By Mitch and Cheryl Ekstrom

There’s a great deal of conversation swirling around the possibility of creating a big-government loan forgiveness program to end the student loan crisis. Call us cynical, but the current student loan crisis originated as a big-government program. But is it cynicism or is it experience? You decide – because there just already happens to be a big-government Public Service Loan Forgiveness (PSLF) program.
“Great!” you say. “How’s that working out?” you say.

Here’s where the experience part kicks in: “Terrible!” we say! Less than one-half of one-percent (0.005%) of all PSLF program applications have been approved. By the way, there have been over 41,000 applications and only 206 have had their loans forgiven!.

We’ve seen it in our coaching practice. One of our clients is an attorney for a non-profit who is 6 years into her 10 year loan forgiveness program. She has been hearing from peers who are a few years ahead of her that many of them are being rejected on technicalities. So big-government doesn’t mind messing with lawyers. Hmmm… that’s what we call a telling sign.

Between articles like the one above and our client’s experience, we generally recommend that people in PSLF programs be exceptionally attentive to meeting every detail of the repayment requirements. Servicers have misapplied payments or put people in forbearance “for a month or two”, meaning the borrowers do not have the required 120 “on time” payments”. But based on the actual numbers (the first PSLF borrowers were eligible for forgiveness in 2017!) people are taking a big risk in PSLF and they’d better have a plan B for paying it off – over years beyond the 10 years it takes to get to that supposed forgiveness point. However, that is a general recommendation for everyone in the program, the specifics must be personal to the circumstances surround the debt, the income, future increases in earnings, and other existing debts.

To get to a specific recommendation, we must assess the client’s overall financial situation, risk tolerance and goals. Below is a recent, real-world scenario in which we walked a client through two options for paying off their $106,000 of student loans, with the first payments starting this coming December. Everyone has a different scenario, and not everyone has this much student debt, but this illustrates HOW someone can reduce the risk of having student loans follow them around for the rest of their lives if the PSLF program goes away (and it could at any time).

Option 1:Starting in December, make 10 years of minimum monthly payments totaling $654 per month on each of 10 or 12 different student loans (they didn’t know exactly how many or what kind of loans, but they did know the minimum total payment) then hope against hope the remaining balance will be forgiven under the PSLF program. This is the option many people are counting on.

Option 2: Based on current income, projected income and all debt; pay off all non-mortgage debt, including their student loans, in 60 months and invest like they mean it the other 60.This is the option people in PSLF have a hard time with, but you’ll see the math- it’s the better option for long term finances!

Unpacking Option 1:
The 2018-2019 federal student loan interest rates are currently 5.05% for undergraduate loans, 6.60% for unsubsidized graduate loans and 7.60% for direct PLUS loans (2). Based on this, we used an average of 6.5% across their loans and derived the below calculations from this amortization schedule.

Using the June loan balance of $105,969 provided by the client, by the time they start paying on their loan 6.5% in December, it will have grown to $109,839.
In ten years of $654/mo. payments, they will pay $78,480 on the loan. And remember, Congress sets interest rates so it could easily change over 10 years. But let’s say it stays the same, and they pay the 120 payments at $654/mo. After all those payments, the balance on the loan will be $100,009. That’s right, people! $78,480 of payments over 10 years only reduced the loan amount by $9,830. But, they could have the $100,009 loan balance forgiven. THEY PAID $78,480! They just have to be one of the less than 0.005% who are approved. What could possibly go wrong!?

After all, let’s face it: $100,009 is a big windfall for the lender. So, one can see why they would be looking for ways to disqualify people. Might this contribute to why the terms and conditions of compliance with the numerous student loan agreements are really hard to understand and follow? But that’s probably just being cynical! So let’s just go ahead and assume they will have the loan balance forgiven without a hitch.

Unpacking Option 2:
Using this calculatorif they paid off the student loan in 5 years and invested the $654 per month at 12% (1); they would earn $53,946 over and above their student loan payoff. The faster you pay off those loans and the balances are reduces the loans are less subject to the interest they add.

However, there is another important piece of this client’s puzzle. They make a good salary and can pay off to pay off almost all of their other non-mortgage debt quickly, before the student loan payments start in December. The payments on that other debt alone is $1280 per month! Once those debts are gone, they free up that $1280 to add to the $654 minimum student loan payment. Their four wall budget won’t change, because the they’ve been paying debts every month with that money. Added together, they would throw $1934 per month at the student loans and pay them off in less than 65 months. And all of this math is before ANY of their soon-to-be-received significant pay raises this year (over $30K total); let alone any future pay raises over the five years (2).

Hypothetically, in the ten years they would make the large student loan payments, but only enough to pay it off in 60 months, but then invest their $1,934 for the next 60 months. They would have $159,529. In cash. In the same ten year span as someone waiting for the PSLF program to approve them.

