A Different Way to Look at Debt

There’s often conversations about debt being good or bad. But really, debt is just debt. It has no emotions and you’re the person who’s in control of it.

I read a comment recently that rephrased this good vs. evil debt mentality in the most perfect way: debt is not good or bad – it is profitable or unprofitable.

Student Loan Debt
I’ve personally never had any student loan debt so I don’t know what it feels like it to have it hovering over my head. But going through the theory of profitable vs. unprofitable debt student loans could fall into either.

Your student loan debt is profitable if:

    Your degree helps you land a job that pays higher than you could get without a degree. (Because we know that not all degrees are going to score you a high paying job.)
    You use your student loans to pay for tuition and related expenses.

If you’ve used your student loan debt to finance a lifestyle that you shouldn’t be living right now then your student debts are not profitable.

Use your student loans to advance your career, earn decent money, and only use them to pay for necessary college expenses and you’re looking at profitable debt.

Consumer Debt

Consumer debt is the absolute most unprofitable debt that you can have. If you’re using credit cards and other personal loans to finance your life you’re living beyond your means and are setting yourself up for financial disaster.

Stay away from this type of debt.

Mortgage Debt

Mortgage debt is a big toss-up. If you plan on living in one place all of your life, purchasing a house may save you money in the long run over renting.

However, if you’re not staying in one place forever and at some point need to sell your home you could lose a lot of money if housing prices drop. OR you could make a small profit when it came time to sell.

Mortgage debt is one that comes down to individual circumstances although I would argue that it definitely leans more toward the unprofitable side of the equation.

Investments

Debt becomes the most useful when it comes to investing. Many investors have built their wealth by leveraging debt and purchasing real estate.

Other ways to use debt to its advantage is when you’re investing in yourself in a way that produces tangible results or using that money to grow your business.

Bottom line: debt isn’t good or evil. When you intentionally use it to its advantage it can be a tool for building wealth. If you use it in an irresponsible way it can be a path to financial disaster.

source: everybodylovesyourmoney.com

Percentage of First-Time Home Buyers Drops

Numbers released recently by the National Association of Realtors show that only 33% of home purchases in 2014 will be made by first-time buyers. That may not sound terrible on paper, but it means a drop of 5% from last year, and the lowest rate in almost three decades.

But why is this happening, when talk of economic improvement and a steadying housing market is so common? The reason is three-fold. Most first time home buyers are in their twenties and thirties, the same age range most crippled by ballooning student loan debt, rising housing costs, and stagnating salaries. Combined, these factors create a generation hard-pressed to save up for down payments.

And that may not be all. According to The Wall Street Journal:

    “Beyond the issues of affordability, some renters might be putting off home purchases because of the damage they saw housing do to the last generation of buyers, said Doug Duncan, chief economist of mortgage-finance company Fannie Mae.” 

To adapt, many are instead renting with roommates or moving in with family, which creates another curious situation. According to a Zillow study, there are 5.4 million fewer households than there would be if the economy was completely recovered.


So how does all this affect you?

Unless home-ownership eludes you for the reasons outlined above, it doesn’t, at least not directly. But in all probability, this is only a symptom of a greater ill. With some worrying about a student debt bubble and others whispering about forgiving student debt, the underlying problem isn’t likely to disappear on its own, and may mean some more turbulence before the economy evens out completely.

source: totalmortgage.com

414,000 Home Sales Won’t Happen This Year Thanks to Student Loan Debt

There’s been a lot of recent buzz about teens and Millennials being extremely bullish on homeownership. And with that comes hope of a stronger housing recovery and even higher home prices in the future.

But it’s one thing to say you’re going to buy a home (or want to buy a home), and another thing to actually do it.

While ambition doesn’t seem to be lacking, the question remains whether many of these young prospective home buyers will actually qualify for mortgages.

A recent report from John Burns Real Estate Consulting noted that 414,000 home purchases would not occur this year thanks to pesky student loan debt.



Using a typical purchase price of $200,000, that equates to nearly $83 billion in lost volume for the real estate industry.

And with 5.26 million new and existing home sales expected this year, that represents about an eight percent loss in transactions thanks to costly student loans.

 Nearly Six Million Pay More Than $250 a Month on Student Loans

There are a reported 5.9 million households under the age of 40 paying over $250 per month on student loans.

That represents 35% of such households and is up from 22% back in 2005. For these households, qualifying for a mortgage gets a lot more difficult thanks to restrictive debt-to-income limits.

It’s compounded by the new Qualified Mortgage rules that limit DTIs to 43%, coupled with the fact that home prices have risen dramatically. The only thing offsetting this is the fact that mortgage rates remain historically low.

For those who can still purchase a home, it reduces their purchasing power by $44,000. So you basically need to look at a smaller home, or a home in a less desirable area.

