Jul 25

New Student Loan Agreement on the Horizon

It seems like Congress is finally closing in on an agreement to and while it doesn’t solve the underlying problem (the easy source of money giving colleges an incentive to keep increasing tuition), they claim it will solve the problem of certain interest rates jumping from 3.4% to 6.8%.

This agreement will tie the interest rates to the market rate, or the 10-Year Treasury note plus 2.05% in interest rates which should set the rates at 3.85% [1]. At face value this seems fair, but I personally think it should really be a 1% increase over the 10-Year Treasury. The less graduates are paying on interest, the more money they can potentially spend in the economy sooner – things like cars and houses. Someone making large monthly payments towards student loans are highly unlikely to be getting a mortgage anytime soon.

The interest rates would be capped as well at 8.5%, 9.5%, and 10.% for undergraduates, graduates, and parents respectively. It would be nice if these caps were lower, but at least students will be paying the “market” rate instead of 6.8% while mortgages are at an all time low. If the Fed continues to keep interest rates at all time lows, student borrowers in the near future should be able to hang onto these low rates.

The part about this plan that I don’t like is the fact that students are being used for profit by the government. It already sucks that private loan companies exist to do this, but hey that’s what business is designed to do right? The federal government should not be doing that! The aim for this program, in it’s current existance, should absolutely to be to break even or make minimal profit as a buffer.

This will generate about $184B in revenue for the federal government, coming directly from students. There will also be an estimated additional $715M in revenue that is specifically going to be used for reducing the deficit [2]! Due to Congress’ own stupidity, they are going to be using us to pay for their budget mistakes from the same people they should be investing in – not taking from. Maybe Congress should stop wasting our money first before taking more money?

I guess we will have to wait and see what Congress ends up doing and if this plan actually does get approved. Unfortunately for future students I think it may take the Student Loan bubble bursting for the actual source of the problem to be solved.
Photo credit: Nastassia Davis [www.nastassiadavis.com] / Foter / CC BY-NC

Jul 24

Student Loan Progress – July 2013

As I was preparing to write this post, I was starting to feel a little burnt out about my debt again. But I have to realize that I’m making progress and keep pushing towards my goal to be debt free. I’m treating it like like as much of an emergency as possible with every last dollar going towards my goal! Since I’ve started this blog I’m doing much better and trying to put a minimum of $2,000 towards the loans each month.

This is where I stood at the end of June:

Loan
 Loan Amount 
Interest Rate
Private 1  $ 26,053.92 7.92%
Private 2  $ 19,971.82 7.92%
Private 3  $ –   7.92%
Private 4  $ 3,532.69 7.35%
Gov 1  $ 22,118.82 5.22%
Gov 2  $ 7,566.56 6.80%
Total  $ 79,243.81

You may remember that I was a little disapointed that my government loans had switched providers, so I was not able to make any payments on them last month. This led to me only putting $1,500 towards my private loans when in reality I could have put a full $2,000. I also thought my expenses would be higher last month with my camping trip, but I think they will actually up being high this month. Go figure!

Here are the payments I made for July:

Loan
 Loan Amount 
 Change 
Interest Rate
Private 1  $ 24,485.37  $ (1,568.55) 7.92%
Private 2  $ 19,919.49  $ (52.33) 7.92%
Private 3  $ –    $ –   7.92%
Private 4  $ 3,506.12  $ (26.57) 7.35%
Gov 1  $ 3,773.04 3.40%
Gov 2  $ 3,309.66 6.80%
Gov 3  $ 5,200.81 4.50%
Gov 4  $ 2,010.27 6.80%
Gov 5  $ 5,270.84 5.60%
Gov 6  $ 2,129.04 6.80%
Gov 7  $ 4,312.47 6.00%
Gov 8  $ 3,322.53  $ (356.72) 6.80%
Total  $ 77,239.64  $ (2,004.17)

As you may have noticed, my new provider has now split all my government loans up individually. I’m not sure if this is a good or bad thing, but may be more helpful in the long run. I’ll be able to target each loan individually in order of highest interest rate and it will be more of a psychological victory as I eliminate each one.

