0 comments on “Love and Student Loans: 4 Tips to Make it Work”

Love and Student Loans: 4 Tips to Make it Work

So you’ve found your perfect match. He’s funny, kind and hard-working. You love doing the same things, especially together. But after finishing grad school, he has a mountain of student loan debt. Is he still the one?

These days 17 percent of student borrowers have more than $50,000 in debt. That debt load comes with repercussions. The payments will crowd out the other uses for your money, and the financial strain could lead to relationship strain.

Using a standard ten year repayment plan, monthly payments will be over $500 per month on a balance of $50,000. That is a big bite out of anyone’s salary. However, most who have that level of debt choose an extended repayment plan to lower the payments. Using a 25 year repayment schedule, the payment will decline to $331 per month.

In ten years, 65 percent of the loan will still be outstanding, and by the time the loan is fully repaid you will have paid interest equal to the amount of the loan. So for a $50,000 loan, $50,000 in interest will also be paid.

Generally those with graduate degrees have higher paying jobs, making it easier to handle the burden of the payment. But it’s not always the case. Now more and more, undergraduates are leaving school with high debt balances without the higher professional salaries.

The payments and the length of time they hang around will make reaching your other goals more challenging. The loan payments will reduce the amount you can afford to spend on housing, daycare, vacations and more. They will make it more difficult to save for retirement and college for your own kids. You will need to have a larger emergency fund to cover the debt payments, and it could be harder to qualify for a mortgage.

It’s no wonder that a significant number said they wouldn’t marry someone until their debt was paid off. If your partner-to-be has significant debt, you need to go into the marriage with your eyes wide open. Here are a few tips to make sure your relationship can handle the extra burden.

  1. Openly discuss the debt.
  2. Understand that as a couple you will be paying off the loan together. If your partner has to give up something to pay off the debt, you’ll be giving it up too. For example, if he puts less into retirement savings, you’ll both have less to retire on.
  3. Agree on how you will adjust your lifestyle to fit in paying off the debt and meeting your other financial goals.
  4. Pay down the debt as quickly as you can. Avoid repayment plans that allow you to pay less than the interest owed even if you qualify for them. If you pay less than the interest owed, your loan balance will grow every month. You are essentially borrowing more with every payment.

Debt can put a strain on any relationship. If you are diving into a new one with debt hanging over your heads, know what you are in for. Don’t believe the debt is your partner’s problem. It’s yours too if you go forward. But if you work together, you can still accomplish your financial goals.

0 comments on “Don’t Gloss Over the Cost of College”

Don’t Gloss Over the Cost of College

If you have a high school junior at home, you may have spent the week of spring break touring a few college campuses. It’s the perfect time to kick off the college selection process with your prospective college student.

You want the world to be your child’s oyster, and no one wants to talk about expenses when dreaming about the future. However, as you reflect upon the tours, it is a good time to bring a dose of reality into the equation.

College is expensive no matter where your child chooses to go, but some choices will set you back farther than others. The following chart shows the average cost of college for the 2017-2018 school year from the College Board.

Average Cost of College

While most parents want to send there children to college, only about 57 percent of them save for it. The average household savings for college was only $16,380, according to Sallie Mae. That means the money must come from somewhere else. The following chart shows how America pays for college, also from Sallie Mae.

How America Pays for College

A full 28 percent of the cost of college will be paid for with loans. The average student loan debt per borrower from the class of 2016 was $27,975. At the current Federal Direct student loan interest rate of 4.45% for undergraduates, over the standard 10 year repayment period, payments on loans of that amount will be about $289 per month.

That can be a significant piece of a new graduate’s entry level job income. It’s no wonder that 30 percent of college graduates with student debt move back in with their parents. With money like this on the line, it is important to sit down with your future college student and cover the facts.

Here are five things to discuss with your child before she chooses a school.

