Category Archive

Are they “good debt”? Is there such thing? I will provide you with the definitive answer! (Ok, it is just my opinion, as is everything here.) I still get excited when someone links to me. Someone recently (not SO recent, since this post has been hanging in draft state for awhile) linked to an older post of mine, where I argued that the federal government’s investment in my education was a good thing, for me and for them. She is considering student loans, and asking the important question: How much is reasonable? How much is too much? Everyone should ask these questions before borrowing, but unfortunately, not all do.

College students are typically young and not financially savvy, and commercials (used to) abound offering you “Up to $40k a year!” for school. It makes me sick when I see those. That is rarely going to turn out to be good debt. If you can go to college without student loans, that is quite obviously the optimal solution. If you can’t, (I think) student loan debt can be a great investment if and only if (iff for math geeks):

• It is a reasonable amount for the degree and expected salary.
• It has a reasonable interest rate (this typically excludes private loans). Canada also doesn’t seem to offer as nice rates.
• It was needed to pay for college, not to fund an extravagant lifestyle while in college.
  • Disclosure: I took an undetermined amount of extra student loans to help fund my amazing study abroad experience. I did get a $5000 scholarship, but I’m sure I spent more than that. I’m not apologizing for that extravagance, even thought it doesn’t meet my own criteria. It was worth every last red cent!
• Other options were exhausted: Savings, part time jobs, scholarships and grants.

Much traditional federal student loan debt really should be viewed on a different level than credit card debt (though current rate offerings are almost 7%, a little high). However, private loan companies jumped into the game and really mucked things up. If you have $100k in 12% interest loans for a degree that commands a low salary, it is hard to say that was a good investment (individual exceptions may apply, as well as non-financial benefits of college). If you have $10k in loans at 2.0% tax deductible interest (some people do have those crazy low rates) for a degree in almost anything, it probably was a good choice.

If you have student loan debt and it doesn’t seem to fit the bill of “good debt” (and you are a pf blogger or reader), you probably are paying it off quickly if you can (go FB!). If you have “good” student loan debt, such as Well-Heeled’s zero precent interest, forever loan, you probably are not (unless you do it for the emotional payoff, which is fair). Mine is more good than bad, but not as good as others. It is at 4.5% (tax-deductible) for about $20k, commanding me almost $70k early on in my career (inflated due to high cost of living city), and more later. If I had extra money, I might pay it down, but I use my money for other priorities. I’m maxing out my 401k before I’ll pay extra on that loan. (It also will be at 0% from this September for about two years.)

I’ve heard anti-debt militants people argue that you should save up, pay as you go, and take extra time to graduate. That is certainly an option, for those of you that it suits. Financially, I doubt I would have come out ahead doing this (how much could I make with no degree?), and personally, it would have (to put it eloquently) sucked. It is an option, but not one that I was interested in.

Some other student loan information:

• From Get Rich Slowly, A rough guide to Student Loan repayment, guest post by me, geared towards those who just graduated and don’t know what to do (one year old). I wrote this because it is the info I wish I had the year before.
• Check out finaid.org: My favorite resource for federal loans.
• If you are considering consolidation of older variable rate Stafford loans, the rate has reset! Current rates for those longer out of school is 4.21%, and in the grace period, a nice 3.61%. Consolidate now to lock in those rates!
  
• For balance, a post on why student loans aren’t good and advocates paying as you go, even if it takes you 6 or more years.
• There are a lot of different ways to get a degree. Here is an interesting article about someone getting a technical certification to earn more while they pursue a degree.

I finally got official word that I was accepted to the graduate program I applied to! It is somewhat anti-climatic for two reasons. First, since my employer is paying I wasn’t hoping for funding and my credentials were quite strong, I sort of expected to get in. Second, several weeks ago, I asked T (who attends this school as a full time PhD student with funding) to check on the status. He found that I had been recommended for admission, so it was a waiting game, really. But a long waiting game, considering they told me I would know in 2-4 weeks in February!

What does this mean for my finances? Not a whole lot, actually. It’s a part time program, so I’ll continue to work. I’ll be really busy starting this fall, so maybe I’ll save even more! Also, I’ll be considered a half time student so my student loans will go into deferment. Since they are subsidized, the rate will be 0%. That’ll free up $141 each month for savings, but I think I’ll continue to put $70 into my student loan payoff account. (This month, only $65 of my $141 payment went to principal!)

