Here I go with another controversial topic guaranteed to result in flaming comments. My flame retardant suit is donned, so here I go.

One of the goals of Occupy Wall Street is to forgive all outstanding student loan debt under the premise that it would inject money into the economy by helping the real people, rather than banks and corporations that received bailout funds.

TARP Funds Were Repaid
So let’s start with the basic premise: banks and corporations got free money, so we should, too. First, the TARP funds were loans. The money has largely been repaid. Corporations that received money, like GM and AIG, granted the US stock in exchange. The US will get the money back when it sells the stock. It’s not a loss. Forgiving student loan debt would result in a net loss.

Student Loans Are Unfair
I will grant this argument. As I stated in an earlier post, college costs are wildly out of sync with future incomes, and the system needs to be fixed. But simply forgiving all student debt won’t change the system, because the people repaying loans have already finished school. Those costs have already been paid. You have to fix the system by changing the way student loans are issued. Colleges can raise costs as much as they want because student loan issuers know that loans can never be discharged in bankruptcy. They have no incentive to deny a loan.

Restore the ability to discharge student loans in bankruptcy (this didn’t happen as often as student loan lobbyists claimed) and there will be instant pressure to reduce college costs because loan limits will be enforced.

In addition, Congress mandated ridiculously high interest rates, especially compared to today’s low interest rates. Student loan rates should be re-pegged to current interest rates like they used to be. That would instantly alleviate some of the burden. By allowing anyone who hasn’t consolidated their loans to do so at 1 or 2% interest would be a boon and restore fairness to a system that Congress made unfair.

Forgiving Student Loans Will Result in Spending Increases
How is that exactly? Will I suddenly go on a shopping spree because I have $1200 extra dollars a month? No, that money would go into our retirement fund along with our other excess income. The most recent college grads probably won’t increase their spending either. They’ll probably just reduce the amount of credit card debt they accrue because they’re unemployed or their first jobs don’t cover the cost of other living expenses.

Student Loans Are Predatory
Yes, this is true, but here’s the thing: no one is required to get a student loan. If you don’t want student loan debt, do three things: 1. Go to a cheaper school. Spend two years at a community college and live at home to save on rent. 2. Work during the summer, after class, or take a year off to work and save up the money for college. 3. Keep your grades up and apply for scholarships or grants.

Should All Taxpayers Pay for Your Student Loans?
At this point, all federally subsidized and unsubsidized student loans are owned by the government. Once Congress removed the fees provided to banks to carry these loans, the loans were sold back to the government. I recently received a notice that my loans had been sold to Sallie Mae. My husband’s were sold as well. He may have a small private loan outstanding still, but all the rest are owned by the government. So, for the most part, it would just take a few keystrokes to wipe out student debt.

But, the money is used to issue additional student loans to new students. Are we also going to make college free for current and future students, or does this immediate student loan forgiveness only apply to past students?

Part of me would love to have my student debt and my husband’s student debt forgiven. We’d be able to put the money into our retirement funds. But I still don’t think it’s fair. I knew what I was doing when I took out my loans. I don’t deserve to have them forgiven just because the economy is bad. What will people do during the next deep recession? Forgive all mortgages? Forgive whatever bill someone has that they don’t want to pay?

 

I saw this post about a guy arguing  with a zombie debt collector on Consumerist, and I think it’s time to remind you what Zombie debt is.  It doesn’t mean the collector is a zombie (although you might feel that way!) It means that the debt is expired or charged off and has risen again from the dead. Unscrupulous debt collectors will try to get you to pay, even though you don’t owe.

When Does Debt Expire?
It varies by state, but most states expire debts after six years. Some debts can last for fifteen years. After that, you are no longer legally responsible for the debt. Some people would argue that you’re morally responsible, but legal and moral are two different things! Personally, I wouldn’t pay it because the money doesn’t go to the company you originally owed. It goes only to the collector, and helps them stay in business so they can harass other people.

What Happens After Debt Expires?
The statute of limitations means that collectors and creditors can no longer sue you to repay the debt once it has expired. They can threaten to, but they can’t actually do it. If they did, the court would see that the statute of limitations has been exceeded and rule in your favor.