  • Tell your student how much you will be able to pay. This includes what you have saved and what you are willing to commit to out of your income. The converse of this is how much should she expect to pay. Only 70 percent of parents of teenagers have discussed their expectations with their child.
  • Outline options for raising the extra money. In addition to student loans and scholarships, your student may be able to raise some money through part-time or full-time work. Taking a gap year to work and save up for school is a reasonable approach.
  • Help your student understand the implications of their choices. Student loans may be hard to avoid, but they can certainly be minimized if you understand your trade-offs. You can calculate the monthly payments given different loan amounts on the Federal Student Aid web site.
  • Provide context for the information. Estimate the kind of monthly salary your student might earn given her career interests. Payscale’s College Salary Report is a good place to start. It wouldn’t hurt to also talk about average living expenses. Career Trends has a cost of living calculator. Don’t forget to show the impact of taxes. How much of her take home pay will be left after student loan payments?
  • Consider starting school at a community college. The average cost per year at public two year colleges is only $3,570 assuming your student can stay at home while she attends.

If you don’t have enough saved to pay for college, think carefully about the impact of paying for school out of your current income. If you are behind in saving for your own retirement, paying for college should not be your top priority. Your child has time to recover from the expenses of school. You do not.

A college education can substantially improve your child’s ability to earn a living. But taking on a lot of debt to pay for it can weaken her financial stability. Help her understand that her choices have implications for her lifestyle after school. Before she makes her final decision, she should know what she’s in for.

 

2 comments on “Your Credit Score Demystified”

Your Credit Score Demystified

Credit scores are an important number. They will determine whether you can get a loan and how much interest you will pay. They can also determine whether you can rent an apartment, and it is becoming more common for employers to check your credit score before they hire you.

Unfortunately, the credit score carries a lot of mystery and mythology for many. So, in this post, you’ll learn all you need to know about them.

The credit score was invented in the 1950s by the Fair Isaac Corporation. It didn’t catch on initially as a tool, but in 1970, the Fair Credit Reporting Act was passed, which standardized data collection and reporting. The FICO score (from the Fair Isaac Corp initials) gradually gained prominence as a tool for assessing credit worthiness from there.

Your credit score has five factors, each weighted according to their importance in determining whether you are likely to repay your loan. The following table summarizes the factors, weights and what they mean.credit scores

The biggest factor in determining your credit score is your payment history. So the most important thing you can do to raise your credit score is to make your payments on time. The second biggest factor is how much debt you have outstanding, and the next easiest way to improve your score is to pay down your debt.

Opening and closing accounts can have an impact on your score by shortening the average length of time your accounts have been open, but it will be minor compared to whether your payment history is strong and your balance is manageable.

A friend, who tries to maximize her travel rewards to minimize the cost of travel, opens credit card accounts for the bonus miles and then cancels them once she has what she’s after. She continues to have a stellar credit score, because she always pays on time and never carries a balance. If you have paid off a credit card balance, don’t hesitate to close the account if you no longer use the card.

Checking your credit score has no impact on it. While credit checks to establish new accounts can influence your score under the new credit factor, simply getting a credit report or viewing your score on-line does not change your score.

Regularly reviewing your credit report is an important defense against fraudulent activity in your name. I recently found a credit card account I had not opened on my credit report. Through a little correspondence with the credit agency and the lender I was able to get the account shut down. Debt established in your name is payable by you unless you actively work to close down accounts you didn’t open.

You can actually live without a credit score. If you are committed to living debt free, a credit score is not necessary. Even if you want to get a mortgage, but have no other debt, you don’t need to open some credit card or buy your next sofa on credit to establish a credit history. The things you do all the time will be enough.

If you pay your rent, utilities, cell phone and other bills, on time, and you have a down payment, you have what you need to get a mortgage. However, without a credit score, you may need to work with a smaller mortgage lender and allow more time. The larger lenders like the efficiency of seeing your character summarized in a single number.

Credit unions, independent mortgage brokers, on-line lenders and smaller banks may all be willing to provide the customer service needed to assess your credit worthiness without a credit score.  You can get pre-approved before you go house hunting and still be ready to jump on the perfect place when you see it.

