Like everyone else and their mother, I have student loans. I’m rocking a Stafford loan that I owe around $6,000 on and a Parent PLUS for $4,000. Expected payoff date: Who knows. I’ve handled the extra cash I receive from refunds pretty well  – I even sent most of it back as payments. On July 8th, I made a $1,000 payment to help reduce interest charges. Two weeks later and there’s no record that any payment was ever processed:

That’s not cool, so I call up My Fed Loan Servicing. Not the most creative name, but it works I guess. After holding for an unacceptable amount of time, I had the dumbest conversation of my life.

Me: “I made a payment on the 8th of July for $1,000 that isn’t showing up.”

Phone Rep: “Let me look into your account, one second…..OK, I am showing that payment on my screen.”

Me: “So why can’t I see it?”

Phone Rep: “Well, any funds returned 120 days after a disbursement are considered a cancellation payment and don’t show up.”

Me: “Then why can I see 2 previous cancellation payments?”

Phone Rep: “I’m not entirely sure.”

Me: “Well this makes it just about impossible to keep track of what I actually owe…”

Phone Rep: “I agree completely and I believe they’re working on a way to let borrowers see all payments made.”

Me: “Yeah, they should get on that. Thanks.”

What kind of company is this? Their only purpose is to manage student loans and collect payments. How hard is it to actually, you know, manage the loans?!? Right now I’m being told I owe $4,100. I have no idea if that’s actually the correct amount. My net worth update from June, before the payment was made, says I owed around $5,200. So a $1,000 payment in July does seem to match with the new balance.

Still, not showing all payments is the dumbest thing I’ve ever heard of. Over 4 years of school, it’d be extremely easy to lose track of how many payments you made and good luck getting a straight answer out of the people you sent the money to.

Do you have any student loan horror stories? Mine isn’t really all that bad, but it’s still frustrating. Let’s hear ‘em!

I have a love/hate relationship with student loans. I love that they make it possible for me to go to school. I hate that school is so expensive in the first place and I hate worrying about paying them back. But, I know my own situation is far better than the one that some students find themselves in. I don’t think I’ll have a terrible time paying back my loans, but others aren’t in the same boat.

A reader recently left an interesting comment on a post where I asked how much student loan debt is OK:

My question is that I’m worried about a friend who has $70K+ in college loans after graduating from undergrad due to out-of-state tuition. I’ve read horror stories online and you still have to pay student loans if you file for bankruptcy. What do people do if they absolutely can’t ever pay them back?

Scary to think about, isn’t it? I didn’t know the answer myself but with some Google-Fu, I found out a ton of information.

If your student loans are so bad you’re considering bankruptcy, you’re basically screwed. Sorry. Both federal and private students loans will only be discharged in a bankruptcy if you can prove a few things. Your friend probably can’t. In fact, I bet almost no one can. From www.bklaw.com, those things are:

1. that you cannot maintain, based on current income and expenses, a ‘minimal’ standard of living for yourself and your dependents if forced to repay the loans; This is usually the easiest prong to satisfy.
2. that additional circumstances exist indicating that this state of financial affairs is likely to persist for a significant portion of the repayment period of the student loans
3. That you made good faith effort to repay the loans. This does not just include making payments on the loans.  It requires doing things over time such as making efforts to increase your income (which includes going back to school to get additional degrees or experience), consolidating loans with the Direct Loan Servicing Center, and other similar efforts.

Editor’s note: Does that last paragraph seem dumb to anyone else? Isn’t it possible that going back to school and borrowing more could actually be the cause for the bankruptcy in the first place?!?

Up until 2005, private student loans were a lot easier to get rid of in a bankruptcy. But then the Bankruptcy Abuse Prevention and Consumer Protection Act was passed. That entire law was heavily supported by banks, credit card issuers, and other creditors. I don’t mean heavily supported as in “Yeah, I like Lady GaGa’s new song.” I mean they foaming-at-the-mouth-let’s-spend-100-million-dollars-get-this-passed liked it.

I couldn’t find any examples of what type of income and amount of debt would qualify for a discharge (shocker), but I bet anyone with a median US income or higher doesn’t qualify.

Why was this law necessary? The banks claim that bankruptcy protection is heavily abused – I’m not convinced. Most bankruptcies are caused by medical bills and/or job loss – not surprising in a country without universal healthcare. I’ve also heard the claim that medical school students were taking out hundreds of thousands in student loans, filing bankruptcy after graduation, and then going on to earn high salaries. But I can’t actually find any proof of that at all.

