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Michelle Singletary
Thursday, November 11, 2010; 12:00 PM

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Michelle Singletary:

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student loan repayment: Hi Michelle, Thanks for the article on student loans. I've been very diligent with my student loans and have had several years of perfect payback. I've got approx. $50k out. $12k from undergrad (interest rate at 2.8%) and the rest at 6.8% from grad school. I'm on the ten year fixed rate plan, but am struggling to make the payments. It's doable, for sure, but my overall savings has been put on a backburner thanks to the $560 monthly dues. Now my question - I've just heard from my agency that they are going to put $8500 (approx. $5k after taxes) toward my loan this year. This is a yearly program and ostensibly I could be having this once a year contribution of a similar amount for as long as I'm with the agency. Would it be appropriate to stretch out my loan schedule to 25 years or something to make the most of this? I think I could switch it back at any point and this would really help me save for a house, car, etc. Part of me wants to get rid of this loan as quickly as possible, but I'm only making about $50k a year and it is really tough right now.

Sarah Halzack: Today's Color of Money: Student Loans 101

Michelle Singletary: I don't see the problem in stretching out the loan payments IF --and that's a big IF -- you continue to aggressively pay it off with the help of your employer.But there may be months where you need some breathing room. I understand that.However, keep thinking you want to make this a 10-year payoff even if you get the extra time.

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Dupont Circle, D.C.: I think the story about the couple who gave away their lottery winnings is adorable but...why weren't they funneling the money they were spending on lottery tickets into the things they found valuable to begin with? They could've wasted thousands over their lifetime!

Michelle Singletary: Well, we really don't know if they were alway buying lottery tickets. Maybe they only spent a few bucks every once in awhile. Given their fugual lifestyle doesn't seem like they were throwing tons of money playing the lottery.But your point is well taken for others who do that.Still, let's not miss the testimony in this story. They won and gave it to people who needed it more!

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Deficit commission: I'd be interested in hearing your thoughts about the draft deficit commission report. I hope that the size and scope of the recommendations will at least wake people up to the seriousness of our national fiscal problems. While my family would be negatively impacted by several of the suggestions in the shorter run, in the longer run I think we -- both my family and my country -- would benefit from the stability brought by the changes.

Sarah Halzack: More from the Post of the deficit commission's report

Michelle Singletary: I haven't had a chance to read the report but it's on my schedule for the weekend.From the Post news stories sounds like some pretty tough recommendations such as eliminating or rolling back the home mortgage deduction.But I agree with you, in the long run some of the recommendations may be needed to stablize the federal budget. others have read the report e-mail me with your thoughts (colorofmoney@washpost.com)

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Student Loans: Michelle, I know how you feel about student loans, but...I begin a second degree program next summer. By living with a family member for a while, I was able to save enough for living expenses for the two years, plus a little emergency fund. I will need to take out student loans for tuition, books, fees and supplies. I'm recently unemployed (not a surprise) and it's great timing to go back to school. I planned for the unemployment as well, saving enough to live on and make COBRA payments for the next five months, COBRA and freelancing here and there. The first time around, my parents took out a PLUS loan for school, but I made the payments and paid the loan off five years ago. Will I qualify for a private loan to bridge the gap between my federal aid if I'm not currently working, or do I need a cosigner? I own my car, have a 401(k), my savings and some small stocks. My credit is great. I do NOT want my parents to cosign anything, but I'll be unemployed when applying and do not own a home.

Michelle Singletary: It's wonderful you are trying to better yourself by going back to school. And it definitely sounds like you have been saving and being a good steward.But for me, I still wouldn't take on the debt. I would work and save some more. The job market is just so unsteady. What if you get all this debt and then still can't find a job or a job that pays enough to cover your expenses and the student loans?Having said that, if you still feel it's necessary I would only borrow the absolute least amount needed. I imagine you probably still would qualify for a private loan. But as you said don't drag your parents back into with co-signing. That I agree with.

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IBR and future implications for credit: Hi Michelle - Read your fabulous column regularly. My daughter is paying $120 per month toward her $120K student loan as part of the IBR program. As you know, in this program the interest is capitalized which grows the principal rapidly. When she wants to purchase a home in the future, will this be difficult due to what will be a sizable student loan, even though her public service job will allow it to be forgiven after 120 payments? Mary

Michelle Singletary: I understand her problem. Hear about it all the time. I were her I would work hard to get to the point where I could make more than $120 payments. The sooner she gets rid of that debt the better. Although IBR forgives after 25 years, I wouldn't want that burden hanging around my neck for that long.So she should use IBR now while her pay is low but as soon as she's in the position to pay more, pay more.

