We’ve long cited a rule of thumb, on this blog and elsewhere, about the amount of money you should borrow for college. It comes from Mark Kantrowitz, the publisher of Edvisors, and it is this: Don’t borrow more for college than you expect to earn in your first year out of school.
The trouble with this rule is that it can be hard to do the math. How do you know what your future salary will be? Many students enter college unsure of their major, let alone their career path. But making an educated decision about where you go to school — which largely determines how much debt you’ll be taking on — means making some assumptions and running through a few scenarios.
Luckily, Junior Achievement USA and Pricewaterhouse Coopers have partnered to develop a (free) app that can help you run the calculations. It’s call JA Build Your Future, and using average cost of college figures from The College Board, and salary information from the Bureau of Labor statistics, it can tell you how your future plans stack up.
Here’s how it works, says Stephanie Bell, the director marketing and media relations at Junior Achievement USA: You start by entering your career, using a drop-down menu of many options. The app will tell you the median salary of that career, as well as the educational requirements and the potential for growth. Once you add your career to the calculator, you can select the level of education you plan to complete, where you plan to complete it — in state or out, public or private — and whether you want to include room and board. You then include payment options, including how much your parents will contribute, any amount you might receive from scholarships and grants, your own wages that you plan to contribute, and student loans. You can ask the calculator to auto-adjust student loans based on the other figures.
What you find, at the end of the exercise, is what percentage of your future monthly salary could end up going to student loans. The calculator will then evaluate the information you plugged in and return an ROI (return on investment) score of between one and five.
In the example I ran, in which I was planning to be a public relations specialist (which, according to JA Build Your Future, has a median salary of $57,550), if I were to attend a public, in-state college for a bachelor’s degree, my four-year total costs, including room and board, would be $71,440. With a few contributions from my parents and scholarships, I could bring my borrowing down to around $10,000 per year, making my student loan payments about 9% of my future monthly salary. The calculator gave my hypothetical scenario a ROI score of four, the second highest. A one would mean my eventual student loan payments would take up 21% or more of my future salary; two is equal to 16 to 20%; three is 11 to 15%; four is 6 to 10% and five — the best possible outcome — means the app predicts your student loan payments will take up between 0 and 5% of your future monthly salary.
Bell suggests using the calculator early — once your student is a high school senior, it’s largely too late. “When you’re having conversations about what your kids want to do when they grow up, they can have this information at their fingertips and that will help them make decisions as they progress through middle and high school.” Should you encourage your kids to give up a life-long dream if the calculator spits out a 1? No. But you might encourage them to spend two years at a community college to lower costs, or aggressively apply to scholarships, or set their sights on an in-state school rather than a pricey private option. “Once you get around a three, you might want to rethink some of your options,” says Bell. “Anything that says your loan payments are 10% of your monthly income or less is probably going to be okay, but families should make these decisions based on their own circumstances and how much debt they feel comfortable taking on.”
I work full-time and am married with three children. In 2010, my husband lost his job — we ended up losing our house and were in a crunch to pay off $45,000 in credit card debt, not to mention two cars and PLUS loans. When all this happened, I went to the first credit card company and worked out a payment plan for the next year. However, the other card companies weren’t as easy to deal with. So I went through the National Foundation for Credit Counseling for help in consolidating our credit card debt. Now I am paying for that one credit card and have an account to pay off the others through a credit counselor.
My question: I took a loan out against my 401(k) to pay off those cards and some college expenses that my youngest daughter will have (after her student loans and scholarship, she needed about $9,000 for tuition). The credit card debt now totals $24,000. Did it make sense to take the loan and be done with the debt? I am repaying the loan over three years.
Hi Annette, here’s the deal with 401(k) loans: On the upside, you pay them back, with interest, to yourself, so looking only at the math, they are a better deal than other borrowing scenarios.
The rub is that if you lose your job — as your husband did, so you know this can happen, and often suddenly — you are in many cases required to pay that money back inside of two months. Otherwise, it is treated as a distribution and you are taxed and penalized as such. So it’s risky. You are also taking money out of the market, which could mean selling investments and locking in losses if you do this at the wrong time. And recent research suggests that if you borrow once, you’re more likely to do it again. All of these things make 401(k) loans a last-resort option.