Can They Report It to the Credit Bureaus?
Typically, no. Defaulted debt can only stay on your credit report for seven years from the date of default. By the time a zombie debt collector gets ahold of it, the debt is usually older than that. A crafty collector may “update” it in order to add it to your report. If that happens, dispute the debt with the credit bureau. They will ask the collector to validate the debt, which the collected typically can’t do, and it will be removed.

How Should You Respond to a Zombie Debt Collector?
As amusing as the call I’m linking to is, don’t engage the collector by phone. Send a letter demanding verification of the debt. Don’t acknowledge the debt in your letter. Tell them to cease contact with you, as well. Legally, they must comply. Typically, they won’t comply. If they continue to contact you, report them to the FTC and your state Attorney General for violating the Fair Debt Collection Practices Act. CC the collector on those letters. You can also sue them in small claims court for violation of the act.

What Is a Debt Validation
The woman on the linked call asserts that the validation is the fact that he paid on the debt for two years and then stopped. That’s not validation! Validation should be an account statement, at a minimum. It should also include something indicating that the creditor has assigned or sold the debt to the collector. It should also detail the original debt vs. additional fees and interest added by the collection agency.

If a collection agency tries to collect an expired debt from you, don’t engage them any further beyond your demand for validation and your cease and desist letter. If they escalate the situation by calling you at work, you may need to hire a lawyer to get them to go away.

For most of the summer, I’ve been eagerly following the story of Diana Nyad as she strives to achieve the goal she first conceived of over 30 years ago. It’s definitely been a struggle, and at this point, she may not achieve the goal this year, but we can learn a lot from her.

Have a Big Goal
Diana’s goal is to swim 103 miles from Cuba to Key West in open water. No shark cage, no wet suit. She’s doing this at the age of 60, after having failed to complete the goal 1978. It’s not an easy goal, but that’s the point. Having a big goal, whether it’s a record-breaking swim or paying off all your debt, gives you something to strive toward. A focus.

Be Prepared for Setbacks
Prior to deciding to attempt this swim at the age of 60, Diana hadn’t set swum a stroke in over thirty years. She was burned out. But then, with that milestone looming, she realized she was in the best shape of her life and now was the time to try.

Of course, there are many challenges. First, the money. This outlandish swim requires a lot of training, an extensive crew, and assistance from experts. She’s been raising money for this dream from the beginning. Second, the logistics. The biggest challenge there was getting the necessary permissions from Cuba and the U.S. Even with the help of the Secretary of State, that took longer than it should have. The last challenge is the weather – she missed a key window in July and August because of the visa issue. Now she has to outwait hurricane season.

We’ve all been through similar, if smaller, experiences. My husband and I were starting to build our nest egg back up when he had to have surgery. We made it through that struggle and now we’re back on track again. Life slowed us down, but it didn’t stop us.

Never Give Up
Diana hasn’t given up on her dream, even as the window of possibility shrinks. She keeps training and preparing for this swim. And that’s the key – even when all seemed lost, she found the focus to keep going. It will be the same with your goal. Emergencies will come up or life will get in the way. Once you deal with that, reclaim your focus on your goal and you’ll quickly catch up to where you were.

Create Steps Toward Your Goal
Diana didn’t just decide to do this on day one and then jump in the ocean on day two. It took time. She had a plan. First, she had to start training again. Then she had to gather her experts and crew. Then she had to start raising funds. Then she had to apply for the necessary visas. Then she had to start training with her crew. First, there was a 24-hour swim as a test and several other long test swims. All of that will make this possible.

You have to do the same for your goals. Don’t just say, “This is my goal” and hope you’ll figure out how to get there. Make a plan. Write it down, step by step, and establish deadlines for those steps. Then hold yourself to the steps.

I hope you’ll follow Diana Nyad’s dream, too. It’s truly inspiring.

In addition to some people opting to walk away from their mortgages, the temptation to default on student loans is growing. Unfortunately, defaulting on student loans can have even worse consequences than defaulting on a mortgage. So, let’s go over what will happen if you default, and options for avoiding default.

What Qualifies as Default?
The government gives you many chances to keep up on your student loans. You only enter default if you fail to make any payments or repayment arrangements for 9-12 months.

