Revisiting Paying Off Student Loans

Student loans have been on my mind ever since I read about the latest legislation dropping Stafford rates earlier this month.

Here’s a brief recap of where my student loans are now. I consolidated my Stafford loans years ago, locking in a very comfortable rate of 3.25%, and the balance currently stands at a little over $22,000. The loan had been in deferment as I completed my MBA at Johns Hopkins, which has stopped the clock the last few years, but with my graduation the interest has started to accrue again. We earn too much to be eligible for the student loan interest tax deduction (certainly not a bad thing) and thus bear the full brunt of the 3.25% rate. Once again, I’m revisiting my student loan dilemma.

$22,000 in student loans at an effective tax rate of 3.25%. We also have a mortgage of around $220k at an effective tax rate of 4.3125% (the rate is 5.75% but it’s tax deductible, in the 25% tax bracket the effective rate is 4.3125%; we could consider only the deduction above the standard deduction for couples $10,900 but that begins to get overly complicated). Math says that if we were to pay down a debt, it would be my mortgage first because it’s at the higher tax rate. So I should never make more than the minimum payment on my student loan unless we have paid off the mortgage (which I envision is something that won’t happen for quite some time).

Proponents of Dave Ramsey’s Debt Snowball approach would say that you should pay off the student loan first because it’s the smaller amount (ahh, psychology). I personally don’t subscribe to that idea, I go by the Blueprint for Financial Prosperity Common Sense Payment Strategy (okay I just made that up, it’s how most people who understand interest rates and math would pay down their debt, I just added some color). While I anticipated this result, it’s always good to revisit things as situations change.

So, the student loan is here to stay for the foreseeable future.


Housing Stimulus Bill Explained

Foreclosure! Housing Stimulus BillThis week, the Senate passed a housing bill a little over a week ago (the House joined last Wednesday) that seeks to give the housing market a shot in the arm. With 1 in every 171 homes going into foreclosure, the cries for help are getting loud and loud and, with the next year’s deficit nearing half a trillion dollars, we might as well pile it on. What’s another few hundred billion? Personally, I don’t like the idea but economic turmoil doesn’t help anyone. It doesn’t help the people who erroneously got themselves into bad loans, it doesn’t help the people who intelligently avoided them, and it doesn’t help everyone else standing on the sidelines. Considering we can’t pass energy legislation and likely won’t before Congress recesses in a week, we might as well take what we can get.

So, what’s going on? Here are the bits that are likely to affect you.

The Main Bailout

The FHA will be allowed to insure up to $300 billion in 30-year fixed mortgages for those at risk and who are living in owner occupied homes. The net result of this is that some loans will be restructured from their current state to an FHA insured loan. It’s help but it’s not a get out of jail free card, you’ll see why in the second paragraph of the gotchas section.

Who is qualified? You qualify if you have a loan that was issued between January 2005 and June 2007, must be spending at least 31% of your gross monthly income on mortgage debt, the total debt cannot exceed 95% of the home’s appraised value, and prove that they will not be able to continue to pay their mortgage. They can be defaulting or current, that won’t matter, but they have to retire all other debt on the home.

What happens? If you think you qualify, go to an FHA-approved lender and they will take it from there.
Any gotchas, catches, or tricks?There are two types of gotchas. First, in order for this go through, the lender will have to write down the value of the existing loan to 90% of the home’s current value and take the hit. Lenders won’t do this unless they think they’ll lose more than that, so you will probably really have to be in trouble to qualify.

The second type of gotcha is the restrictions and extra payments the borrower will have to bear. You can’t get a home equity loan for at least five years, you’ll have to pay the 1.5% annual insurance premium to the FHA for the guarantee, you’ll have to pay a 3% exit fee on the principal to the FHA if you sell or refinance, and finally you’ll have to give up all profits to the FHA if you sell or refinance within a year. After a year, you’ll only be on the hook for 90% of the profits and drops by 10% each year until it gets to 50%, where it will be forever. That’s a long time.

The Supporting Cast Measures

There are a few other additions to the bill that may be of interest.

