According 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?

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)

This 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.

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.

Randy Pausch, a Carnegie Mellon University computer scientist whose “last lecture” about facing terminal cancer became an Internet sensation and a best-selling book, died Friday. He was 47.

Randy Pausch taught Building Virtual Worlds, a class that started sometime in my sophmore or junior year, at Carnegie Mellon University and was a force on campus even before his famous Last Lecture. I always wanted to take Building Virtual Worlds but demand for the class was tremendous those first few years. I wasn’t going to get in the first few years it was offered but I’m upset I didn’t try harder. The class was well known around campus and it’s not surprising he was able to turn that into the ETC.

In listening to his Last Lecture, I understood where all his passion and his energy came from. He was following every dream he had and is an inspiration. If you haven’t seen it, I recommend watching it, you’ll be inspired.

Here’s his Last Lecture:

The following email was sent to CMU Alumni from President Jared Cohen:

Dear Alumni:
It is with great sadness that I inform you that our dear friend and colleague Randy Pausch passed away today, July 25, after a brave struggle against pancreatic cancer.

Randy captured the minds and hearts of millions worldwide with his Carnegie Mellon lecture, “Really Achieving Your Childhood Dreams,” and his book, “The Last Lecture.”

Randy, who earned his doctorate from Carnegie Mellon in 1988, returned to the university in 1997 as an associate professor of human-computer interaction and computer science. Along with Carnegie Mellon Professor Don Marinelli, Randy was the co-founder of the Entertainment Technology Center, a leading interactive multimedia education and entertainment center.

At Carnegie Mellon, Randy was also the director of the Alice software project, a revolutionary way to teach computer programming. The interactive Alice program teaches computer programming by having kids make animated movies and games. A fitting legacy to Randy’s life and work, Alice may in the future help to reverse the dramatic drop in the number of students majoring in computer science at colleges and universities. Randy was also known as a pioneer in the development of virtual reality, and he created the popular Building Virtual Worlds class.

An award-winning teacher and researcher, Randy was also a National Science Foundation Presidential Young Investigator and a Lilly Foundation Teaching Fellow. He used sabbatical leaves to work at Walt Disney Imagineering and Electronic Arts (EA), and he consulted with Google Inc. on user interface design. He is the author or co-author of five books and more than 70 articles.

Perhaps the greatest lesson, however, Randy taught us all was how to live, even in the face of great challenges, and how to follow our passion. While Randy’s greatest passion was clearly his family, he did not shy from sharing his passion for his work as a professor, for his students, and for Carnegie Mellon. We will miss Randy, but we will carry the memory of him and all that he did to make Carnegie Mellon a better university and each of us who knew him a better person.

A memorial service for Randy will be scheduled at a later date. For more information, visit www.cmu.edu.

Sincerely,
Jared L. Cohon
President, Carnegie Mellon University

News:

• Carnegie Mellon University homepage - A nice memorial to a great man. [cmu.edu]
• ‘Last Lecture’ professor dies at 47 [CNN.com]
• In Memoriam: Randy Pausch, Innovative Computer Scientist at Carnegie Mellon, Launched Education Initiatives, Gained Worldwide Acclaim for Last Lecture [MarketWatch]

(Photo: nimboo)

What’s the FSA loophole you ask? First, an FSA is a Flexible Spending Account and it’s an account where you can deposit funds pre-tax, they’re deducted from your paycheck. You can only use those funds to pay for qualified medical expenses. A qualified medical expenses can be anything from co-pays to prescription and over the counter medications. The only downside to the FSA is that you must spend all the funds within the plan year or they expire. Allocate too much and you find yourself wasting it on over the counter drugs you hadn’t planned on buying; allocate too little and you lose out on some of the tax benefits.

There is a loophole in the system though. Once you determine your FSA balance for the year, you can begin immediately spending it and be reimbursed. The amount you allocate is deducted from your paycheck each month so you could conceivably spend your entire year’s allocation before you even pay for it. If you were to leave your job, you wouldn’t have to pay the negative balance, between the amount spent and how much you’ve contributed, on your FSA. That’s the FSA loophole.