What Happens If You Default?
Unlike some types of debt that will eventually become stale if you just ignore them, federally-subsidized student loans will follow you for the rest of your life. As long as you’re in default, you will not be able to qualify for a mortgage or any other type of loan, including future student loans. You may be turned down for jobs because it will appear on your credit report. The government or your lender also has the option of garnishing your wages or tax refunds in order to be repaid.

Can You Negotiate a Lower Payment When It Goes to Collection?
Student loans are not like any other kind of debt. Once it enters collection, the costs only increase. You will not be able to negotiate a lower pay-off balance. In fact, you will be responsible for all of the collection costs as well as penalties. Depending on the type of loan, you will owe an additional 25%-40% of the balance. The financial aid website explains more about the collection costs.

Can Student Loans Be Discharged in Bankruptcy?
In very, very, very, very rare cases, you can have your student loans discharged in bankruptcy court. Unfortunately, you have to prove that there is no way you can ever repay your debt, which typically requires that you be severely disabled.

Can You Apply for Loan Forgiveness?
Direct federal loans may be forgiven after 10 years of public service. Only certain jobs qualify and you have to make 120 payments after 1997 to qualify, but if you’re interested in that route, visit FinAid to learn more.

Are There Alternatives to Defaulting on Student Loans?
Fortunately, your lender has many options to avoid defaulting on your loans. Your first option is deferral. Your loan can be deferred for a specific period of time. If you’re returning to school, some loans won’t accrue interest while you’re in school. Other loans will accrue interest, but you won’t be required to make payments. Members of the military on active duty are eligible for special deferrals. Financial hardship deferrals are also available. If your situation is so severe that a deferral isn’t sufficient, lenders also offer forbearances. Interest accrues during a forbearance and you are responsible for paying it, but you won‘t be responsible for the full payment amount until the end of the forbearance. Some types of forbearance simply reduce your payments while others suspend them. Your lender will review your finances to determine the most appropriate option for you.

If you’re at risk for default, the first thing you need to do is contact the lender or consolidator who currently holds your loans to discuss your options. They will help you apply for a deferral, a forbearance, or a new repayment plan. Don’t risk your financial future by defaulting on your student loans – it will only make things worse.

A couple months ago I blogged that my husband and I are saving nearly 25% of our income every month, and have been doing so for several months. We were able to reach that rather astounding figure because we significantly paid down our debt and spend carefully.Then something even more astounding happened. Yesterday I asked my husband how much we’d be putting aside this month. He tossed out a figure that equates of 53% of our take-home pay for the month. 53%!

How We Saved 53% This Month
Honestly, I’m still figuring it out. We aren’t living like misers. We went out to dinner just last weekend, we order out a few times a month, we saw Star Trek (with coupons). I also did some stocking up at Target and CVS. So what happened?

I can point to one deferred expense: our auto insurance renewal. Worried that the payment would be late, we put it on one of our credit cards rather than risk the combination of the postal service and the insurance company’s ridiculously slow processing time. (It’s the one bill we don’t pay through online bill pay because after all this time, they STILL haven’t figured out how to process the payments efficiently.)

Still, even if we had written a check for the insurance, we’d be setting aside 40% of our income this month.

How did we do it?
We didn’t get raises this month. We didn’t receive windfalls. Our credit card bills were typical, maybe $100-200 less than usual, but certainly not 25% of our income lower. We haven’t paid off any student loans in full. We could, but we’re trying to add as much as possible to our down payment/moving fund.

Is It a Result of Changing Attitudes?
As I write this, I still don’t know how we did it. It could just be luck. It could be falling interest rates automatically reducing his student loan payments. It could be both us unconsciously spending less. It could be a reduction in grocery costs. (That seems unlikely. It’s summer fruit season, which means I’m going overboard at the farmer’s market.) Gas prices are rising, not falling, so it can’t be that.

It may simply be that we’re both getting such a good feeling from saving so much money that we’re unconsciously looking for ways to save more and are therefore reducing our expenses without trying.

Next month we’ll probably only save 25-30% of our income because we’ll have to pay the credit card with the auto insurance bill on it. I don’t expect we’ll be able to continue the 50% success every month. Once we buy a house, we’ll be back to 15-20%. Our target for post-home purchase, post-car purchase is 10-15% of savings, outside of the money we set aside for irregular expenses. Then as our income increases, so will our savings goals until we’re back to 50% again.

