Debt-A-Holic: Till Debt Do Us Part

“Borrowing to pay for college has become the primary way that most students pay for college,” says Tamara Draut, director of the Economic Opportunity Program at Demos and author of “Strapped: Why America’s 20- and 30-Somethings Can’t Get Ahead.”

Parents who are unable to save the staggering amount of money needed to fund an undergraduate degree for their kids have a few choices. They can go into debt by getting a PLUS loan or by taking out a second mortgage — or they can put the burden on their children.

“If you look at the way we used to do it, we had pressures on states to keep tuitions low and affordable for middle-income households, and for lower-income households we had grant aid that covered about three-fourths of the cost of going to college,” says Draut.

“Now the majority of aid is debt-based aid and the grants cover about a third of the cost of school.”

According to the College Board’s “Trends in College Pricing 2007,” average tuition costs for the 2007-2008 academic year are $23,712 at a private school and $6,185 for a public school. Add in room and board and the totals come to $32,307 and $13,589, respectively.

Loan deferment refers to a temporary period when a borrower is not required to make payments for an eligible reason. For Subsidized Stafford Loans, the interest that accrues on the loan during the deferment is paid by the federal government. For Unsubsidized Stafford Loans, the interest that accrues during a deferment must be paid by the borrower during or after the deferment period.

As a borrower under the federal loan program, you are entitled to a certain number of deferments of your monthly payment provided you meet the criteria and complete the appropriate documentation. One such example is if you became unemployed. You are entitled to unemployment deferments for a specific period of time. Another would be if you entered repayment and then went back to school at least half time in an eligible program, you would be eligible for an “In school” deferment.

If you answer yes to at least of these eight questions, you may be addicted to debt, according to Debtor’s Anonymous.

15. Are your debts making your home life unhappy?

14. Does the pressure of your debts distract you from your daily work?

13. Are your debts affecting your reputation?

12. Do your debts cause you to think less of yourself?

11. Have you ever given false information in order to obtain credit?

10. Have you ever made unrealistic promises to your creditors?

9. Does the pressure of your debts make you careless of the welfare of your family?

8. Do you ever fear that your employer, family or friends will learn the extent of your total indebtedness?

7. When faced with a difficult financial situation, does the prospect of borrowing give you an inordinate feeling of relief?

6. Does the pressure of your debts cause you to have difficulty sleeping?

5. Has the pressure of your debts ever caused you to consider getting drunk?

4. Have you ever borrowed money without giving adequate consideration to the rate of interest you are required to pay?

3. Do you usually expect a negative response when you are subject to a credit investigation?

2. Have you ever developed a strict regimen for paying off your debts, only to break it under pressure?

1. Do you justify your debts by telling yourself that you are superior to the “other” people, and when you get your “break” you’ll be out of debt overnight?

If you answer yes to 8 or more of the preceding questions, it may be time to seek help.

Source: 15 Questions [Debtor’s Anonymous]

12. Being unclear about your financial situation. Not knowing account balances, monthly expenses, loan interest rates, fees, fines, or contractual obligations.

11. Frequently “borrowing” items such as books, pens, or small amounts of money from friends and others, and failing to return them.

10. Poor saving habits. Not planning for taxes, retirement or other not-recurring but predictable items, and then feeling surprised when they come due; a “live for today, don’t worry about tomorrow” attitude.”

9. Compulsive shopping: Being unable to pass up a “good deal”; making impulsive purchases; leaving price tags on clothes so they can be returned; not using items you’ve purchased.

8. Difficulty in meeting basic financial or personal obligations, and/or an inordinate sense of accomplishment when such obligations are met.

7. A different feeling when buying things on credit than when paying cash, a feeling of being in the club, of being accepted, of being grown up.

6. Living in chaos and drama around money: Using one credit card to pay another; bouncing checks; always having a financial crisis to contend with.

5. A tendency to live on the edge: Living paycheck to paycheck; taking risks with health and car insurance coverage; writing checks hoping money will appear to cover them.

4. Unwarranted inhibition and embarrassment in what should be a normal discussion of money.

3. Overworking or underearning: Working extra hours to earn money to pay creditors; using time inefficiently; taking jobs below your skill and education level.

2. An unwillingness to care for and value yourself: Living in self-imposed deprivation; denying your basic needs in order to pay your creditors.