I’ve heard stories of people paying for entire operations (think: $$$$$) through underfunded FSAs prior to quitting their job. The idea behind the program is that the shortfalls are balanced out by the expired overages, though I wonder if they’re designed to handle extreme cases.

What do you think of this loophole? Have you ever taken advantage of this loophole? Do you think it should be closed off? If so, how? Have you heard of people paying for thousands of dollars in elective operations this way?

(Photo: dan4th)

My sister is a public school teacher in Boston. She’s participating in a program where her student loans will be paid off after some number of years teaching difficult students in schools in low-income neighborhoods. The arrangement works for my sister because she would be teaching anyway, though as a young female teacher the rowdy students seem like they would be a greater challenge for her, and now she’s also getting sizable debts forgiven. She hasn’t complained once yet, so perhaps things are well.

I don’t know the name of the program she’s participating in but there are several public service programs that offer the same benefits. If you’re in one of these fields, you’ll want research these more as you could get some of your loans forgiven. I don’t know if the pay for these jobs is adjusted accordingly though.

Public Service Loan Forgiveness Program

The Public Service Loan Forgiveness Program is the biggest of the loan forgiveness plans. It offers total loan forgiveness on Stafford, Grad PLUS and associated consolidation loans in the Direct Loan program if you work in a “qualified public service job” for at least 10 years and continue to make payments during that span. Ten years seems like an awfully long time. The standard payment structure on Stafford Loans is equal payments over ten years! However, typical consolidation repayment lengths are often thirty years and consolidation is always a good idea.

A qualified public service job is often determined by the employer, rather than the role you play. If your employer is a nonprofit, tax-exempt 501(c)(3) organization, you’re eligible. If it’s the federal, state, local, or tribal government, you’re eligible. Finally, if you’re in a full-time Americorp position, you’re eligible. If you don’t meet any of those, you can still qualify if your employer is a non-profit type entity that is engaged in public service but is not a political organization, religious organization, or a labor union. Rules are slated to be finalized by the Department of Education in November.

TEACH Grant

The TEACH (Teacher Education Assistance for College and Higher Education) Grant is a grant worth up to $4,000 a year if the student agrees to teach at least four years in the next eight in a “high-need” field in elementary or secondary school that serves low-income students. It’s a new program and you need to apply with your school’s financial aid office. If you’ve already graduated, unfortunately you can’t apply for this particular grant.

If you are out of school, thus ineligible for the TEACH Grant, consider asking your school district’s administration to see if they are covered under The National Defense Education Act. Under that Act, if you become a full-time teacher in an elementary or secondary school that serves students from low-income families, you can get some of your Perkins loans forgiven. It’s 15% of your loan for the first and second years, 20% for the third and fourth years, and 30% for the fifth. My sister may be in this program.

Volunteer Work

Those two programs have been getting most of the press lately but there are several other programs available. Here are some of the other options:

• AmeriCorps: Receive $7400 in stipends and $4725 towards your loans for 12 months of service.
• PeaceCorp: You can get deferment of your student loans and partial cancellation of Perkins Loans, 15% per year of service up to 70%.
• Volunteers in Service to America (VISTA): $4725 for 1700 hours of service.

In addition to the programs mentioned here, there are many more specific programs.

Additional resources:

• Public Service Loan Forgiveness [IBRinfo, nonprofit, nonpartisan Project on Student Debt]
• TEACH Grant Program [Federal Student Aid, office of the US Dept. of Education]
• Loan Forgiveness [FinAid.org]

(Photo: jmurawski)

I’m a huge fan of credit cards and I’ve never been in credit card debt before. I’ve been fortunate enough to learn the dangers of easy credit and was never seduced by its siren song, or her underhanded tactics like double cycle billing. The latest saga involving credit cards is debate in Washington over the proposed consumer protection rules offered by the Federal Reserve Board under an update to Regulation AA (Federal Trade Commission Act) — Unfair or Deceptive Acts or Practices.

