Category Archives: Dealing with Debt

Being frugal means being flexible

Over the weekend, I posted my goals for November. In summary, I planned to pay off the entire remaining balance on my credit card and finish half of our Christmas shopping without reducing the amount budgeted for savings.

Well, this week I received a letter from my student loan company that threw off my plans. My student loans are currently in voluntary forbearance, which is a lender-approved delay in repayment. It has no negative effect on my credit score, but the loans continue to accrue interest.

It’s obviously not an ideal situation. However, when I made the decision I had just transferred my credit card balance to a card with an interest-free introductory period. I was simply too overwhelmed by both payments, so I decided to focus on one at a time. I wanted to focus on paying down my credit card debt before the interest-free period ended, and start paying down my student loan debt once my credit card was paid off.

My remaining balance on my credit card is a little higher than the amount I usually budget toward credit card debt, but I shifted things in the budget to allow me to pay it completely this month. My forbearance period on my loan is set to end in December, so it would have worked out perfectly. I would have made my final credit card payment this month, then used that money in December to begin paying down my student loan.

According to the letter I received from my student loan company, even though my forbearance period doesn’t end until December, my first payment is due November 28. Because my consolidation loan hasn’t finished processing yet, the minimum payment due is $300.

I started moving things around in the budget, trying to fit in this extra $300 payment. I found a little wiggle room in our discretionary spending, but our budget was already pretty tight because of Christmas. I didn’t want to cut too much and risk spending more than our income this month. Even after cutting several spending budgets, including a drastic cut to our Christmas shopping fund, I still came up short.

I came up with two possible options to make up the difference:

We could split the difference between the credit card debt and the student loan debt. It would delay our final credit card payment until next month, but allow us to pay the minimum payment on my student loan this month while we wait for the consolidation loan to process.

Or we could reduce the amount we put into savings this month. If we cut our savings amount in half, we could pay the student loan and still pay off my credit card.

Neither option is particularly appealing to me, but you know what? Tough. This is the way it has to be.

I made the decision to cut our savings for the month. I’ve been looking forward to paying off this credit card for a year now. When I opened the interest-free credit card last December, I figured out how much I needed to pay on my credit card each month to ensure that it was paid down before the interest-free period ended.

Even though we were on a very tight budget before I found a full-time job, we diligently paid the bill every month, always looking ahead to the final payment. Sometimes when I started to feel overwhelmed, the only thing that kept me going was the thought of making the final payment this month. The idea of delaying that another month is just too frustrating. I’m willing to cut our savings for a month to make it possible for us to pay the remaining balance.

I was really bummed when I realized my plan wasn’t going to work out perfectly. But you know what? At least we have the money to pay all of our bills. Even when our plans are unexpectedly derailed, we’re still able to put a little bit in savings. It’s not as much as we’d like, but it’s something.

There was a time when $300 would have been impossible to squeeze into the budget. There was a time when we absolutely just didn’t have that kind of extra money. If cutting back our savings a little for a month is as bad as it gets right now, then we’re doing a-ok.

What would you have done?

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It sure wasn’t this hard to get the student loans in the first place …

This week I received the loan application and promissory note for my private student loan consolidation. According to the letter, I’ve been “conditionally approved.” If all of my paperwork is sent back correctly and verified, I’ll be actually approved. If I’m able to consolidate these loans, I’ll cut the interest rate and minimum payment almost in half. I’ll also have a shot at paying them down in less than 5 years.

First I need to send in a long list of documents, including a recent statement from the lender with all the loan information, my latest pay stub, a copy of my driver’s license and degree, and a copy of my marriage license since the original loan is still under my maiden name.

I was on hold for an hour Tuesday night trying to get some questions answered about the documents. The list they sent me wasn’t as clear as the one above.

Once I’ve submitted all of the documents, loan processing will begin. They will verify my employment, check my references, etc. They already ran a credit check to conditionally approve me, but they may run a more detailed credit check before the loan is officially approved.