So making minimum payments for 10 years while gambling on the long-shot of having the loan balance forgiven — instead of getting focused on paying off all debt in 5 years and investing the income they weren’t living on anyway because they were servicing all sorts of debt — while being exposed to multiple years of risk with way less cash reserves – is at least a $59,520 mistake.

Inevitable Math – 1
Servicing Debt – 0

But there’s one more factor which makes this early debt retirement and accelerated investment scenario even better: They have cut 5 years of financial risk out of their lives from a $100K+ loan hanging over their heads; a loan that can’t even be cleared by a bankruptcy! And, as frequently cited by one of America’s most trusted sources of financial wisdom, the nationally syndicated radio talk show host and multiple New York Times best-selling author, Dave Ramsey: In any 10-year period you have an 80% chance of experiencing a financial setback. So this risk factor is real and that makes it a big deal!
So, as you assess your own total debt load and options for getting your money back to work for you instead of the lenders, we hope this real-world scenarios helps. And if you want help assessing all the myriad details of your situation, consider contacting a Ramsey Preferred Coach. They are professionals with a mission to help you win with money.

(1) Based on the average return of the S&P 500 since its inception in 1926 of 11.69%.
(2) Given projected income increase, they could easily pay it off much faster than 60 months. But for the purposes of the illustration, we kept it to the more conservative 60 months of growth.

About the Authors:
Mitch and Cheryl Ekstrom celebrated their 41st anniversary in December and their first great-grandbaby is on the way; due July 7th. Mitch spent more than 30 years of active duty in the U.S. Coast Guard and is now an IT professional on the largest financial system of its kind in the world. Cheryl manages money for the Physics Department at the University of Maryland. Prior to that, she managed multiple bank branches. As a young couple, they made babies faster than money; so they borrowed — a ton of it — which led to real-world money struggles. But they have been living out, teaching and coaching the Financial Peace University (FPU) principles since Sep of 2009 and it has changed everything!

They have led 70 of Dave Ramsey’s classes — not just Financial Peace University — and have taught and coached over 850 couples, singles, teens, co-workers and family members. They’ve held classes in churches, at companies, on military installations, in Mitch’s office and in their home; sometimes three at a time. In addition, they have run numerous financial wellness seminars and budgeting workshops, given talks on money and relationship issues at marriage conferences, and delivered corporate training to reduce financial drama in the lives of the workforce — all by word of mouth. They’re happily so busy; they haven’t bothered to create a web-presence.

Closer to home, they’ve been blessed to see five generations of both their families achieve dramatic improvements in their finances and most every relationship in their lives. So no one can tell them this doesn’t work. It’s not a theory. They are multi-generational practitioners who are passionate about helping others experience the same strength and hope.

They can be reached at:

Mitch and Cheryl Ekstrom
Ramsey Preferred Coaches
Dollar$ense, LLC
301-466-7194
mecaekstrom@aim.com

DOLLAR$ENSE
Eliminate debt. Build wealth.
Gain financial speed going uphill.

I hope everyone is having an amazing summer! Can you believe July 4th has passed us already? Since we are now into July, I suspect that back to school ads and sales are coming soon. I need to let you know about a proposed rule that the Consumer Financial Protection Bureau (CFPB) released regarding debt collection.

Under the rule, even if you don’t owe any money to any collection agency, the CFPB is proposing that the collection agencies can contact friends and family to leave limited contact messages. Yup. One of the proposed rule changes will allow the collectors to contact you if anyone you know owes a collection account. This not only violates the privacy of the person with a debt in collections, but how about your privacy and peace?

The proposed rule has other issues, but that one is going to affect people who do not owe any debt. Here are some rule provisions for people who do have a debt in collection.
The Proposed Rule would allow debt collectors to:

1. Call seven times per week, per debt, and allow one contact per week, per debt. Have five student loans? 35 calls allowed. Three medical debts? 21 more calls. And on and on.

2. Allow unlimited text messages and emails to consumers.

3. Allow legally required notices to be embedded in emails as links, which consumers have been warned NOT to “click” because of the virus and malware dangers.

4. Require the consumer “opt Out” of electronic communications, with no clear procedure to do so, may be required by snail mail. We have to wait and see.

5. Allow collectors to “DM” consumer social media accounts.

6. Allow the collector to violate privacy by leaving “limited contact messages” with friends, family, and neighbors.

7. Not prohibit debt collectors from “tricking” consumers into restarting the statute of limitations on time-barred debts by making any small payment.

8. Has other impacts that may not directly affect local consumers, but may, for example, by allowing collection attorneys to violate the FDCPA with “safe harbor” protections against liability.