Conforming Loans ceiling set to $625,500. A temporary measure increasing the maximum value of a “conforming loan,” or loans that would be guaranteed by Fannie Mae or Freddie Mac, was increased and pegged to home prices in a geographic region. I mentioned it as the Little Footnote on the 2008 Tax Stimulus Package and it really was a boon for the higher end housing market. Well, it’s permanent now.

10% home-buyer “credit,” up to $7,500. It’s not really a credit, it’s a 15 year no-interest loan of up to 10% of a home’s purchase price, no greater than $7,500. I don’t know if this will induce many folks into buying, there’s no sense rushing to buy something if you think it’ll still go down in value. No one loses money by sitting on the sidelines in this market.

My Thoughts

Overall, I think the way the “bail out” was structured was reasonable. Borrowers might be bailed out, only if the lenders accept the writing on the walls, but they don’t get to reap any rewards on the back end. I like the idea that the government gets at least 50% of a bailed out home’s appreciated value if it’s sold or refinanced. That’s a hit and the cost of doing business. Qualified borrowers get to keep their homes, lenders don’t lose as much, both sides seem to win.

It appears that the only losers are those excluded from the deal (taxpayers included). Lenders may be stubborn and refuse to take the hit, borrowers may find themselves close but not quite over the 31% gross income rule, and others may be left out because of the date of issue on their loan.

You can’t save everyone.

(Photo: respres)


Kiva BusinessCard: A Philanthropic Credit Card

The Kiva BusinessCardUnfortunately, the Advanta Kiva BusinessCard has been discontinued.

I was really surprised when I heard about the Kiva BusinessCard, a credit card offered by Advanta, because it sounded asymmetric with the types of offers credit cards usually have. Advanta has been really innovative in the types of cards they’ve been offering, trying to capture those smaller markets, and I believe this card is yet another attempt to do so. First, they were offering up a business credit card for online marketers, now they’re offering a business card with a philanthropic twist known as the Kiva BusinessCard.

Kiva - Philanthropic MicrolendingKiva, a program I’ve only written about briefly in the past, is an international, philanthropic microlending organization. They give loans to aspiring entrepreneurs in developing countries in an attempt to lift them from poverty, you can read more from their about page. It’s the embodiment of the old maxim: “Give a man a fish; you have fed him for today. Teach a man to fish; and you have fed him for a lifetime.” I wrote that in the past I would give it a try but that fell on the back burner as, at the time, many of their loans were 100% funded.

So, what is Advanta offering with their card? If you offer a loan through the Kiva system, paying for it with the Kiva BusinessCard, they will match it dollar for dollar up to $200 per month. In actuality, since Advanta won’t know the exact loan you’re funding, Advanta supplies the funds to Kiva and they loan it out as needed but the intent and effect is still the same – an aspiring entrepreneur gets funds they otherwise wouldn’t get if you used another card. After the loan is repaid, the funds are given back to Advanta, just as they are to you after a loan, but they retain it (you have the option of retaining it or making another loan).

The 5% bonus cash back transaction categories are Kiva loans and charitable donations of up to $1,200 a year; 1% on everything else with no limit. $1,200 isn’t a tremendous amount but that’s 5% more you can give to charitable organizations each year, not counting the charitable income tax deduction you’d get.

Some other notable features of the card:

  • 15 month 0% APR balance transfer promotional period,
  • $0 fraud liability,
  • No annual fee

It’s an interesting offer, wonder how popular it’ll be.


Filing A Pothole Damage Claim

Huge PotholeLast winter, I did a fair amount of driving in the outskirts of Washington D.C. and on one of those occasions, hit a pretty nasty pothole. I was only about a mile away from my destination so continued onward and then checked on the tire after I parked. I looked at it and, fortunately, no big deal. After my meeting, I drove back to my office. It was an uneventful, leisurely (stop & go traffic) thirty minute drive. After parking, I didn’t check the tire and just went inside. I didn’t notice I had a flat until I came back out, three hours later, at the end of the day to go home. Sonofa… fortunately, I had a spare and I had Costco tires, so I drove over to the local Costco and had the tire repaired for free (a great reason to get your tires from Costco if you can stand the wait).