So bankruptcy is probably most definitely out for your friend. Quick question though – $70,000 doesn’t seem that bad. Is your friend having trouble finding a job or do they work in a low paying field? If so, I understand, but otherwise, I’d just focus on paying as much as I could each month.

Since you will pay back every cent you borrowed, it’s best to borrow from someone is going to be as easy going about repayment as possible. That someone is your Uncle Sam. Federal student loans are the best possible loans you could ever take out for one simple reason: you get to pick from a million different repayment options. This is a quick and dirty list:

• Standard – fixed monthly payment for 10 years
• Extended – Fixed annual or graduated amount over 25 years. You’ll probably pay more interest than what your degree actually cost. You also must have $30,000 or more to repay.
• Graduated – Payments start out smaller and increase every 2 years. Balance will be paid off in 10 years or less.
• Income Based – Required monthly payment is limited based on income and family size
• Income Contingent - Payment amount is adjusted each year based on gross income, family size, and amount of loans. Any balance remaining after 25 years (!) of payments will be forgiven. Doesn’t apply to Parent PLUS loans.
  

Quick note: Defaulting on federal loans is an extremely bad idea. The government WILL get its money. Remember that scene at the end of The Social Network where Sean Parker tells Eduardo Saverin “We will get the signature”? It’s just like that, only with the force of the US Government and you won’t receive a million dollar settlement like Eduardo. Default and think you’re getting a tax refund? You will never see a check. Default and you may not even be able to renew any professional licensees. CPAs & MDs – that’s you!

Damn, this post is getting long. I’m gonna wrap things up and just say that this should be a reminder to not borrow money like there’s no tomorrow. I know there’s pressure – and I think it’s a crime that every high school student in the country is told to borrow borrow borrow go to college, get a good job, and everything will be OK.

You can’t control the price of tuition and you probably don’t have $100,000,000 to bribe lobby politicians to pass laws you like, but you still have the final say in what you borrow. Consider state schools and community colleges to reduce the price of your education. Think about vocational training or starting your own business if the thought of writing another paper makes you want to stab yourself in the face.

This post comes from Mike of CreditCardForum.com, which is a forum for the best credit card reviews (or at least that is what he hopes for it to be). Most recently he wrote the Blue Cash American Express review.

Warning: Before you even read this post, I’ve got to warn you – Even if you pay little to no interest, carrying a credit card balance is definitely not for everyone! There are so many ways credit card companies can screw you over it ís not even funny. I’m not writing about this topic to actually advocate it, but rather to demonstrate how ridiculously expensive student loans are right now.

My friend, Chris, who is a few years older than me was laid off from his job last fall. His bachelor’s hasn’t exactly been too helpful in landing him a new job, so he’s decided to go for a law degree.

His options? Well, there are 20 ABA-accredited law schools in California and of those, just about all of them cost about $40k or more per year. And I’m not just talking about the trust fund baby schools like USC and Pepperdine. Even the U.C. law schools run $38,906 to $44,244 (and even more for out-of-state residents). So here is the rough math on how much he will have to pony up over his 3 years of school:

$40k per year tuition = $120,000
$3.5k per year for parking, books, misc. school expenses = $10,500
$7.2k per year for rent and utilities ($1,200 per month split between 2 people) = $21,600
$3.8k per year for health insurance = $11,400 (most schools require this)
$4.5k per year for food = $13,500
$650 per month for car (payment + insurance + gas + maintenance) = $23,400
————————————————————————–
Grand Total = $200,400

Now I’m not accounting for inflation and miscellaneous expenses, but that figure is a ballpark range for how much money he has to come up with. You may be asking why I am not factoring in part-time income? Well, some schools like Chapman actually force students to sign an agreement where they agree to work no more than 20 hours per week (which is ridiculous). So depending on where he goes, working may not even be an option and if it is, I can’t imagine he will be able to bring in more than a few thousand a year while he’s juggling full-time law school.

For non-private loans, here is what he has been offered:

Subsidized Stafford Federal Loan – $8,500 per year at 6.58%
Unsubsidized Stafford Federal Loan – $12,000 per year at 6.58%
Unsubsidized GradPlus Federal Loan – Up to cost of attendance less other aid at 8.5%

So with the exception of the $8,500, he’s looking at paying 6.58% to 8.5% starting from day one. Please, someone tell me why the Fed can afford to loan money at essentially 0% to the banks but hard working grad students are socked with up to 8.5% interest?! I think it is outrageously high and so does he. So guess what he’s decided to do? Pay for the first year using credit cards!

