pay on that account.  And he accepted that and subtracted it from my balance due.  I’m not quite sure how long we took to pay off that TV, but I’ll always remember my first loan.

My dad was quite the master of budgeting as well.  He didn’t have spreadsheets, but he worked out his budget extraordinarily well using the envelope system (which I understand made a recent comeback thanks to TikTok). Every payday he would go to the bank and get a certain amount of cash to fill the envelopes.  He had a list of exactly how many of each denomination bill he needed.  Then he would lay it all out on his desk like a Monopoly banker and would fill each envelope with the budgeted amount.  Each regular expense had its own envelope.  Then when the bill came due, he would go to that envelope and get the money to pay that bill.  If the amount in the envelope wasn’t enough, he would rework the budget and would have to figure out which category could spare a little to cover the difference that month.  It seemed incredibly complicated at the time.  But it was amazingly effective.

My dad taught me so many things I am grateful for.  The lessons weren’t always easy at the time.  (Especially the time he taught me how to stop going up hill without drifting backward in a manual transmission car.  That lesson came with a LOT of tears.)  But I will forever be grateful for the many things he taught me.  I hope I am able to have anywhere close to that kind of a positive impact on other people’s lives.  Thank you, Pops!

This Pause Is Giving Me Pause

Leave a reply

In March of 2020 everything changed in the world as we knew it.  Everything closed down.  Masks were pervasive.  Toilet paper was a hard-to-find commodity.  And my least favorite task was bathing the groceries.  But as the pandemic moved forward, we learned more about the virus.  Treatments and preventative vaccines were created.  And now everything feels a lot more like normal.  Well….almost everything.  Student loan repayment seems even more up in the air now than it did at the beginning of the pandemic.

In March 2020 the President announced a pause on federal student loan repayment, as well as setting the interest rate on all Federal Direct Student Loans to 0%.  This was supposed to last for a few months, until the public health emergency had passed.  But we all know now that the public health emergency did not end after a few months.  And neither did the loan repayment pause.  The pause has been extended several times.  It really looked like repayment (and the accrual of interest) was going to resume in January 2023.  It was supposed to coincide with the processing of loan relief in the form of up to $20,000 in forgiveness for qualifying borrowers.  But that loan forgiveness program got all tangled up in law suits and we’re really not sure when that will be resolved.  So the pause was extended yet again.  And this time the end date is a moving target.

Last week the U.S. Department of Education announced that the payment pause would end sixty days after a) they are allowed to implement the debt relief program, or b) the litigation is resolved.  If neither of these things happens by June 30, 2023, then repayment (and the accrual of interest) will resume 60 days after that.

Clear as mud?  Yep.  I have long thought that the federal student loan programs are too complicated for the average borrower to understand thoroughly.  There are too many different repayment plans.  There are origination fees deducted from loan amounts that make borrowing less transparent than it ought to be.  Loan servicers have a known history of not being up front with borrowers when they call with questions.  Loans come with something called a “variable fixed” interest rate, so each year brings a new loan with a different interest rate from prior loans.  And these interest rates are much higher than rates on car loans or home mortgages, which is very discouraging. It’s hard for me to keep up with all of the details, and I spend my whole life living in the student loan world.  I can’t imagine how intimidating it must be to a brand new college freshman.

But here we are.  Student loans were complicated enough before our country started using student loan borrowers as political punching bags.  Borrowers are now caught in the crossfire of arguments about many different policies.  I’m still not sure how I feel about the proposed debt relief program currently tied up in the courts.  But I feel very strongly that student loan borrowers shouldn’t be made to suffer because of the political battles of others.  And I guess that’s why the payment pause was extended yet again.

Will this be the last extension of the pandemic payment pause?  Only time will tell.  But if there is something to know, you can be sure I’ll share it here when that time comes.

Student Debt Relief Details

Leave a reply

At the end of August President Biden announced a plan to forgive up to $20,000 in Federal Direct Student Loans for borrowers with income below $125,000 per year.  Shortly after that announcement, the legal challenges aiming to stop the program before it started came rolling in.  This past week a couple of those legal challenges were dismissed, which makes me think this forgiveness might actually happen (but then an appeals court blocked progress on Friday evening, so we can’t be sure).  Without any fanfare, the application for debt relief opened this past week.  And people have been submitting the application in droves!

You may be eligible to receive forgiveness of up to $10,000 if you meet the following conditions:

  • You have an outstanding federal direct loan (subsidized, unsubsidized, graduate PLUS, parent PLUS, or direct consolidation) that disbursed prior to June 30, 2022.  If you borrowed your first loan for the current academic year, you are out of luck.
  • Your adjusted gross income from your 2020 or 2021 tax return was less than $125,000 for single filers, or less than $250,000 for families.  You can use either year’s income—whichever is lower.  If you were classified as a dependent student for the 2021-22 academic year, then your family’s income will be used rather than your own to determine your eligibility.

