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
March 15, 2016
Private Student Loans: Borrower Beware
Privately financed college loans were less than 10 percent of the $1.3 trillion in unpaid student debt last year, according to the Consumer Financial Protection Bureau. The bulk of student loans are funded by the federal government. But the minority who borrow from private financial institutions often learn painful lessons after graduation: it is much more difficult to negotiate affordable repayment plans with private lenders. Private loans are unlike federal student loans, which have standardized repayment options and procedures.
This blog is intended to help parents and future college students avoid getting into difficult situations in the first place with private loans. Squared Away interviewed two student loan experts at Clearpoint Credit Counseling, an Atlanta non-profit: Terrence Banks, a counselor who works directly with borrowers, and Thomas Bright, a blogger.
Question: Graduates trying to renegotiate their private loans conveyed some harrowing stories in Clearpoint’s 2013 blog post. Have things improved since then?
Terrence: The complaints are still valid and still rampant. But some – not all – private lenders have stepped up to the plate to make private loans a bit more financially feasible.
Q. What would you advise parents and matriculating students do when making their first borrowing decisions?
Terrence: Exhausting the federal loan option is paramount before you go to the private loans. If you find yourself in trouble where you can’t make a payment, you have more options under the federal than the private loans. Also try to find out the potential income for your future profession before going down this road and borrowing at all. And then look for grants – there’s a slew of grants that are untapped each year because people don’t take the time to access them because student loans are so readily available.
Q. How do borrowers get themselves into the situations like this one, described on your blog? “I am able to consolidate my federal loans (big help on the monthly payments) but not my private loans.” Borrowers also talk about inflexible private lenders and being harassed with phone calls from these lenders. … Learn More
March 8, 2016
Study: College Debt Hurts Retirement
College graduates learn very quickly that paying hundreds of dollars toward student loans each month makes it difficult to afford things like a nice apartment or a car.
But they might not appreciate the long-term consequences of their record levels of borrowing: college debt is an added threat to their retirement security, according to a new study by the Center for Retirement Research.
The researchers gauged the debt’s impact by looking down the road to retirement and projecting what would happen if working people of all ages had started out with the same profile as young adults: 55 percent of today’s 20-something households have student debt, and they owe $31,000, on average.
College debt has a bearing on retirement security through two avenues. First, money going into loan payments is not available for a retirement savings plan. Second, lenders place limits on how much total debt a homebuyer can have, forcing many borrowers to delay home purchases; and getting a home loan would be very hard for the 17 percent of student loan borrowers delinquent on their debt.
Based on these assumptions and using 2013 data, the Center’s National Retirement Risk Index shows that those at risk of a lower standard of living when they retire would increase sharply to about 56 percent of working U.S. households – compared with 52 percent at risk when the student loan projection isn’t figured into the NRRI calculation.
This “represents a substantial increase in the already alarming rate of households at risk,” said the Center, which supports this blog. …Learn More
February 23, 2016
8 College Repay Plans – and Counting
This was going to be a quick blog post about the new student loan repayment program rolled out by the federal government in January. But the differences between it and the seven plans that preceded it were too confusing to figure out on a tight deadline.
This isn’t just the view of one cranky blog writer. Craig Lemoine, a financial planning professor and student loan expert at the American College of Financial Services, which trains financial planners, also admits to being confused about the repayment options, which keep increasing in number.
If Lemoine were a student, he asked, “How on earth would I know which one to pick?”
His confusion pales in comparison with that of a lovely and loved young member of my family. She’s vague on the details of how her own student loans work. Here’s a rough approximation of our recent telephone conversation: …Learn More
January 26, 2016
How Melanie Paid Off Her Student Debt
Sitting at her computer in the oversized studio apartment she shares with her boyfriend in Portland, Oregon, Melanie Lockert received confirmation on Dec. 10 that her ordeal was over: $81,000 in college and graduate school loans were finally paid off.
She had two reactions. The first was an existential panic. “Who am I without debt?” the 31-year-old asked herself. Then a grin spread across her face. “I started dancing and screaming in my apartment. It was such an amazing moment, and I felt incredibly happy to be done with this,” she said.
Recent college graduates might despair that their day of liberation is far away or might never come. But Lockert’s single-minded focus on demolishing her debt, particularly by accelerating her payments recently, provides a roadmap – and some hard lessons – for those facing a seemingly endless string of monthly payments.
Lockert’s path followed a zigzag pattern, which she documented in a Dear Debt blog that she started writing in 2013. Being debt-free was not her first priority when she packed up her undergraduate loans and moved from California to New York in 2010 to attend graduate school – a decision that would more than triple her total student debt. Paying off her loans required a lot of patience and sacrifice, some risk-taking, and brutal self-honesty. She concluded that she couldn’t accomplish her financial goal if she pursued a career in the field she had studied in college. … Learn More