Anyone who saw the news this weekend saw the incredible act of generosity by billionaire philanthropist Robert F. Smith, the commencement speaker at Morehouse College, in Atlanta. Mr. Smith paid the student loan debt of the 2019 graduating class- a total grant of about $40 million dollars. For most graduates, however, student loans will follow them long after the diploma is received.

Many students are on the “Student Deferment” program for their loans, but after graduation, payments begin in six months. What do they do next?First and foremost, students must have a plan. They must have a budget. Then three steps: 1. get to paying as soon as possible on a repayment plan, 2. get out of the student deferment before it statutorily ends and, 3. stay out of forbearance in the future. Going into and out of forbearance is the fastest way to grow a student loan balance. Why? Because the interest capitalizes every time the loans go into and out of forbearance, and when students change payment plans. Capitalization means that the outstanding interest becomes a part of the principal balance, and you then pay interest on the new principal. This is a reason that student loan balances balloon.

The first issue, that few borrowers truly understand, is that during student deferment unsubsidized student loan interest already capitalizes quarterly for the length of the deferment. Four years of loans every semester, unsubsidized interest amounts capitalizing every quarter. This is why students graduate with thousands of dollars of student loan debt amounts over what they actually borrowed. So, during school, these loans are growing. After graduation, many students are faced with large payments they cannot afford on the “Standard Repayment Plan” over ten years, so they immediately put the loans into “forbearance” and a payment is no longer due. But once again that unpaid interest will capitalize every time the loan goes into and out of forbearance.

So, what to do? Here are a few first steps.

1. Have a budget and include in the budget the biggest student loan payment you can afford. Things may be “tight” again for a little while but getting right into payments and staying out of forbearance will make loan payoffs faster and less expensive.

2. Download the Student Loan Guide, “Do You Have the Right Student Loan Payment” from my website and follow the steps to retrieve your total federal student loan data from the National Student Loan Database (NSLDS). From there, check your loans CARFEULLY, to make sure they are, in fact, yours. Look at the disbursement dates, and make sure you were attending. Mistakes sometimes happen.

3. Use the Debt Snowball for the individual loans. If you can avoid consolidation, you can stack your loans from lowest total amount to highest, and attack the debt using a “debt snowball.” As each loan is paid, you will have a huge sense of accomplishment, and the motivation to keep going.

4. Avoid Forbearance. If you cannot make any payment at all AFTER your student deferment period ends- call your servicer and get into a payment plan, do NOT go into forbearance. If you graduate this month, you have a few months before the first payment is due. Get moving on these, but if there is an unavoidable reason you just cannot make the payment, get into Income Driven Repayment, or some other plan, and make sure you absolutely re-certify every year. When you go into and come out of IDR, guess what? Your interest capitalizes.

In my humble opinion, it is this interest capitalization that is making student loans hard to pay off. And when people enter into forbearance, it is because there is a short-term issue causing a hardship or some other issue. The servicers will happily put you into forbearance, “so you don’t have a payment due for six months” but in the long run, it actually hurts the borrower financially. We need stronger disclosures.

Best of luck to the class of 2019! May you find your joy and excitement felt during “Pomp and Circumstance” lasts for years as you leave college and embark on the rest of your journey!


image credit: gocollege.com

 

Stress due to financial issues is a real concern for Americans. Studies have been done on this topic. It’s actually quite amazing how people can manage this stress over a long period of time. The average person struggles for three years, yup, 36 months, before asking for help or considering bankruptcy. With 78% of American families living paycheck to paycheck, there are a whole lotta people paddling like a duck furiously under the water trying to look like they are smoothly swimming through the waves.

The American Psychological Association (APA) did a study in 2014, just five years ago, that found 72% of Americans felt stress related to finances “occasionally” and 22% felt “extremely stressed” about their finances, that is more than 1 in 5. Fast forward to 2019. The economy is doing better, and the unemployment rate is low, but we are no less stressed about our money. In fact an October 2018 survey revealed that now 52% of respondents reported that they are are “regularly stressed” by finances. We are going the wrong way. And Americans, businesses, and entire communities are suffering.

The obvious effects of financial stress – depression, anxiety, insomnia and headaches- directly affect the physical wellness of each person. It follows that when we are under financial stress, we get sicker. But there is a lot more to this. Americans with financial stress tend to either take action, or “freeze” and don’t take an action, that compounds the financial issues longer into the future. One 2016 study found that 1 in 5 people with financial stress either thought about missing, or actually missed a needed medical appointment because of money concerns. This decision further increases the risk of illness, and potentially the loss of pay from missing days of work. But physical illness isn’t the only effect. People with financial stress are also more prone to skipping work, but not while actually ill. The effects of not sleeping and anxiety can make going to work very difficult. Staying home can mean losing hours, reducing the paycheck and compounding the crisis.