The plan to use 0% credit card offers
Ryan wrote a post earlier this year about the crazy idea of balance transferring your student loan debt away. Well I have to agree it is crazy for 99% of people, but for my friend it actually might be worthwhile. Here’s why:

Since Chris is older, he has a great credit history with high credit limits. In addition, his mom has actually agreed to help out and use her credit to do this. She has a Chase Freedom card with a $32,000 limit and a Blue Cash American Express with a $44,000 limit as well as a few others.

• He’s checked and the schools on his short list don’t have caps on credit card limits. So if someone is crazy enough to do it, the school will let you pay for your 40K of tuition on plastic.
• Assuming he avoids the balance transfer fees, he will actually be netting a few hundred dollars in rewards since the cards give 1% to 1.25% cash back.

Chris asked my advice for the best way to pull this off and here’s what I told him:

Step One: Get a card that offers 0% on purchases
American Express regularly runs promos that give 0% on purchases for the first 12 months. If his mom applied for a second AmEx, it’s unlikely she would be given a credit limit anywhere close to what she has on her old Blue Cash card (which she got before the recession) but lets say she opened one of their other cards with the 0% on purchases offer and was given a $10k limit. What she could then do is transfer a good chunk of her available credit from the Blue Cash over to the new card and bam! She suddenly will have a card with a lot of spending power AND the 0% on purchases!

Step Two: Charge the tuition to the new card
This actually may be the hardest part, because it definitely takes some balls to make a $40,000 purchase with plastic! (Though most schools allow payments on a per semester basis, which would split it into 2 payments).

Step Three: Setup automatic bill pay + watch the account like a hawk
Even with the credit card reform, if you make 2 late payments with 6 months that might be grounds for a rate hike. So obviously they will have to do everything possible to avoid this. I recommended setting up automatic payments and also watching it manually, in case something goes wrong with those.

Step Four: Before the 12 months is up, transfer or pay it off
Carrying the balance past the 0% period would be insanity. So he would either need to transfer it within 365 days from the date of account opening or pay it off. This is definitely risky because who knows where the economy will be in a year? 0% offers might not be around! However lucky for Chris, his mom says if all else fails, she will tap her savings to pay it off and then formalize a loan between mother and son to pay it back.

They haven’t decided yet whether this will be a one-time thing or something they try and repeat every year, using credit cards to finance as much of law school as possible. What do you think? Is Chris insane or does this approach actually make sense for his circumstances?

Editor’s Note: While balance transfers allow you to pay down a balance without interest, they still require minimum payments. Most cards have minimums of 3% or 5%. A 3% minimum payment on $40,000 is $1,200!

Confession time. I’ll be carrying credit card debt for at least the next 4 months. Probably longer. The amount is high for a college student too – $1,800. Like I said, it’s a big number. Thanks to a good credit score though, I’m not paying a cent in interest.

How did I manage that? I mentioned in my App-O-Rama post that I had a few different CC benefits I was looking to cash in on. One of those was a no interest promo offer. I knew I’d be buying airfare to Italy and let me tell you  – that ain’t cheap! I also had to pay an $800 deposit for the study abroad program. In the same month.

Faced with those expenses but not wanting to eat up most of my savings and blog income all at one time, I turned to the credit card companies. They aren’t usually the 1st place you think of when you want better finances, I know. But they’re kind of like your in-laws. You don’t really like them, but then they offer you gifts and you can’t really say no to gifts so….what the hell you at least put up with them to keep getting free stuff.

I applied for the American Express Blue card since I was confident I’d be approved and they offered a full year of no interest. Any card would have worked though – they just need to offer a 0% interest promotional offer on purchases. “On purchases” is important. You might see “0% on balance transfers” and that’s def. not the same thing. Balance transfers are for the stuff crap you couldn’t afford and already bought on another card.

Now I have until May 2012 to pay off my flight. Depending on how much I earn this summer, I’d like to have it paid off by September/October. Worst case scenario is I pay whatever amount is remaining in April 2012 with my student loan refund – 7.9% interest is better than the 15%(!) that AMEX will charge.

*Carrying a balance, even without interest, isn’t for everyone. I still have to make at least my minimum payment ($36.00) every month. If I’m late or miss a payment, my promo rate disappears and I’m in for a world of hurt. This is a game and the rules are made up by the credit card companies.*

If there was ever a double edged sword in finance, it’s gotta be interest. Interest is great when you’re lending money – you get paid! But it seems downright evil when you gotta pay it, am I right? But interest either way can be kinda confusing. APYs here and APRs there. % signs all over the place. It’s a confusing world.