Long term, a M.S. degree in my field translates to roughly $10k-$15k more than a B.S. with similar experience. It’ll increase my expertise and help me advance more quickly. It’ll open more doors to have a top school on my resume. I also get some sort of stock options when I complete it, but they vest slowly, so I can’t count on that. I already have 9 credits at a lesser (top 50) institution, so I should finish in less than two years if they accept 6 credits.

T thinks I should take the next step and apply for a full time Ph.D for Fall 2009. I don’t even really want to go for my Ph.D., but I’m laid off in January and the economy is still poor, it is a reasonable back-up plan. Obviously, I wouldn’t go without funding. I know that graduate school should be a passion, not a back up plan, so I’m hesitant. While I may be able to pull off a Ph.D. acceptance, I’m less confident that I could pull off funding at this particular university. My previous graduate university offered me funding for my M.S., which is unusual, so there is a chance. However, the competition is extremely stiff at this level.

I suppose I have until fall to think about it. I have my GRE’s, my professors have electronic letters of recommendation that could be revived easily. No need to decide today.

Instead I’ll relish in my acceptance and enjoy my summer before my free time dwindles to zero!

P.S. - If I hadn’t banned myself from the grocery store, I would make Fettuccine with red pepper feta sauce, complete with homemade whole wheat pasta. The only ingredients I’m missing are chicken stock, eggs, and red peppers. It sounds like a meal T would enjoy as much as I would. He sometimes thinks my ideas of a good recipe to try are odd. I suppose it can wait a few weekends!

P.P.S - Sorry if all the food talk is too much. I am not talented enough to start a food blog, so I just sneak my food thoughts into my personal finance blog!

RacerX and Single Ma both say they won’t (at least not 100%). Shuchong argues that her parents paid for hers and figures it was a good investment for the doors it has opened in her life. I find the whole debate a bit perplexing. It implies that most people have the choice, which I don’t think is the case. Trent makes some points on why you shouldn’t pay, but the only one that holds up as a rule is that it is a burden on the parents. Most parents will help their kids to the best of their ability, and if parents can’t afford to, what is there to argue about? What are we really debating?

Paying for your kids college will no doubt give them an edge in the early stages of their life, and maybe beyond. I find that is difficult to argue. If you take two identical high school senior and pay for Student A’s education at the best school he can get into, and send Student B on his own, in most cases Student A will come out ahead.

But who cares? We’re never talking about two identical students, but individual students with unique talents, goals, and personalities. I want to emphasize that kids can be quite successful in life even if parents “choose not to” (can’t afford to) foot the bill.

Here are my tips on how to make college affordable and still be able to compete with those who had an advantage. These tips are geared at those students who, given different financial circumstances, might have found themselves at a top school. These thoughts are not new, but I want to emphasize that they really do work and won’t put you at a huge disadvantage in life.

Scholarships/Financial Aid
This is obvious. Apply for all the scholarships you can, fill out the FAFSA, and with any luck, you won’t need to do any thing else on this list! However, don’t be fooled–it isn’t as easy as it sounds. Most students will get some help, but few will get everything provided.

Get a job while in college
Working full time is not ideal–school really does have to come first. However, in my part time jobs I never had a problem getting off of work when I needed to study. I hate hearing “my parents really wanted me to focus on school and be involved on campus, so I didn’t work.” My parents also wanted those things for me, yet I still had jobs throughout college and had a great experience. You can “do it all”, so to speak.

Very few kids who didn’t work spent more time studying than I did. For the most part, they just spent more time relaxing and goofing off with friends (which may have it’s benefits, but doesn’t further education/career. You can still “network” without having excess free time.) The worst cases simply spent a lot of time partying or smoking pot.

After the jobs related to my major, waitressing was a the best college job I had. The most money could be made on Friday or Saturday nights, and you would be done in time to go out with friends. Even if you havea job, make time to be involved in campus activities. Even if you are an officer in an organization, being involved on campus isn’t that time consuming. As an added bonus, you can add a nice bullet on your resume: “Maintained a [X] GPA while working 20 hours a week.”