How You Can Do It
You don’t have to live hand-to-mouth. It just takes dedication to saving. A commitment to prioritizing your savings every month. If you can, budget to save a set amount each month before you start thinking of ways to spend. Our savings is in our budget so we aren’t tempted to spend it on other things. Even if you only save for irregular expenses, you’ll eke out a little interest and discover you can live on less. Once you learn to live on less, push it a little more. Soon you’ll be saving every month without feeling deprived. Trust me – we don’t feel deprived at all.

If you think you can’t do it, remember that just nine months ago, we were putting all of our excess income towards debt payments and saving nothing. Then we paid off a significant chunk and the flip was switched to savings. If you can work your way out of debt, suddenly you’ll be able to save a big chunk of money without trying, too.

As I mentioned the other day, we’re saving about 25% of our monthly take-home. We didn’t start out there, but we’ve come a long way since I started this blog. Back then, we spent every dollar we earned either on debt payments or living expenses. Now we save a substantial portion. As part of financial literacy month,  here’s a look at how we made the switch over the course of a year.

Dedication to Paying off Debt
First, we were both committed to getting rid of our credit card debt and at least two high-rate student loans. We still have sizable student loans, but those will take 30 years to pay off. Instead we focused on what was doable. Our primary goal was to reduce our debt-to-income-ratio so we could buy a house. We managed to take our monthly debt payments from about $2100 to around $1100 a month. A large chunk of that was credit card debt and the two student loans. We’ve also seen reductions due to declining interest rates on auto-debited loans.

Increased Income
We’ve been fortunate to see our income grow substantially in the last year, which also helped. My husband made a job change before I started this blog that saw a 40% increase in salary (he was grossly underpaid before.) We’ve both received sizable raises since, which resulted in a total income jump of about 60% in the last two years. We never would have gotten here without that, and we both worked hard to achieve that.

Financial Windfalls
The $28,000 in windfalls we received really put us over the edge. They allowed us to pay off a substantial portion of our debt. Of course, we also had to pay a third of them in taxes, so we had to dedicate ourselves to saving up money for that. As soon as the debt was gone, the need to pay the IRS really kicked us into saving mode.

Reduced Spending
We haven’t just reduced our spending on debt, however. We’ve also reduced our spending in several other areas, including clothing, auto (thanks to falling gas prices), and groceries. In addition, we eat out less and watch movies at home more often. My husband would probably like to go out more, but we have a backlog of 200 movies on our Blockbuster queue and the tyranny of the list, as we call it, keeps us home.

A Clear Savings Goal
We both want to save up an emergency fund and agree on the importance of that. We also need to buy me a new car soon. But the thing that really has us saving is the short-term goal of buying a house by the middle of this year. We have a hefty down payment already, but every extra dollar helps with closing costs, upgrades, and moving expenses. I imagine we’ll have a burst of spending after we close on things like paint, carpets, appliances, and flooring, but then we intend to return to our frugal ways to save up for the car down payment.

Communication
All of this boils down to one very important key to saving money: both spouses have to agree to save money. It won’t work if one saves and the other spends it all. It’s important that you sit down and work out your goals together.  Then neither of you will feel like you’re suffering or wonder why the other is so determined to save.

If you do one thing this month, sit down with your spouse (or a piece of paper if you’re single) and create one financial goal that relies on saving money. If you’re out of work, then the goal is clear – stay afloat until you’re employed again. If you have a job, then the goal might be bulking up the emergency fund, but it could also be saving up the cash to buy something that has benefit to you and your family. Once you have a goal, formulate a strategy for getting there.

Once you start saving, it becomes a habit that rewards you every time you look at your fat bank balance. Trust me, it worked for my husband.

As I said last month, was an awesome month for debt reduction. We met our goal two months early, and now we’re pushing on to drive down more debts.

Debt Reduction Progress in October
We reached our primary goal of paying off $38,567 in debt on September 22, then we couldn’t decide what else to do. At this point, our cash cushion has ballooned, although we have to use some of that for taxes. Now that he’s gotten into this whole idea of paying off debt, my husband went ahead and paid another $1,000 toward the small student loan we had slated for an early 2009 pay-off. We’d like to pay it off before we buy a house because it reduces our debt-to-income ratio another $78 a month.