As I go through this process, I can’t help but think back to six years ago when I first took out student loans. It was a lot easier. I filled out FAFSA, which qualified me for a certain amount of student loans. Then I filled out an application, signed it, and they sent me money. They didn’t ask me any questions about employment or monthly expenses. They didn’t even ask if I fully understood the loan.

I absolutely take full responsibility for my decision to take out these student loans. It was my mistake, and believe me, I’m paying for it now. My point is just that I was only 17 years old when I started my freshman year. Because I was turning 18 within a certain number of months, they allowed me take out loans even though I was a minor.

I understand that student loans exist to ensure that every student has the chance to attend college. That’s great. However, it seems to me that if you’re going to allow a minor or even an 18 year old to take out a loan that can never be discharged, not even in bankruptcy, there should be stricter safe guards in place to prevent predatory lending, especially since repayment doesn’t begin until four or five years later. How can an 18-year-old know if they’ll be able to afford a $300+ a month payment in four years? Most of them don’t even know what their careers will be.

Student loans made it possible for me to go to college. That’s nothing to snuff at. But if I had known what I was getting myself into, I would have borrowed a lot less money than I did. I also would have stayed away from private loans and stuck with low-interest federal loans.

Obviously, I should have known better. But I didn’t, and neither do a lot of 18-year-old kids. I remember thinking that it was a lot of money as I filled out the application. I also thought, “I won’t have to worry about this for another four years. By then I’ll be a college graduate, making a ton of money!” Ha. Yeah right.

I remember how I thought about money at 18, and I think about the other 18 year olds I knew. I can’t help but think, “No wonder so many people my age are in this mess.”

Finally on my way to paying down my student loan debt

Last night I called Chase to find out more information about consolidating my private student loan debt for a lower interest rate. I was hesitant to call. With the stock market rebounding yesterday, part of me wanted to wait another week or so to see if the credit market stabilizes a little.

The truth is I was just being a chicken. The economic crisis isn’t going anywhere in the next 6 weeks, so I figured I might as well get this out of the way to find out my options.

Not only do they still offer private loan consolidation, but I’m approved! I answered all of the questions over the phone, they ran a credit report, and approved me based on my credit score, income, etc. Now they’ll send me a loan application and promissory note, which I’ll sign and return with the necessary legal documents.

Honestly, just finding a lender who is willing to issue this type of loan was the hardest part. I’ve worked hard over the past year to raise my credit score, and it seems to be paying off. I doubt I could have gotten this loan in this economic market without a good credit score to back me up.

Depending on the interest rate they offer me, I could see a 50% decrease in my current interest rate. That’s going to translate into thousands of dollars by the time the loan is paid off. It will also mean a lower monthly payment. We’ll continue to send the amount we’ve budgeted for debt repayment ($325 a month plus additional snowflakes), but more of our payment will be going toward the principal instead of interest.

This is a huge relief. I’m hoping now that I’ll be able to get the loan processed without any kinks so I can finally start paying off this debt.

For the past 2 years these student loans have been the source of a huge amount of anxiety for me. They’ve been in voluntary forbearance, which means my credit score has not be adversely affected even though I’m not currently making monthly payments, but the interest has continued to compound. I hated that they were continuing to accrue interest, but I just couldn’t pay both my credit card debt and student loan debt at the same time under our previous financial situation.

I decided it would be best to put the student loans on the back burner so I could focus on getting out of credit card debt. Credit card companies aren’t as forgiving of missed monthly payments as student loan lenders, and they don’t offer voluntary forbearance. They also have higher interest rates.

Watching this debt grow as the interest has continued to compound and knowing that I’m not doing anything about it has been the hardest part. Now that I’m on my way to paying it down, I already feel a lot better. I can finally see the light at the end of the tunnel. I’ve managed to get out of credit card debt, which was once equally overwhelming, so I’m feeling encouraged.

I just hope it continues to go smoothly!