You won’t be negatively impacted by having no credit score with other credit checkers. Having no credit score means you have no debt, which is a profound statement these days. Your future landlords will be happy to review your history with prior landlords. Employers looking to judge your character by your credit score will get the information they need by its absence. Certainly no score is much better than a bad one.

Your credit score is an important number, and the best ways to keep it strong are to pay your bills on time and pay down your debt. If you can accomplish that, the other factors play a minor role. You can live without a credit score, so don’t take on debt simply to establish one.

1 comment on “Fight Credit Card Debt with a Credit Card”

Fight Credit Card Debt with a Credit Card

Welcome to 2018. Now that the Christmas decorations are put away, the champagne has been sipped and the resolutions made, it is time to get down to business. If one of your resolutions was to pay down your credit card debt, there is a tool you may not have considered that can give you a leg up. It’s another credit card.

No, I usually don’t endorse opening new credit cards. You’ve got enough trouble with the ones you have. However, if you are truly committed, a card where you don’t have to pay interest will juice up your debt reduction efforts for any payment amount you intend. The reason is more of your payment will go directly to reduce your balance and less to interest.

Some credit cards offer a balance transfer feature with a zero percent interest promotion for the first 12 to 21 months, depending on the card. If you transfer your balance from another high interest card, you won’t incur interest during that promotional period. That means your entire payment will go to pay down your balance.

The cards generally have a 3.0 to 5.0 percent balance transfer fee. But compared to the high average annual rate charged on a typical credit card, it may be well worth it.

A survey done by U.S. News and World Report, found that most credit card holders who carry a balance had not used zero interest credit cards to reduce the cost of their debt, and two thirds thought they could pay off their balance within 18 months, a typical promotional period.

The following table shows how transferring a $3,000 balance from a typical credit card, with a 16.0 percent interest rate, to a card with a zero interest introductory rate could save you money and get you out of debt faster. With a $200 monthly payment, the balance is paid off two months earlier on a zero interest card, and you save $277 in interest, after the balance transfer fee.

Zero Interest Credit Card

There are some pitfalls, and not all cards are created equal. The first area of concern is which transactions get the zero interest treatment. For some cards, it is only new purchases, and for others it is only the balance transfer. Since you are trying to reduce your debt, you want zero interest on the balance you transfer.

Avoid making new purchases on your card. If you make additional charges, it can hamper your debt reduction efforts. When a card charges different interest rates on different transactions, regulations require payments above the minimum be applied to the balance with the highest interest rate. That means your extra payments will pay off your new purchases before they go to pay off the balance you are working on.

The financial institutions issuing these cards have no mercy when it comes to late payments. If a payment is late during the zero interest period, you may lose the zero interest benefit, and your rate will bounce up to the current new purchase rate. As a result, you will have paid the transfer fee for no reason.

Finally, if you are unable to fully pay off the balance you transferred within the promotional period, you may have to pay deferred interest on the balance remaining. That means your remaining balance will be charged the new purchase interest rate for the full introductory period at the end of that period.

U.S. News has a good comparison of the top balance transfer cards. In addition they provide a more in-depth guide to determining whether a new credit card is the right move for you.

Before you embark on this debt reduction mission, make sure you are working on the right priority. Debt reduction is not the first step on your road to financial security. Your emergency fund is. Don’t make extra payments on your debt until you have built up at least three months of living expenses in savings.

Debt reduction should also wait until you can manage it as well as a contribution to your company retirement savings plan large enough to get the company match. The company match is free money. Or, put another way, it provides a 100 percent return on your contribution. Debt reduction saves you a lot, but not nearly 100 percent.

Eliminating your high interest credit card debt is an important goal. If you have an emergency fund in place and you are getting your full company match in your retirement savings plan, it is the next thing you should be working on. Taking advantage of a zero interest credit card, can make your efforts even more effective. For at least a short time, your payments will go directly and fully to reducing your balance.

Image courtesy of adamr at FreeDigitalPhotos.net

 

2 comments on “The 12 Days of Financial Security for Christmas”

The 12 Days of Financial Security for Christmas

 

Forget the birds and performing artists. These are the 12 gifts of financial security!