So let’s get mathematical up in herrr and figure out what we pay in interest every SINGLE day. My student loan lender is actually semi-tolerable and gives me an uber simple formula that tells me exactly what I’m paying for one day’s use of the gov’s money. Here it is:

Right now I have 2 lenders so I have to do 2 separate calculations ’cause the interest rates are different. Add the final amounts together and I get $1.61 + $0.37 = $1.98. That’s $60 a month or $722 per year all going to interest in exchange for borrowing $12,919.

Sure, right now my balance is nice and relatively small, so the per day isn’t too bad, considering I’m getting an education out of it. But it’s easy to see how larger balances will really tip the scale in the other direction. If I graduate with a $60,000 debt, the per day jumps to roughly $12. Crazy!

Unless my understanding of math and how interest is charged is wrong, which it probably is, this calculation works for other (all?) types of debt too. So let’s add it all up people!!! Don’t try and get sneaky and forget any types of debt either:

• Student loans
• Car payment
• Mortgage
• Rent to own shenanigans
• Credit cards

How much are you charged per day in interest? How does that # make you feel?

While I think I do a an overall bang up job of managing my money and whatnot, it’s nice to know that other people think so too. More specifically, I’m talking about credit scores. Credit scores are like opinions – most people have ‘em and some of ‘em really blow. Love it or hate it, credit scores are used to sum up our financial lives into one compact little number.

I’ve been keeping tabs on my credit score since the fall just for kicks. (To do list: get a hobby). I’ve been using the website www.creditkarma.com. It’s free and legit. They pull my TransUnion (1 of the 3 credit bureaus) credit score and let me know how it stacks up against everybody else. As of today, my score is a respectable 704. The worst score is 300 and the max is 850.

While my score is relatively awesome now, that wasn’t the case last year. Just back in October, it was a mediocre 637. Here you can see how fast it rose. That’s a 67 point increase for the math challenged.

SEXY!

As awesome as Credit Karma is, the TransRisk score they provide is not necessarily the same as my FICO score. FICO stands for the Fair Isaac Corporation. They are the king of credit scoring and what they say matters most. I decided I should find out my official score, in case Credit Karma was lying to me or something. It was even better than I thought:

awwww yeaaahhhh

731! Now that’s what I’m talking about. At this point, my score has no where else to go but up. My credit card accounts and student loan will continue to “age” which should tack on more and more points as time goes on. Plus I’ll be able to get credit line increases, which will also make my score climb.

Have you checked your credit score? What is it?

According to a new study by CardHub, the decrease in consumer credit debt has nothing to do with people actually paying down their balances. Instead, the decrease is the result of customers defaulting and banks writing off debt. According to Federal Reserve data, 75 billion dollars of debt was charged off by banks, yet total credit card debt only decreased by 66.9 billion compared to 2009.

Now that the economy is slowly improving, I suspect we’ll see more and more people return to using their credit cards. With that comes larger balances. One thing the article didn’t make clear was whether this debt is being carried month after month or simply the total balance owed to banks at a certain point in time. I usually owe $200-500 a month, but I wouldn’t call it debt since I never pay interest and have that much in my checking/savings accounts at any given moment. Would my “debt” be included?

When the economy went south, people who had the cash available but still carried a balance probably paid off their debts. Now I’m guessing that those same people (assuming they have jobs) are resuming their previous spending habits and not worrying about a bit of interest. Of course, plenty of other people have sworn off credit cards for good. I’ve heard from plenty of customers at work that they’ve got their balances paid off and aren’t touching their cards for a long time.

What do you think of this study? Agree/Disagree? Any other theories on consumer debt?

I received this email from a reader and though we could help him out:

I’m a senior in high school and have been accepted to numerous universities. Some are public, a few are private. Most are in my home state, but a couple are out of state. I’ll be financing college mainly with student loans and working part-time. Scholarships should also help out a little, but I’ll still most likely graduate with student loan debt. My question is basically this: How much student loan debt is “OK”? Is there a certain amount that’s just too much?

Thanks,

David

This is a great question. More and more people are heading to college to get a degree, but some are taking out a LOT of debt in order to make it happen.

The rule of thumb I’ve seen mentioned in numerous places is to not borrow more than what you can expect to make your first year out of school. In my case, as finance/accounting major, I estimate I’ll start at anywhere from $40,000 to $60,000. So if we go by the rule of thumb, I should limit my debt to $50,000. A good way to estimate your future salary is to do a simple Google search for “average MAJOR HERE salary” or “starting salary for MAJOR HERE”.