Credit crunch hits close to home

With only two payments left on my credit card debt, it’s time to get serious about paying down my ridiculous private student loan debt.

For the past year, I’ve been working hard to claw my way out of leftover debt from college. My first goal was to focus on my high-interest credit card debt. I can’t tell you how thankful I am that we’re almost completely credit-card-debt free just as the financial world is crumbling.

After paying down credit card debt, my next goal is high-interest private student loan debt. My plan was to lower my 8-12% interest rate by consolidating my high-interest private student loans at today’s lower rates. I planned to attack those loans for the next three years until only our low-interest federal debt was left.

I’ve been keeping an eye on two separate lenders for private loan consolidation: CitiBank and Chase. Since it takes about 6 weeks for processing and my forbearance period ends at the end of December, it’s now time for me to apply for these consolidation loans.

Last night I logged into CitiBank’s website to find out what information I would need to gather to apply this week. Unfortunately, it appears that CitiBank has stopped offering this type of loan in the past two weeks. I guess it’s not surprising, but it’s certainly disappointing.

Private student loan consolidation is still listed as an option on the Chase student loan web site. However their information hasn’t been updated since June. It’s highly possible that they’re no longer accepting new applications either. Sigh.

My credit score is excellent, so I’m hoping I’ll be able to find a company that’s still offering private student loan consolidation. Unfortunately, my timing couldn’t be worse. I need to find a lender before December at pretty much one of the worst times in history to get a loan. With lenders cracking down even on credit limits, this type of high-risk private student loan consolidation seems to be next to impossible to get even for people with high credit scores.

We’re currently devoting $325 a month to debt. Without consolidating to a lower interest rate, my monthly payment is about $300. Luckily, we have enough money in our budget to cover the payment as is, but I was hoping to cut our minimum monthly payment in half. If our minimum payment was only $160 and we continued to send $325+ every month, it would greatly reduce the amount of time it took to pay down the debt. If we could gradually raise that amount to $500 a month, we could pay off $20,000 in about three years.

Obviously, things could be much worse. Even if we have to keep the high interest rate for a little longer, we’re still better off than we were a year ago with $4,000 in credit card debt.

I’m grateful that we’re able to make ends meet and save a little money at the same time even as the financial market crumbles around us. It’s still a bummer. I had lofty goals to pay off my private student loan debt in the next three years. If we can’t get a lower interest rate, then that’s clearly not going to happen.

I’m calling Chase tonight to see if I have any options with them. If not, I’ll call my original lender and see if I can bargain for a lower interest rate. I’m hoping I’ll have some bargaining power thanks to my high credit score, but I’m kind of doubting it. With lenders cutting credit limits and saying “see ya” even to responsible borrowers to reduce their credit risk, I’m thinking they’ll be unlikely to take on a loan like this.

Just goes to show how much harder it is to achieve lofty goals in this crazy financial market …

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My personal (student) loan experience

As part of the Extended Group Writing Project at the Personal Finance Bloggers Network, I’m sharing the story of my biggest financial mistake: my student loan debt.

I was in the same position as many high school graduates. I knew I needed to go to college if I ever wanted a chance at a successful career. Unfortunately, two of my sisters were also in college at the time. I didn’t qualify for grants or financial aid, but my parents simply didn’t have enough money to cover the high cost of tuition for three children simultaneously. My grades were good, but I didn’t think they were good enough to earn me scholarships, so I didn’t apply. I know, stupid.

I didn’t choose an expensive Ivy League or out-of-state school. I was happy to attend a state school. State schools are still expensive, though.

I often hear people say that living in an off-campus apartment is a luxury that students on a budget can’t afford. I completely disagree. For the first year I lived in the dorms. In addition to tuition, my food and boarding costs alone were $800 a month. It was much cheaper for me to live off campus in an apartment with roommates.

My parents generously contributed by covering my rent. I worked part-time all the way through college, but most of my time was devoted to classes, homework, and extensive work for the campus paper. I didn’t have time to work the hours I needed to cover my tuition and living expenses.