On the first day of Christmas my true love gave to me a fund for emergencies

On the second day of Christmas my true love gave to me a budget for expenses and a fund for emergencies

On the third day of Christmas my true love gave to me a maxed out retirement, a budget for expenses and a fund for emergencies

On the fourth day of Christmas my true love gave to me a pay-down on my visa, a maxed out retirement, a budget for expenses and a fund for emergencies

On the fifth day of Christmas my true love gave to me a Roth IRA, a pay-down on my visa, a maxed out retirement, a budget for expenses and a fund for emergencies

On the sixth day of Christmas my true love gave to me full estate planning, a Roth IRA, a pay-down on my visa, a maxed out retirement, a budget for expenses and a fund for emergencies

On the seventh day of Christmas my true love gave to me insurance for disabilities, full estate planning, a Roth IRA, a pay-down on my visa, a maxed out retirement, a budget for expenses and a fund for emergencies

On the eighth day of Christmas my true love gave to me a 529 for my kids, insurance for disabilities, full estate planning, a Roth IRA, a pay-down on my visa, a maxed out retirement, a budget for expenses and a fund for emergencies

On the ninth day of Christmas my true love gave to me a pay-down on my student loans, a 529 for my kids, insurance for disabilities, full estate planning, a Roth IRA, a pay-down on my visa, a maxed out retirement, a budget for expenses and a fund for emergencies

On the tenth day of Christmas my true love gave to me a sound investment strategy, a pay-down on my student loans, a 529 for my kids, insurance for disabilities, full estate planning, a Roth IRA, a pay-down on my visa, a maxed out retirement, a budget for expenses and a fund for emergencies.

On the eleventh day of Christmas my true love gave to me a long-term care policy, a sound investment strategy, a pay-down on my student loans, a 529 for my kids, insurance for disabilities, full estate planning, a Roth IRA, a pay-down on my visa, a maxed out retirement, a budget for expenses and a fund for emergencies.

On the twelfth day of Christmas my true love gave to me, a pledge to be mortgage free, a long-term care policy, a sound investment strategy, a pay-down on my student loans, a 529 for my kids, insurance for disabilities, full estate planning, a Roth IRA, a pay-down on my visa, a maxed out retirement, a budget for expenses and a fund for emergencies.

Merry Christmas everyone!

0 comments on “How Much Mortgage Loan Can You Afford?”

How Much Mortgage Loan Can You Afford?

When my husband, Jeff, and I were in the market for our current home, we took the steps you usually do to make sure we could jump on our dream home should we find it. The biggest part of that was getting pre-approved for a mortgage loan. After submitting all our information to the bank, we got back an approved loan amount that was frankly shocking. There was no way we could afford a mortgage payment that high. What were they thinking?

The amount of loan that you qualify for and the amount of loan you can afford are two different things. In expensive housing markets, like Portland, Seattle, San Francisco and others it’s tempting to spend as much on a home as the bank is willing to lend you, because your dollar just doesn’t go very far in these cities. But that can take away all your financial flexibility and ultimately your financial security.

You may be thinking if a bank is willing to lend you the money, you must be able to afford it. But the bank doesn’t really care about your other goals or even your financial security. They only care that you can make the payment, and they have a formula that gives them confidence you can. The formula is the debt to income ratio, and it is the biggest factor in determining how much money the bank is willing to lend you.

The debt to income ratio is your monthly debt payments divided by your gross monthly income (your income before taxes). Banks generally cap your debt to income ratio including the mortgage payment at 43 percent. Other factors like your credit score and down payment will influence whether they will lend the full 43 percent. But if you have a good credit score and can put at least 10 percent down, you will likely be eligible for the maximum loan amount.

