Posts Tagged "debt"

Houses

Reverse Mortgage: Yes or No?

The older people who either consider a reverse mortgage or actually get one don’t have much else to fall back on.  Their primary assets – outside of their homes – are a car worth no more than $7,000 and about $2,000 in a checking account.

This was one salient fact unearthed about reverse mortgage users – or people who’ve looked into them – in a 2014-2015 survey led by Stephanie Moulton at Ohio State University. This supports a later study by Moulton that found that people who take out the loans tend to be in worse shape financially than other homeowners. The survey provides a more complete picture of who is turning to reverse mortgages – and why other people find alternatives to solve their financial issues.

Federally insured reverse mortgages, known as Home Equity Conversion Mortgages, or HECMs, allow homeowners over age 62 to borrow against their often-substantial home equity. These loans do not have to be paid back until the older homeowners sell the house or die.

Despite these attractive financial features, reverse mortgages are not popular: fewer than 60,000 were sold in 2015.  Many elderly homeowners are appropriately wary of a complex financial product. The fees and interest rates are also higher than on a standard mortgage.  But the idea behind HECMs is to allow cash-strapped seniors either to pay off their existing mortgages, eliminating house payments, or to create a readily accessible pool of cash or a new source of monthly income. Either way, they free up money that retirees can use to meet their expenses, emergencies, or medical bills.

The researchers interviewed some 1,800 older households after they had received the counseling required under federal law to apply for a HECM reverse mortgage.  About two-thirds of those counseled proceeded with the loans, and one-third decided against it. Here’s what these two groups look like: …Learn More

Fined illustration

Autopay Ends Credit Card Late Fees

Credit card companies usually set small-dollar minimum payments, so there’s really no excuse for incurring fees for late card payments.

Yet many consumers fail to pay on time. In a new study, British researchers found a no-brainer solution that is highly effective: setting up automatic payments of our credit cards.

The researchers started out with a different premise: that customers might learn, over time, to prevent maddening late fees after having to pay them numerous times. The researchers roundly rejected this after following nearly 250,000 U.K. credit card holders over two years.  When it comes to late fees, we do not learn from our mistakes.

What they noticed, however, was a clear distinction between card holders who incur late fees regularly and those who don’t or who stopped incurring the fees.   Setting up autopay “all but eliminates the likelihood of future [late] fees,” while the probability remains “persistently high” (about one in five) among people who did not, they said.

Further, a seemingly obvious explanation for chronic late fees didn’t hold water: that people don’t have the cash to make their minimum payments.  Payers of late fees “do not appear to be liquidity constrained,” the study found. Apparently, most people simply forget to pay those pesky credit card bills. …Learn More

Is There a Student Loan Gender Gap?

Now comes the toughest part of borrowing money for college: paying it back.

There is much for this year’s crop of graduates to learn.  For example, the federal government gives you a reprieve after graduation, usually six months, before requiring you to start repaying your debts. But did you know that interest builds up during this “grace period”?  Starting payments right away reduces how much you’ll have to pay back.

Making repayment mistakes or not having a plan can also be very costly.  Click here for some tips to avoid these mistakes.

Here’s another issue: women borrow slightly more money for undergraduate degrees than do men but earn less after college and seem to have more difficulty paying back their loans.

In 2012, women borrowed $21,000 for an undergraduate degree, on average, compared with about $19,500 for men, according to a new study by the American Association of University Women (AAUW).

Men are able to pay their debt back faster too. During the first four years after graduation, men pay off 38 percent of their outstanding college debt. Women pay about 31 percent. Women graduates with student debt are also more likely to report more difficulty making their rent payments, AAWU’s survey found.

Many questions remain unanswered. What explains the differences? Also, the study doesn’t control for how much young adult men and women earn in their jobs. Nor does it sort out the implication of different payoffs for the different types of degrees that men and women choose.  Careers in software engineering or nursing are more likely to justify hefty loans than degrees in film or women’s studies with uncertain career paths.

This study raises interesting issues, which future research will hopefully address.

In the meantime, women, it’s something to think about. Learn More

Crumbling wall

College Calculator Bridges Class Divide

A degree from a premier college can vault a teenager from a low-income family to the height of economic success as an adult.

College listTo date, 15 colleges have signed on to work with Levine, who initially created the calculator for applicants to Wellesley College, where he is an economics professor.

But disadvantaged students face a multitude of barriers to attending the nation’s top colleges, from getting the grades required to withstand stiff competition for acceptance to the absence of a degreed family member who can steer a child, niece or grandson through the process.

Phillip Levine is breaking down one barrier: the well-founded fear among low-income and even middle-class families that an elite liberal arts college is out of the question.