Take Out Student Loans
I’m also tired of “I’m so thankful I’m not burdened with debt”. My $133/mo really is not burdening me, especially when I think of the opportunities it provides me. Don’t be scared of loans, but don’t be careless with them either. You have to be smart about this, but student loans can be a good tool. It is silly to go into a bunch of debt to get a degree that won’t earn you much money. However, it is equally silly to forgo a low interest loan (especially subsidized) if you’ll have a strong earning potential once you graduate.

Pick a marketable major
There is something to be said for studying what you love, but understand the implications. I am not arguing that the world doesn’t need majors in comparative literature. However, studying something that has lower earning potential is a luxury. If you can get scholarships to do this, wonderful! If your parents are footing the bill, great! Have fun! Just don’t go $120k into debt to become a pastry chef (true story, saw it on Suze Orman). You’ll regret it, even if you love baking. (I do love math/science, but not everyone is a nerd like me.)

This isn’t to say you are limited to majors that lead directly to a lucrative career. If you are majoring in something impractical (or actually, anything) have a plan and be able to justify any money spent on that degree. Truly loving what you do can be justification enough, as long as you can afford to pay back any debt you incur.

Don’t go to a “brand name” school (unless financial aid makes it worth it)
I am going to admit it–a good school helps your resume for your first job. I doubt my current job would not have hired me based on my college resume, solely because my undergrad school is unrecognizable outside of the region. However, I’m less than two years out of school and working primarily with people whose college educations cost a lot more money than mine did (and getting an M.S. at top university fully paid for).

Without a brand name school, good grades are especially important. If you have mediocre grades at a mediocre school, you won’t stand out. If you are a bright student at a mediocre school, take advantage of it. Get high marks and get to know your professors. They might be able to hook you up with a grading or TA job, or they may have connections in industry. Be involved on campus, become an officer, and be an outstanding well rounded student.

After college, get your first job at the best company that recruits at your school. Do well in it, get some good experience. Perhaps you’ll find you really like your job and you are well paid, so no need to move on. If not, with a little experience you will have a good chance of getting in to any company you want to work for.

Bottom Line
Kids whose parents pay for college (especially fancy ones) simply do not have to be as motivated and outstanding those who are on their own. I’m not saying that they aren’t (there are many talented and motivated students everywhere). However, average (and below average) students at those schools will likely do better than equally talented students elsewhere simply because of the parental advantage. Doors will be opened for them more easily, but you can open your own doors. If you are committed, hardworking, motivated, and have some sort of aptitude in something, you should be able to do just as well, even without your parents financial support.

What I’ll do for my kids
I’m not sure yet. I’ll help them to the best of my ability if they show the motivation and aptitude for college. If I can’t afford much, I’ll help them in ways my parents did–encouragement and support. I’ll also help them in ways my parents didn’t (because they didn’t know). I’ll be sure they apply for every scholarship they are eligible for. (I would have qualified for free tuition based on my ACT score had I taken them in the right month!) I’ll have solid advice about the admissions process and show them outstanding schools that provide excellent financial aid. I’ll also help them navigate the financial aid office and truly understand any loans they take out. They will be personal finance experts by the time they graduate high school! And I’ll tell them everything I just wrote here (provided it still applies when my theoretical unborn children go to college!)

My new goal is to stop paying extra towards my student loans. Sometimes I see “extra” money in my checking account, and I just can’t resist shooting $50 over. (This is especially easy since my loan and my checking are at the same bank.)

Why do I want to stop this seemingly “good” behavior? It doesn’t line up with my goals at all! I know that extra payments on my student loans is practically the worst use of that $50 (other than spending it on something unnecessary). Even just the ~$50 extra I have automatically contributed is another $600 this year that could go into my 401k… which pre-tax is probably around $1000! It’s just a silly thing to be doing. In fact, I’m going to contact them and tell them to just take the minimum payment, and then up my 401k contributions by 1% I will do it! Even by 1.5%! (Can you do half percents?)  [Note:  I went overboard and upped it by 5% for now, though I doubt that will last.  I'm of the mindset that you contribute as much as you can and lower the contributions until you can live comfortably.  Best to start out too high.]

I do put some extra money each month in a specified “Student Loan Payback” account, though it does currently earn a little less than the 4.5% the loan is at. This is a good idea because, assuming I get the deduction for the interest (I may not qualify for 200 it isn’t costing me much. If the rates ever go up again, it might save me money. If my brilliant plan to be a half time student and full time worker pans out, it will definitely be making me money. It also gives me more flexibility and security than paying extra. I would much rather have a $15000 loan and $15000 in the bank than a $0 loan and $0 in the bank.