Suppose that you and your partner make $108,000 per year between the two of you. You also pay $1,000 per month in student and car loans. Here is what your current debt to income ratio would be:

Debt to Income

How much mortgage will your bank lend you? Your current debt to income ratio is 11 percent. Assuming that you have good credit and a 10 percent down payment, your debt to income ratio could increase by 32 percent.  That allows for a total monthly mortgage payment, including taxes and insurance, of about $2,850. The bank will likely lend you around $450,000, using today’s interest rates on a thirty year mortgage of 3.63 percent and average property taxes and insurance rates in Portland, Oregon.  The value of the home would be $500,000.

Can you afford that? Let’s see. The following table estimates your monthly take home pay and how much you’ll have left to live on after all your debt payments.

mortgage paymentYour total debt payments take up almost 70 percent of your take home pay. The money remaining after just making your debt payments is less than $2,000. That puts you in a precarious position. If either you or your partner loses your job, you won’t be able to cover all your payments.

The size of your debt payments drive the size of the emergency savings you need to set aside. You won’t be able to reduce your expenses if you lose one of your incomes with payments like these. If both you and your partner make about the same amount of money, you will need to have at least $8,500 in emergency savings. You’ll need even more, if one of you makes more than the other. You should also have enough additional savings to cover your health care plan deductible.

But even if you have emergency savings, the payment is more than you can afford. You will inevitably have maintenance and repair expenses on the home you just bought. The more expensive the home, the larger those bills will be. Some of your remaining income will need to be set aside for that.

A good rule of thumb for maintenance and repair is $1 per square foot. In Portland, a house in this price range will be about 2,500 square feet, so you would want to set aside $2,500 per year or $208 per month and hope nothing needs fixing right away.

This example assumes you are saving 5 percent of your pay for retirement, which isn’t nearly enough. The longer you wait to save more the greater the portion of your income that will need to go to savings. If you’re still in your twenties, you can get away with saving 10 to 15 percent of your pay (around $1,000 per month). But if you are in your thirties, and don’t have current retirement savings, you should be saving 20 to 30 percent of your pay (more than you have left).

And what about your other financial goals? There is no room for them, whatever they may be. With this mortgage, about all you’ll be able to do is make the payments.

Instead of letting your bank tell you how much you can borrow, you need to figure out how much you can afford while still working toward your other financial goals. To keep your monthly obligations at a more comfortable level, your total debt payments should be no higher than 25 percent of your income.

With the income in the example, that allows for total debt payments of $2,250, and a mortgage payment (including taxes and insurance) of $1,250. That translates to a mortgage of $206,000 and a home value of $229,000 with 10 percent down. That’s just a bit more than half what the mortgage company was willing to lend you.

To estimate how much loan you can get away with given the payment you can afford, try this loan calculator. This calculator only provides the loan amount, and doesn’t include taxes and insurance, so you’ll want to leave room for those. However, it’s a good place to start.

Houses are expensive. Their true cost is much more than the monthly mortgage payment, and you have other goals beyond owning a home. Controlling your housing costs is one of the best ways to ensure you can meet those other goals. Base the house you buy on what you can afford, not what your bank is willing to lend you.

Image courtesy of dfrsce at FreeDigitalPhotos.net

 

0 comments on “The Monster Lurking in Your Bills”

The Monster Lurking in Your Bills

What creeps up on you without you even being aware? It gradually but surely takes away your freedoms and keeps you from doing the things that are important for your future. It takes away your sense of security and control. This evil monster is debt.

Debt is an insidious thing. While it lubricates the gears of society and allows you to accomplish things that would otherwise be difficult, it can undermine your financial security and your ability to reach your financial goals. Here’s how it happens.

The Student Loans

You and your partner went back to school to get your master’s degree a while back. Between the two of you, you still have almost $60,000 in student loan debt. It was important to go back to school so you could make the next step in your careers, and while that debt will help you earn more, the payments are over $600 per month.

The Mortgage

You move out to the suburbs and buy the house of your dreams. It’s a little bigger than you need, but the agent said it would be a good investment. Your mortgage company didn’t hesitate to make you the loan, so they must think you’re good for the payments. Your mortgage alone is $1,800 per month. Taxes and insurance add another $700, taking you up to an even $2,500.