This can get pretty tricky if the recent grad has accepted a job in a certain locale and doesn’t want to spend half their day commuting.

The prevalence of households with student loan debt also mean it’s more difficult to save for a down payment. And with the FHA becoming a lot less viable for many prospective buyers, more money is needed to get the job done.


Record Number of First-Timers Are Using Gifts to Buy Homes


Perhaps this is why 27% of first-time home buyers received a gift from relatives or a friend last year, per the National Association of Realtors.

That’s up from 24% in 2012 and matches the highest level since NAR beginning tracking in 2009. It’s apparently even higher this year.

The Realtor group also revealed that 54% of first-time home purchases were delayed in 2013 because student loan debt hurt their ability to save for a down payment.

Simply put, college students are spending a lot more money on tuition but salaries don’t seem to be rising.

In fact, incomes appear to be dropping, with college graduates aged 18 to 34 years old working full time experiencing a $3,300 drop in average annual earnings from 2007 to 2012 (adjusted for inflation), per Census Bureau data.

Factor in all the competition in the housing market that demands either a larger down payment or a higher bid and you’ve got a recipe for renting.

Perhaps the home builders will take note of this trend and start constructing more affordable housing.

Tip: There’s nothing wrong with accepting a gift from a parent or relative because a low down payment can raise your mortgage payment three different ways, which could cost you a lot more long-term.

source: thetruthaboutmortgage.com

Making your Credit Cards Work For You

Navigating the financial landscape of your 20s can certainly be a challenge. Between managing student loan debt and paying rent all on an entry level salary, making your credit cards work for you may be at the back of your mind. But it’s imperative for you to pay attention to your plastic and make your credit cards work for you. Here’s how:

source: 20smoney.com

4 Tips to Help 30-Somethings Handle Student Loan Debt

By the time most college graduates reach their 30s, they've been dealing with student loans for years. Yet increasingly, even 30-somethings still face big challenges from their outstanding college debts, and those challenges are affecting the way they manage the rest of their financial lives. Homeownership rates among 30-year-olds have fallen much more dramatically since 2008 for those with student loan debt than for those without it, according to a recent Federal Reserve Bank of New York study.



Yet many people in their early 30s have either already started a family or plan to do so in the near future. That raises the question of how to balance your own financial needs against those of your children in order to reduce the odds that your kids will suffer under the crippling weight of excessive student loans of their own.

Let's look at some tips for getting your own debt paid down and for preparing for potential family educational costs down the road.

1. Put Student Loans in Their Place.

Many borrowers assume that they should always pay down their student loans as quickly as possible. Yet even though paying off those loans can give you a psychological boost, it's not necessarily the smartest move if you have other debt with less generous terms and higher finance charges. By understanding the terms of your student loans as well as credit-card agreements, car loans, mortgages, and other debt you might have, you can identify the highest-cost debt you have and prioritize getting that paid off first. Even if that means waiting longer to retire your student loans, doing so will still save you money in the long run.

2. Don't Skimp on Savings.

Whether to put money toward savings and investing when you have outstanding student loan debt is a subject of debate, with good arguments on both sides.

But to take advantage of the tax deductions and free employer-matching contributions you get from contributing to a retirement account, it's worth diverting extra money away from paying down student loans, especially those with low interest rates in the 3 percent to 4 percent range. As your income increases, you'll be able both to stay current on your loan obligations and to set money aside for other important financial goals.

3. Make Your Employer Pay for More School.

As you advance in your career, getting more education and boosting your skills might be a lucrative move. But once you're in the workforce, you don't necessarily have to pay for those classes yourself anymore. Many employers have recognized the value of investing in their employees through tuition reimbursement programs, which will pay you back for all or part of your costs. Availability and conditions differ from company to company, and typically, the education has to be connected to your job. But they're a great way to avoid adding to your student loan debt.

4. Don't Let Student Loan Debt Hit You Twice.

As heavy a burden as today's young graduates carry, educational debt among their parents is also reaching epidemic levels. In 2011, parents received $10.6 billion in Parent PLUS loans, a 145 percent increase since 2000, even adjusted for inflation, according to a study from The Chronicle of Higher Education and ProPublica. And the size of average individual loan is up as well, by about a third to nearly $12,000 in constant dollars. If you have kids or plan to, you'll want to take steps to ensure you don't end up facing a huge loan burden a second time around.

Put time on your side by setting up savings programs for their college educations now. As your income grows and you rise into higher tax brackets, the advantages of using a tax-favored college savings strategy such as a 529 plan increase in value. As with any market-based investment and saving strategy, 529 plans work best when you give them as much time as possible to produce strong returns. Moreover, 529 plans have very small minimum starting investments, so you can start a account without placing too big a burden on your finances.

source: dailyfinance.com

Student Loan Deferment, Forbearance, & Forgiveness Options

Student loan debt is a problem in the U.S. It has surpassed $1 trillion, and even surpassed credit card debt for the first time ever. I do not carry any student loans, but my wife and I are still paying off her original loans. Recently, she has decided to change careers and has gone back to school to get a second degree. In the process, she has learned a thing or two about student loans and put together this guest post. If you have any student loans or are considering a new degree, you should find some value.

