# Time Really Is Money

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?

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?

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

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.

# Student Loan Origination Fees: Up, Up? Or Away?

I hate federal student loan origination fees.  They’re like a hidden tax on students.  And they’re made worse by the fact that they are now tied to the federal sequester budget cuts.  Before the sequester, these fees for graduate students were 1.0% on the Federal Direct Unsubsidized Stafford Loan and 4.0% on the Graduate PLUS Loan.  As a result of the sequester, these fees went up to 1.051% and 4.204%.  And then 1.072% and 4.288%.  And now, as of October 1, 2014, 1.073% and 4.292%.  And if Congress never votes to end the sequester cuts (or to address origination fees in some other way), these rates will continue to rise once or twice a year indefinitely.

I think the thing that irks me most about origination fees is the fact that they exist at all.  These fees were first added to these loans back in the 1980’s, intended to be a temporary cost saving measure.  Now here we are, decades later, and these “temporary” fees are an ongoing cash cow for the federal government.  For example, a law student who borrows a Grad PLUS Loan of \$20,000 for the year will be charged an \$858 origination fee on that loan.  That’s not exactly small change….that’s a month’s rent (or more)!

Origination fees are deducted up front from student loans before the funds disburse to the school.  This means that when a student asks for a certain amount of loan funds, they actually receive less than that amount.  Origination fees really aren’t very transparent.  Even if the student knows about them up front (which they should), the reality of the reduction doesn’t really hit home until the student sees that lower amount arrive…and they realize that they have to pay back the fee that was deducted.  With  interest.  Even though they didn’t get to use that money.  Seems to me that it’s a poorly designed, not very transparent tax on students who have limited or no income.

For years the National Association of Student Financial Aid Administrators (NASFAA) has been pushing for the elimination of these fees.  And finally there is a glimmer of hope that Congress might be listening.  Rep. Susan Davis from California has brought to the House a bill to eliminate these origination fees.  Finally!  I don’t have any illusions that this bill is actually going to pass in the upcoming lame duck session, but the fact that Congress is even talking about this issue is good news to me.  And hopefully it will eventually bring good news to all student loan borrowers.

# What I Learned in Washington

I was lucky enough to go on a true adventure last week.  I accompanied a group representing the Pennsylvania Association of Student Financial Aid Administrators to Washington, DC to talk with various groups about issues of concern to the financial aid community.  We met with staff from several Pennsylvania Representatives, and also met in person with Representatives Charles Dent and Glenn Thompson. In addition to these meetings, we also met with staff from the House Committee on Education and the Workforce, the Senate Committee on Health, Education, Labor, and Pensions, as well as a representative from the Consumer Financial Protection Bureau.  These last three I mentioned were perhaps the most valuable meetings, as they had as many questions for us as we had for them.  Talking with the people in the trenches, dealing with real students, is quite valuable for these folks and they were happy to pick our brains a bit.

While the other aid administrators in my group were focused on things like Pell grants, my focus was strictly on the income-driven loan repayment plans and the federal Public Service Loan Forgiveness (PSLF) plan. The Pay as You Earn (PAYE) loan repayment option and the PSLF plan have been under the microscope a bit too much for my comfort lately.  These programs have been tagged by both sides of the political fence as being unsustainably expensive…though there is no real proof that that is the case.  President Obama’s most recent budget proposal called for capping the amount forgivable under PSLF at \$57,500, as well as increasing the number of years required for non-public service loan forgiveness under PAYE from 20 to 25.  A recent Senate tax reform proposal called for making amounts forgiven under PSLF taxable.  Assorted other changes have been tossed around as well.  Thankfully every one of these proposals has been tied to legislation that is doomed not to move forward.  But once something is placed on “the list” of things that can be looked to for budget cuts, it is in danger of change.  It was my mission in DC to remind the decision makers that these programs were created in order to make it possible for student loan borrowers to be able to afford to choose a career in public service work.  I sat in various offices on Capitol Hill and explained how important it is for students to be able to choose their loan repayment option based on their chosen career path, rather than letting their amount of student loan debt choose the path of their career.

The reactions I received were a pleasant surprise.  I did not encounter anyone who wants PSLF to be taken away.  And of the eight Representatives’ staffs we met with, only Rep. Dent expressed strong feelings about wanting to make changes to the PSLF program.  I find this encouraging for the future of this program.  Maintaining the PSLF program protects career choice for prosecutors, public defenders, government workers, and public interest attorneys.  The other positive response was in regard to grandfathering existing borrowers if future changes to these programs should come.  The general consensus on the Hill is that if changes do happen to these programs in the future, those who have already borrowed student loans relying on the existence of these programs should not be subject to any changes—the changes should start with new borrowers as of a certain future date.

It was a whirlwind tour of Capitol Hill.  And I don’t know if I made any difference at all.  But I definitely feel a bit better knowing that I gave it a good effort.  And I definitely feel a bit more confident about the future of these federal student loan programs that I care about.  Change may come.  But I’m feeling like my current students and alumni are going to come out just fine.

# My First Loan

Do you remember your first loan you borrowed?  Perhaps it was a student loan.  Maybe it was a department store credit card.  But more likely it was a loan from your parents.

My first loan from my parents is still amazingly vivid in my mind. My sister and I shared a bedroom and we really wanted to have a small black and white television in our room.  (It was the 1970’s. TV technology has come a long way since then!)  I think I was about eight years old and my sister was about eleven.  My parents agreed that we could have the TV, but we had to pay for it ourselves. It was my very first purchase on credit.  I don’t remember exactly how much the TV cost, but I think I had to repay somewhere in the neighborhood of \$30 for my half of the TV.  Quite a lot for an eight year old in the 1970’s.  My father was very legitimate about the whole thing.  He had ledger sheets where he tracked the balance due.  I would save my change and make payments from my allowance and birthday and Christmas gifts.  And within a year I had paid my debt.

While my father did not charge me interest on this loan, he did teach me some very valuable lessons about purchasing on credit.  I learned the importance of making regular payments.  I learned the joy of watching my debt amount decrease.  I learned the pride of having successfully made a fairly major purchase.  I learned that sometimes you have to sacrifice the things you want to make payments on debt.  Debt is an obligation.  Credit allows you to buy things without having the money on hand in advance, which is very helpful for expensive things like houses and cars and higher education.  But paying it off…that’s freedom!