One of my friends, he wasn’t so lucky. In fact, he saw the same pothole day after day after day (even calling it into the Virginia Department of Transportation, or whatever agency is in charge of roads in Virginia) on his commute and one day, by freak accident, caught the edge and it tore up his tire’s sidewall. He was furious. He saw that pothole every day, even reported it, and still it persisted and he wanted to know if he could get reimbursed for it.

Apparently it’s not a common problem. According to TRIP, a national transportation research group, “deteriorating urban pavement conditions cost the average driver more than $400 annually.” Four hundred dollars! The worst offenders are major metropolitan areas such as New York, San Francisco, Los Angeles, and even Baltimore, but TRIP estimates that 23% of major metropolitan roads are in poor condition.

Did you know that damage caused by a pothole may be reimbursable by the county, city, or state depending on the circumstances? Until my friend mentioned it, I didn’t.

Can You Win?

Governments aren’t as good at paying back money as they are about taking it in the first place, so you probably want to be pretty confident that you’ll win before going through the arduous process. The transportation authority is responsible for the damages if you suffered damage after they knew about the existence of the pothole. In some places, the transportation authority doesn’t even need to know about the existence of the pothole for you to be reimbursed. In those areas, it’s assumed that the responsibility of road maintenance falls on the transportation authority at all times. It’s pretty much a crapshoot.

How To File A Claim

First, you need to get your documents in order. You will need to provide repair bills, record of the location of the pothole, as well as the time and date of the accident.

Next, you need to determine who is responsible for the road. If it’s a city road, you’ll want the city’s Department of Transportation. If it’s a county road, you’ll want the county’s Department of Transportation. Lastly, if it’s a state road, then go to the state’s Department of Transportation. Some governments have online forms for you to fill out, otherwise require a phone call, but ultimately you might want go the route of the telephone so you talk to someone and get the full story on what the rules are for your jurisdiction.

Your claim may not be paid out but it’s worth a shot, sure beats filing a claim with your insurance company and getting your rates jacked up.

(Photo: rudiriet)

 The Home 

Landlines Are A Waste (Almost)

Old Rotary PhoneThe Consumerist’s Chris Walters commented about a Slate article in which they found that landlines were now considered a luxury expense. With rising costs in everything else, land-lines were becoming useless and cut from the monthly budget. In the Slate article, writer Daniel Gross pinged the under-30 crowd at the offices of Slate and Newsweek and discovered that very few had home phones at all. Those who did used Skype.

Since college, I’ve never had a land-line telephone. In fact, I still have the 412 Pittsburgh cell phone number I had when I was in college. Number portability enabled me to migrate that number across four carriers (six if you count the AT&T Wireless to Cingular to AT&T Wireless merger-acquisition-spin-off merry-go-round) in five years. Landlines are dinosaurs on a mammalian planet. I don’t know how much a land-line costs nowadays but even the ubiquitous “triple play for $100” seems like you’re overpaying for the telephone.

However, I can think of three situations where you’d want (or be forced to have) a land-line:

Children. While your cell phone does get 911 service, hitting 9-1-1 and then the green Send or green phone button is one button more than the traditional land-line. This is, of course, worst case scenario and not particularly strong justification for paying $20/month but it’s certainly a consideration for some parents. This is also only a consideration for very young children, the age at which they shouldn’t and wouldn’t be left home alone anyway, so you’re really talking about scenarios in which the parents are incapacitated. Either way, I know that some parents have justified having a land-line for this very reason.

Security systems. Most security systems need a telephone line if you want it to communicate with the central station. Some newer systems can take advantage of wireless networks but most still rely on the old land-line. A land-line is one of the hidden costs of getting a security system, if you’re sold on or required to have central monitoring.

DSL. DSL is a digital subscriber line and it’s internet service across the phone system. Unless your provider offers naked DSL or dryloop DSL, you’ll be required to have phone service to get DSL.