As someone who had an account in collection in the past, I personally find this intrusive and stressful. You want to DM my social media accounts? My SOCIAL MEDIA ACCOUNTS? And there doesn’t appear to be a limit- so Facebook, Instagram, and Twitter all a few times a day? Seems like that’s okay under this rule. Sure, they cannot post anything to your page, but “accidents” happen, right? You want to text me however many times a day you want to? What if I am at work? Do I want to open my phone at lunch to a blast of ten texts? Really? Where would it end?

The good news, however, is that we can submit a comment to the CFPB regarding this rule, how it would affect us, and perhaps how we don’t want debt collectors to call us personally if a friend or family member is having a financial issue. If we all submit comments, respectfully and with a discussion of the impact on us, the CFPB must take these comments under advisement before the final rule goes into effect. Here are the links for the rule text (it’s over 500 pages!), the page to submit your comment, and the original release of the rule into the Federal Register. I’m a nerd, and I like to provide sources for everyone. And if you have insomnia, the proposed rule will knock you out in no time.

To submit your written comment:
regulations.gov/comment?D=CFPB-2019-0022-0001

More Information about this Proposed Rule can be found using the following links:
Open Notices Debt Collection Practices Regulation F
Federal Register Publication”

Please submit a comment and help me spread the word to others who may not be aware of this proposed rule. We all have the opportunity to make a public comment before August 19th. After that time, the “public comment period” is scheduled to close. We have over a month to get after this. We can positively influence this rule if we all raise our voices to the CFPB.

Enjoy your vacations and the rest of your summer!

By, Mitch and Cheryl Ekstrom

Half of all Boomers (and the upcoming Gen Xers) have done little-to-nothing to prepare for retirement. Many have given up on the hope of a reasonably comfortable retirement. Currently, around half of them begin taking Social Security at age 62. The current maximum Social Security benefit at age 62 is $2,209 (1) – or $26,508 per year. As an hourly wage, it would be $13.25.  Nationally, boomers estimate their average annual cost of living in retirement at about $46,000 a year (2). If they have the Social Security benefit listed above, where will they get the $19,492 needed to close the gap to $46,000? Working? Maybe.  But there are other steps you can take NOW for those who haven’t yet reached retirement age, and some ideas for everyone, even if they have.

Imagine if a few small changes, just different choices immediately, could add $175,000.00 to the nest egg. Let’s take the example of a 50 year old couple who decide to get a plan to remove all debt and start saving the money they could by making just a few different decisions until they are 67. What if they invested the money for those 17 years, with a good portfolio of mutual funds. They would:

1. Stop Eating Out all the Time. The average person will save about $37.00 per week by eating in. Our couple has saved $295 per month. If they invest this at a very reasonable 7% annual growth until age 67, they will have built $116,239.00!

2. Buy Nice Used Cars instead of New Cars. Let’s have them stop buying new cars every three years. The average new car loses at least 20% of its value in the first year and 10%-15% per year over the next four years. (3) Let’s also say our couple was only buying inexpensive new cars at $25,000. Applying the lowest loss rate on inexpensive new cars, their car would lose $10,000 in value in three years. If they cut that depreciation in half, with a gently used car 2-3 year old car, they could save $5,000 every three years. The resulting $1,667 per year, if invested at 7% until age 67, would produce another $60,311.

Just these two changes, eating in more and driving used cars, would add $176,550.00 in savings to their nest egg.

Next, Paying Off Debt is the biggest step Boomers and Gen Xers need to take to save for retirement.

3. Lose the Credit Cards. The interest charged by credit cards averages 19.24%. (4) The average boomer carries $7,041 in credit card debt (5) So let’s get a solid plan to pay them off and invest the annual $1,354 saved on interest payments at 7% until age 67 — adding another $48,971. That is just the interest! Think of the monthly payments that are no longer owed!

Three steps, and they’re at $225,521.

4. Get Rid of the Mortgage. Today’s Boomers are carrying the greatest amount of mortgage debt into their retirement in the history of our country. (5) We have a few ways to save here. If our sample couple has a 7% rate on an average mortgage and refinance to 4.125%, their payments drop about $6,000 per year. If invested over 17 years at 7% they will add another $216,947 to their nest egg. That is just interest savings. We haven’t discussed paying the mortgage off, and investing that former payment!

So, four steps. Small decision changes that can add $442,468.00 in total!

Let’s assume they did all the investing in a traditional IRA and it didn’t grow from age 67 to age 70 1/2. Their required minimum distribution at age 70 1/2 on that amount is $16,697 ($442,468 / 26.5). (f) This amount added to the maximum Social Security payout at age 62, puts their annual income at $43,205 — just $2,795 away from their estimated $46,000 of annual expenses in retirement.