Levine designed a calculator to estimate how much an individual applicant will actually pay, after plugging in his or her family’s unique financial data, such as income, house value, mortgage amount, etc. – and the calculator is way easier than filling out a FAFSA form. Argh.

What’s new about Levine’s cost estimates is that they come from crunching family financial stats into a program that contains an individual college’s unique information about its financial aid and work-study programs, as well as how much current students pay based on their parents’ financial information [these data are supplied anonymously to Levine]. …Learn More

Prudential billboard

Our Stubborn State of Financial Illiteracy

The U.S. retirement system is built on people having a working knowledge of finance.  Yet financial literacy among a big chunk of Americans ranges from unimpressive to abysmal.

This revelation was again confirmed in a survey that recently debuted by financial literacy guru Annamaria Lusardi, head of the Global Financial Literacy Excellence Center at George Washington University. In a 2011 survey, Lusardi had found that too many Americans were unable to answer three very simple financial questions.

This new survey is more ambitious, though the results are no more promising. It asks 28 questions in eight areas: earning money, budgeting, saving, investing, borrowing, insuring, understanding risk, and information sources.  In the nationally representative survey, about one in four people got no more than seven answers (25%) correct.

One telling finding is that the highest scores were for knowledge about borrowing, with nearly two out of three answering these questions correctly. I suspect this knowledge has been gained from experience – experience with high-interest credit card bills and onerous student loan payments, as well as mortgages.

Understanding risk questionIn every other financial topic surveyed, about half or less answered the questions correctly.  Questions about risk, which is at the heart of many financial decisions, fared worst – only 39 percent answered these correctly.

An important connection is made in the report regarding 18- to 44-year olds, who answered only 41 percent of the questions correctly (versus 55 percent for people over 45). Younger adults also answered “I do not know” most often. 

When it comes to retirement, those who would gain more from financial knowledge are the least knowledgeable.  Saving that starts in early adulthood can go a long way toward achieving retirement security, thanks to compound investment returns over the many years remaining prior to leaving the work force. It’s unfortunate that those who could benefit from compounding often don’t comprehend its effect. …Learn More

Blood for Student Loans

Graduation cap

Illustration by: Kjell Reigstad

 

Interest in the student loan problem from the media and politicians seems to be ebbing.

The issue does not go away for Joshua Roiland. Every day, money worries grind him down – him and millions of other young adults working through the emotional fallout and shattered relationships caused by debt.

Roiland owes $200,000-plus and earns only $52,000 as a newly minted University of Maine journalism professor. He begins his article on Longreads by describing a 340-mile round-trip drive to a clinic in Lewiston, Maine, that pays him $50 for a pint of his youthful blood. …Learn More

Feature

Unpaid Water Bills Open Door to Advice

Nearly half of the low-income residents in some sections of Louisville are delinquent on their city water bills. In Newark, water customers’ unpaid balances have been known to reach $4,000.

The shutoff and reactivation fees that some cities charge when they stop a customer’s water service create another problem in places like Houston: they add to the unpaid balances of customers who are already struggling financially. Cities are also becoming more aggressive about collecting on their debts, hiring third-party collection firms.

Researchers and the National League of Cities tried an alternative in the form of an ambitious pilot program involving five city water departments: Houston; Louisville, Kentucky; Newark, New Jersey; Savannah, Georgia; and St. Petersburg, Florida. Driving the program was the recognition that unpaid water bills are an indication of deep financial distress. So the cities, which are loathe to turn off this essential service, embraced a broader vision: providing financial counseling to empower families with delinquent water bills to better manage their situations.

While every city’s pilot program was slightly different, Ohio State researcher Stephanie Moulton said they had two things in common: an agreement to restructure residents’ unpaid water bills to make them affordable, and at least one private session with a financial counselor or coach already working for the city or a local non-profit. Some cities added other services, such as screening for public benefits if a job loss had caused a resident to fall behind on the water bill.

Houston, for example, trained and certified six customer service representatives in its Department of Public Works to act as financial coaches, said Bonnie Ashcroft, a departmental section chief. The counselors who coached clients on their household finances also advised them on how to reduce their water bills.

It’s not possible to do a rigorous analysis of the pilot’s overall effectiveness, because each city’s water department is unique. But individual analyses of each city found three that showed marked improvements in their water payments, Moulton said. These successes were presented in a recent webinar. …

In Houston, customers’ unpaid account balances declined, on average, from $544 to $374. Unpaid account balances in Newark went from $969 to $605. The frequency of payments in these cities also increased, Moulton said. Learn More

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