See how much sense it all makes? Still, even understanding all that, it is really hard to resist the urge to send in extra money!

T also has a hard time with it, though even harder for him since he has neither a 401k or student loans. When I mentioned that if i started school, my loans would become 0% interest and payments wouldn’t be required, he said something like “But, you would still want to just pay them, right?” Well… It is a struggle I have with myself, but what kind of pf savvy girl in her right mind would pay down a 0% loan?!? I just can’t do it. Or, actually, I really want to do it because paying off loans feels great. But I need to make this more about math than it is about mind. So I won’t. I won’t!

I think I mentioned I’m re-applying to graduate school. I have 9/30 credits completed (through distance education while working) at “University A”, in the state I formerly lived in. I could continue on this path, taking 3 credits a semester (6 a year) and graduate in 3.5 years. University A is usually ranked in the 30s or 40s in my field.

My new job is more flexible about where you do your education.  I now have access to another (distance education) program at “University B” a top 10 university in my field.  Even better, they are on the quarter system, require just nine courses, and I can take four each year. They also will accept two transfer credits, meaning if they accept my application, I’ll be done in under two years! It’ll also be a boost to my resume, as I went to a relatively no-name undergrad university. It also probably will be a lot more work and a very difficult two years… but it should pay off big time in the long run.

I was already really sold on this idea but I just came up with yet another great benefit. At “University B”, each class is four credits, which by their system would classify me as a “half time” student. So what does that mean? Well, my student loans are Federal Subsidized Stafford loans, meaning while I’m enrolled in school at least half time, the government will pay the interest for me. I could also completely cease making payments if I wanted, freeing up $133 extra each month to invest/save. WOW! (I’ll have to decide exactly what I plan to do when/if this whole thing is a reality)

In dollar terms, what does this mean? Well, last month the interest on my loan was roughly $75, so if I’m in this program for roughly two years, it’ll save me about $1800. I can’t wait until September to get this started! Let’s hope that they accept me! I should find out within a few months!

I’m not a strict budgeter. I set monthly goals in excel based on fairly narrow categories, and I track my spending for each category. If I buy a magazine at the grocery store, I sometimes it slip into the grocery budget, even if it should be in entertainment. If I go over my budget, I don’t really worry about it. If I save $100 less one month, it’s not a big deal. As long as my net worth continually grows and I’m conscious of my spending, I’m not strict at all. I’m great at making a budget, but after that, I ignore it!

This week I decided I wanted new running shoes. Usually, I’d just buy them and worry about it later. This time I actually went into excel, and tried to see where the money was going to come from. If it was going to detract from my savings, fine, but I just wanted to know. I was able to take a little bit out of my utilities (low energy bill in the fall), a little out of “personal”, and was able to come up with an extra $75 for running shoes. There is a chance the shoes will be a little more, but the vast majority won’t affect my savings.

While I was there, I set up a rough December budget. Due to the year end bonus, I should be able to put $1000 towards my student loan, $2000 in my e-fund, and leave plenty of wiggle room in my new years vacation budget. I love bonus month!

I consolidated my student loans last June, and the process was pretty painful. It really shouldn’t have been, but there were some minor issues that turned into huge problems due to Wells Fargo constantly giving me wrong information about what forms I had to fill out to fix them.

Anyway, a few days ago I noticed that my loan had been taken off ‘in-school deferment” status and put into repayment, and a retroactive “hardship forbearance” had been processed without my knowledge. As part of this, $366 of interest was capitalized into the loan. I was upset because interest is tax deductible (if it is paid as interest, not if it is rolled into the principle!) so I contacted Wells Fargo to complain.

Their response, basically, was that it is too late and they can’t help me. They also explained that this was an unusual siltation, and in most cases, I would have been given the opportunity to pay the interest. So, that will cost me about $100 in a tax deduction, but I was surprised at the level of helpfulness and competence they showed in dealing with my situation.

Here are snippets from the most helpful correspondence I’ve had with their loan department to date:

According to our records, we originally disbursed your Federal Consolidation Loan (CA0001) on 01/05/2007 and since you were enrolled in school half-time, we processed a half-time study school deferment on loan CA0001.