Imagine how much more they would close the gap if they got serious enough to give up $5 lattes, stops at the local pub, took staycations instead of vacations, eliminated unnecessary drives, did serious meal planning, operated only one car — and any number of other cost cutting measures. And paid off their mortgage.

Of course we haven’t spoken about the increased expenses that come with aging. But we also haven’t addressed the myriad of ways our couple could have increased income over these 17 years. So it seems there is money to be saved, earned and invested; and even if they make only half of the adjustments cited above, they’ll be way ahead of the, “…done little-to nothing- to prepare…”, crowd. The reality is that once you give your money to another person, both it and it’s time value are gone forever.

Difficult? Yes! But not compared to waiting! Each month of delay makes it tougher. And doing these things of their own accord is highly preferable to spending 20 to 30 years living in poverty or relying on children or charity or some combination of the three.

So it’s time to get smart about our spending, saving and investing. Let’s get our money back and put it’s time value to work for us instead of the lenders!

So get after it, Boomers (and the rest of us) and let’s do it now! You don’t have to be broke in retirement. If you need help putting a complete plan together to get started and/or make up for lost time, consider hiring a Ramsey Preferred Financial Coach. These hi-octane professionals are loaded with information, tools, training and strategies to help you.

Eliminate debt. Build wealth. Gain financial speed going uphill.

Mitch and Cheryl Ekstrom are Ramsey Preferred Coaches and Financial Peace University Coordinators. They lead financial wellness courses to help people of all generations get debt free and save for retirement. Mitch and Cheryl turned their own finances around 10 years ago  and have witnessed first hand the financial knowledge now pass to five generations. They celebrated their 41st anniversary in December and their first great-grandbaby is on the way; due July 7th. Mitch spent more than 30 years of active duty in the U.S. Coast Guard and is now an IT professional on the largest financial system of its kind in the world. Cheryl manages money for the Physics Department at the University of Maryland. Prior to that, she managed multiple bank branches. They can be reached at:

Mitch and Cheryl Ekstrom, Dollar$ense, LLC, 301-466-7194, mecaekstrom@aim.com 

(1) https://www.fool.com/retirement/2018/10/21/heres-the-maximum-social-security-benefit-in-2019.aspx

(2) Bureau of Labor Statistics as cited by https://finance.zacks.com/average-cost-retirement-4951.html

(3) https://www.finance101.com/new-cars-lose-value/

(4) https://wallethub.com/edu/cc/average-credit-card-interest-rate/50841/

(5) The Stanford Center on Longevity report, Seeing Our Way to Financial Security in the Age of Increased Longevity, points to an increase in mortgage debt among older homeowners as a concern, noting that in 2012, one-third of homeowners over 65 were still paying off a mortgage – up from less than a quarter of homeowners in 1998. And, the amount owed on a mortgage has nearly doubled from $44,000 to $82,000 (as cited in https://www.housingwire.com/articles/47364-stanford-boomersare-entering-retirement-with-less-savings-greater-mortgage-debt).

(6) https://www.irs.gov/publications/p590b 

I had the amazing privilege to attend the Consumer Assembly last week in Washington DC, and there was a panel discussion on credit scoring. The panel was actually a discussion on a group of American consumers that are dubbed by the industry the, “Credit Invisibles.” These are people who cannot get a “good” credit score in the typical way, by having open lines of credit that are at least six months old. The industry that scores credit, including the Fair Isaac Corporation (FICO), the developers of the FICO credit scoring models, and Vantage Score Solutions, LLC, the developers of the Vantage credit scoring models, feel that “credit invisibles” are disadvantaged in receiving access to credit products. And they are, but this new model by FICO to address the credit invisibles and those with marginal credit is not good for consumers.

I first blogged on the new “UltraFICO” score back in October in a two-part article series. The first was an introduction to the scoring model and the second was on some unspoken dangers related to judgments and bank account attachment when the credit reporting agencies have you bank account information, which you must consent to disclose under this model.

During last week’s panel discussion I learned more about the purpose of the model, and some facts that have me re-thinking my original posts about how this score may be “OK” for a mortgage product. And I was wrong in my previous posts. The model is not “OK” for any credit. None.

Before I move on to the specifics, I have to take a moment and point out that the panelists, including the VP from FICO from whom I received the information directly, entered into the lion’s den of an audience of consumer advocates, and spoke openly and answered questions about their products. That was a very nice thing to do, and I am appreciative of their honesty. I also know that in their “heart of hearts” they believe that they are helping consumers. It is at that point, I cannot disagree more. Remember, the credit scoring businesses are in the business to help people get and stay in debt. Any model that they can create to help consumers access credit is good for them, not necessarily for you. They sell these models. You are denied under one, they offer a second. Here are five “Fun Facts” about the UltraFICO:

1. The “UltraFICO” will be marketed, and is intended, for all types of credit not just secured, collateralized mortgages. In my original post, I speculated that the releasing of banking information to show the history of cash transactions might be “ok” or even great for mortgage lending, the only good use I could envision for this model. Well, when you apply for a mortgage, the banks take your last months of bank statements anyway. So, for that credit product, this appears to be moot. The UltraFICO will be available to all creditors who wish to purchase it.