Financial Plan Update
Even without my December paychecks, we’ll be on track to cover the remaining tax balance and our vacation debts. Depending on the final balance of our cash cushion, we may open a savings account or leave it in the checking account as a cushion.

We’ve also decided it’s time to update our annual budget – which is really just a summary of expected monthly costs. But we have a conundrum – how do we calculate the gas costs? We typically average expenses over the last six months, but gas prices have been all over the place the last six months. We could do three months average for gas prices, but which three months? On top of that, we had a lot of travel this summer, some of it driving, so expenses were higher than average anyway. We may just use the summer anyway, because we’d rather over-budget for gas than underestimate the cost.

Progress on Other Goals
Our emergency pad has grown to $6,000 in anticipation of the taxes and vacation.

We’ve discussed the plan to open Roth IRAs in January. We can’t open them now because we’re not sure whether the windfalls have pushed our AGI over the limit for this year. As soon as the IRS releases the draft 1040, I’ll have a better idea of whether we can start funding it for 2008, or designate those payments for 2009.

We’re also arguing about when to buy a house. I’m looking at late summer. My husband is looking at early spring, mostly because he’s sick of listening to me fuss about our blasted kitchen, the horrible stove, the leaking ceiling, and the drumming neighbors.

How’s your debt progress coming? Share your successes and roadblocks in the comments.

We did it! We’ve paid off $37,787 in debt in ten months. As I said last month, August was an awesome month for debt reduction. We eliminated one student loan and cut another one in half. Despite that, we thought we wouldn’t get the balanced paid off before the end of the year. Fortunately, luck was on our side in September.

Debt Reduction Progress in September
Done! On September 22, we paid off a grand total of $37,787 in debt. We were able to do this for two reasons:
1. We spent much less than we budgeted for travel in July and August, which meant we had an extra $1,000 to put towards debt.
2. A windfall came in two months early, which gave us another $2200 to apply to debt. All told, we paid off that last $4500 in student loans, as well as an extra $1,000 toward a small student loan we had scheduled to pay off in 2009.

The Ten Month Debt Plan
In order to achieve this goal, we had to dedicate ourselves to it. At first, my husband was hesitant, but he came on board once he saw the progress we were making. The progress was slow at first, but accelerated as our incomes rose and we received additional windfalls. This is our specific plan of attack:

1. List our debts by type, balance, and interest rate.
2. Rather than highest rate first, we started with credit cards first because student loans affect mortgage applications differently.
3. Next we tackled the medical loan, which appeared on his credit report as a student loan.
4. When those were gone, we moved onto two small, high-rate student loans.
5. To be able to put more money toward debt, we cut some expenses. My husband started taking his lunch to work more. We went out to dinner or the movies only rarely. We cut back the cable bill. I cancelled a couple subscriptions.
6. When the windfalls arrived, we had a plan in place so we weren’t tempted to do something else with the money.
7. We set a date and a number as our goal so we had a firm target, not an amorphous plan of “paying off debt.”

Certainly, we couldn’t have reached this goal unless we knew that at least two of the windfalls would arrive, but we didn’t know exactly how much they would be or when they would arrive. Even without them, we still would have paid off around $17,000 in debt. That’s no small feat indeed.

Debt Plan Update
Now that we’ve accomplished our goal three months ahead of the original schedule, we have to decide how to proceed. First, we’ll pay off the zero interest Goodyear card early to ensure that a shorter term charge doesn’t start collecting interest. Second, we’ll start saving the money toward year-end taxes. We plan to have my salary withheld in December to get ahead on the balance due. We also have to ensure that the money for our January credit card bills is saved up, since our December vacation charges will appear on that statement.

Progress on Other Goals
Our emergency pad has grown to $2,000 in anticipation of the taxes. We could move it into a savings account for two months, but it doesn’t seem worth the effort to earn a buck or two in interest.

Once we know the final total for our tax balance, we’ll then look to contributing to our Roth IRAs. The tentative plan is pay $500 a month toward the small student loan and $500 toward retirement. Any overages will be applied to the small student loan so that it’s eliminated before we apply for a mortgage. Every little bit helps.