Each year, I took out federal Stafford loans to cover my tuition. Then I took out additional private loans to cover my living expenses.

The truth is, I didn’t really know what I was getting into. I was very young, and I thought, “I’ll be making so much after I graduate, paying these loans won’t be a big deal!” That might be true for low-interest federal loans. Not the case when it comes to $20,000 in private loans at 8-12% interest. Ouch.

I had no understanding of interest rates. I didn’t know the difference between a 4% and a 12% interest rate. I’d never paid down debt, so I didn’t know that the difference between those percentage points was thousands and thousands of dollars.

That money paid for me to eat and live, but I certainly could have lived more frugally. I didn’t really shop for groceries. I ate out constantly. I bought stuff I didn’t need. I had a lot of fun.

Was it worth it? Yes and no. If I could go back and do it all over again, I would still go away to school. Those four years were essential to my personal growth. I became the person that I am today because of those four years of independence and learning. If I hadn’t gone away to school, I never would have met my husband. I’ll take some debt in exchange for my husband and an invaluable education.

I would have stopped at the federal loans, though. I would have taken out as much as I could at 4% interest and worked my butt off in my part-time job, lived as frugally as possible, and earned my education without that extra $20,000 at an average of 10% interest.

I’m paying the price now. My private loans have a minimum monthly payment of $250. If I paid the minimum payment, it would take 30 years to pay them off.

They’ve been in forbearance steadily accruing interest for the past 2 years. I simply don’t have the money to pay the minimum payment and pay off my credit card debt. Paying down this debt is my only way out of it. Like federal student loans, private student loans cannot be discharged even in bankruptcy.

My federal loans are $75 a month, and my husband’s small amount of federal student loan debt is deferred until he graduates. When we finish paying our credit card debt in November, those private student loans will become our focus.

My credit score is very high, so I should be able to consolidate them for a lower interest rate. That will cut the minimum payment almost in half. Then my goal is to pay off the high-interest student loan debt in 3 to 5 years. I don’t want to be paying my own student loans when it’s time to send our kids to college.

My biggest mistake was that I signed up for a loan that I didn’t understand. I will never again do anything with my money that I don’t understand.

I’m overwhelmed by the debt, but we have the tools now to pay it down. It took four years to acquire it. My hope is that it won’t take 30 years to pay it down.

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Working an unexpected raise into the budget

Last week we found out that Tony is getting a raise for his monthly teaching assistantship stipend, which works out to about a $160 increase in our monthly income after taxes. Woo hoo!

This is particularly exciting because we weren’t expecting it at all. We thought it was a mistake when the deposit was higher than normal last week. But he called and they confirmed that yep, it’s a raise, and we can expect that amount every month from now on.

Today when we sat down to rework the budget for September, we were amazing at how much money $160 is when it’s put to work in a budget. In the past we probably would have blown that extra money and still felt strapped for cash at the end of the month. Now that we’re budgeting, this extra money will make it a lot easier for us to reach our goals.

We decided to divvy up the extra money between savings and debt. We’re putting an even $300 toward savings, which is about a $75 increase. We also upped our debt payment by $75, bringing it up to $325. We still won’t make our final credit card payment until November, but our final payment will be small.

We haven’t decided what to do with the extra $10 floating around in our budget. We might tack it on to our entertainment budget just to give us a little extra mad money every month. Snowflakes and other miscellaneous income will continue to go into our savings account to save for Tony’s tuition, our future expenses, and emergencies.

Yay for raises! We weren’t expecting to see an increase in our income so soon, but I’ll take it!

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Savings vs. debt: What’s your priority?

Most personal finance gurus agree on a wide range of money topics, but there’s one that causes continual controversy: When creating a budget, should debt or savings take precedence?

When we set our first zero-based budget using mint personal finance software,  we struggled with this one. Right now we’re focusing on paying down credit card debt. As of November we’ll be completely credit card debt free, and that money will then go toward a sizable chunk of student loan debt.