2. The UltraFICO is intended to be a “second chance” credit scoring model. This little piece of information was new to me, and this is the first indication that it is not good for consumers. I originally believed that borrowers could just “opt-in” to this model by consenting to include their banking info. Actually, this is intended to be an option for people who would be denied credit in the original model. The credit denial becomes a “maybe” and the borrower has the option to “consent” to include their banking info in the hopes that their credit score will go up and they can be approved.

3. The Premise of the UltraFICO by Fair Isaac is faulty. One telling thing about this model is the statement by the panelist that the checking account information would be reliable because, “Consumer’s are in control of those accounts.” I disagree. I had a debit card number stolen and used in a fish market in Mexico. Filed the report, got the money back, but in this day and age of data breaches, I would never make the statement that consumers are always in control. FICO assured us that their model would be able to determine these little situations and not count them, but the scoring models are not transparent. All types of situations can arise where a consumer, for a period of time, may not be in complete control of every transaction in their account.

4. The UltraFICO model needs two to three years of banking information. Ah, another tidbit of info I was previously lacking. To use this model, consumers must 1. not have bounced a check in the last twelve months 2. Have at least two to three years of checking account information available for the model and 3. Have an average balance of $400.00. Good to know. 78% of consumers live paycheck to paycheck. There are many consumers that cannot maintain an average $400.00 balance after bills are paid and groceries are purchased. The VP assured us that in the beta-testing, using Experian as the Credit Reporting Agency (CRA), most consumers had their score increase under this model. But this now provides the information that a consumer may know they do not have, and “opt-out” of the model, rather than be denied AND have a score decrease.

5. Your banking info will be out there to the CRA, including “new” Finicity, who will become a CRA to comply with the Fair Credit Reporting Act. A fourth CRA will enter into the picture, Finicity who will be the CRA for these UltraFICO banking information providers to FICO for scoring. Because FICO never sees anything but the “raw data” they have zero, none, no liability for what happens to your info. Under this model, FICO assures us that it will be a “single use” calculation of the borrowers banking info. Okay, what happens then? The CRA and the creditors are responsible for protecting the data and are subject to the FCRA, so, it’s good. Or is it?

Data breaches have recently revealed sensitive info that an identity thief can use to create an account, such as social security number and date of birth. But now, a breach can put your banking info at risk, no need to create a fake account when they can raid yours, or use the UltraFICO themselves. How many additional hours will consumers add to the identity theft cleanup mess when the bank must investigate everything, and to close that account could subject the consumer to bounced checks and whatever else. But, you can file a dispute with the Credit Reporting Agency online. Eyeroll.

If you are purchasing a house, find a bank who will perform manual underwriting, and do not use the UltraFICO to provide your banking account information. Please. Your info will be out on the internet for who knows how long. Even if the CRAs pinky swear to delete it. For other types of credit, if you are going to be denied without this info- you are going to be denied. The interest rate is likely higher than you would expect anyway once the UltraFICO model is used. And for the car dealers and others who will “deny” people initially to access their banking information for approval, we know, we know. If you give a mouse a cookie, he will want a glass of milk. Protect your banking from the UltraFICO.

 

 

We are in spring! As we make the transition from winter into the new season, I want to invite you to take on a personal goal to find and save as much money as you can in April. Think of it as the “grown up” Easter Egg Hunt. We all tend to have several places we spend money without really counting the cost. Once we really pay attention to our money and write down where it goes often we are surprised on how much “runs away” after the bills are paid. So, for the savings challenge, there are three basic steps that if you commit to for 30 days, you will surprise yourself by how much you get to keep in your pocket.

Step One: Make a grocery budget and a list. Then take cash and leave the debit card at home

This can seem very scary if you don’t normally give yourself a budget. We start at the grocery store because those guys are the GREATEST marketers and woo money away from us on a consistent basis with “Red Hot Buys” or those end caps with items on sale that aren’t on the list. Even if you use the item on sale, if you aren’t out, and it isn’t on the list, you will pick it up later. Save that $2.99 now. Do that for three items, and you have saved just about nine bucks. Skip the sale items you don’t need and watch the savings grow!

Another tip: When you shop the sales and the “buy one, get one free” (BOGO), the bottom of the receipt will indicate what you have saved. That is money you would have spent if you had not been a super shopper. Transfer that amount to savings for additional motivation.