After loan CA0001 was disbursed we received your request to add another loan to your Federal Consolidation Loan. We processed this request and disbursed your new Federal Consolidation Loan CA0101 on 06/07/2007. Loan CA0101 canceled out loan CA0001.

[My note: this loan was listed on the original application, and I have no idea how they forgot it. It also took them a million years and several phone calls to take care of this issue]

In October we received updated enrollment information from your school showing you dropped to less than half-time status as of 05/05/2007. Usually we would update the deferment end date and process an administrative forbearance on the account to keep it current. However, since you dropped to less than half-time status before loan CA0101 was disbursed on 06/07/2007, we had to remove the deferment from loan CA0101 and process a standard forbearance on your loan.

We regret that because we just received your updated enrollment information and made the adjustments to your account, there wasn’t sufficient time for us to notify you of the outstanding interest so that you could pay it before it was capitalized onto the principal balance of your loan. However, by processing the standard forbearance on your loan, we kept the loan from being reported as delinquent to the credit bureaus and from being assessed late fees. [My note: Gee thanks how kind.... especially since I was not getting billed and my account online clearly said "deferment" with nothing due!]

Well, it sounds a bit confusing, and I’m not sure that I buy the “there wasn’t sufficient time” line, but I do understand their motivation. They also reminded me that after THREE YEARS of on time payments, I would qualify for another 1% rate reduction. I’m certainly annoyed that I will not be getting any tax breaks on the interest I pay this year, but if I was more in tune with the rules, I could have notified them of my school status myself.

While checking my online banking, I noticed my student loan is suddenly back in repayment status I took 6 credits of graduate classes last semester and was granted a student loan deferment. I thought this was great news, because my loan is subsidized and I am not charged interest during a deferment.

It seems like my class this semester doesn’t qualify me for the same treatment, perhaps because I’m only doing 3 credits. Wells Fargo has taken it upon themselves to mark 6/07 until 10/19 as a period of hardship forbearance! More like a period of “Wells Fargo screwed up… again!” I’m going into the branch tomorrow to inquire about this. If it doesn’t affect my credit report, then I suppose I’ll let it slide. I have to go to the branch anyway because I can not, for the life of me, figure out how to set up auto-payments online in the appropriate way to get the rate discount offered. I can set up payments online, but it seems it isn’t the same thing as when I mail the forum in. They make it confusing!

More annoying, they not only charged me interest for the “forbearance” period (this is to be expected), but they capitalized it into the loan, raising the principle by $366. I’m going to fight that, even if I have to simply pay the interest outright. If I do that, I can deduct it from my taxes! In the loan documents, it says they can capitalize the interest into the loan if I choose not to pay the interest, but I do NOT choose that, they gave me no option! This all just seems wrong. They haven’t provided me any notification or got any consent from me.

What makes me most annoyed is that until I pay off my student loan, I’m stuck with Wells Fargo. If it were something more simple, I’d just take my money elsewhere.

I’ve been cluttering up someone else’s comments area on a post about Federal Aid for college students. Honestly, I’ve never heard anyone take the position that federal aid is a large factor in why college is so expensive. Then again, it isn’t something I’ve discussed with many people, so it is may be a more common idea than I thought.

Rather than continuing to disagree with the overall point, I want to approach it from an entirely personal angle. One examples doesn’t prove a darn thing, but I’m not out to prove anything, just to think and discuss.

I graduated high school without a penny saved for my college education. Yes, I could have saved something myself (I worked part time through high school), but I didn’t. No one suggested it to me, and I didn’t think of it myself. My friends were quite well off and their parents were planning on paying for college for them, so it wasn’t “normal” to be saving for college.

Even though there wasn’t any money set aside, the question of whether or not I would go to college wasn’t raised. It was obvious that I would–I was a bright student who loved school and excelled in math. I couldn’t imagine doing anything else. I went to the state school because it was relatively inexpensive. Even today, after yearly tuition increases (one year it was a 20% increase!) it is “only” $5000 for tuition, another $1000 for fees, and $6000 for room and board.

