Category Archives: Personal Finance 101

Federal Student Loan Debt Relief & Repayment Options

recessionIt’s a fact almost universally acknowledged that burgeoning student loan debt is crushing an entire generation, leaving students and parents in a state of financial shock. Defaults on both federal student loans and private loans are on the rise, and in an effort to help student borrowers cope with soaring education costs (and perhaps to brighten the state of public sector employment), the government has created new federal debt repayment programs. If utilized properly, these can help graduates better manage the cost of student loans.

  • Income Based Repayment Plan: As a part of the College Cost Reduction and Access Act, the IBR (or Income Based Repayment) plan was introduced on July 1st, 2009. This particular plan is capable of significantly reducing the monthly payments of those borrowers carrying heavy debt load relative to their income.(Check out this IBR calculator to see if you qualify & how much your monthly payment would be.) For eligible federal student loan borrowers, IBR lowers your repayment cost to a maximum of 15% of your disposable income, and after 25 years, any remaining debt is forgiven. Plus, the federal government may cover interest rate payments on subsidized Stafford Loans for up to 3 years. Also worth noting: If you work for the government, in education or for a non-profit, your remaining debt will be forgiven after 10 years of IBR payments.
  • Pay As You Earn: Introduced on 21st December, 2012, PAYE is in many ways pretty similar to IBR. However, the PAYE program caps student loan payments at 10% of discretionary income, instead of 15%, making it even more affordable. It will also cover unpaid subsidized interest payments during the first 3 years of repayment, and any remaining loan balance will be forgiven after 20 years (or 10 if you’re in government/non-profit work). However, only borrowers with loans issued entirely after October, 2007 qualify – for everyone else, there’s IBR.
  • Economic Hardship Deferment: The CCRAA re-defined  financial hardship, thereby resulting in changed qualification criteria for Economic Hardship Deferment or EHD. Graduates that previously qualified for this may no longer be eligible, and might instead choose forbearance, which is a more expensive option than EHD. The best alternative to EHD is actually PAYE or IBR, and EHD should be reserved for returns to school or medical residencies.
  • Income-Sensitive/Graduated Repayment: On the surface, income-sensitive repayment seems similar to IBR and PAYE, since it enables you to make lower monthly payments based on your income level. But that’s where the benefits stop. Unlike IBR and PAYE, there is no loan forgiveness or subsidized interest subsidy, so there’s little advantage to choosing this option. Similarly, graduated repayment enables you to make lower monthly payments at the beginning of your re-payment term, possibly extending the term of your loan or ballooning to much larger payments down the road. This plan also doesn’t offer loan forgiveness or interest rate subsidies, so it also doesn’t offer the benefits of IBR/PAYE.

The bottom line is this: Even if you can afford to pay down federal student loan debt on-schedule (or even better – ahead of schedule), IBR and PAYE make more sense than any other federal repayment plan currently on the market. The reason is simple: They provide you with the possibility of loan forgiveness and interest rate subsidies should your earning potential ever decline, and don’t penalize you for early re-payment, should your income and ability to re-pay increase. And of course, if you don’t earn enough to re-pay your loans per a standard re-payment plan, they also save you money over forebearance (or God forbid, default.)


Budgeting: Three Big Questions for the Beginner

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In many ways, budgeting is like dieting. Some people adopt an aggressive budget and stick with it (like the dieter who goes from carnivore to vegan overnight and quickly becomes a weight-loss success story), while other people adopt that same aggressive budget, but keep breaking it — like the dieter who keeps sneaking cupcakes. Other people adopt too loose a budget and never accomplish their savings goals — like the dieter who thinks that he should still be able to eat fried chicken every day. Finally, other people adopt a budget that works for them moderately and helps them save over time — just like the dieter that makes a few sensible changes to her food habits and starts exercising a little. You will need to decide what kind of budgeter you’re going to be.

That decision is largely going to be based on what you want to accomplish by budgeting and how well you understand budgeting. Here are the three big questions to help you understand these ideas.

Why do you want to budget?

First, you need to decide why you want to budget. Do you have something(s) that you’re trying to accomplish in the short-term or the long-term? Are you trying to stop going deeper into debt, pay off your debt or save? If you’re trying to save, what are you trying to save for–an emergency fund, a trip or a new child? Without having a clear sense of what you hope to achieve, reaching your goals is harder. Try to answer these questions for yourself:

  • What exactly am I budgeting for? - This will help you clarify a specific and concrete goal to focus on.
  • What am I willing to give up in order to reach my goals? – This will help you understand whether your goal is realistic. Maybe you aren’t ready to give up much, so a smaller goal might be better.
  • Is this a short- or long-term goal? Do I have both? Most of us can’t save enough for retirement in one year. On the other hand, you might be able to pay off a credit card in that time. Set realistic time horizons for your goals.

What’s your budgeting personality?

Like the dieters, budgeters come in different types. Some of us want the fast and furious approach, hoping to reach our goals in a jiffy while slashing costs left and right. Others prefer the slow-and-steady approach. But whatever your budgeting personality, it’s important to know two things:

1) Your habits – If you’ve been a big spender your whole life, hoping to cut costs dramatically all of a sudden might be too hopeful. On the other hand, if you’re generally frugal to begin with, you might be able to set more ambitious goals than you think. Make sure you understand what your habits are really like — and not just what you’d like them to be.

2) Nothing is set in stone — You can change your habits –and your budget– to meet your specific financial needs at any time. Whether you get a big raise or get laid-off, odds are your budget will need to change from time to time to reflect the changes in your life, goals and abilities. That’s where having a budget in the first place can help you adjust accordingly, since the budget will help you to already have a sense of what you earn and spend. It is okay if your budgeting personality evolves over time to reflect your changing life circumstances.

How well do you understand your income and expenses?

Just as a dieter can’t mindlessly eat what they want, a budgeter can’t successfully save without understanding their income and expenses. As with dieting and calories, you need to know how many dollars you bring in each month and how you spend them. Without accurate income and expense information, you will struggle to be successful at savings because you won’t be able to know how much you have left to spend or save. So how can you get good information?

The easiest way to get started is to sign up for a transaction and budgeting service like Mint.com, which imports your transactions from your bank accounts and credit/debit cards into one place so that you know exactly how and what you’re spending your money on. A free service, Mint also groups your transactions by categories like restaurants, gasoline, shopping, groceries, etc. so that you can more easily use its budget tools to set short term and long term goals. Mint is the service that we use here at the Five Ten Twenty Club, and we cannot recommend it enough because it is very easy to see your transactions by category, your progress toward your goals, and how much money you have left to spend on each budget category.

You can also use financial software or programs like Excel to export information from your various card, loan and savings, checking and investment accounts into a consolidated statement. This is the preferable method if you’re already a budgeting pro — or if tracking every last detail is super important to you (services like Mint.com are great, but don’t break down into individual items purchased on one grocery trip, for example). This level of detail isn’t necessary for everyone though, so don’t let it trip you up.

Finally, your receipts can also be tracked using apps like Expensify, ShoeBoxed or OneReceipt, which allow you to take pictures of your receipts using your smart phone; some of these apps will even pull your receipts directly from your email accounts and organize them by category or for tax purposes. This feature can help you with any other budgeting method you choose to use and is especially useful if you work for yourself or have significant deductions.

Do you make a weekly or monthly budget yourself or through a service like Mint.Com or apps like ShoeBoxed? What have been some of your victories or mistakes when budget-making? Share your experiences in our Community Forum!