Would you like to contribute? Here’s the press release discussing the proposals, simply scroll down to Proposals for Comment and click on Submit comment underneath Regulation AA.

My thoughts:

Freezing Interest Rates

One of the proposals is prohibiting banks from increase rates on pre-existing credit card balances. At first glance, this makes total sense. When you sign on the dotted line for a mortgage, you are aware of how the interest rate will behave. On a 30-year fixed mortgage, it will never change. On a 5/1 adjustable rate mortgage, it will be set for five years, then change every year after that. While in the last few years this was abused, in principle is makes total sense. You know what you’re getting into. With credit cards, the rate is always variable and can always change. However, you accept that when you apply for and begin using the card.

That being said, I do think that credit cards should be adjusted to reflect the way it’s actually being used and that requires that rates be locked at the time it is being spent. The consequence of this is that all interest rates will rise because it reflects a greater risk assumed by the credit card company and credit cards will be harder to get. You provide no proof of income when you apply for a credit card, perhaps that will change.

Application of Payments

Consumers taking advantage of 0% for life offers recognize this little line item, credit card companies apply payments to the lowest interest rate first. For example, recent 0% for life offers usually require two or three purchases a billing cycle. The cost of those purchases is at the prevailing rate, usually much much higher, and payments are applied to the 0% offer.

Consumers should be allowed to pay down whatever balance they want, not be forced to pay the lower offer. In all cases, this will be the amounts with the highest interest rate. Don’t listen to Dave Ramsey, you want to pay the higher interest rates first, not the ones with the smallest balances.

Double Cycle Billing

This is tactic is just underhanded. If you’re an impartial observer, you can understand variable interest rates because credit card companies put it plainly in their agreements. Double cycle billing? Give me a break. Double cycle billing is when they take the average of your two previous bills and charge interest on that. I don’t even know why this was even acceptable in the first place.

Summary

Obviously, the banks don’t like it:

“We are deeply concerned that these rules will result in less competition, higher consumer prices, fewer consumer choices and reduced consumer access to credit cards,” President and CEO Edward Yingling [of the American Bankers Association] said in a statement.

I don’t agree that they go to far, I think they’re great proposals, but I do agree that it will result in less competition, higher prices, fewer choices, and reduced access but that’s exactly what we need. We don’t need credit card offers piling up in our mailboxes, we don’t need the average family credit debt to be around $10k, and we honestly will survive if there are fewer credit card companies.

Weigh in on proposed credit card laws [CNN Money]

(Photo: thetruthabout)

Amazon is running an Amazon Prime promotion where they will give you a one month free trial of Amazon Prime and a $10 credit towards products sold by Amazon.com. This offer is for new Amazon Prime members only and expires July 28th.

Amazon Prime is their fast shipping program that offers free two-day shipping on any order and $3.99 expedited next-day shipping. The program normally costs $79 a year.

It’s likely that signing up will have you automatically renewing. To change that setting, read these instructions from the last Amazon Prime promotion.

The New York Times recently released a great series about consumer debt called The Debt Trap. One common thread in several of the videos is the devastating effect “emergencies” can have on your personal finances. A medical emergency, a job loss or cutback in hours, all of these emergencies were weathered, in the short term, with credit cards. In the long term, the credit cards charged high interest rates, piled on fees, and made it extremely difficult to recover. It’s like telling someone to pause for five minutes in the middle of a foot race so that you can strap on a 100 pound rucksack. You might catch up, but probably not.

This underscores the incredible importance of having an emergency fund. The economic climate is pretty rough right now. IndyMac went into conservatorship, Wachovia announced they were slashing 11,000 jobs, and the price of oil gyrates in the triple digits. The stock market is down and there’s a lot of red in those brokerage accounts. The last thing on most people’s minds is boosting that emergency fund. But now is the most important time to focus on your emergency fund.

In times of prosperity, it’s easier to weather emergencies without a plan. Bonuses are bigger, regular and OT hours are more plentiful, and there is less fear that you’ll lose your job. Boosting an emergency fund isn’t fun, but neither is crushing debt, bankruptcy, eviction, and the unfortunate feelings that come with it.