But you already did it, and the good news is you’re paying it back to yourself, not a creditor. It also likely has a lower interest rate than your debt, although I don’t know what interest rate was negotiated by the credit counselor — it may be very good. In any case, just make sure you continue paying it and your credit card debt off and hang on to that job. And note: In general, I don’t recommend borrowing from or shortchanging your retirement to pay for college expenses. There is financial aid available that your children can tap if necessary, but you are not going to find financial aid resources to fund your retirement.
We’re so excited to share this guest post today from Jen at The Happy Homeowner. Sometimes, you have to go to extreme measures to pay off extreme amounts of debt, and she buckled down and did just that. It’s an inspiring story for anyone who is currently staring in the face of unopened credit card bills or overwhelming amounts of debt.
I’m not too proud to admit it: I used to be a complete financial disaster. I was the Princess of Interest and Queen of the Shredder. I spent my way into oblivion for a few years, and I had no intention of changing my high-roller lifestyle.
At least, that’s how I used to think.
While I can’t really explain it in detail, I simply had an epiphany one day while waiting in line to buy an armful of clothing that I had absolutely zero need for (nor did I have any business paying those prices!). It was as if the universe decided to reach out and give me one giant slap in the face: What in the world was I doing?! Why was I destroying my future for some frivolous, materialistic desires today that I’d regret tomorrow?
So I went cold turkey. I walked around the store to put everything back where I found it. Then I high-tailed it out of there, went home, and cried myself to sleep after spending hours digging through piles of unopened credit card statements, tallying up my debt totals, and creating my first-ever budget.
A few life changes that were already in the works eventually found me in Boston for grad school—with my $14,000+ credit card debt balance in tow. So there I was, about to embark on an epic Ivy League learning adventure—all the while being young, broke, naïve, and in debt up to my ears.
Sure, I could paint myself a victim and continue to shirk responsibility. Or, as I soon found myself doing, I could pull on my big girl pants and triumph by working my tail off to create a better financial future for myself.
When I moved to Boston, I had already secured a part-time job that paid all living expenses. I’d also negotiated a graduate assistantship, and I’d lined up part-time work at a local hospital as a patient observer (I was pursuing a Master’s degree in Psychology). Three jobs and full-time school…phew!
But it wasn’t enough. I did some quick calculations, and I realized that I could feasibly slay my debt dragon if I could just.bring.in.more.money. Talk about motivation! I became relentless in my pursuit of extra cash, and I stopped at nothing until I had found ways to make my zero balance dreams come true.
These came in the form of a part-time job in the system where I was attending school (score one for Tuition Assistance Programs that helped me get my grad degree for less than $500!), a part-time position as a brand ambassador, a part-time sales rep for a running accessory company, and some community-based teaching.
This was the phase of my life that I affectionately refer to as “Insanity.” No, I wasn’t working all of these jobs every single day, but there were weeks when I had something to do or some place to be to for all of them. I didn’t have much of a social life, but I found stress relief through a local running group.
The biggest motivating factor throughout all of this was watching my debt balances melt away. I continued at break-neck speed for almost 11 months before I began to slowly decrease my workload (some of these things I still do today but most are a fond memory at this point).
In August of 2008, I made my final payment, $1,277.25, became credit-card debt free. I have remained so ever since.
About Jen: Jen began The Happy Homeowner three years ago, where she writes about living a healthy, balanced life one cent at a time. Her latest project, Change Your Life in 40 Days is aimed at inspiring others to become the best version of themselves in body, mind, and spirit. You can find her on Twitter and Facebook.
Welcome this week to Tarra Jackson, a financial coach, author and former VP of lending for a financial institution in Delaware. We thought she could offer a unique perspective inside the credit approval process. Particularly if you have a few blemishes on your credit history, this post is for you!