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Paying off Debt : Hi Michelle,I read your column faithfully and follow most of your advice. Here is my question, I received about $5K back in state/federal refunds in October and decided to pay off my car a year early. This way I was able to free up $400 a month to apply to other debt. My thought is to proceed with the debt snowball by applying that $400 to other bills - is that the right solution or should I try to save a portion of it? I'm so excited about paying down debt that I just want to get rid of it and not save. By the way, I also paid off 5 smaller credit card bills.

Michelle Singletary: The way I recommend people attack debt is the snowball, focusing on one debt at a time while making the minimum payments on the others. Start with the debt with the lowest balance. Throw all the extra money at the debt at the top of the list and then, as I said, make the minimum payments on the rest. BUT, I would be sure to hold back some of the money in the debt payment plan to build up some cash savings. It might not be the three to six months, but something. Otherwise if you don't have any savings and something happens-- the car breaks down -- you end up putting the repairs on credit.

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High School Seniors and College Graduates Conversation needed: Finally, the costs of college and college debt has caught everyone's attention. We initially had the conversation with our high school senior about what we can afford to pay - in-state tuition with room and board. We have financed the costs of applications to other out of state (OOS) schools with the understanding that scholarships and grants must cover the gap. Although the feds offer financial aid to middle class families, if you make over x amount of dollars, get ready to pony up your own money. We are not getting ONE PENNY of financial grant money from the fed government. Private colleges may have more scholarships and grants to award, but a $5,000 scholarship may only make a dent in the overall expense. Loans sound okay except when the repayment comes along. A $500 monthly payment may sound ok, but realize that may mean not moving out as fast, keeping the clunkier car, etc. Maybe an in-state school or community college is a better investment of my time and money, long-term. Food for thought.

Michelle Singletary: What you just wrote it a WHOLE meal.I totally agree. It's what I'm planning with my kids. Apply where you want. If you get money -- not loans -- and we can pay without debt, you go. If you don't get money you go in-state.I've just seen and heard too many stories of people going broke trying to go to a certain school. I don't want that for my kids.

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Home mortgage rebate credit cards: Hi -- A friend of mine told me about her credit card that accumulates cash-back rewards which are then (at end of year) applied to your mortgage as an extra payment. The card she has, Citi Home Rebate Platinum Select Card, seems to be discontinued -- but is there anything similar out there? We just bought our first house & I would MUCH rather pay down my mortgage than accumulate airline miles that I never get to use. Thanks!

Michelle Singletary: You don't need a credit card to pay down your mortgage.Just make one extra payment a year and you can knock off several years from your mortgage. Watch, if you can, the video I just recorded. I profiled a woman who paid off $100,000 and became debt free in four years. Now granted she was single with no kids and making good money but the point is she did it without spending to get money back.Reward credit cards work when you SPEND money. So really you aren't getting a great deal. Unless all the spendin is stuff you need --- groceries, etc. you are buying stuff or eating out, etc.Don't spend and instead take the money you would have put on credit and put it towards your mortgage.

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Paying down bills: We owe $60,000 on a 15-year mortgage with 8 years left at 6.83% and $24,000 on a flex rate home equity line ( 3.5% currently) We plan on moving and retiring in 3 years. Which should we pay down first, or should we just save as much as possible?

Michelle Singletary: If you think you can sell the house to cover what you owe, I would just make payments as planned since you are moving in a few years. So save.

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Student Loan Extortion: I was looking at my girlfriend's private student loan (she just graduated and will start paying it off soon). It is a private college loan. It has a whopping 10.25 interest rate. Please explain to me, as this loan can't be defaulted upon (making it the SAFEST investment), how it has such a high rate in this lending environment? Is there any way to refinance to a rate that is more in line with today's rates?

Michelle Singletary: How can they charge her 10.25 percent?Because they can.Because she let them.Some people refinance their homes and take out extra cash and pay off this type of loan. But can she refinance that loan on it's own for a lower rate?Sorry, haven't seen anyone who could.

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Lowest balance vs highest interest rate?: Hmm...you said "Start with the debt with the lowest balance." I have always heard that you should pay of the debt with the highest interest rate first as the compounding interest minimizes the amount of of principal that you are paying off at a given time. Why do you suggest the lowest balance first?