Step Two: Give yourself a weekly budget for gas, lunches, kiddo, etc., and withdraw exactly that amount of cash once a week. Again, leave the debit at home”

If you know your family has a drive through dinner on Wednesday between sports and scouts, budget for it and pay cash. You will not be as tempted to add on an item or “up-size” anything when you order. And if you don’t have the debit card with you and make a commitment to stick to your budget of cash for that one week, you are likely to be more aware when you must give up your paper money, and not overspend. Even better? The rest of your money stays in the bank!

Step Three: Save your change. When you are out spending only cash, you will get change as you purchase stuff. Save your change for the month.

I have a few mugs around the house to collect change. One is by the front door, so you take the keys out and see the mug, you put the change in there. The one that actually gets the most coin is on the washer (right?). Once a week, collect the mugs and empty them into a centralized place, perhaps a jar, or a piggy bank. At the end of the month, count the booty.

If you are already doing the steps above to your money, here are a few additional tips that you may try for 30 days and get in to the savings challenge as well!

Challenge yourself to save a specific amount each week

Mike and I try to squeeze at least $8.00 off the budget each week, just on various things. Seems silly, but when we are successful, we are saving a little over $30.00/month, $360.00/year. We aren’t always able to do it, but we have a goal for that money.

Withdraw your cash for envelopes only once a week, instead of per paycheck

Withdrawing money only once a week means more stays in the bank, and if we have money left over from the previous week, we can take out less. Also, this ensures we don’t keep a lot of cash around for temptation. If it’s in the bank, we are less likely to use it mindlessly!

Save your singles

The next step after saving your change is to save your singles. Mike will break a five before he gives up his dollar. It adds up! Doing that each week for the month of April may accelerate your savings!

Calculate your savings weekly to really see the impact of implementing a few changes this month. Every dime you save is a win. No amount too big or too small. I’m in. If you want to see how we are doing, and let me know what YOU have saved, just like my Facebook page: dawnkennedylaw. Game on!!!

There should be a rant warning attached to this article, but I am going to try and provide some tips, so it’s a rant with tips. Odd, but utter frustration with the student loan servicers is the place where many of us are today. I know I am frustrated with the level of “service” many students are getting.

An audit reportby the Department of Education Inspector General was released back in February, and it was a doozy. Between 2015 and 2017 Federal Student Aid, which provides oversight for servicers, found that there were many instances where the servicers failed to meet requirements with respect to borrowers, follow the federal rules, and actually harmed borrower’s rights.

But my rant isn’t only with the government oversight failures. The servicers are contracted to “SERVE” borrowers. Taking payments, updating the accounts, making arrangements to change plans or prevent default, etc.  For weeks there have been reports within our listserv of borrowers waiting on the phone 90 minutes or more to get to a human. Or a fax number that isn’t working. In some cases there was no response from the loan servicer to any communication by a borrower (or lawyer) at all, be it email or fax.  I haven’t tried a carrier pigeon dipped in the blood of a virgin, but not sure who to address it to.

And while systemic problems with the system aren’t limited to only one servicer, NelNet has recently come under fire, again, for their servicing problems. A year ago Nelnet acquired another servicer, Great Lakes Educational Loan Servicers, and made themselves the largest of all the student loan guys. And they are currently in six lawsuits for their shenanigans… well done, guys.  Don’t get me started on FedLoan either- they also left the “service” out of “servicer.” 

So what can a borrower do? Know their rights. Keep trying to contact the servicer, and if they don’t respond, get help. Document everything. And know what your servicer cannot do. If you are getting the run around, or the servicer is doing any of the behaviors listed below, you can, and should, always file a complaint with the Consumer Finance Protection Bureau.

1. They cannot threaten you with late fees.

2. They cannot just “steer” you into forbearance, there may be an affordable payment option available, they need to let you know about those.

3.  They cannot allocate your payments in a way that hurts you.

3. They cannot “thwart” your extra payments to reduce the loan or pay off early. It is in the servicers best interest to keep you in your loan as long as possible. If you are making extra payments, DO NOT let the servicer put you into a payment holiday, skipping payments ahead. Make them put your payment on principal. And keep records!

For more things loan servicers cannot do to you, read “9 Things Your Student Loan Servicer Isn’t Supposed to Do”. Here is the most current link to servicers with contact info. And here is the link to the complete list of phone numbers for the Department of Education departments that  “handle issues” related to federal student aid”

 

 

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.

I am a lawyer, so it may be odd that I recommend to many people that they should try financial coaching as an option before filing for Chapter 13 bankruptcy. It is also, in many cases, an unpopular opinion with both consumers and some lawyers. I’ll get this out of the way upfront. Yes, I can take a bankruptcy matter, but I find there are many cases where it may do more harm than good. It is also tax refund season, and many people wait for their refund to file so they can afford the bankruptcy filing fees. In fact, I have received a few calls in my practice about it lately, so I thought I would get my rationale into an article.