And the effects of financial stress go beyond individuals or families. Businesses are affected by financial stress by both employees, and the business itself. Financial stress can affect productivity and attention at work. Study data, from integration firm Innovu, released in February 2018 reported a, “financially stressed employee” will spend an average of 20 hours a month on financial issues at work. Also, that 70% of workplace accidents are due to distractions caused by stress in the workplace. And a financially stressed business will affect workplace morale due to real concerns about financial insecurity. This insecurity can lead employees to find new jobs, leaving the business short staffed, adding to and perhaps accelerating business reorganization, bankruptcy, or outright failure.

Financial stress also affects whole communities. Neighborhoods that have a large number of residents facing financial insecurity tend to have a higher use of prescription drugs for pain and depression. Financially stressed residents are often in poorer health due to the physical effects of long term stress. Additionally, involvement in community activity tends to decrease in neighborhoods where there is financial distress, and increase where there is a sense of neighborhood financial well being.In fact, financial stress was identified as a top community health concern in an entire midwestern county. Olmsted County, Minnesota is implementing a strategic initiative through 2020 to improve community health.

The impacts to the family, health, work, and community from financial stress are brutal. But there are some steps that anyone can start immediately, these can’t fix anything overnight, but sometimes just knowing where to start can help to reduce stress.

  1. Take a breath. Admit that you are tired of this, in fact you are Dave Ramsey, “sick and tired of being sick and tired.” And you are deciding now that things are going to change. Read those statistics, you are not alone, and you are not “stupid” or “bad” or whatever term you beat yourself up with when you open the mail. Tell yourself, “I may not know how yet, but I know WHY we are no longer living this way.” And then start to make your plan.
  2. Get those four walls secured. The right thing to do is to make sure the “four walls” around you and your family are paid for before anybody else gets a cent. Forget the FICO, forget the credit card. When there is food in the house, the utilities and rent or mortgage gets paid, and you have a ride to work, you can fight the rest of the way. If you are hungry, fearing eviction, and not sure if there is going to be water tomorrow, you honestly cannot think about anything else. If you are a small business, determine your “four walls” that must be addressed first or you are unable to bring income to the company
  3. Get some help. There are a ton of free blogs, articles, and resources online to get you started. You can download my free ebook, “Nine Mistakes to Avoid When You are Having Money Problems” without an email address or any other personal information. Then ask people to help you. Your work may have a wellness program with resources. Your church or local Ramsey Preferred Coach may host Financial Peace University Course. Consider working with a financial coach to help you get organized, get a plan, and walk with you. You don’t have to go it alone, but you must have the courage to share your situation with someone else.
  4. Know Your Rights. Know that nobody, no company, no creditor, no bank, NOBODY, has the right to abuse you, harass you, call you at work, and threaten to sue you if they really aren’t getting ready to file. They can call, yes, but you do not have to be belittled, shamed, or guilted into making payments, even if you owe the money. Call a consumer advocate or lawyer.

The second definition for “Price” in the Oxford dictionary online is, “an unwelcome experience, event, or action involved as a condition of achieving a desired end,” and the usage example given is, “the price of their success was an entire day spent in discussion.” For many Americans, the price of their credit cards, or driving a car with high payments, or a mortgage payment that is keeping them “house poor” is that unwelcome experience. And a result of that unwelcome experience is debt. And the price of that debt is stress.

Americans are stressed about their financial condition. The price of such worry is costing money in healthcare related to stress, relationship issues related to fights over money, and job productivity decline. A very recent and startling statistic, published by CNBC in March 2018, reveals 30% of Americans are stressed about money, “constantly.” And a whopping 85% reported being stressed “sometimes.” Here is the top reason from the article:

   “Why? Well, 66 percent of adults, including 71 percent of millennials, say it’s because they don’t have a three- month  emergency fund, and 46 percent say it’s because they don’t have any savings set aside in one to cover an unexpected expense like a job loss or medical problem.”

This is not a new phenomenon that all of the sudden Americans are stressed about money. A 2014 report from the Consumer Financial Protection Bureau found that seven out of ten American workers say financial stress is their most common cause of stress, and almost half (48%) say they find dealing with their financial situation stressful.

Why am quoting stats when you may be visiting this article for ANSWERS because you are up at night unable to sleep due to money worries? Because you need to realize up front that are not alone. CNBC’s report translates to almost 3 out of 10 Americans are stressed constantly, over 8 out of 10 are stressed sometimes. I know, I know, “my situation is different…” and I know that it is! Everyone’s situation is uniquely theirs.

What I am on a mission to change is the shame, guilt, hopelessness and embarrassment people feel when they are deep in money problems. I think that is so important. Debt is hiding in the households of the American family and it is killing the livelihood of many of us. We need to throw open the curtains and look around and understand we are not alone. You CAN take control of your money and regain your peace of mind. You CAN find people to walk with you. You CAN create the plan that is right for you and your unique situation. And you can get back that good night’s sleep.

The information in this blog post (“post”) is provided for general informational purposes only and may not reflect the current law in your jurisdiction. No information contained in this post should be construed as legal advice from The Law Office of Dawn K. Kennedy or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this Post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.