1. A feeling or hope that someone will take care of you if necessary, so that you won’t really get into serious financial trouble, that there will always be someone you can turn to.

Source: Signs of Compulsive Debting [Debtor’s Anonymous]

Here’s the last article in our 3 part series on Debt Consolidation. Hopefully you have found this series to be useful.

Best Things to Do for Debt Consolidation
If you own a home with some equity in it, there are a few options available that are fairly attractive.

Take out a Home Equity Loan. These loans carry a fairly low interest rate and that interest is tax-deductible. Most fixed rate loans are for a 15-year term and also carry an origination fee of anywhere from $75 to a couple of hundred of dollars. The cost of an appraisal and title insurance is also added to this.

“Cash-Out” Refinancing. Another option is to refinance your property for more than the amount you owe and use the extra money to pay off your debt. This is a one-time only option as the interest rates will be much lower but the payments will be over 15 or 30 years.

Refinance Your Car. This is a secured loan and you can borrow against it. The danger is that the car may not last as long as the debt does and it’s hard to buy a new car when you owe more than it’s worth.

Get a Personal Loan. If your credit isn’t too bad, you may be able to get an unsecured loan. The rate will be 11% or more but you’re bound to stay on the lower end of the rate if you use a credit union instead of a bank. It’s still most likely to be less than you’re paying the credit card company.

Negotiate Better Terms. By just calling your credit card company, you can often negotiate lower interest rates.

Another Alternative. You can also seek help from the National Foundation for Credit Counselling (NFCC). They are a non-profit organization that provides free and confidential debt management advice to anybody who needs it. You can consult with them right over the phone.

NFCC also works with creditors so they’ll be eager to work out a repayment plan with you. NFCC is very realistic when speaking to you and you may qualify for their low-rate mortgage program. They also offer financial planning for a small fee.

Today we’ll continue our series of posts on debt consolidation. Here are some things to avoid when you are considering consolidating your debt:

Debt Consolidators Who Will Do It All
Debt consolidators are great at boasting about what they will do for you. They say they’ll lower your interest rates, reduce your monthly payments, negotiate with the creditors. And they’ll do it all for the easy payment.

Usually debt consolidators charge a fee that is included with the monthly payment you are paying. This is usually 10% or 15%. They give your payment to the creditor who then in turn, gives them their fee out of that payment.

Why pay someone to do what you can do for yourself? You can talk to creditors and lower interest rates just as well as they can. The difference is, 100% of the money you pay towards your debt will go towards your debt – no third party will be taking any of it.

Debt consolidators can make it sound like it’s worth it when they tell you the dire situation you are in. They may tell you that it’s going to take almost the rest of your lifetime to pay off the debt with the payments you are making without them. They then turn around and tell you that you can do it in two or three years using their services. Who wouldn’t want to run to them to handle our finances? However, there are many valuable services available online where you can plug your debt into an online calculator and it will tell you – honestly – how long it will take you to pay off your debt and what you can do to reduce this time.

You must also do extensive research on debt consolidators as they have been known to make late payments or even miss payments, damaging your credit history even further.

The Balance Transfer Trap
It’s relatively easy to obtain a low-interest balance-transfer card but these rates only last for a limited time. At that time, you usually need to switch to a different card. The biggest problem with this is that all of the activity can taint your credit history.

If you want to use balance-transfer for a few months, just be sure to close the accounts yourself. Contact your credit company and ask that the account be marked “Closed at customer’s request.” If you don’t, it will look like the creditor closed your account and that will also make you seem high-risk.

This is part 1 of a multi part series on Debt Consolidation. We hope some of your questions about debt consolidation will be answered within this series, and you can get some idea of how to best approach your individual situation.

If you are swimming in debt, debt consolidation can sound like the answer to your prayers. But debt consolidation may not be able to offer everything you are hoping for. The flashy ads that are seen on television and that come in the mailbox every day promise that it’s quick, it can lower your interest rates, and cut your debt in half. However, there are a few things that people in debt need to remember before they get caught up in the idea of someone magically taking their debt away for a very low cost.

The Loan
Debt consolidation loans are not easy to obtain, regardless of what the advertisements tell you. If you need this type of loan, it’s probably because you are already in debt and your credit history is probably already scarred.