Outside of those three cases, I don’t see the point of a land-line. Anyone have a land-line anymore?

(Photo: clemson)


Online Banking: How’d We Do Without It?

Online banking is wonderful. It’s difficult to believe that even as recently as ten or fifteen years ago, online banking was a rarity. It seems ubiquitous now (especially with so many online banks offering high yield savings accounts). My first account was at our local credit union and they were ahead of the curve in offering banking online services. You could check your balance online, transfer between credit union accounts online, and do all sorts of cool online stuff! (Unfortunately, they haven’t upgraded non-security related features in fifteen years, but they are a credit union after all)

Since then, the number of features offered by banks and their online banking services has blossomed. There are banks that operate entirely online, from opening an account to depositing funds, with interest rates that beat the long-term CD rates of conventional banks. It might seem like old hat to many readers, but it wasn’t that long ago that the idea of a 100% online bank sounded like a scam.

(Click to continue reading…)

 Frugal Living 

Frugal Date Idea: Fun Recipes & Board Games

Board GamesKim Palmer of US News & World Report’s Alpha Consumer asked people for their best frugal date ideas and here was my submission:

Our frugal date consists of finding a fun and creative recipe online and then cooking it for dinner. We’ve discovered many great recipes this way, and we’ve improved our ability to cook and improvise. This takes the frugal idea of cooking your own meals, rather that eating out at restaurants, and combines it with a frugal way of entertaining yourself (since the entertainment of cooking and company is essentially free). Then, after the cooking and enjoyment of the wonderful food you’ve created, follow it up with a fun night of board games or card games. A deck of cards isn’t more than a dollar, and there are thousands of games you can play!

Turns out it was chosen as one of the top three and she’s asking for votes for the best! Canadian Dream’s idea of just hanging out at a bookstore is one that my wife and I have done in the past – it’s a great way to check out a bunch of books and have a quiet reading night.

Anyway, if you have a free moment and want to see some cute frugal date ideas, head on over and submit a vote.

(Photo: greencolander)


WIN: Debt Figures Are Amazing

$962 B in Revolving Consumer DebtAccording to the Federal Reserve, report in a NYTimes article, Americans have nearly a trillion dollars of revolving debt (which includes credit card debt). That’s a lot of debt… oh yeah, total consumer debt is $2.57 trillion. Amazing right?

Capital One Total Compensation Those are two really big numbers huh? Well, if you were John Adams Kansas, President – Banking of Capital One Financial Corp., then that top number would be your total compensation package for 2007. If you were Richard D. Fairbank, Chairman, President and CEO of Capital One Financial Corp., then that bottom number would be your total compensation for 2007. In fact, if you were Richard D. Fairbank, you’d probably be upset about your number because it’s 45.5% less than what you got in 2006, which was nearly $37.5 million dollars.

Before people get all upset that they’re making so much money, their salaries are $0. Their bonuses are $0. It’s all in stock. I’m not pointing their salaries because I think it’s excessive, though they might be, I wanted to point out how ridiculous those numbers are. (Data taken from the July 2008 issue of Cards & Payments)

$286,000 in DebtThis is the most amazing debt story I’ve ever heard. When the story starts, Diane McLeod tells us that she has $286,000 in debt. Her story is one of misstep after misstep, from rolling her credit card debt (~$25k) into an adjustable rate mortgage ($10k in fees, plus it adjusted) to raiding her 401(k) (which cost $3k in taxes, paid in credit cards). Along the way, she was given shoddy advice from people with their own interests in mind. I’m not absolving her of responsibility but someone had to extend her this credit. She’s not drowning in debt, she’s halfway to the center of the Earth.

Average Number of Credit Cards per Household: 13 This figure is again from the New York Times series The Debt Trap (click on Start and then the lifetime link). The average household has thirteen credit cards. 40% of households carry a credit card balance. While having 13 cards doesn’t mean you’ll use them all, you can’t escape the 40% figure… especially when you couple it with that first number.

Guns won’t bring down America, debt will.

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