Frugaling

Student Loans: Gorge On The Federal, Financial Trough

I’ve been gorging on the financial trough that is the Federal government. They know how important I am, and they’ve been more than happy to open up their coffers for a swell guy like me. I’m part of the educated elite, don’t you know? They’re investing in me. What an ego boost!

Although, when I look at my Mint.com account, with all the accounts consolidated into one domain, I see a different picture. Suddenly, I appear to be the fool in a bigger game of Monopoly. I own nothing, and I’m being given nearly unlimited funds to continue deeper down this rabbit hole of debt. Today, that hole sits at $37,605 (see my previous post on debt that started this site) – a gut check that leaves me breathless and anxious. I’m told to rest assured: Everyone goes through this – it is nothing compared to other people. That doesn’t assuage my worries.

What does comfort me is that the greater economy is realizing the impact of over a trillion dollars in student loan debt. You see, economists and businesses have taken note. Even though the country has shrinking credit card debt, we’ve replaced it with student loans. It’s a shell game, and WE the students are going to be left with the bill.

Student loan debt is the responsibility of students, government, and corporations, alike. There are too many hands on the profits, and not enough students that know they deserve better. That interest rate that we pay, 6.8%, may be raised very soon if Congress doesn’t act. Even worse, banks prime rate for loans through the Federal Reserve is 3.25% – other rates are near 0% (citation). That prime rate is what banks get to lend money to suckers like you. Congress finances our student loans at 6.8%. Are you doing the math? I am. That’s 3.55% more than what banks pay to lend money.

Our government shouts from the staircases, halls, and opulent gardens that we are a country that prides itself on education. Education comes first here in America, and we are the best country because of it. Unfortunately, we are neither. The country is consistently ranked behind most of Europe for education and our crumbling, decaying system of education is hurting our future. One of the best ways we incentivize an education is by making Federal loans highly accessible. One of the worst ways we cripple our economy is by charging more than double the interest rates that big banks get. Where’s the logic? This seemingly short-term decision to pass on the debt to an even younger generation seems ill-advised and destined for long-term failure.

The government is profiting over this system of student loans. In fact, they’re poised to earn $33.5 billion for fiscal 2013 (link). If this was Goldman Sachs, Citigroup, and/or (insert bank name here), we would write this off as yet another crazy, astronomical year for the banks. But this isn’t a corporation or a for-profit machine. This is our government, which aims to protect against predatory lending. The irony? It’s doing just that.

Only 39 percent said they fully understood the burden student loan debt would place on the future, and 60 percent now have at least some regret over the choice of education financing. (AICPA Survey Results & HuffPo)

To start paying off her $120,000 in student debt, she is already working two restaurant jobs and will soon give up her apartment here to live with her parents. Her mother, who co-signed on the loans, is taking out a life insurance policy on her daughter. (New York Times)

I’m convinced that students (me included) are not able to accurately calculate and convert a bucket of student loan debt into a monthly payment – with compounding interest – on a salary that doesn’t exist yet. Good luck with your repayment plans!

Perhaps we need to tackle this problem at the government level, as well. Perhaps it’s time for our representatives to represent. Perhaps they can follow the lead from the champion of the middle class, Senator Elizabeth Warren.

The rise and noise over student loan debt has just begun. President Obama will be tackling this impending disaster soon, but will it be too late?

What Can You Afford When You’re Broke?

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Everything is different when you’re in debt. The concept of affordable goes out the window. Paradoxically, you can afford anything and nothing. There is no budget that does justice to this imbalance.

This fall, I’ll be making around $1300 per month, which is comparable to a single receipt from The Rich Kids of Instagram. I need to find a way to pay rent, utilities, gas, student fees and a portion of tuition, food, car insurance, and health insurance – all with about $1300 (after taxes).

I’ve poured hours into a budget that might get me there (if I sell my car). Each month, I may be able to net $100. Quite simply, that’s $100 per month that I need to be paying off student loans or saving.

This is where it gets tricky. With 6.8% interest piling on my student loan debt and a severely strained budget, I’m caught – close to being able to manage it, but still losing ground. This is the cycle of poverty and debt. This is why people can’t get out. When you’re finally making more, the debt you accrued is calling.

It’s fiscally irresponsible to do anything that costs extra money.

Truth be told, it was a huge splurge to buy a plane ticket this weekend to visit my long-distance partner. The price will come back to haunt me in loan interest. But despite this recent spending, I’ve been conserving nearly every dollar I have. This next academic year I want to stop the onslaught of debt – any way I can.