If you are a credit risk, the consolidator may try to sell you on a loan that’s easy to get but will charge you with interest rates as high as 21% or 22%. This could be much higher than the interest rates you are currently paying on your debt. Though the loan may promise low, low monthly payments in the end, you’re going to end up paying more.

Here’s a funny clip I came across: the Daily Show’s take on credit card debt. Take a look:

As long as you carry your debt long enough, you can just die and never pay it off! What a brilliant idea!

I came across a pretty easy way to raise your credit by lowering your overall debt utilization. From DebtKid.com:

Call your current credit card companies. Ask them if they will increase your limit. Even if you owe $1000 on a $1000 limit card, if you’ve been paying on time, there is a good chance they will raise your limit. This provides more “available credit” (debt to limit), a big key to raising your FICO score.

How it works

Let’s do a quick example to show how effective this is:

Let’s say you have three $1000 limit credit cards, each each has a $900 balance.

Card #2: $900/1000 limit. 90% utilization.

Card #2: $900/1000 limit. 90% utilization.

Card #2: $900/1000 limit. 90% utilization.

You give a quick call to each card. Card #1 raises your credit line to $1500, Card #2 to $2000, and Card #3 to $3000. Great!
Now:

Credit Card #1: $900/1500 limit. 60% utilization.

Credit Card #2: $900/2000 limit. 45% utilization.

Credit Card #3: $900/3000 limit. 30% utilization.

Total debt: $2700. Total Limit: $6500. Overall: 42% utilization!

Like DebtKid advises, it’s best if you don’t use this extra credit, or else it defeats the purpose of lowering your debt to limit ratio. It’s also important to remember to check if a credit increase can be done without a hard credit pull, which could have an adverse effect on your credit score. In addition, this method is most effective when you have a lot of debt on many cards that are close to the limit. But with our nation’s consumer debt increasing daily, I suspect this many apply to a larger portion of our population than it should.

College seniors are just about to start graduating this year and they will face the reality of the student loans they have taken out during their college career. They will need to consider whether to consolidate the student loans and debt they have acquired and this process has become quite complex.

A year ago, it was easy to see why consolidation was the way to go when it came to these loans. You could lock in at low rates, only pay one bill, and maybe even extend your repayment options. That has all changed today as a result of rule changes and higher interest rates.

Some borrowers were aware of the changes that lay in store for them and have already consolidated. Some were not so lucky and now have fewer options.

The good news is that these interest rates are not going to skyrocket within the next couple of months. The climb will be gradual. The rate for Stafford loans is set to go up only 8 base points. This will bring it from 7.14% to 7.22%. Parents with PLUS loans will also see a small increase going up to 8.02% from 7.94%. In actuality, this only amounts to a few dollars over the period of the loan.

Those who just graduated should take action within six months. After that, the grace period runs out and they will once again be faced with higher rates. The other good news is that for those who do wish to consolidate, their options are far greater than they were before.

This is due to the fact that the government has abolished the ‘single holder’ rule. In the past, this meant that the borrower needed to consolidate with the same company that held the loan to begin with. Now that this is no longer the case, companies often offer attractive packages and this may be more involved than just looking at interest rates. Companies may offer a discount if the payment is automatically taken out of the borrower’s bank account every month. Another may offer to lower the rate after 36 months of timely payments.

Although these incentives offer more options, it does make the process more complicated as borrower’s may be confused as to what will serve them best. Kantrowitz suggests going with a loan whose benefits are available easily and immediately. There is no point waiting for 36 months for a cut-back when most of the loan has already been paid off. And because of things that are out of their control, it’s very hard for a borrower to make 36 monthly payments on time. Something as simple as a move could delay the payment for that month.

Consolidation is an appealing option for those wanting to extend their repayment period to lower their monthly bills. While this seems attractive, borrowers need to be aware that this could cost them much more money due to interest. You can always decide to change the repayment date at a later time.

Another thing to consider is that it may not be wise to consolidate all the loans. Consolidating large loans with high interest rates with small loans with much smaller interest rates simply does not make sense.

Deciding which way to go in the matter of consolidation can be tricky and it does involve studying the loans and what the exact agreement is. Consolidation is generally known as a great way to repay but this isn’t the case in every situation. Make sure you do the appropiate research before taking any action.