Have you or someone you know ever wondered what lenders are actually looking for to approve someone with less than perfect credit for a loan? I have…
The reality is … not everyone has A+ credit (usually a credit score of 700 or higher). Actually, 47% of the US population has a credit score less than 700 and 20% of the US population has a credit score less than 600*. Does this mean that those with “colorful” or less than perfect credit will not be approved for a loan? Or that they have to go to alternative lenders (Buy Here Pay Here, Title Loans, Payday Loans, etc.)? Absolutely not!
Over my 10 years of financial services experience and career has been as a lender. Most people have heard about the 5 C’s of Credit (Character, Capacity, Collateral, Creditworthiness, & Conditions). Well, here are the top five things that I and other lenders really look at to approve a loan for applicants with less than perfect credit.
- Relationship. Most financial institutions/lenders look at the financial relationship the applicant has with them. Does the applicant have deposit accounts (checking or saving accounts, CDs) with the financial institution? What services does the applicant utilize with the financial institution (online banking, debit card)? Has the applicant ever caused the financial institution a loss (unpaid overdrawn checking account, past loans unpaid, etc.)? The more the applicant is committed to the financial institution by having deposits, using other services, or paying past loans on time, the better.
- Stability. Lenders look for how stable the applicant is with their residence and especially their employment. The longer the applicant has lived at their residence and job, the better. Stability is a sign of consistency and responsibility. Lack of stability, which is identified by frequent changes in residence and employment, may be a red flag.
- Low debt-to-income ratio. Debt-to-income ratio tells the lender how much of a payment the applicant can afford to pay monthly. The debts that are taken into consideration are mainly reported on the applicant’s credit report. The debt that may not report on the credit report that is used to calculate the debt-to-income ratio is the applicant’s rent. The debt-to-income ratio is calculated by dividing the total income into the total amount of monthly payment expenses in the credit report, plus rent/mortgage (if not reported in the credit report). Some lenders use the applicant’s gross income (before taxes and other deductions are taken out) when calculating this ratio. However, applicants use their net income (after taxes and other deductions are taken out) to pay their bills. It is recommended that the applicant knows how much they can afford based on their net income and all current expenses, including expenses that are not reported in the credit report (such as utilities, childcare, etc.) are taken into consideration. A debt-to-income ratio of 40% or less may help the applicant with less than perfect credit.
- Collateral. The type of loan (auto, unsecured, credit card) the applicant is applying for may determine what type of collateral needed. The value of collateral may play a significant role in the lender’s decision. Even if the applicant is applying for an unsecured loan or credit card, the lender may recommend or require collateral, such as a vehicle free and clear of any loan or lien or cash, to reduce the “credit risk.” Credit risk is the loss of principal or loss of income from a borrower’s failure to repay a loan. The collateral reduces the credit risk for lender.
- Payment history. Of course the obvious is credit history. But, some financial institutions look beyond the score and read the credit report to see the full picture. They look at the applicant’s credit report to see how they paid other creditors. This is important because the payment history with others may be indicative of how they will pay future lenders. Paying existing creditors on time, even if there were some credit mishaps in the past, may show the lender that the applicant now has the ability to pay their bills.
Clearly, not everyone with less than perfect credit will get approved, but this insight may help with understanding that there are some lenders out there that do not just judge all applicants solely by their credit score. So, before apply for a loan, ask the lender if they take any of these things into consideration with their credit approval process.
This morning on Today, we took your questions — and you had some good ones! What’s the best way to teach kids about money? How does closing a credit card affect a credit score? To get the answers to these questions and more, check out the video clip below.
This week we’re thrilled to welcome Jeff Yeager, our favorite cheapskate. He offered to share the below post, which is based on his newest book, How to Retire the Cheapskate Way: The Ultimate Cheapskate’s Guide to a Better, Earlier, Happier Retirement. Follow his five “don’ts” and you’ll be well on your way:
Don’t blindly accept the advice of financial and retirement planners when it comes to the amount of income you’ll need to live on in retirement; their advice is often based on one-size-fit-all formulas that may not apply to you, your lifestyle, or your spending habits… especially if you have a flair for frugal living. For example, advisers often say you’ll need to have 80%-110% of your pre-retirement income to live on comfortably in retirement—maybe, maybe not. When it comes to understanding and controlling the spending side of your finances, you must accept responsibility and become your own CFO (“Chief Frugal Officer”), figuring out exactly how much you’re spending pre-retirement and how that spending might change once you’re retired.