I’ve read “The Total Money Makeover” by Dave Ramsey, and I think his plan makes sense for people who are settled into a home where they plan to stay long-term. Unfortunately, that’s not the case for my husband and me.

We decided that focusing on debt isn’t the best option for us. Instead, we figured out how much money we have left over at the end of the month once all of our bills and living expenses are paid. It’s about $500. So we’re devoting $250 to our savings and $250 to student loan debt.

I know, this might not make sense to some of you. However, all but 1/3 of our student loan debt is low-interest federal loans. The interest rate for those is 4%, which isn’t much higher than the 3% interest rate on our ING savings account.

I briefly considered putting the high-interest private student loan debt before savings. If we devoted all $500 of our extra money at the end of the month to those loans, we could pay them off in 3 years. After that, if we continued to devote $500 a month to paying off the federal loans, it would take another 8 years to pay those off. Of course, I’m hoping that as our income increases, we’ll have more money to put toward debt so we’ll be able to pay them off faster.

The problem is, we need to save to pay my husband’s tuition for the next two years so we can avoid even more student loan debt. With so much to save, we really can’t afford to leave our savings alone while we get out of debt.

So for now we’re splitting the difference. Aside from the minimum payment for the federal loans, all $250 of our debt money is going toward the private student loans until they’re paid off. When those are paid off, we’ll start paying off the federal loans.

It’s not completely equal, though. At the end of the month, unexpected income or surplus money that we didn’t spend goes toward credit card debt for now. Once we’re out of credit card debt, our savings accounts will take precedence and extra income will go there.

The $250 budgeted toward student loan debt is fixed until further notice. If our income permanently increases through a raise or other source, we’ll reconfigure this plan. Once my husband is finished with school, bringing in a full salary, and we’re settled in a city where we plan to stay long-term, we’ll rent a cheap apartment and start attacking our debt. We don’t plan to start saving a down payment for a house until those student loans are out of our lives.

The point is, no solution is one size fits all. This is what works for us right now, but we’ll adapt our debt to savings ratio as our lives and plans change.

What are your thoughts? Does debt or savings come first in your budget?

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What I Learned on “The Suze Orman Show” last night

Suze Orman is my financial hero. I love her philosophies on money management because she focuses not only on money, but on the emotions surrounding our money. Too many financial advisers ignore the fact that money is one of the most emotional topics in our lives.

Suze believes that in order to make real progress in your finances and bring about real change, it’s important to address the fear, shame, and anger associated with your past financial decisions. Only then can you move on and start fresh. Otherwise, your financial demons will continue to haunt you.

If you’ve never seen her show or read one of her books, I recommend tuning in Saturday nights on CNBC or check out “The 9 Steps to Financial Freedom” or “The Money Book for the Young, Fabulous, and Broke” from your library.

I learn a lot from every episode. Here’s a round up of the best tips from last night’s show for those of you who aren’t dorky enough to watch it faithfully every week. Happy Sunday!

• When interest rates are low, like now, do not lock in interest rates for long-term accounts. It’s better to keep even large amounts of money liquid in savings and money market accounts for now. When the market rebounds and interest rates start to rise again, then is the time to commit to long-term investments like CDs and bonds.

It seems like common sense, but I would probably be tempted to lock in a large amount of money at 5% instead of my 3% interest rate savings account to get the additional 2% interest. However, I’d be kicking myself 3 years later when rates rose to 7% or 8% and I was locked into a 5% CD for 10 years.

• When a spouse or partner is going behind your back and racking up thousands of dollars in credit card debt, your biggest problem isn’t the debt; it’s the deceit. If you don’t sort out the issues behind the overspending and deceit then it won’t matter if you pay off the debt because your partner is likely to rack up more.

As Suze says, in this day and age it’s often not, “Til death do you part; it’s til debt do you part.” I agree. Solid relationships are built on trust, and your finances are an essential part of that trust. Making sure you’re on the same financial page as your partner is one of the most important steps you can take to ensure the long-term success of your relationship.