I paid about $2,500 in total towards my loans this month. I’m still working on completely paying off Private Loan #1 and I’m slowly making progress on that. The $356 you see for the government loans is in total, next month I will be able to show each individual loan. The $2,000 towards the principal was good progress compared to last month. Hopefully next month will bring more of the same!

Jul 19

Why Aren’t We Graduating From College?

A recent article on the Harvard Business Review blog discussing the current state of college education. Their summary? It’s not looking pretty. A little over half of students are completing their four-year degrees within 6 years, and only 26% (!!!) of people getting two-year degrees finish within 3 years [1] . That means that a large portion of the second half of those students at four-year colleges aren’t even graduating and most likely still have some amount of debt and no degree.

I don’t necessarily think it’s that students are becoming dumber or lazy, but many college students are simply unprepared for such a decision. You have just turned 18 years old and high school didn’t really prepare you for this. All of a sudden you need to decide what you want to do the rest of your life, oh and by the way, if you make the wrong decision you will have to work anyways because you will have $35,000 in debt!

Students and parents need to become more involved in this process, do your research ahead of time! What do you enjoy doing? What are your passions? Figure out what schools you can go to, how much they will cost, and then how much someone in that field can expect to make after graduation. Will you be able to pay off the debt in a reasonable amount of time on that salary, or will you be stuck in debt forever?

If you are currently in college my advice would be: you definitely need to work your ass off. You are the one paying for your education, so don’t waste your money. GPA is also not the end all that some people make it out to be, but it can really be a determining factor in screening canidates to be selected for interview. Don’t freak out if you don’t have a 4.0, but many companies do set a threshold of say a 3.5 in order to be able to interview with them. After your first job though, GPA becomes largely unimportant.

Use your time wisely too, you don’t need to spend every waking minute studying or doing homework but you want to set aside enough time to be succesful. There will still be plenty of time to party – do you really need to wake up hungover every morning? More importantly, you need to network. Internships and co-op positions are extremely valuable experience and a good way to make connections. You could be the smartest person at your school but if you don’t know anyone, have no experience, and lack communication skills you may get passed over by an “above average” student that has been building their resume. Your college should have a ton of resources at your disposal, get to know your career development office very well and any professors that have industry experience.

If you are looking to go to college or know someone who is and they are unsure of what they want to do, don’t waste those years at an expensive 4-year college. Go to community college and save the money, take some classes there and figure out where your interests are first. It would be much better to “waste” that time there, especially because if your grades were good enough in high school many times community college can be free or close to free. Many states also have transition programs to state colleges afterwards that are similiar in nature. If you woul prefer something more hands on, you may be able to skip the college route all together – research some technical and trade schools in your area as well.

Photo Credits for this post: 
aprilbell [1]
1060 [2]

yirsh [3]

Jul 13

A new way to approach student debt?

It looks like Oregon is on it’s way to attempting to solve the student loan crisis in their state. But just how feasible is their solution? The basic concept of the plan is that you would not receive any traditional loans and you would not pay any tuition. You heard that right: no student loans. What you would do upon graduation is pay the University 3% of your income for 25 years. Essentially it would put everyone on an income based repayment plan that you currently get through federal loans.

I definitely agree with this program in principle, but I think it needs a few modifications for it to actually succeed. Let’s look at a few examples of how much each person would be paying over the course of those 25 years:

30,000 Salary: $22,500
50,000 Salary: $37,500
75,000 Salary: $56,250
100,000 Salary: $75,000

As you can see, obviously the higher salaries would be “subsidizing” the the cost of lower paying degrees and you know what? I’m actually OK with that with a slight modification. If you are able to pay more than the 3% of your income, you should be be able to pre-pay your “loan” amount up to a certain max amount. Maybe something like the cost of tuition + $1,000 to cover any extra expenses? That would seem pretty fair to me.

You may also argue that students would not be motivated to pursue higher salary jobs because they would pay more back, but I think that is what the payback cap would be if you start to pre-pay your loan back instead. We also don’t see the increase in taxes really stopping anyone from taking that $100,000 salary job compared to the $50,000 salary job.