You may be eligible to receive up to an additional $10,000 in forgiveness (for a total of up to $20,000) if you received a Pell grant as an undergraduate student.  If you don’t recall whether you received a Pell grant, you can find out by logging in at http://studentaid.gov and selecting “My Aid.”  The “Grants” tab will reveal whether you received a Pell grant.

You may not need to do anything to receive this forgiveness.  If the Department of Education already has your income information on file, your forgiveness can be processed without your having to take any action.  If you submitted a 2022-23 FAFSA, you should be all set (though the Department of Education may follow up for parent information if you were a dependent student for 2021-22).  If you submitted 2020 or 2021 income information to your loan servicer in order to be on an income driven payment plan, then you should also be all set.

If your income info is not already at hand, you will need to submit the application for debt relief before December 31, 2023 in order to receive this relief.  The form is very simple.  If you know your name, date of birth, email address, phone number, and Social Security Number you should be able to complete it in two minutes or less.  After submitting the form you should receive a confirmation email. The Department of Education will contact you if more information is needed.  Once the application is approved, you will be notified, and then your loan servicer will be in touch to let you know what your new loan balance is and what your new monthly payment amount will be.

It sounds really simple.  I hope it actually turns out to be that simple.  But it certainly can’t hurt to try.  If you  are eligible….bring on the debt relief!!

 

A Rundown of that Big Student Loan Announcement

Leave a reply

This was a big week for financial aid news.  On Wednesday President Biden announced a plan to forgive up to $10,000 in student debt for some borrowers and up to $20,000 for other borrowers.  And there was a lot of other good news bundled in there as well.  Here’s the good, the bad, and the ugly of what I know so far.

The good is that this will bring a lot of relief to a lot of student loan borrowers.  Any borrower with outstanding Federal Direct Student Loans as of July 2022 will receive up to $10,000 in forgiveness on their loan balance if their income for 2020 or 2021 was less than $125,000 for single tax filers, or less than $250,000 for joint filers.  If those same borrowers also received a Pell grant for their undergrad study, they will receive up to an additional $10,000 in forgiveness, for a total of $20,000.  Nobody is going to receive forgiveness of more than their current balance, but some borrowers may be fortunate enough to have their total outstanding balance forgiven.  The details of how this is all going to work is still a bit fuzzy.  It’s my understanding that if the Department of Education has the borrower’s income on file already, either from an income-driven repayment plan or from a current FAFSA form, there won’t be an application process required—the forgiveness should process automatically.  For those without income information on file, there will be an application process.  I’ve heard that the application will be short and simple, but that remains to be seen.  I’ve heard conflicting information about whether this application will become available in September or October of this year, but I’m sure we’ll know soon.  And there is a catch for those in their first year of graduate study this year.  If you were a dependent student for financial aid in the 2021-22 academic year, this will all be based on your parents’ income, not on your own.

The other big news in the announcement was yet another extension of the pandemic-related payment pause on federal student loans that began in March 2020.  Since that time all Federal Direct Loans have not required any payments, and the interest rate on these loans has been set at 0%.  These terms have been extended one last time, through December 31, 2022.  Repayment will resume in January for those borrowers not in another deferment status (like the in-school deferment while you are working on your law degree).  And loans will start accruing interest again in January.

These two things are the hot topics in the news, but there was additional good news tucked away in Biden’s announcement, which I think are even more exciting than the hotter, sexier topics.  The Department of Education is planning to make a major change to the way unpaid student loan interest is managed.  Previously, when a borrower with large student loans was making payments on an income-driven payment plan, the amount the borrower paid was oftentimes less than the amount of interest accruing.  And that extra interest was added on to the principal of the loan.  This is called negative amortization.  The borrower was making regular payments and their total amount due was growing rather than shrinking.  This is going to change going forward.  While it may take a while for the details to be released, the announcement on Wednesday claimed an end to the process of negative amortization.  If you make an income-driven loan payment (even a payment of $0), no extra interest will accrue.

The final piece of the announcement involves the creation of a new income-driven payment plan, which will be much more favorable to borrowers than the existing plans.  Existing plans calculate the monthly payment based on 10%, 15%, or 20% of the borrower’s “discretionary income,” dependent upon the plan.  This new plan will calculate that at 5% of discretionary income for undergraduate debt, but sadly will maintain the 10% calculation for graduate level debt.  There will be some kind of weighted calculation for those with both graduate and undergraduate debt.  But this new plan will still be an improvement even for those with only graduate level debt, because the definition of discretionary income is changing as well.  On the existing income-driven plans discretionary income is 150% of the current poverty guideline.  On the new plan that will be 225% of the poverty guideline, so the portion of the borrower’s income protected from inclusion in the student loan payment calculation is larger.

