January 5, 2017
Millennial Couple Squares Away Finances
The Knapkes hiking last May in the Rocky Mountains.
Heather and Tyson Knapke were like a lot of young couples starting out: they were in debt.
One household expense on their credit cards loomed larger than all the others: at least $1,000 every month for groceries and dining out. Some weeks, the Denver-area couple could be found at their various favorite restaurants Thursday night straight through Sunday night.
The food budget “was astronomical, and I had no idea,” Heather said.
Their lives changed dramatically after realizing about 2 1/2 years ago that their finances were spinning out of control. How this couple transformed their debt-laden household into one that is free of credit card and college debts and has a tidy emergency fund, with retirement saving now well under way, could be a blueprint for other Millennials in the new year.
Here is the order in which the Knapke’s accomplished this: reduce expenses, impose a budget, pay down debt, and start saving for retirement.
“I’m trying to get ahold of my finances early – earlier than most people – so compound interest works in my favor so I’m set when I’m older. That’s the goal,” said Tyson, who is 32.
How did the couple get into trouble in the first place? Before marrying, Heather, a 33-year-old hairdresser, had learned a few things about controlling expenses as she purchased shampoos and hair dyes for her clients. Her personal finances were, as a result, in decent shape. Then she fell in love with a man in debt. Tyson had graduated from the University of Colorado with a communications degree, $16,000 in student loans, and another $9,000 distributed among three credit cards. …
December 6, 2016
Student Loan Repayment: 12 Rules
It’s easy to drown in the financial details of student loan repayment. Here’s a life preserver.
The rules of thumb listed below were culled from interviews with two experts on student loans. Betsy Mayotte is director of consumer outreach for American Student Assistance, a non-profit that educates people about their loans. Craig Lemoine is program director for the American College of Financial Services, which trains financial planners.
1. If you earn enough to make your payments, start paying.
The reason: Student loans in most cases must be repaid in full. The sooner you start making your full monthly payments, the sooner your loans will be paid off and the less in total you will have to shell out. A decision about how much extra to pay on student loans should be weighed in the context of other financial goals, including paying off high interest credit cards and putting enough money in a 401(k) to ensure you receive your employer’s match.
2. Open your student loan mail.
The reason: Owing tens of thousands of dollars is serious business. Ignoring a letter from the company that holds your loan won’t make the problem go away – in fact, it could worsen things.
3. Call your loan servicing company. But do not call without doing some homework first.
The reason: If you’re struggling to pay your loans, the companies that handle your student loans can be very helpful. They are experts not only on your particular loan account but also on the federal government’s rules for loan repayment. Nevertheless, student loan servicers are not perfect. Representatives might not know much more than is on the U.S. Department of Education’s website, Lemoine said. And sometimes their advice can conflict with information from another representative in an earlier phone call. To make sure you’re getting the best advice, it’s important to read the information on the federal website, know your potential options, and compile a list of detailed questions pertinent to your unique situation. “Going in blind can cost you money,” he said.
4. The best option for lower-income former students with high debt levels is an income-based repayment plan. …Learn More
October 6, 2016
Starting the College Conversation Early
Parents have finished the summer college tours with their teenagers. Now comes the hard part: figuring out how to pay for college. But Judith Ward, a senior financial planner for T. Rowe Price in Baltimore, urges parents to prepare for this moment well before their child’s high school graduation to help minimize college costs when the time comes.
Squared Away interviewed Ward, whose advice comes from a combination of her professional experience and putting her own two kids through college. They are now 23 and 27, employed, and paying back modest student loan balances.
Your company’s 2016 survey of parents and children between ages 8 and 14 about paying for college points to a disconnect between what young kids are expecting in terms of paying for college and what their parents are planning on.
Yes, we found in our survey that 62 percent of kids expect their parents to cover most of whatever college they want, but 65 percent of parents say they’ll only be able to contribute some to their college. There’s definitely a disconnect. But it’s easy to rectify – just start talking to your kids about college.
Question: Can parents really talk to their kids about college at 8, 9 or 10? And what do they talk about?
In fairness to the kids who answer these survey questions, they have no idea what the cost of college is. It’s not the enormous number it is to their parents. But start when they’re young by having conversations that are not necessarily about the cost of college. Just start making college part of the conversation and sharing your own stories. That will have them thinking about college and thinking, “I’m going to be expected to go to college.” …Learn More
July 5, 2016
Parents, Start Student Loan Homework!
Here’s a reminder that parents should start their homework this summer to minimize college loan repayments over the long haul. A few basic decisions can add or subtract thousands of dollars.
A little help came last week, when the interest rates on all federal student loans were reduced. Despite the declines, the rates for the PLUS loans available to parents remain much higher than the loans available to their offspring – taking out a PLUS loan will nearly double the interest paid on $50,000 over 20 years, compared with an undergraduate Stafford loan.
