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Student Loans – Understanding Income-Driven Repayments Part 2
If you read part 1 of this series, you have a basic idea of how to calculate your student loan repayment. The next question you should is, "what happens to the interest you are not paying?" In short, it gets added to your loan. But that is an oversimplification of what happens. Accrued Interest If your Income-Driven repayments are less than the interest, the unpaid interest will accrue. In other words, it will sit there waiting for you to pay it back. Some programs that cap how much interest can accrue. Knowing how your loan and the different IDR plans handle accrual of interest is extremely important. Capitalization Certain events will cause the accrued interest to capitalize. Capitalizing your interest adds it to the loan balance. This new, increase balance, is now charged interest. Capitalization can create an increase in the amount of future interest accrual and cause your account balance to snowball. Avoiding capitalization is a crucial part of any student loan plan, so it is essential to know what would cause your interest to capitalize. Some of the more common, and avoidable, reasons for interest to capitalize are: Consolidating your loans Changing or exiting an Income-Driven Repayment Plan [...]
Student Loans – Understanding Income Drive Repayments (IDR) – Part 1
Student loans are a burden on college graduates. Imagine graduating, landing your first job and then six months later having a mortgage payment but no house. This is what is happing to twenty-somethings because of decisions they made when they were 16. The biggest problem with student loans is the drain they give on your monthly cash flow. Graduating with student loans is like trying to drive a boat with the anchor down. The student loan payments continuously pull you back from moving forward with your financial goals. A Chinese proverb says, "the best time to plant a tree is 20 years ago, the second-best time is today". If we could all go back and fix our mistakes from 20 years ago, we would all be better off. Too bad, we cannot. Since we cannot fix the student loan mistakes we have made, we need to make the best decision going forward. Income-Driven Repayments give us the best tool to recover from the student loan death blow. What Are Income-Driven Repayments? Federal student loans have a great feature called income-driven repayments (IDR). These payments often offer lower than usual payments based on your family size and income. They offer a [...]
How Safe is my Money?
Every few years, it happens. A Bernie Madoff (I know, the name gives it away) type makes big headlines for stealing millions of dollars from his clients. When it makes the news, it is usually very wealthy people who lose some of their wealth. When it doesn't make the news and dollar amounts are smaller, ordinary people often lose everything. First, I want to explain why your money is safe with Family Life Financial Planning. At the end of the article, I will ask you a few questions to ask any advisor you may hire. Knowing your money is safe should be your priority when investing. This doesn't mean you won't have your accounts go down in value, but your advisor's office won't be closed one day because he's on the beach with your money. As odd as it might sound, it is more challenging to commit Madoff-type fraud when working with regular clients. Madoff was a hedge fund manager, not a financial advisor. Since he was a hedge fund manager, he had direct access to his client's funds. They gave his company the money, and he invested it as he saw fit, sometimes even on his next vacation. These [...]
What is a Fiduciary?
We have all sat down with an "advisor" and wondered if their advice was trustworthy. We know they have the knowledge but do they have our best interests at heart? So we make no decision and choose not to do anything. Trust is the key to any relationship. It is hard to build the trust to put your life savings with someone in a simple 1-hour conversation. The Fiduciary standard is a great head start, and you should avoid working with anyone that is not a fiduciary. So, what is a fiduciary? When talking about financial advisors, a fiduciary is legally required to always act in your best interest. As I said, it doesn't create trust but gives a good headstart. It's good knowing someone is putting your interest ahead of theirs. Fiduciaries even allow the law to back this pledge up. This raises a question; are advisors not required to put your best interest first? Sadly, yes. Most financial advisors are not required to put your interest first. They are even allowed to make recommendations based on the commissions they will make. Brokers For most of the financial services industry's history, stockbrokers have functioned as a go-between for investment [...]
Should I Pay off Debt or Invest First?
If you watch any of the money guru's on TV or listen to any radio shows, this is the number 1 question people ask. I get this question all the time, and people always expect a quick, easy answer. It's not a hard question to answer, but it's not a quick, easy question either.To make the best decision, you first have to know what kinds of debts you have; and I do not mean good debt and bad debt.Fixed Loans vs. Revolving DebtThe primary difference between debts is if they are fixed loans or revolving debt. Revolving debt, like a credit card, has a revolving balance. In my mind, they are like the revolving doors in old department stores. As you're going in, someone else is going out. Likewise, with revolving debt you pay something off, then charge the balance back up. As your payment drives the balance down, your new purchases drive the balance back up. Fixed loans, on the other hand, do not allow you to continue borrowing. Once you make the payment, the balance goes down, and you cannot access that money again. A good example of fixed loans is car loans or mortgages.This factor should be [...]
Real Estate – Is a 15 Year Mortgage Really That Much Better?