Ditching The Car Loan – My $10,000 Liability

By Frugaling 1 Comment

There’s a beautiful, shiny, blue, 2006 Honda Civic coupe in my parking lot. I’ve owned it for nearly two years. The car has run perfectly – no maintenance issues or starter problems. It gets around 30+ miles per gallon – depending on my need for speed. Today, I’ve decided to sell it.

Two summers ago, I was in a different place mentally and physically. I moved for graduate school and I was a single guy looking to impress. The things we purchase, wear, and surround ourselves are often a display of our wealth – or lack thereof. I wanted a nice looking car (read: expensive-looking) that would last a long time and wouldn’t take much upkeep. I didn’t actually have the money, but the convenient credit was all too easy to acquire. It’s only now that I’m realizing my grave mistake.

I’ve paid $196 a month on my car loan for nearly 24 months. I pay nearly $40 per month in insurance. I pay about $30 per month in gas. And then… There’s depreciation. Conservatively, it costs me about $300 per month to own this luxury (after registration and taxes). My debt clock reads $37,753 – time to cut out the extras.

When I stepped back and examined my needs and wants, I realized that this expensive vehicle was the elephant in the room – the biggest extra I own. Over this summer I hope to sell the car, buy a cheap (2002 and earlier) Toyota Camry or Corolla and a bike. I’ll use the proceeds of the sale to pay off the rest of my $7,500+ left on the auto loan and take the difference to buy a vehicle in cash – no loans or credit needed.

I can’t keep kidding myself… I can’t keep saying that I’m trying to eliminate my debt, while keeping the largest liability in that parking lot. It’s time to make some sacrifices for my future.

Should I Have a Credit Card If I’m In Debt?

By Frugaling 3 Comments

Reach into your wallet, rubberband, or purse – wherever you stash the cash. What’s in your wallet? Personally, as a self-described “minimalist,” I have five cards wrapped in a rubberband – that’s it. No cash. No frequent shopper punchcards. Nothing extraneous.

Living cashless is freeing, and in my mind, safer. Losing a credit card is nothing. Lose the cash, and you’re never getting that back. But there’s a fundamental question I’ve been asking: If I’m in debt, should I even have a credit card?

Plenty of news sources and bloggers have weighed in on this general question of owning a credit card.

Some advocate for little to none:

Have only one credit card with a low limit, and only one loan with monthly payment not exceeding 25% of income.

Cut up your credit cards.

Leo Babauta of Zen Habits (Link)

Others present a case for building credit and learning to manage them:

If you really want me to give you a number of cards to have, fine… how about five?

John Ulzheimer for Mint.com (Link)

The reality seems far murkier than the pole positions would have you believing. My main credit card offers trip cancellation insurance, auto rental collision damage waivers, travel accident insurance, travel and emergency services, lost luggage reimbursement, trip delay insurance, baggage delay insurance, roadside assistance, price protection, return protection, and much more. If you even travel a bit or ever purchase a large ticket item, these insurances and protections are vital. I get all these things with no annual fee and 1% cash back on all purchases (with 2% back on dining). Not a bad deal, if I’m already going to make the purchases (non-affiliated link to Chase Sapphire card).

Therein lies the rub: If I’m already going to make the purchases.

The reality is that these features are established to encourage spending – plain and simple. Everything about a credit card is framed around increased spend. It’s ease and culturally-sanctioned use exacerbates it. In fact, the demonization and haunting fears of losing cash or slowing down transactions have been propagated by the major credit processors (see the Visa Check Card ad below).

Without that credit card, you may have never gone through with the purchase. Buying an LCD TV at $300+ is a swipe away. But, it would be at least fifteen $20 bills – the payment and hurt of giving that concrete cash dissuades discretionary spending.

Where does that leave us? Seemingly, it’s in moderation that I must end. A credit card is an important tool to use carefully. Each time we reach into that wallet (or, in my case, rubberband), we must be conscious of the concrete loss of cash. The digital numbers being extracted from your bank account are real. The consequences of spending more are real.

For now, I’m keeping my credit cards. I’m in a managed debt situation due to student loans. Instead of cutting up my credit cards, right now I’m going out and consciously spending less. Because, in reality, the world out there encourages you to spend and spend. Cooking at home, reading a good book, spending time with friends and lovers, and exercise are all so much more meaningful and make it impossible to spend beyond your monthly budget. Let’s refocus on what matters to overcome the debt.