That was a lot of information for one little Presidential press conference.  And not everyone is happy about it.  Any kind of loan forgiveness comes with questions about equity.  Some think any forgiveness at all is too much (and I’m actually anticipating delays in implementation due to legal challenges from this camp).  Others think $20,000 is not near enough.  I’m still conflicted myself about the forgiveness portion of this, but I’m not angry and not begrudging anyone the forgiveness they may receive.  I think it will help a lot of people. But the other parts of the announcement are the more important parts, as they are solid first steps toward fixing a student loan system that hasn’t been serving students particularly well for some time now.  In a perfect world, my job as a financial aid administrator would be completely unnecessary because education would be affordable to all.  But we don’t live in a perfect world.

I’m sure that there is still a lot of clarification to come on all of this.  I’ll be watching for updates at https://studentaid.gov/debt-relief-announcement/ and through my many financial aid administrator networks.  When there is more news to share, you will certainly hear from me.  Until then, I hope that you are able to find some joy in all of this news.

Time Really Is Money

Leave a reply

As some of you already know, I’ve been taking classes through Penn State’s World Campus to lead me (hopefully) to become a Certified Financial Planner.  My goal is two-fold.  First, I think this education will help me to better help my student population.  Second, I think this will lead me to a nice side-gig that I can pursue for a bit of extra income after I retire from Penn State.  This semester I’m taking a class in Corporate Finance.  At first I had my doubts about how practical this class would be for me.  But it turns out I really enjoy it.

Last week we started learning about something I’ve been preaching about for years:  the time value of money.  A dollar today has a different value than that same dollar a year from now.  If you put in into a savings account with a 2.0% interest rate that dollar is worth $1.02 in a year.  If that dollar was borrowed from a Grad PLUS Loan with a 7.6% interest rate, the use of the dollar is costing you an additional $0.076 for the privilege of using it for the year.  Whether you are saving or borrowing (I know…borrowing is much more likely at this stage in your life) it is important to understand the power of compounding interest.

There is a reason you’ll always hear someone telling you to start saving for retirement at the very beginning of your career.  The earlier you start, the longer your money has to grow.  The older the dollar, the more time it has to age.  That dollar that was worth $1.02 after one year is worth $1.48 after 20 years—and that’s at 2% interest.  With a more typical 10% retirement investment return that dollar is worth $6.73 after 20 years.  $17.45 after 30 years.  $45.26(!) after 40 years.  The longer the money has to grow, the more exponentially it is able to grow.

Much like you want your interest to compound for as long as possible when you are saving, you want it to compound for as short a time possible when you are borrowing.  Because student loan numbers can be scary, let’s look at a car loan.  Let’s assume you are borrowing $15,000 to buy a used car.  Your interest rate is 4%, regardless of the repayment term.  If you take 7 years to pay it off you will pay $205.03 per month and you’ll pay a total of $2,223 in interest.  If you shorten that to 6 years, you will pay $234.68 per month and you’ll pay a total of $1,897 in interest.  Shorten it to 5 years, and the payment is $276.25 and the total interest is only $1,575.  The shorter the term, the less interest you pay.  The same rules apply to your student loans and someday your home mortgage.  The shorter the time you take to repay it, the less you will pay in interest.

Next time you make a deposit to your savings account or borrow a little extra loan money, take a moment to think about the time value of money.  Every dollar is worth more (or less) than you think!

Budget on Fyre: Are You Floating?

Leave a reply

There was some sort of major sporting event last night that a lot of people were watching on TV.  Since my husband and I were uninterested in the game, we decided to cook up a bunch of football food (my best chicken wings ever!) and settle in front of the TV to watch something we are very interested in:  documentaries about a music festival.

Both Netflix and Hulu are currently running documentaries about the Fyre Festival.  This April 2017 festival was advertised as the ultimate in luxury.  An island getaway for beautiful Millennials. Live music, fancy accommodations and food, excursions, and famous people. The ultimate place to see and be seen.  It sounded too good to be true.  Because it was too good to be true.  It was actually a Ponzi scheme that somehow came to an ugly fruition.  The more money the festival collected from the unsuspecting ticket holders, the more impossible it became to cancel the festival.  Ultimately the festival ended up being canceled after the guests arrived at the island to find FEMA tents with rain-soaked mattresses rather than the promised luxury villas.  There was no real food.  No real infrastructure.  The festival creator Billy McFarland had been spending the next month’s money before it came in to cover last month’s expenses.  When he paid the bills at all.