Michelle Singletary: I say tghat because in my experience working with dozens and dozens of people in debt, they need to see progress in paying off debt soon. So you attack the little debts, clean them out. Then people get charged up and often speed off the payoff on the other debts.Consumer Reports not long ago looked at both methods (lowest balance vs. highest interest rate) and found there wasn't much difference in the interest saved. Why? Because if you become very motivated to pay off debt using my recommendation, you also pay off the debt sooner meaning less interest anyway.This is all about a mind game. I do what I can to help people stay on track in terms of paying off their debt. If they can quickly pay off debts taking them off their list, they feel a sense of pride and stick with the debt payoff.

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529 leftovers: My son will be graduating with $10,000 leftover in his 529 funds; he also has Stafford student loans of $15,000. After graduation, his monthly student loans payment would be $170, which is not bad. Should he take out the 529 leftovers to pay down his student loans, or should he keep the leftovers in the 529 program as his emergency fund?

Michelle Singletary: I'm confused. Why does he have loans if he had money in a 529 plan?Why borrow when you had the money?Oh well, I would pay off the debt.

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Rent vs. buy: Michelle, our family has been renting a house and we want to move when the lease is up in spring. However, there's a very good chance I'll have a new job and we will move out of state. It obviously doesn't make sense to rent in this environment. But what about when we move? We will have enough saved for a down payment, I think, but does it make sense to continue to rent, or take the plunge and buy in our prospective new location (likely CT, which is even pricier than MD)? Our concern is that we have already been renting for several years and have passed up the chance to rebuild equity (and take advantage of the down market). On the other hand, if we rent we might be able to continue to build up savings, and we remain flexible. At the same time if we move we will want to stay put for a while and not disrupt kids again. I feel pretty confused.

Michelle Singletary: In this crazy housing market, I would rent until you know for sure where you are going to live long-term.What if you buy now and can't sell when you need to. What if you can't sell for what you paid for the house?When you rent you aren't wasting money. You are providing a roof over your family's head.Rent until you get settled. And save as much as you can until you know where you might live long term.

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Reward Credit Cards: I have a reward credit card through Capital One. As much of our necessary (and I mean only necessary) spending goes onto that card. The rewards - 1% on most things and 2% on groceries and gas with no limits - are a nice bonus that you can get in check form or applied to your bill. Since I always pay my card off, it's useful. Discover cards are well known for giving rewards as well. Just make sure to read the fine print (annual fees would take away all those rewards) and pay in full. Then you can apply that cash check to whatever debt you need to pay down, which is hopefully not much, or feed it back into your purchase of things you need or savings.

Michelle Singletary: I just caution people about reward cards because studies show that when you use plastic -credit or debit -- you spend more than if you paid with cash. This includes in the grocery store. So if you are spending more a 1 or 2 percent cash back isn't really a deal.

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No home mortgage reduction: I currently rent, so why not keep renting and not have to be responsible for repairs and whatnot? I realize this is a hypothetical and hopefully not a stupid question, but I hope you could clear this up.

Michelle Singletary: I understand your point. But many, many people don't even use the mortgage deduction because they just take the standard deduction for tax purposes. And they still buy homes.

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Financial planners: Michelle, please help. I'd like to talk to my parents over Thanksgiving about getting a fee-based financial planner. They're in a tough spot -- need to sell their house quickly, have spent 401k money to pay the mortgage, worried about retirement funds. I want to get someone who can help them assess their options and come up with a reasonable plan. It needs to be someone who will work with people with not a lot of money. I've been to the napfa website, but I'm not sure which specializations to look for (retirement planning doesn't seem right -- too late to really plan). I want to make sure to ask the right questions, so I can find the right person to help them. Also, I'd like to offer to pay; do you know how many visits are typically needed? Thanks!

Michelle Singletary: Sounds like your parents need a credit/debt counselor not a financial planner. Go to www.debtadvice.org to find a consumer credit counsleing non-profit near them. That will help with the budgeting issues.

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Re: Home mortgage rebate credit cards: But her question was, do you know of a credit card that offers that option. If she's spending on her credit card anyway, why not have those "points" go towards mortgage? She could also pay an extra month each year, but this would be in addition.

Michelle Singletary: I know what her question was and I answered it the way I wanted to.Thought I made my point pretty clear. I'm not going to advise people to spend on credit to get money back. As I've said over and over again, studies show people -- even people who are good with their money -- SPEND more when they use plastic. So spending on your credit card anyway still means for many spending more than if you didn't use the plastic.But if you insist. No I don't know of any such card.