My Student Loan Automatic Withdrawal Payments Stopped

Last year, as I started my second degree, I noticed that my automatic withdrawal of student loan payments (from my previous degree) had stopped. I had not requested this, so I called my loan service provider, Sallie Mae, to inquire.



What I found was that I did not have to make payments as long as I was enrolled in school for at least half time. And they had automatically enrolled me. This had me wondering if there were any other life circumstances which would grant student loan repayment relief, so I did a bit of research.

If you find yourself in a complicated life situation now or in the future consider some of these student loan repayment relief options: deferment, forbearance, and forgiveness. I’ll highlight each in more detail.

Student Loan Deferment

Student loan deferment is a period during which repayment of the principal balance of your loan is temporarily delayed. Interest will not accrue on subsidized loans during the deferment period. Since my loans were subsidized, they were automatically deferred.

I was a returning student, but there are other circumstances that could lead to deferment. Who is eligible for deferment?

According to Federal Student Aid, a U.S. Dept. of Education resource, you are eligible for deferment during the following life circumstances;

• You return to school and are at least half-time enrolled in a college, university, or career school
• You study in an approved graduate fellowship program or in an approved rehabilitation training program for the disabled
• You are unemployment or unable to find full-time employment for up to 3 years
• You experience a period of economic hardship (includes Peace Corps service) for up to 3 years
• You are under active military duty during a war, military operation, or national emergency
• It has been within 13 months following the conclusion of qualifying active duty military service, or until you return to enrollment on at least a half-time basis, whichever is earlier

You can apply for deferment online through your lender. If you are enrolled in school you will probably want to contact your school’s financial aid office at the start/end of each semester. Do not assume they will automatically enroll you (or un-enroll you).

Unbeknown to me, my deferment period incorrectly ended this spring when I completed a “milestone” in my degree program. The financial aid office made it appear that I had completed my degree, so Sallie Mae removed me from loan deferment and I didn’t find out until large sums of money suddenly began withdrawing from my bank account automatically.

Student Loan Forbearance

There is another option for relief of student loan repayment if you do not qualify for deferment – student loan forbearance. According to Federal Student Aid forbearance allows you to stop making payments or reduce your monthly payment for up to 12 months.

There are two types of forbearances – discretionary and mandatory.

Who is eligible for forbearance?

Discretionary forbearance: under these circumstances, your lender decides if you are eligible for forbearance:

• Financial hardship
• Illness

Mandatory Forbearance: under these circumstances, your lender is required to grant forbearance:

• You are serving in a medical or dental internship or residency program, and you meet specific requirements
• The total amount you owe each month for all the student loans you received is 20% or more of your total monthly gross income (additional conditions apply)
• You are serving in a national service position for which you received a national service award
• You are performing teaching service that would qualify for teacher loan forgiveness
• You qualify for partial repayment of your loans under the U.S. Department of Defense Student Loan Repayment Program
• You are a member of the National Guard and have been activated by a governor, but you are not eligible for a military deferment

Receiving loan forbearance does not happen automatically. You need apply by making a request to your lender.

Deferment vs. Forbearance

With both deferment and forbearance, your payments are delayed. The difference is that with deferment, your interest on subsidized loans does not accrue. With forbearance, your interest will continue to accrue on unsubsidized AND subsidized loans. This makes deferment the better of the two, if you qualify for it.

Note that if you are in default on your loan, you are not eligible for either deferment or forbearance.

Student Loan Forgiveness, Discharge, & Cancellation

If you are a public employee, have a low income, or meet certain other criteria, it is possible that your loan debt could be forgiven, discharged, or cancelled.

There are many different criteria for each. I won’t go into full detail here, rather, just give you a list and link to some resources for you to dig in to deeper.

• Death
• Permanent Disability
• Your School Shuts Down
• False Certification of Student Eligibility
• Bankruptcy
• Teacher Loan Forgiveness
• Public Service Loan Forgiveness

You may also want to look in to income based repayment, which allows you to legally cap your student loan payments at 15% of your income.

To become eligible for the income based repayment plan you must prove partial financial hardship as defined by your lender. But, it is possible to be making a substantial salary, even into six figures, and still qualify for Income-Based Repayment depending on your debt level. If you’re a public employee for 10 years, your loans could be forgiven after 10 years of repayment. After 25 years or 300 payments you could be granted loan forgiveness regardless of your career choice.

source: 20somethingfinance.com