When I watched last night how McFarland had been spending money before he had it, I couldn’t help but think about how people often live on credit card float.  It’s a simple enough trap to fall into.  You use your credit card to pay for everything (reaping the credit card rewards), and then pay the bill in full at the end of the month.  It seems like you are doing everything right.  But what you’re really doing is falling behind.  You are spending next month’s money on this month’s bills.  And once you fall into it, it’s a difficult cycle to break.  The easiest way to avoid it is never to fall into it.  If you are a credit card reward junkie (like I am) you should make sure you aren’t falling into the float trap by having at least one month’s income in your savings account.  If you aren’t able to restrain yourself in that way, it’s best not to go down the float path at all.  Limit yourself to cash and debit card—forget about the rewards.

People tend to make some really bad decisions about their money.  In the case of the Fyre Festival, Billy McFarland made some really bad decisions about other people’s money (and is now serving six years in federal prison because of it).  Don’t be a Billy McFarland.  It’s best not to float.

Repair or Replace?

Leave a reply

This past summer I had to make a very difficult decision:  repair or replace.  It’s a decision we face all the time.  Sometimes it’s an easy decision to repair, such as when you lose a button off a shirt, or a screw falls out from your glasses.  These repairs are very easy and inexpensive.  Most people can do these repairs themselves.  Sometimes it’s an easy decision to replace, such as when your cell phone charging cord stops working or your toaster won’t toast any more.  These things would be difficult to repair but replacing them is very inexpensive.

Things get more challenging when a repair is very expensive and a replacement would be even more expensive.  Like when your refrigerator stops working, or your laptop gives you the black screen of death.  In my case it was my trusty Subaru.  It was a 2004 Forester with nearly 170,000 miles on it.  Repairs to get it through inspection would have cost about $1,000.  That’s just shy of the value of the car. And within the next two years, two more scheduled maintenance issues would be at least another $1,500.  If I just drove it around town, I may have made the decision to repair.  But that was my camping car—the one I use to tow my teardrop camper to music festivals near and far.  At the time I had a trip to Wisconsin only a few weeks away.  The thought of being stranded in some random part of the flatlands of the Midwest with no way to tow my camper because something else went wrong on my ailing Subaru was just too much for me.  I started shopping.

I was not financially prepared to buy a car.  All I had for a down payment was my ailing trade-in and a few hundred from my savings.  And I had very specific needs as the replacement needed to be towing my camper within a short time.  I knew immediately that I wanted a Subaru Outback, and my price range limited me to a used car between 4 and 8 years old.  I scoured both the local dealerships and the Internet.  I test drove a few Outbacks that would stretch my budget too far.  I made a list ranking the cars that were in play as possibilities.  I made a spreadsheet listing the pros and cons of each car in the running.  And I found perfection at a Honda dealership near Pittsburgh.  A 2012 Subaru Outback, with a trailer hitch already installed, in the color my husband preferred, with a moonroof as a bonus.  And it had less than 60,000 miles on it.  Smack dab in the middle of my price range.

I didn’t get the best deal on financing because I was pressed for time.  I had to rely on the dealership to help me get a loan on the spot.  I’m currently in the process of refinancing that loan with my credit union, which will lower my interest rate by more than 2%.  Yes…you can refinance car loans.  Keep that in mind if you ever feel like your car loan isn’t your best deal.

Am I happy about the fact that I now have a car payment?  No way.  Am I happy that I now have a reliable car in great condition that will likely carry me through the next 8 years?  Absolutely!  It’s sometimes a very difficult decision, whether to repair or replace.  But I’m feeling confident that I made the right choice.

Interest Rates Rising

Leave a reply

Last week the Federal Reserve raised its base interest rate for the first time since 2006.  The Fed rate is the rate at which banks lend money to each other.  During the financial crisis of 2007-2009, this rate quickly spiraled down to zero, where it has remained ever since.  Until last week.  With the economy strengthening the Fed finally felt secure in starting to move this rate upward by 0.25%.  Tiny moves like this are expected to continue throughout 2016 until we land at a Fed rate of 1%.  Which is still very, very low.

So what does this change in interest rates mean in real life? Savings interest has been ridiculously low since the financial crisis.  And this is not likely to change anytime soon.  It will probably be late 2016 or even 2017 before we start to see any movement there, as banks are slow to pass on interest gains to savers.  Consumers of credit, however, will see changes right away.  Mortgage rates, car loan rates, and credit card interest rates will all rise almost immediately.  If you have any variable rate debt that can be converted to fixed rate debt, it’s best to do that sooner rather than later.  Most existing student loans will not see any change, as federal student loans made in the last ten years all have fixed interest rates.  But interest rates on student loans borrowed after July 1, 2016 will likely have higher rates than loans made in the year prior.

This interest rate increase is a sign of hope to me.  Hope that we are finally returning to a more normal economy.  The reality is that a 1% Fed rate is still extraordinarily low, and while credit interest rates will be rising, it won’t be by enough to break anyone.  Normalcy in the economy has been completely absent for most of the last decade, so now we move forward and learn what our new normal in America is going to be.