Feel your job is 100% safe? That’s great, but that’s actually not the most devastating emergency. About about half of all bankruptcies are the result of medical bills. You can’t predict the future, but you can prepare for it.

How To Start a Fund?

It’s very simple, get your check book, get your budget, and open an account at HSBC Direct (review), they are currently paying 3.50% APY. If online banks make you uncomfortable, open one at your local bank. A fund at 0% APY is better than no fund at all.

You’ll want to save at least six months of expenses, which you can tell from your budget (you budget right???). Try to accumulate that over [insert comfortable time period here]. The faster you do it, by sacrificing some discretionary spending now, the better.

Another option is to ladder your emergency fund in certificates of deposit. One place that makes it very easy is ING Direct but their current rates are all in the 3.30% APY to 3.00% APY range, less than HSBC Direct’s standard high yield savings account rate, so I would put it in HSBC Direct for now.

What are you waiting for?

(Photo: c.violette.run)

Usually.

My friend just had their first child and began researching 529 plans. A 529 plan is an education savings plan run by a state or an educational institution, it’s named after Section 529 of the Internal Revenue Code. The plan offers tax benefits to individuals saving for future education. In his case, he was looking at a savings plan, rather than a prepaid plan*.

And now he had a choice: an in-state plan with a tax deduction or an out-of-state plan with potentially cheaper funds. Specifically, he wondered if he should open a Maryland 529, which offers a tax deduction to Maryland residents, or a state plan offering Vanguard funds, which is known for lower mutual fund fees. The state plan he found was Nevada’s, which is run by Upromise but offers Vanguard funds. (Plan data provided by Saving For College, run by Bankrate)

College Investment Plan (Maryland)

• Program Manager: T. Rowe Price Associates, Inc.
• Residency Requirement: No.
• Maximum Contributions: No annual limit until account balance for beneficiary reaches $320,000.
• Account Maintenance Fee: $25 / yr, waived with automatic investments or balance greater than $25,000.
• Management Fees: 0.28% manager fee, 0.25% once program assets reach $2 billion.
• Tax Deductions: $2,500 per beneficiary per year by account owner is deductible with a 10 year carryforward on excess contributions.

The Vanguard 529 Savings Plan (Nevada)

• Program Manager: Upromise Investments, Inc. and Vanguard Group, Inc.
• Residency Requirement: No.
• Maximum Contributions: No annual limit until account balance for beneficiary reaches $310,000.
• Account Maintenance Fee: $20 / yr, waived if account owner or beneficiary is a Nevada resident or assets in account exceed $3,000.
• Management Fees: 0.65% manager fee, include underlying fund expenses.
• Tax Deductions: None.

Comparing just the Nevada plan against the Maryland plan, it appears that the Maryland plan is superior. What you’re trading off is the tax deduction versus the mutual fund fees, but the tax deduction is only available the year you contribute. In Maryland, the $2,500 deduction is worth $125 (5% state income tax) making it nearly a wash between the slightly higher account fees in Nevada.

It’s really a choice between T. Rowe funds vs. Vanguard funds. If you’re an index fund type of investor, the T. Rowe Price Equity Index 500 (PREIX) has an expense ratio of 0.35%. Vanguard’s 500 Index (VFINX) expense ratio is 0.15%, meaning T. Rowe’s ratio is more expensive by 0.20%. On a balance of $10,000, that’s a difference of $20 being whisked out of the account each year for nothing. While $20 doesn’t seem like much, that’s a fee taken out each year and one that will erode your investment’s growing potential.

If it were me, I think the Nevada plan is superior of the two because it offers access to cheaper Vanguard funds.

Five Best 529 Plans

Liz Pulliam Weston of MSN money recently looked at the 5 best college savings plans and listed Nevada as one of the top five. The other states included were Alaska, Nebraska, Rhode Island and Virginia. The Virginia plan offers access to some Vanguard funds too.

* A prepaid plan is an option where you “lock in” the price of an in-state public college education right now. You can always convert it to a private or out of state school later on based on some conversion tables.

(Photo: lednew)