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Color of Money Challenge: Michelle: I was heartsick to read about two of the women you had profiled in the latest Challenge. Does Ms. Brown have any legal recourse with Hair Cuttery? Is there anything your readers can do to help her (and any other women trying to make a go of it when released from prison)? I'm not a religious person, but I was so upset that "do unto others" seems to mean that Hair Cuttery execs would like to be fired while struggling to make ends meet.

Sarah Halzack: Sunday's column: Color of Money Challenge

Michelle Singletary: I believe Kelly is exploring her legal options. And a number of organizations have reached out to her.It's a sad situation. But Kelly is not alone. There are many, many ex-offenders having trouble finding work because of their past. Certainly people should be punished for their criminal activity but what happens when they get out? If they are to succeed and become productive members of society somebody has to give them a chance at employment.

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Mortgage deduction: Oops, I meant deduction, not reduction. And, I wasn't trying to make a point, but I suppose you answered my question anyways, so thank you.

Michelle Singletary: You are welcome. And really it's a discussion we should be having.

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Even without the mortgage reduction: ...there are financial advantages. First, for similar type payments, you gain equity in a home. When you rent, the money is gone. When you own, only some of the money is gone. When it is time to sell and you can get at least as much as you paid, then you will have earned equity that will come back to you. Additionally, your home can be a source of emergency funds as collateral. If you find an emergency, then you can often take out a second mortgage or home equity loan for emergencies. You have no such collateral if you rent. Rent vs. own is a decision each individual has to make, but there are financial benefits beyond the tax incentives.

Michelle Singletary: Thanks. Good points.

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new credit card: Hi Michelle, love your chats! I just applied for a new credit card because the only one I had open was the one my parents got for me in college 4 years ago so I could buy books, etc., and they'd pay the bill. It's been mine for the past 2 years after college and I currently have a balance of $3k on it (mostly due to some large purchases when I moved out that I plan to be able to pay off when I get my year end bonus.) The CC is a card that earns airline miles, but my dad said I'll never spend enough to earn substantial miles, so I decided to open a new card with a much lower interest rate as opposed to any rewards. It has 0% APR until 2011 on all purchases and transfers, but a 3% transfer fee. I think it makes sense to close the first card, transfer the balance and pay the fee. The first card also has an annual fee of $60 and the new card has no annual fee. Transferring the balance and canceling the initial card makes sense right? Thanks!

Michelle Singletary: You have to do the math. What's the transfer fee?Will you end up paying more with that fee even at zero percent interest?But if the math works out, then I would take advantage of the zero interest and pay off the $3,000 over the next year.Then only charge what you can pay off EVERY month.

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Boston, MA: Thank you so much for your article. Everything you said is true. Student loan companies want to work with you. Call them and they are more than happy to provide you with options. It is your responsibility to pay off the loans. Trying to avoid it won't work. And if you haven't consolidated your loans, definitely do this.

Sarah Halzack: Today's Column: Simple rules for managing student loans

Michelle Singletary: Thanks. I do think people get so overwhelmed with how much student loan debt they owe that they do stick their heads in the sand.But the debt won't go away. So best to figure out the best way to pay it back and quickly.

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Pay extra each month: Since I bought my first house almost 20 years ago, I have always paid more than the monthly mortgage. In lean months, I "round up" to the nearest hundred dollars, so sometimes it is as little as $10-50 extra. When I have better moments, I will round up more. Right now, I round up to the nearest $1000 which means that I put about $500 extra per month towards principal. As I regularly watch my amortization, my payoff date for my 30-year mortgage is anywhere from 21-24 years. And even though my house has lost a lot of equity, this helps me stay a little ahead of the game so that if I needed to sell my home at a loss, I could still come to the table without cash. I think people need to rethink their spending habits sometimes and pay a little more on the mortgage rather than complaining about being underwater and complaining when the bank won't approve their short sale.

Michelle Singletary: The moral of your story, if I may, is live below your means and work hard to become debt-free! or do it all. That's the point I make.

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Buying a house without deduction: I just finished a financial planning seminar sponsored by my employer. The planner said one of the biggest predictors of a secure retirement is owning a home with no outstanding mortgage. Remember when you buy a home, you eventually will have a place to live in rent free when the mortgage is paid off.

Michelle Singletary: Amen to that!

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Michelle Singletary: Well, times up.Thank you so much for participating in the chat. Love it when you guys get fiesty!I say that to say, we may disagree, but it's imporant to have these discussions, even if you disagree with me. We watch and listen to so much junk but how much better off so many people would be if more of our conversations were about money or debt or when's the best time to buy a home?Stay financially safe!


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