The exact dollar figure in grants that I got is unknown, because I’m not a good record keeper. I estimate that it would be about $10,000. I got about $22,000 in subsidized government loans, which means the government paid my interest throughout school. I’m sure there is fancy math to figure out that cost to them, but I’m just going to round it to a cost of $1000/yr for four years. I’ll also throw in the $5000 merit based scholarship I got to study abroad, because it was a government program and one qualifying factor was finiancial need. That puts the governments total investment in me at a whopping $19,000, a humbling number.

But, what will they get back on it? It is hard to quantify, because if I didn’t go to college, I have no idea what I would have done. I would have stayed in my home state, and with hard work I might have been able to earn, say, 35k a year. This would make my tax bill (at 25%) be 8.7k a year, for 47 (65-1 years. I’m simplifying the math, but I’ll do both calculations the same, so it should be a wash. Total lifetime taxes: $408,900

My first year out of school, I’m earning $56k. My oportunity for salary growth is much greater than if I had no degree. For simplicity, let’s just say I make $67k (my salary offer for my new job) for my entire life. This is ridiculously unlikely, but so be it. My tax bill for this salary (at straight 25%) is $16.75k, for 42 years 65-23) that ammounts to an impressive $703,500.

The difference? $294,6000. It would take some more accounting to flat out demostrate that they made a good investment in me and I don’t know finance. Yet it seems apparent to me that over my life I’ll pay substansially more in taxes than that 19k investment in my education. Strictly based on taxes, I was a good investment. This isn’t to mention the decrease in US students graduating in science and engineering, the need for us to stay up to date in technology, and the value I provide to my company and our economy.

The playing feild between the haves and the have nots will never be level, but government aid helps those of us who’s parents don’t have a pile of money saved up at least get ON the field and try to better our lives. When I have kids, they probably won’t qualify for any sort of aid, but I’ll be able to provide for them with money I’m able to save due to my education. Government aid can help one generation so that the next can do it without that help. It is sort of like the saying, “Light a man a fire, he’ll be warm for the night. Light a man ON fire, and he’ll be warm for the rest of his life.” Or wait, maybe the saying was about fish….

It is difficult for me to look at government aid as anything but good because my experience with it was good. It not only helped me, but it didn’t go to waste on some student who frittered away they governments money while skipping class and getting wasted. I understand there is another side of it, but it is a side that I just will never be on.

Something I’ve noticed in some of the financial blogs I read is that some people who have their money “figured out” are quite arrogant about it. I notice it more so in the comments than in the actual bloggers. It’s sure nice to pay your credit card in full every month and to be sitting on a pile of savings and able to live within your means. It’s practically essential for happiness, I think.

However, just because someone hasn’t been able to do this, doesn’t mean they are a worse person. It means they either started in a worse position or made a series of poor decisions (or both). I applaud anyone who has their finances under control, but those who do not aren’t going to improve by us judging them. Of course, I tend to be slightly liberal and fall subject to the “bleeding heart” stereotype occasionally.

One opinion I came across personally offended me, because it was essentially calling me a worse person because I didn’t follow their rules. This is the opinion that advocates never taking on debt and ridding yourself of debt before investing. At first glance, that seems reasonable. However, my life hasn’t worked that way, and I don’t think that I did it (or am doing it) “wrong”.

I understand most people agree that education and houses are “good debt”, but there are those that think there is no such thing. I financed my entire college education on student loans. Oh sure, I had jobs. They helped out, but you can only make so much money working part time and summers. A few say that was a mistake, that I should have went to work full time until I could save up enough to afford to pay for college in cash. There are people who do this, and it is admirable. However, education was very important to me, I was always a bright student, and I knew that i wouldn’t be happy if I didn’t go to college. I picked a major I enjoyed that would allow me to earn a good living, and put my heart into school.

For the most part, my loans were subsidized and accrued no interest until I graduated. A year before I graduated, I received a job offer of a respectable 55k + benefits in an low cost area, and took my final semester abroad. Financially, it wasn’t responsible for me to go to Asia for my last semester. Still, I don’t regret it. I knew that it was on borrowed money, but it was the only time in my life that I would have the time to do something like that. So I did it. I don’t regret it. The money you borrow can be repaid, but you can never get that back time.

Since then, I’ve been working on paying my debt down. I’ve paid about $6k so far, and have slowed down now that the interest is subsidized again (since I am taking classes part time while working). I have about $20k left. If I had waited until I could afford college, I would have wasted years of my life in a low paying job when I am capable of more.