Don’t plan on retiring on Social Security income alone – it’s only intended to replace about 30-40 percent of your pre-retirement income. But don’t underestimate how far you can stretch that Social Security income if you’re a smart-consumer and, particularly, if you retire 100 percent debt free. Many comfortably retired frugal folks I’ve met manage to cover their routine and fixed expenses (e.g., food, healthcare, utilities, housing, insurance, etc.) with their Social Security income alone, using their other savings and income to afford things they “want” rather than the things they “need.” What I call “Social Security Stretcher’s Syndrome” (“SSSS”) – seeing if you can minimize your spending on life’s true necessities so that your Social Security income will cover them – is a challenging but kind of fun little game played by many frugal retirees.
Don’t overly focus on the investing side of planning for your retirement. Yes, growing your nest egg is important. But learning to live within (or even below) your means throughout your working years – in essence “test driving” your retirement lifestyle budget – and, most important, paying off all debt (including your home mortgage) before you retire are every bit as important as the size of your retirement savings. In fact, “cheapskates” feel so strongly about the importance of retiring debt-free, that they simply say you are not qualified to retire unless you’ve first retired all of your debt. Consider postponing retirement, downsizing your lifestyle, or even selling of some of what you own to pay off debt before you retire – that’s the cheapskate’s advice. For frugal folks, the greatest asset you can have in retirement isn’t investments or something you own, but rather something you don’t have: debt.
Don’t assume that in retirement you won’t have any income from part-time work, even if you don’t have any specific plans or interests in that regard before you retire. Nearly two-thirds of today’s retirees report that they have or plan to work part-time or develop some other form of “earned income” during at least a portion of their retirement years, and a majority of those say that it’s a desire to remain active – rather than an economic necessity – that’s their primary motivation. Even while drawing Social Security you can earn some additional employment income without diminishing your Social Security benefits; regulations vary, but, for example, if you begin drawing Social Security before full retirement age, under 2012 rules you can earn up to $14,160 in annual wage income without any reduction in benefits. So many “cheapskate retirees” set out to do just that: find some enjoyable way through part-time employment to supplement their retirement income by at least that amount. Many do it quite easily – and happily – by becoming what I call “selfishly employed,” turning a hobby, skill, or other passion into a small, income-producing cottage industry of their own.
Don’t assume that your living expenses will remain constant or necessarily increase even at the rate of inflation after you retire. Of course everyone’s situation is different, but most retirement planning models are based on the assumption that – perhaps after an initial/modest decrease in spending upon retirement (e.g., you’ll no longer have commuting costs and other work-related expenses, etc.) – your cost of living will stabilize and then gradually increase with inflation. While for some this may be the case, data from the U.S. Department of Labor’s Consumer Expenditure Survey shows that, on average, personal spending decreases steadily and dramatically for most people throughout their retirement years. As we age and our lifestyles slow down, we naturally spend less. We also tend to already have the things we want… or we’ve decided we no longer want them. With the notable exception of spending on healthcare (which increases as we age), nearly all other types of expenses actually decrease for most people as they age. And, of course, making a conscious decision to downsize (or what I call “simplesize”) your lifestyle in retirement – or relocate to someplace where the cost of living is lower – can make a huge difference when it comes to living comfortably on whatever funds you’ve managed to save for retirement.
About Jeff: After spending 24 years working in Washington, DC-area non-profits, Jeff realized he’d reduced his dependency on money to the point where he could retire early — or, as he calls it, become “selfishly employed” and pursue various interests. His first book, The Ultimate Cheapskate’s Road Map to True Riches: A Practical (and Fun) Guide to Enjoying Life More by Spending Less, was published in 2008. You can connect with him on Facebook.