• FDIC insurance only covers $100,000 per depositor per financial institution, so if you’re holding more than that in a traditional bank, split it up into different financial institutions to ensure that you’re protected.

• When it comes to investing, “It’s better to do nothing with your money than to do something you don’t understand.” Do your research before you do anything. Enough said

• When Suze denies or approves someone on the “Can I Afford it?” segment, she hits a pedal under her desk to control whether the “Approved” or “Denied” graphic comes up on the screen. Who knew?

• Suze would rather you invest the $60 a month you’re paying to watch her show on cable into your savings or retirement accounts. Really, she said that.

• Private student loans are evil. The lenders can set the interest rates as high as they want, and you can never get out of it. Not even if you file for bankruptcy. Do NOT take out private student loan debt. Not for you, not for your kids. Period. I have personal experience with this one. I wish someone had told the young, naïve 18-year-old me to stick with federal loans if any.

The only credit card I use

When I was in college, I learned “the credit card lesson.” It’s a familiar story. I started with an “emergency card” that I didn’t use for a year. Then I had some car problems that landed my only car in the shop with a $400 bill.

I decided my broken car qualified as a real emergency, so I charged the repairs. When I realized how easy it was to magically have extra money, I started charging stupid things. Pizza, DVDs, bar tabs. I ended up with $4000 in debt over a two-year period.

Luckily, that was enough for me. Obviously $4000 is a lot of debt for a 22-year-old, but it was manageable. I paid the minimum payment every month to keep my credit score high. After I graduated I transferred the balance to a 0% interest card and started doubling and tripling my payments. As of November I’ll be completely free of credit card debt forever. I don’t plan to carry a balance ever again. To me, the interest I’ve payed is a small price for such a valuable life lesson.

Despite my decision to stay away from credit, my husband and I just acquired a new card in May that we use regularly. Why? At the time we were planning a road trip back to our home state of Indiana to get married. We’d carefully constructed a budget months in advance, but we didn’t planned on gas prices skyrocketing to $4 a gallon in May.

To save a little money, we decided to get a BP credit card to charge our gas expenses. The card carried a 10% rebate for the first 60 days, which meant that we got $30 back on the $300 we spent round trip to drive from North Carolina to Indiana to Washington D.C. and back to North Carolina. Basically a free tank of gas.

We continue to use the card for gas even now that the rebate rate has lowered to 5%. We never ever carry a balance, so we never pay interest. The 5% rebate would obviously be pretty silly if we paid a high interest rate. However, because we pay it off every month, we pay 5% less for gas than the price at the pump.

It may not sound like much, but at $4 a gallon, it equals 20 cents per gallon. It lowers our gas budget by about $5 a month, or $60 a year. Since we never pay interest, I say why not save 5%? Every little bit helps.

I also like having our gas bill come once a month in a lump sum. It makes it easier for us to track our expenses and budget.

We choose to travel by car instead of air when we can to save money, so when we make the long trip back to Indiana at Christmas, we’ll automatically save 5% on fuel expenses for the trip.

In most cases, opening a credit card for the “rewards” is a terrible idea. No matter how much you promise to be responsible (“I’ll only use it for groceries and pay it off every month just to get the frequent flier miles”), it almost never works out that way. You spend more than you should or end up charging more than you can afford to pay in a month and the interest starts accruing. But with a gas card, it’s easy to avoid charging unnecessary items or overspending. We don’t consume more gas just because we’re charging it. In my opinion, this is the one case where a credit card rewards program makes sense.

An added bonus: BP offers the option to donate your rebates to the Conservation Fund to help reduce your carbon footprint. We’ve only received one rebate so far (you can only get them in $25 increments), and we requested that rebate in a check to offset the overage in our budget that resulted from $4/gallon gas on the trip. But I like having the option to donate my rebates in the future.

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