First, a few bankruptcy basics. When most people think about filing bankruptcy, they are referring to a Chapter 7. A Chapter 7 bankruptcy (meaning filed under Chapter 7 of the Bankruptcy Code) wipes out or “liquidates” almost all of the debtors unsecured debt, but there are exceptions. As well as some rules regarding secured debt such as cars and mortgages. It’s not just a wave of a magic wand, and since 2008, requires the debtor “pass” means test, if the household income is below certain thresholds. There are of course special exceptions, and what law doesn’t have exceptions?

What if the consumer “fails” the means test? Then the bankruptcy code they are eligible to file under is a Chapter 13. A Chapter 13 is basically a court approved repayment plan to creditors. The bankruptcy filing creates an estate, and a bankruptcy trustee manages the repayment for three to five years until it is completed and the bankruptcy (estate) is discharged.

So now we know the basics, why coaching before filing? My top three reasons.

First, the consumer keeps control of his or her income while debt is paid. When a consumer files bankruptcy, all of the debts and all of the income are listed on various “schedules.” The consumer’s assets, meaning property, bank accounts, disposable monthly income, etc. become the “bankruptcy estate.” This includes the consumer’s income, because it is what the filer is promising the bankruptcy court he or she will use to repay the debts. A repayment plan is submitted to the court, and if approved, the estate (with the payment plan) will be managed by a bankruptcy trustee, who works for the court.

So, the consumer no longer gets to control his or her income. It is an asset promised to pay debts, and all debts are paid from this estate for the length of time that bankruptcy is in repayment. This also means that any income increase, such as a raise or bonus, at any time the estate still exists will belong to the trustee. The trustee may demand that more money be paid to the creditors, particularly if the increase exceeds 10% of the consumer’s current income. And you cannot lie to the court. Never a good idea. And most of the time the consumer must submit personal tax returns to the court annually anyway. This is for as long as the estate exists.

Only after discharge will the consumer regain control. While it is true a certain percentage of the debt can be discharged at discharge, most of the debt must be repaid. The general rule is that at least as much of the debt that would have been discharged if the consumer qualified for a chapter 7, and the court can order more based on disposable income and assets.

Another note, if the consumer owes family money, and pays some of it back in the months preceding a bankruptcy filing, the trustee, under what is known as a “claw back,” can demand the family member return the money so it can be added to the estate. This is because the court will presume that the money was paid to a “preferred” creditor.

Second, coaching can help change attitudes and habits, a bankruptcy often doesn’t. Consumers are already required to go through a credit counseling type personal finance class before filing any bankruptcy and again before it can be discharged. I can’t speak to the effectiveness of these courses. But you can potentially see the limited change in money habits these courses have by looking at the average of Chapter 13 bankruptcies that successfully make if the full five years to discharge.

Only about one in three approved payment plans makes it through to discharge. Yup. Only about 33%. Yikes. Another statistic? Approximately 8% of bankruptcies are from re-filers, which account for about 16% of annual filings. More than 1 in 20 filings each year are from consumers who already filed once before. Yes, life can happen to anyone, and I am not here to judge, but if the consumer worked with a Ramsey Preferred Coach, I would take a bet that there would have been an emergency fund prior to that second filing.

When someone works with a coach, the repayment of debt comes not from fear of the court or trustee, but from a sincere desire to change from habits that can be personally harmful, to those habits that give peace of mind. The “not owing a monthly payment to anyone who charges a $39.00 fee if you are one second late with a payment” peace of mind. Also, a coach can keep you accountable. How can you forget to budget if you meet with a coach each month for a while? What if something comes up and you have a question? There is a coach walking beside you for support. Coaching is not forever either, and many people don’t even need three to five years of coaching, unlike a Chapter 13.

Third, the consumer may be asked about filing a bankruptcy long after it is removed from a credit report, and it may affect future opportunities. I find this to be a heartbreaking fact that many people do not really consider prior to filing. Everyone is thinking about the credit report, the “ten years” hit in the “public records” section. But that is just one part. Consumers are often asked on a job application, mortgage loan application, security clearance application, “Have you ever filed bankruptcy?” Which is not the same as, “Have you filed bankruptcy in the last ten years?” And the “have you ever” question must be answered YES. This can lead to loss of some future opportunities that were never even thought of before.

Jobs in law enforcement, for example, are difficult to obtain after filing. Not to lie, even getting a license to practice law can be a challenge because an applicant may not pass the Moral Fitness requirement. Military or government jobs requiring a clearance may be an issue. So, while there is protection against losing your job during a bankruptcy, and protection from discrimination at your current employer, no such protection exists if you try to change jobs later in private industry.