This is why your major is really important. Some majors simply pay better than others. Liberal arts majors simply don’t pay, on average, as much as other majors like finance or engineering. That means I would never encourage an art history major to pay $100,000+ for a degree. If they used a Parent PLUS loan to pay for that, their monthly payment would be $1,208. That’s a huge liability when you’re fresh out of college.

Some fields get some leeway though. Doctors routinely graduate medical school with $120,000 in debt, sometimes much more. This is balanced with the fact that their earning potential skyrockets just a few years out of school. When you make $200,000 a year, you can much easily afford to pay $2,000 or $3,000 a month towards loans.

I like the annual salary rule, although I wouldn’t freak out if you go over it, either. I would be uncomfortable if I owned much more than $60,000 right out of school (this is including my study abroad costs). Anything approaching 6 figures for a bachelor’s degree and I think you need to re-evaluate your choice of school. This might mean staying in state or choosing public over private.

Hope this helps, David!

Readers: How much debt do you think is too much? How much did you graduate, if any?

Once of the first things I discovered when I started reading personal finance blogs was the credit card balance transfer. If you have a huge balance on a crappy 20% interest rate card, you can transfer that balance to another card with an introductory rate of 0% for a certain number of months – usually 6-12. You can pay down your debt quicker this way and save a crap load of interest in the process.

Then there are people, who are extremely creative and awesome, that borrow against their credit line using balance transfers and stick the cash in a savings account, pocketing the interest they earn. This was an easy way to earn some extra cash when online savings accounts were paying upwards of 4%. Unfortunately, those days appeared to be over. As the economy got worse and worse, balance transfer offers dried up and savings account rates dropped like crazy.

I was checking out The Digerati Life and I had to do a double take when the page loaded because I saw “24 Month 0% Balance Transfer”. 2 years is practically unheard of, or at least I can’t recall seeing any in the past few years.

This got me thinking – would it be possible to save on some student loan interest using a balance transfer? Here’s how I see it going down:

• Apply for a balance transfer card, one that will let you write a check to yourself
• Use that money to pay off any existing student loans
• Pay no student loan or credit card interest
• Profit!!!

As with any plan this brilliant, there are a few problems:

1. You need a credit card with a higher limit than what most college students can get. That means…asking your parents to participate in this scheme. Not gonna happen for me.

2. You’re trading 4 years of no payments (but interest is adding up!) for monthly minimum payments. Discover isn’t going to let you defer your credit card balance for 4 years like student loan lenders will. If your card wants a 3% monthly minimum and you’ve borrowed $5,000, you better have $150 available every month.

3. You’re not in full control. Paying off a high balance in 2 years wouldn’t be possible for most people. That means you’d need another balance transfer card. But what if the banks stop providing them? You’re screwed!

4. Complications. Make a late payment? You just lost your intro period and now your balance is growing like gang busters every month thanks to penalty interest rates.

While I can’t take advantage of this yet, I think it could work once my student loans enter repayment. During college, it would simply be too hard to come up with the monthly minimums, not to mention trying to get my parents to sign on. After graduation though, I think I could swing it. My credit limits should be much higher than they are today and more balance transfer offers should appear as the economy strengthens. I’d have to be making sizable student loan payments anyway, so I could easily send some of that cash to my credit card company instead.

Check out this scary/interesting reminder that appeared on my latest credit card statement:

According to this, I could spend the next 7 years of my life paying for what I spent in December. Crazy. My December spending was high compared to most months, thanks to Christmas and a last minute battery change for my car. Which brings up another point: Who knew how expensive batteries were? That block of acid cost me $130.

Back to the point, $500 in monthly expenses isn’t even outrageous. For me it is, but I’m a semi-broke college student and last month was an outlier (math terminology FTW). In a few more years, I’ll be putting $500+ on my credit card every single month without blinking an eye. That will be the new normal.

What’s outrageous is taking 7 years to pay off a credit card bill! Take a look at that minimum payment. $10. That seems low doesn’t it? I borrowed $500 from Chase and they only want $10 back? That’s 2% of my total balance. Although my interest rate isn’t pictured, it’s currently 18.24% variable. That means Chase can change my interest on new purchases to whatever they want, as long as they give me 15 days notice.

For comparison, I’ll have 10 years to pay back my student loans. Debt that took me 4 years to accumulate. I can stretch that out to 25 years if I need to. Yet Chase is willing to give me 84 months to repay 1 month’s worth of expenses.

Minimum payments + High interest = Not Cool