If you're like me, your Facebook feed is full of advertisements to switch from a 30-year to a 15-year mortgage. They tout incredibly massive savings. Is it legit?Yes. Well, mostly. The savings on a 15-year mortgage is massive. For example, on a $150,000 4% mortgage the savings is $58,088. That is a crazy amount of money to save.WHY MOSTLY?One of the most important economic terms you should know is opportunity cost. Opportunity cost is what you give up when making a decision. In this case, the opportunity cost of a 15-year mortgage is everything you can do with $393.14 per month; the difference between the much larger 15-year mortgage payment and the 30-year payment.Most people that choose a 30-year mortgage use the savings to buy a car or go on vacation. If this is what you would do, please choose a 15-year mortgage. But what if you were to invest that $393.14 and earn 6% per year? In year 5, you would have 27,440.84. That is a nice emergency fund.In year 10, you would have $64,162.87In year 15 you would have $113,305.23. In year 30, your account would be $384,847. Interestingly, in year 15, you would have a loan balance [...]
Real Estate – Should I buy a house to save on my taxes
She is 30, making a high income and worried about paying too much in taxes. During our conversation, she mentions, "I thought I'd buy a house to save on my taxes, is that a good idea?"Realtors and mortgage loan officers will be the first to tell you, "You can write off the mortgage interest." What I am about to say may make my mortgage and realtor friends upset, but it's only accurate for a small number of people. In fact, most people cannot write off their mortgage interest.Why the ConfusionTaxes are complex. Most people know the terms, but little about the mechanics of how they work. Yes, you can deduct your mortgage interest, but only if you itemize. What is a deduction? A deduction is an expense that lowers your taxable income; if you make $50,000 and have $20,000 in deductions, you're only going to pay tax on $30,000 of your income. Itemizing vs. The Standard DeductionYou have to itemize your taxes to receive a deduction for your mortgage interest, but most people do not itemize. In 2016 only 30% of tax filers itemized their deductions. Very few people itemize because they do not have enough deductions to surpass the [...]
Saving For College – I Am Starting Late, What do I do?
I understand the guilt of not saving for college. For many, paying for college is the status symbol of a good parent. I do not think it is, but many people feel this way. If you feel guilty because you have not saved for college, don't. If you are worried about what to do since you are starting late, here are some tips. And I am keeping the best one for last.1. Start a 529A 529 Plan may not be right for everyone, but it is a good starting point. It offers a tax advantage option to save for college. Even with less time for the money to grow, putting aside a little now will help. With the cost of college, every penny you can have ready to use will be beneficial.2. Have "The Talk"It's not comfortable, but asking the grandparents what their intentions are is very important to have a solid college funding plan. You do not have to ask, "How much are you going to give," but you should ask, "Do you have any plans?"You can frame this conversation around being prepared for financial aid requests. Help from grandparents can be beneficial, but if given through the wrong [...]
529 Plans – What If We Do Not Use the Money?
The 529 Plan is a great way to save for college. They offer stock market like returns, state tax deductions, tax deferral, and if used for qualifying educational expenses can even be tax-free. With these significant advantages, the one nagging question everyone asks is the say. What if we do not need the money for college?Luckily, there are a few solutions. Non-Qualified WithdrawsWhat if my child doesn't go to college? This would be the worst case scenario. You've put aside money for the last 18 years, and little Jimmy decides to join the circus. If you take the money out of the 529, you will pay taxes on the gains and a 10% penalty. It's not that large of a penalty.For example, if you put $10,000 into the 529, and not it is worth $25,000, and you take the full $25,000 because Jimmy needs to buy a harness to practice his trapeze act. Since you had a profit of $15,000, you would pay tax based on your income tax rate. You would also have a penalty of $1,500.This is not much different than just investing in a taxable brokerage account.Penalty-Free WithdrawsSome withdraw are taxable but do not have the additional [...]
Why Your Loan Servicer May Not be the Best Place to Find Help
Recently Michael Lewis, author of the Wolf of Wall Street, had a podcast episode speaking of the student loan crisis. One of the significant points he brings is that your loan servicer is not giving you the best advice. In my experience, Michael Lewis is correct. I have personally spoken with many borrowers who reached out to their loan service and received advice that cost them thousands of dollars. Some have even lost out on forgiveness. So, why does this happen?The 7 Minute RuleMichael Lewis specifically spoke of Navient having a 7-minute rule. Navient measures their customer service representatives by their ability to finish calls within 7 minutes. They do not judge employes by how well they solve the customer's problem, but by how fast they get off the phone. Sadly, often, the best solution is for borrowers to use one of the income-driven repayment options. These options are also some of the most lengthy conversations to talk through. When I create a student loan plan, it can take 3 hours of work, not a 7-minute phone call.Call Center Jobs SuckI have experience in call centers, and they are not great jobs. They are a modern factory — finely tuned [...]