Yesterday, I stopped by the floor of the stock exchange to talk to CNBC’s Maria Bartiromo about what rising interest rates mean for consumers. Mortgage rates have popped about .5% — what does that mean for a family’s budget? And is it too late to refinance a house or car loan? To get the answers to these questions, check out the video clip below.
We now have 2 kids in college. Both had college funds, but thanks to the stock market, they ended up small. Both are receiving some merit scholarship help, but we are, like many parents, in that middle ground where we make too much to qualify for help, but not enough to really afford it. Any tips for keeping our parent loan amounts from getting too out of control?
Hi Judy — unfortunately, this happened to a lot of families who weren’t in age-based allocations within their 529 plans. A 40% reduction in 2008 if you were in all stock could’ve wiped out all of the gains to date, and some people reacted by pulling out their money, locking in losses.
We also hear about your scenario a lot — people who have too much money to qualify for aid, but too little to afford college. But the reality is that the poor pay a greater share of their total family income toward college than middle income families, and middle income families pay a greater share than higher income families. So this idea is actually a myth.
That said, if you have specific financial circumstances that make footing your expected tuition contribution difficult — job loss, salary reduction, special needs child, caring for elderly parent — you should bring them up to the school because it may merit an adjustment in financial aid. Talking to the school is always the first step. Scholarships are also a great option — I know you mentioned your children have a few merit scholarships, but I’m sure they haven’t come close to maxing out what is out there. Your children can continue to search for scholarships even after they’ve started school. Academic advisors and department heads are good sources of information, as are websites like fastweb.com and The College Board’s Scholarship Search.
As for how much money a parent should borrow, there are a few rules of thumb. I don’t want to see you borrow for all of your children combined more than you can afford to repay in 10 years or by retirement, whichever comes first. Total amount borrowed should be less than annual income, and if you want to retire in less than ten years, it should be significantly less. Your children should be borrowing student loans as well, looking into federal options first because they carry lower interest rates and better terms.
This week we welcome Joan Otto, editor of Man Vs. Debt. She’s here to talk about UNautomating your finances, which is the opposite of Jean’s standard approach. (If you’re familiar with her advice, you know that she’s all about automating — your bill payments and your savings contributions. In fact, it’s a Money Rule: #62: Automate.) But we’re all about showcasing different perspectives, and what works for Jean may not work for you — as you’ll read below, Joan is knocking out a hefty amount of credit card debt with her method.
My husband and I are in the trenches of a war to pay off just under $90,000 in credit-card and loan debt. Since we started in early 2011, we’ve dropped that number by almost $33,000 – and we’ve done it running, in a way, contrary to most major financial advice.
We pay our bills online, but we receive hard copies of most of them, rather than email statements, and we sit down and pay them one at a time. We keep a calendar with what bills are due when. We make regular contributions to our savings account – but we do so manually. And we’re opposed to debt consolidation, because we want to be the people in control of where our money is going and when.
And the thing that surprises people the most – I keep a by-hand transaction register (a “checkbook,” though it goes well beyond checks) that I balance at least weekly if not more frequently.
When I explained all of this to the community at Man Vs. Debt, where I’ve been chronicling our debt-payoff journey for more than a year, a few people were critical. “You’re making things too hard,” they said.
When I started reading Man Vs. Debt in early 2010 – almost two years before I became editor and community manager – its founder, Adam Baker, had just released a guide called Unautomate Your Finances (which is now available for free).
At the time, I had most of our bills automatically deducted from our checking account. I had 401(k) and regular savings accounts with automated contributions. I was still keeping a transaction register – sort of – but I wasn’t worried about balancing my figures with the bank’s; when in doubt, I checked the online balance and estimated.
Baker’s guide suggested I quit all that. And if what I’d been doing had, you know, been getting me anywhere, I’d have fought him tooth and nail.
It wasn’t working, though. We were doing a lot of the “right” things, and we were tanking hard financially. All the systems in the world don’t fix a broken mathematical equation. When money out is greater than money in, you’ve got a problem, right?