The loathing we feel toward our apartment grows with each passing day. This month it experienced a huge surge when our upstairs neighbor got a drum set and formed a band. At this point, I expect that we’ll be leaping into housing market by late spring/early summer if only to save our sanity.

How’s your debt progress coming?

July was a pretty good month. We paid off the medical loan and made an extra payment towards a student loan. This month was even better. Our second windfall arrived and one more student loan is now gone. September is looking very good, too.

Debt Reduction Progress in August
The second windfall arrived about mid-month and then we had to wait ten days for it to clear. (Why do banks still do this? Why?) Once that was done, my husband eagerly set up the transfer to eliminate one student loan entirely. Thanks to other extra payments, the balance was just over $4000. Now it’s $0.00!

Debt Goals for September
In early September, we’ll make a $5,900 payment toward another student loan, which will use up the windfall and leave us with a $4500 balance we can pay off by the end of the year. We also have extra money in our checking account to cover the bills associated with some recent wedding-related travel, but it looks like we spent less than planned, so the leftover will also go toward debt.

Debt Plan Update
With one student loan gone and another cut in half, we’re well on track to reach our original goal by November. Then we’ll turn to taxes. We may withhold my paychecks in Dec. to cover part of the taxes, but we’ll still owe a bundle in April.

Progress on Other Goals
We’re holding steady with our $1,000 emergency pad. Although part of it was used up when I had to buy new tires after getting a flat on the highway. I knew the expense was coming, I just hadn’t planned to buy them on a Tuesday afternoon. Replenishing the funds won’t be a problem, though.

I’m still debating our retirement plan. I’d like to start saving 10% of our income, but since neither of us gets a match, I’m leaning toward Roth IRAs, with the overage going into our 401K plans.

The house plan is still on indefinite hold. If prices come down 15% by spring, we’ll start looking, but our bottom isn’t expected until fall 2009. On the other hand, I loathe our apartment. Every day, my hatred burns a little stronger. I may not last until 2009 in this place. If it comes down to a choice between buying early and murdering my neighbors, I’m sure we’ll go with buying early.

How’s your debt progress coming?

This post is my 203rd post at Sound Money Matters! I passed the 200 mark while I was out of town, so I’m celebrating now, instead.

June wasn’t a great month for debt reduction, but we got back on track in July and are now 60% towards our $35,000 goal. We also received word that our second windfall will arrive within weeks, which will make August a banner month for debt repayment.

Debt Reduction Progress in July
We paid off the last of the medical loan this month with a payment of $762, and also paid an extra $1500 towards the first of three student loans we plan to pay off by next March. In addition, we accidentally paid an extra $325 to our primary credit card. That worked out well, actually, because our late July bill was huge. The overpayment brought it closer to our budgeted payment.

We also contacted the student loan company that we thought was applying our excess payments towards future interest and learned that they can’t do that. It seems that the interest portion was so large, that we were only paying a tiny portion of additional principal with our excess payments. The bills they were sending us were for less than the actual accrued interest.

Debt Goals for August
As soon as we receive our windfall, we’ll pay off one student loan in full and make a sizable payment toward the second one. August will also see another large credit card bill, which we’ll have to pay in full (although it may not be as large as we’d anticipated.)

Debt Plan Update
Once again, my husband plotted out our debt payments for the rest of the year. We’ll easily eliminate two of his student loans by the end of the year. We should also be able to save for the taxes. When my windfalls start arriving, that will go towards the emergency fund, taxes, and his third student loan. It’s possible that we could have made a nice dent in that by the end of the year, too.

Progress on Other Goals
After receiving a raise, I considered boosting my retirement contributions. Unfortunately, my employer doesn’t provide a match. Since I’m not losing any matching funds by contributing less, I opted to maintain them at 3% and put as much money as possible towards the debt. Given the lagging performance of the stock market right now, I’m not really losing any stock gains with this strategy. Come January, I expect we’ll contribute more to our retirement plans.

We’re still undecided about house hunting. Certainly, we’ll wait until we complete this year’s debt plan, and probably until we complete that third student loan. Once all our debts are gone, we’ll have reduced our monthly debt payments from approximately $2500 to roughly $1100. Not bad for 15 months work!

I’ve given up on losing those last three pounds. They’ve set up a nice little house around my hips and my attempts to foreclose on them have not gone well.

How’s your debt progress coming?

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