And that’s it. My three biggest reasons for advising consumers to try coaching first, before filing a chapter 13 bankruptcy. If you or someone you know is in a financial situation where bankruptcy has been raised in conversation, you (or they) may want to have a chat with a financial coach, first.

This is the week that the IRS is estimated to process to filers. In the first quarter of every calendar year federal (and sometimes state) tax refunds are issued to qualified filers. In fact the average tax refund for the 2018 filing year (2017 return) was over $2,200.00. I’ve already spoken about how to ensure every dollar you can keep goes into your pocket each month, and not into the IRS coffers (until you file the next year’s return). Another issue, comes from the fact that the money received by many taxpayers is immediately spent paying down debt accrued the previous year. Some of that debt is from short-term overspending during the holidays, accounting for about 39% of Americans using the refund to clear that debt.

It is this cycle of annual debt that needs to be addressed, because if $1,000.00 of that refund was placed into a “baby” emergency fund, many Americans would not have to incur debt for “emergencies.” The stats are incredibly scary. The latest figure is that 78% of Americans live paycheck to paycheck. Almost 8 in 10. Following the logic, everyone knows at least a few people who are unable to cover even the smallest of budget hits without putting another bill in jeopardy. Additionally, a full 70% of Americans are in debt.

The recent government shutdown highlighted that for many Americans just treading water with money, they are one missed payday from being in financial distress. And we all saw the comments and memes about how government workers should have something put away or should be able to cover one month of expenses. Based on the statistics, 8 out of 10 cannot.

So, why am I telling you this? If you have a tax refund coming, and do not have $1000.00 saved for an emergency, you are not taking full benefit of the Uncle Sam Savings Plan. $1,000.00 goes a long way for car or home repairs, unexpected expenses, and other hits to the budget that throw a wrench in how the bills are paid. And once you put $1,000.00 away, be diligent in keeping it that way. Refill it if it gets used. Seriously. Mike and I had a pipe burst recently during the Polar Vortex, and we mopped up the water, grumbled a little, and called the plumber, knowing it could be covered from the emergency fund. (For Ramsey listeners, we are finishing baby step 2.)

Of course, $1,000.00 isn’t a “full” emergency fund, which is three to six months of expenses saved, but it is a good start to cover many, many of the instances where Murphy moved into the spare bedroom for a week. Of course, my next piece advice is to get out of debt as fast as you can, so YOU control your income, not some credit card company or bank. When you commit to payments, you promise to give them a share of your income each month, no matter what life throws at you. And I would strongly urge anyone getting the “average” refund to apply the $1200.00 over that emergency fund starter towards any outstanding debt.

Somewhere around 80% of taxpayers get some sort of tax refund each year, and that was true again for 2017. The average refund amount was $2878.00. And while many people love to celebrate the lump sum when they get the check, the IRS shouldn’t be used as a savings account. Here are a few reasons why:

1. You could actually have the money to use throughout the year. If an employee paid every two weeks adjusted their withholding to be accurate as to what they really will owe, that average “refund” of $2787.00 becomes $110.00 in the paycheck every payday. This equates to roughly $220.00/ month into the household! With 78% of Americans living paycheck to paycheck, that is a big addition to the monthly budget.

2. The IRS controls the overpayment until they give it back. The IRS doesn’t pay interest on the extra amount you paid or allow you to access your own money until tax time. Once you have it withheld, or you send it in for the self-employed, it is in the IRS coffers until you file your tax return. And the government isn’t paying you any interest on the money they get to use until they have to refund the excess you gave them. In reality, you are losing control of your own income.

3. The cycle of debt/ pay with return is expensive. Many Americans go into debt throughout the year and pay off balances with a tax refund. This allows lenders to charge interest, even short term, and the debt is much more expensive than if the money was in your budget every month to use. An extra $220.00 a month can prevent the need to take on short term and expensive debt, especially if you use that money for an emergency fund.

It’s too late to affect your 2018 tax return and refund, because the 2018 tax year closed about a week ago on December 31st. But you can make changes now to bring home more money in each check, and to prevent a huge sum being refunded in 2019. Check your withholding, by checking your paystub, or ask HR. If you had a change in dependents such as a new baby, kid graduated and moved out, or got divorced, make sure the number of people you are paying taxes for is accurate.

For example, a family of four should be withholding properly for a family of four. One special note for a two-income family-the higher earner should be withholding the proper number of dependents; the second earner should claim zero. This prevents under withholding and a tax bill at the end of the year.

After your adjustments, enjoy the new sum in your paycheck, and for the first few months, why not squirrel the extra away in an account? You haven’t seen it regularly anyway. Only once a year in that government tax refund.