If we use the example of Oregon State University, the cost to attend in 2013-14 in Tuition and fees is $8,538. So that means over the course of 4 years your total would be $34,512+$1,000. That means that everyone making over $50,000 a year would most likely want to pay more than the minimum. You would obviously have the choice of what to do, and for people making less they would still be able to use the IBR method to pay a lower total amount.

The only thing that it seems may be a problem is with the program itself, and how the funding will work. Australia already does a similar thing, so there must be some way to make this work! If we assume that there are about 4000 freshman entering Oregon State University each year the costs for the state would rise very quickly.

Year 1: 4000 Students * $8,538 = $34,152,000 Cost
Year 2: 8000 Students * $8,538 = $68,304,000
Year 3: 12,000 Students * $8,538 = $102,456,000
Year 4: 16,000 Students * $8,538 = $136,608,000

Total cost: $341,520,000

So the total cost at this one university before they even begin receiving a cent of income from the program would be around $341 million! I didn’t even factor in people not completing their degree or dropping out – and what do you do to them? Still charge them 3% over 25 years or until they pay back how much they were “loaned”? Those are more rules and situations that Oregon would also have to account for.

The other side of the program, or the income assuming that the average student graduating with a bachelor’s degree will make $40,000 a year.

$40,000 Salary * 4000 Students * 3% = $4,800,000 Income/Year

fast forward 4 years to when they are making the “full amount” each year…

$40,000 Salary * 16,000 Students * 3% = $19,200,000 Income/Year

and then 24 years later when they have the “maximum” amount of students paying…

$40,000 Salary * 96,000 Students * 3% = $115,200,000 Income/Year

So while the school would technically be able to break even on a per-student basis, it would probably take many years to actually generate a positive cash flow (if they even do?) and that is a huge, huge cost upfront. You also have to take into account students that become unemployed, or students that eventually leave the workforce to start a family. Obviously there would be a lot more complex calculations going into this, but I like the sound of this program at it’s face value with a few tweaks. I’ll leave the technicalities and funding to someone much more knowledgeable on the program than me!

Jul 10

Living Paycheck to Paycheck

There was recently an article on CNN Money that a staggering 76% of Americans are living paycheck to paycheck, something that was very disheartening to read. About 16% of Americans are considered to be below the poverty line in America [1], so it’s crazy to think that 76% of people are also living paycheck to paycheck. One would think that this number should be lower?

If we dig into the article a bit more, I think a more accurate way to display the information that is presented in the article is that 27% of Americans have no savings at all. That is what I would qualify as living “paycheck to paycheck” – which still isn’t that great of a rate. But it isn’t as drastic as the headline that lures us into the article and that actually lines up pretty well if you factor in the people living right at the poverty line or slightly above it.

We can also see that 22% of people have less than $100 in savings, while 46% have less than $800 in savings. I think that in this case we are actually dealing with two groups of people. There are the people working hard just to pay their rent, feed their families, and pay the bills. There is no way this person or family is going to be able to save money without increasing their income and there is a legitimate reason they are working paycheck to paycheck.

We then have a second group of people who are making enough to live comfortably but nothing extravagant, but spend every last dollar of their paycheck on stuff they might not really need. They keep up with the latest iPhone, they have an unlimited data plan, and they might get a more expensive car than is really needed on a loan. They probably also have a large amount of credit card debt as a result of living “paycheck to paycheck” and splurging on going out every night or buying expensive furniture and clothes.

And while the second group definitely does exist and is a sizable amount, I don’t think it’s as bad as the article makes it out to be. I think they use the 76% statistic to draw you in right away, and while almost half of the people not having at least a three-month cushion there was another half that at least did have an emergency fund. I think if you wanted to really stretch, you could say that half of all Americans are living paycheck to paycheck and make a valid argument for it.

What do you think of these statistics? Was there a time in your life when you were living paycheck to paycheck? Was it out of need or overspending?

Photo Credits for this post: aeropw