This is an argument for having prospective students take out the loans, rather than the parents. As for paying them back, financial advisers tend to agree that young adults with decades of work ahead of them can share in that responsibility at a time their parents are facing retirement. This complex family decision depends on myriad factors, including how much income the graduate can expect to earn after college and how comfortable the parents are.
There are one-time, upfront fees on federal student loans, and they are also much higher for parent PLUS loans: 4.272 percent of the loan’s principal amount versus 1.068 percent for Stafford loans for undergraduates – these fees will go up for loans disbursed after Oct. 1.
The Institute for College Access & Success has put together an excellent cheat sheet explaining the federal loan options, who qualifies for various types of loans, and the costs of each. To see this sheet, click here.
Below is the institute’s summary of the new loan rates, effective July 1: …Learn More
May 26, 2016
Array of Financial Products is Dizzying
Rather than put his money in a bank, my cousin, who’s in his mid-40s, makes loans in $25 increments on a peer-to-peer lending website. He decides on the amount of risk he’s willing to take on – and the riskier the borrowers he chooses, the more he earns on his “savings.”
My cousin’s $25 investments illustrate how much our consumer finance market has evolved over several decades. We all embrace the convenience. Car loans are a more affordable way to buy a vehicle, Internet banking lets homebuyers get several mortgage quotes at once, and paying with cell phones is much easier than paying with cash or even credit cards.
But all this innovation has a downside. One example is the change from installment credit with fixed payments in the early 1960s to revolving credit, which lets consumers choose to pay a small required minimum – and increases the high credit-card interest that undisciplined borrowers pay. A recent and egregious innovation is companies that purchased lawsuit settlements from victims of lead paint poisoning for a fraction of their value. Both innovations offer convenience in exchange for personal financial impacts that are either excessive or difficult to recognize.
A primary outcome of all this financial innovation is that U.S. households “in aggregate have taken on greater risk,” conclude professors at the Harvard Business School in their 2010 paper, “A Brief Postwar History of US Consumer Finance.” Consumers now have an enormous amount of latitude – arguably too much latitude – to borrow, shift assets, save for retirement (or not), play the markets, or engage in peer-to-peer lending, they say.
As a result, risks pervade our investment portfolios, savings and retirement accounts, borrowing decisions, and how we purchase consumer goods. And that’s the problem. …Learn More
April 21, 2016
Game of Loans: Refinancing Student Debt
Brendan Coughlin, who runs the student loan refinancing unit for a major bank, is very upfront about this: some young adults should not refinance their loans.
One example is a graduate new to the labor force who doesn’t feel stable yet in his or her job. Refinancing a federal student loan with a high interest rate can make sense and saves money. But one reason not to refinance federal loans is that they have a major advantage over loans refinanced by private lenders: flexible repayment options for those who might have difficulty meeting their monthly payments later.
Another reason not to refinance is that the government forgives the debt after five or 10 years for certain types of teachers and public service workers.
Understanding whether to refinance is so important that Coughlin, as president of Citizens Bank’s consumer lending unit, instructs the bank’s loan officers to talk prospective customers through the pros and cons three or four times – to make sure they’re clear about what’s at stake.
“We really don’t want to have a customer swap out their loans and have a surprise. We want to make sure they’re making the right decision,” he said.
If you clear the hurdles, however, it might be time to refinance into bank loans with lower interest rates than the steep 6.8 percent currently charged for some federal student loans – and the double-digit rates on some private loans. Citizens Bank estimates that more than 40 percent of the $1.3 trillion in student loan debt outstanding is both held by someone who could qualify for refinancing and has interest rates high enough to potentially make it worthwhile. …Learn More
March 24, 2016
Americans Are on a Credit Card Binge
Rising levels of credit card debt are a good thing and a bad thing.
And they are definitely rising: during the final three months of 2015, Americans added $52.4 billion to what they owe on their credit cards, according to a new CardHub report based on Federal Reserve Board data.
For context, that is nearly as much as was added to cards in all of 2014.
Spending rises when consumers have jobs or get better jobs and when the economy is growing, as it is now, said Lowell Ricketts, an analyst with the Center for Household Financial Stability at the Federal Reserve Bank of St. Louis. With incomes increasing, he said, “they’re in a stronger position to make those investments like purchasing a new home or renovating their existing homes.” The surge in credit card debt indicates that people are using plastic to pay for things like the furniture for the new house.
The bad part is what happens to over-leveraged spenders when the economy suddenly turns down, which is what WalletHub analyst Jill Gonzalez is concerned about. “We are starting to get into scary territory here,” she said. The fourth-quarter binge “was much larger than usual.”
During all of 2015, credit card balances, net of payments, increased by nearly $71 billion, substantially higher than the $57.4 billion increase in 2014. Last year’s fourth-quarter binge was only part of the story, Gonzalez said. …Learn More