Well, the problem was, we didn’t know we had this problem, because we’d automated the knowing right the heck out!
The act of writing down each bill I have to pay on our calendar is tangible. It helps me be conscious of what I’ll owe when, and it actively changes my behavior, because I’ve imprinted in my memory something like, “Oh, I know I have to pay Discover $50 by the 12th.”
The same goes with making our payments. I highlight each paid bill as I take care of it. And it feels wonderful! (I have said on Man Vs. Debt before – I hypothetically may be the kind of person who writes something already accomplished on a to-do list just to be able to cross it off. Don’t laugh.)
I love this tangible, physical, visual act of highlighting. To me, it serves a real purpose. Could I use an online calendar and mark things as “done?” Well, sure. But I like to physically take action.
Even more importantly, I love the feeling I get when I pay our most-hated debt, a credit card that at its worst had a balance of almost $40,000 and is now down under $17,000. Every time I pay bills, I pay this most emotionally charged debt last, and it leaves me with a great feeling. I’ve described it as ending the game with a grand slam, or a 90-yard touchdown pass. You might win either way, but when it’s the last moment, and when you are the person taking action, it feels amazing.
So does tracking our payoff progress (again, manually, in a spreadsheet I update monthly). I love the idea of money-management systems that keep track of your finances, making sure everything balances and showing you neat graphs of your remaining debts. But I don’t love them in practice. I need to be forced to really LOOK at where the money is going, and at the same time, to get the concrete positive feedback of typing in those new, lower numbers!
Maybe you’re already debt-free. Maybe you’ve automated your savings, and you’re having good success. That’s awesome! But whether you’re just starting the long road to debt freedom or already onto the savings and wealth-building path after it, if your motivation is ever waning, can I suggest giving unautomation a try?
Take it from me: It feels amazing to see your success!
About Joan: Joan is the editor and community manager for Man Vs. Debt, where she’s documenting her family’s journey to pay off almost $90,000 in non-mortgage debt. You can follow the Man Vs. Debt crew on Facebook, Twitter and Pinterest, and check out more about the “big why” behind Joan’s debt-payoff – quitting her full-time job to begin working from home and homeschooling her 13-year-old daughter – on the family’s personal blog, Our School at Home.
My husband and I have booked a cruise for our wedding anniversary. We currently do not have a credit card. We want to have one specifically for this trip: cruise charges (drinks, excursions), bike/kayak rental, etc. We want to build credit and will consider making large purchases on it when we have the cash first and will pay off within the same month. What card or company should we consider?
Angela, credit cards have a bad reputation, and there’s a good reason for that. If you carry debt, the interest rates can be a killer. But they’re also an important tool to have in your wallet — used wisely, they can help you improve your credit score, as you noted, and even earn you money or other perks in the form of rewards.
This is a good, timely question, as many people are in the thick of planning their summer vacations. If you’re going to be paying off this card in full each month — as, of course, you should — you want to look for a card that will give you rewards by spending on things that you buy anyway. Card issuers often dole out rewards based on categories of spending — you might get more back when you shop at grocery stores, for instance, or fly a certain airline. Remember that this is a card you’ll use not only on your upcoming cruise, but also on other purchases when you return, so take a careful look at your spending and then look for a card that will reward you based on where you spend money anyway.
My favorite website to sort through the options is LowCards.com. You can search by gas cards, home improvement, retail, travel cards, and then narrow them down by the credit score requirements. If you’re not sure you’ll use something like miles, I’d look for the most generic card you can find – one that gives you cash back for spending across the board. LowCards.com picked the American Express Blue Cash Everyday card as the winner in that category – right now they’re offering $100 cash back if you spend $1,000 in the first three months of membership, and that cruise may get you there. The card also pays 3% back at US supermarkets (for up to $6,000 per year in purchases), 2% back at US gas stations and select department stores, and 1% on all other purchases. And there’s no annual fee, which is important because depending on how much you spend, a fee can really eat into your rewards.
Enjoy your cruise, and happy anniversary!