The New Car

Your local car dealership is offering a no-interest loan on a new car when you trade in your clunker. Your car is ten years old, so it’s about time for a new one. Your loan payment is $350 per month.

The Once in a Lifetime Trip

You had a big anniversary last summer, so you and your honey took a dream trip to Italy. You were inspired by the trip a coworker had taken. If your coworker could take a trip like that, of course you should be able to as well. And it was so romantic. The trip set you back $10,000, and you put it on your credit card. Since then you just haven’t been able to make a dent in the card balance. Your minimum credit card payment is $250 per month.

The Consequences

What are you up to now? Every month you are obligated to pay $3,700 in debt payments before you do anything else.  You don’t get to choose not to make those payments. Between the two of you, you make good money, but money feels tight.

After taxes and health insurance premiums you’re taking home about $4,700 per month. But that only leaves you $1,000 to pay for all of your other expenses. And you haven’t set anything aside for emergencies or your future retirement.

Paying your bills is all you think about. You juggle your payments between paychecks. You wait to send payments until the very last minute. You’ve over drafted your bank account twice this year. You’re starting to quarrel with your partner.

Debt has turned from something that provided an opportunity to something that is ruining your life. How could this be? The debt was taken on for good reasons. What else were you supposed to do?

Vanquishing the Monster

Debt can be minimized if you go at life with that intention. Student loans can be limited by working part time and living as cheaply as possible. Buying only the house that you need will reduce your mortgage payment and property taxes. And paying cash for everything else will go a long way toward growing your financial freedom.

But if the monster is already in your life, the only way to get rid of it is to pay the debt down. These are the steps.

  1. Create a budget. Include in your budget all the things that you spend money on monthly as well as an allocation for irregular expenses, like car or home repairs or uncovered health care expenses. Nearly all expenses are predictable if you sit down and think about the present as well as the future. Setting money aside for these expenses, that can be foreseen, but for which there isn’t a monthly bill, will help keep you from adding to your debt.
  2. Using your budget, cut back your non-debt spending wherever possible so that you have a little wiggle room. Stick to this new spending plan.
  3. Use your wiggle room to build some emergency savings. Your goal should be to save enough to cover your minimum living expenses for three months. If you have two incomes, you can get away with saving what the lower of the two won’t cover, but if there is only one, you’ll have to save enough to cover all those expenses. The emergency savings will keep you from adding to your debt in the event that you unexpectedly aren’t working.
  4. With your emergency savings in place, use the money you were saving toward it to begin attacking your debt. The debt snowball popularized by Dave Ramsey is a good approach.
    • Pay only the minimum payment on all outstanding loans except the one with the smallest balance.
    • Concentrate all the money freed up by making only the minimum payment and what was going toward your emergency savings to pay as much as you can on the smallest loan. The extra payments reduce the loan balance directly, and will allow you to pay down the loan faster.
    • Once that loan is paid off, move on to the next lowest balance and use all the money you were paying on the first loan to add to your payment on this loan.
    • Keep going in this way until you reach your mortgage payment.

Pay as much as you can. Don’t be discouraged if the amount is small. Every little bit makes a difference.

Don’t worry about the interest rate on the debt you are paying off. While you will pay more interest if you don’t pay down your high interest loans first, you will get out of debt faster by paying off your debt in the order of the balance. Getting out of debt faster will increase your financial flexibility, reduce the amount of emergency savings you need and allow you to make progress on your other financial goals.

Don’t worry about paying down your mortgage until your other debt is paid off, and you are fully meeting your monthly savings goals.

If your employer offers a match to your retirement plan contributions, it is important that you contribute at least enough to the plan to get it. Paying for your future life is one of those bills you need to be setting money aside for every month, and getting help from the company where you work will go a long way. Ideally you would do this before you begin the debt snowball.

Debt is a monster. If it has taken over your life, the only thing to do is to get rid of it. It won’t be easy. But if you lay out a budget, cut back your spending and pay as much toward your debt as possible, you will eventually win.

Image courtesy of Pansa at FreeDigitalPhotos.net