This newer debt clock hasn’t gotten quite as gigantic as the other one, but it’s more directly troubling for many young Americans.  Currently, $922 billion is owed on student loans. This month, for the first time, more was owed on student loans than credit cards.  That’s a significant and unfortunate milestone.

Laws in 2005 made it more difficult to discharge student loan debt.  Under more and more circumstances, graduates (or non-graduates!) with debts for their educations are stuck.  Even if they fall into tough financial times and need to declare bankruptcy after exhausting all other options, their student loan debts could still be waiting for them after all of that if they couldn’t demonstrate enough financial hardship to satisfy the means tests.

Should you go to college?

After reading the previous paragraphs, is that a loaded question?  Maybe.  It probably should be.  It’s not as easy a question to answer as it was twenty or even ten years ago.  With flagging job prospects accompanying the rising debt loads, a college degree is not only not the slam-dunk it once was, it might just be a technical foul.

If you’re going to need any substantial student loans to fund your education, then a cost-benefit analysis is absolutely essential to avoid saddling yourself with debt that will be difficult to pay back with your post-graduate employment.  Excessive student loan debt could limit your options on the marriage market as well, as it’s something that cannot be wisely ignored.

Here’s a list of pondering points:

• Consider your commitment level. Are you going to college with the intent on graduating, and do you know how to get to that point?  If it’s just to get away from home, and you’re not serious about studying, you’re already in trouble.
• Consider what your major will be. You can major in English if you want, but you’ll need to look at what the expected jobs, salaries, etc., will likely be available for someone with an English major.  What is the starting salary level for someone with your intended major?  (You can check here.)  Can you get these same jobs without a college degree?  If so, why are you wasting four years and going into debt in the five- or low-six figure range?
• Consider what you want to do afterwards. Are you already the successful entrepreneurial business type?  Then you probably would end up behind if you left your income stream to go to college, no?  Keep your momentum.
• Consider whether you want to do an end run. Loopholes are present.  You can get a four-year degree by age 18, without having an Albert Einstein or John Nash cranium.  Here are some useful Evernote presentations by a guy who did it.  (There are links there to how he did it.)  The cost is placing out of a couple of years of your college courses with good grades on CLEP exams and the like, as well as living at home rather than living on campus — that is, not “having the college experience.”  But this costs less than one semester’s worth of college paid the typical way, and you have the paper to get college graduate-level jobs.

Students (and parents):  Give your college payment strategy serious thought, and don’t just listen to the guidance counselor.  Question what you think you know about a college education, because what you don’t know could cost you for the rest of your life.

(Thanks to Prairie Ecothrifter for including this post in the Carnival of Personal Finance!)

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A big part of family finances, of course, centers around debt: credit card debt, car loan debt, student loan debt, and the biggie: mortgage debt.  Mortgages last a long time, and with the easy money policy that began about ten years ago which played a part in driving mortgage rates down to their lowest in over four decades, those mortgages were bigger than ever.

Mortgages are so commonplace that we think of them almost as a mainstay of our financial lives, a class of debt all in themselves.  If we don’t have any other debt, we say with a hint of pride: “We’re debt-free … except for our mortgage.”  (This is the position we’re in.)  Which isn’t really debt-free, but we’re at least hitting a triple and the ball’s almost getting over the back wall, right?

Debt on a primary residence is consumer debt

If our homes are “our biggest investment” then how come so much money goes out the door each month in support of this “investment”?  At best, it’s a durable consumer good with few problems.  At worst, it’s a nightmare of taxes, repairs, nosy neighbors, and bored kids who like hurling raw eggs all over the place.  Probably, it’s somewhere in between.  But it costs, and costs, and then it costs some more.  Unless the house happens to be a multi-family unit, and the rents from the other units pay above and beyond the principal, interest, taxes, insurance, and maintenance, the house isn’t an investment.  It’s an expense, and a big one at that.

We continue to save up for that down payment so that we can “own our own home,” when it’s against the odds that we ever will truly own it.

Would you sell your house and rent in order to be completely debt-free?

That’s what Frank over at The Happy Rock has done.  He sold his house, and now rents.  He tells No Credit Needed with more than a little hint of pride: “We are 100% debt free.” Including the mortgage.  They owe no one on this earth anything.

Frankly, this is a step that would be a very hard sell for a lot of people, including my family.  On the face of it, it’s humbling — possibly humiliating? — to go back to renting after owning, with or without debt.  All of a sudden there are restrictions on what can be done in the living space.  I know it would not be at all pleasant if we had to do this.

But that would be a problem with me, not a problem with renting.  I floated the idea past my wife four years ago when we could have sold our previous house for more than we can today, and she would have gone along with renting for a while, but there would have been a deadline.  Whether selling and renting would have worked out in our favor or not, we will never know, but the desire to stay in the house won.  I didn’t argue too much about it.

In the end, there are a number of ways to financial peace and happiness, and being completely debt-free, even if it means not owning a house, is certainly one of those ways, and I commend Frank for turning his back on “financial business as usual” to live this lifestyle.

What factors drive you to own a home (and a mortgage) or not?  Are you where you want to be in this regard?

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“My only regret was that I didn’t bet my mortgage.” – friend about Superbowl

That’s far more gambling than I could ever stomach (though I sincerely doubt that her friend would have actually gone through with the wager). The only time I’ve seen a real six-figure wager like that was onWho Wants to Be A Millionaire? when middle-school English teacher Nancy Christy took a guess at the $500,000 question without really knowing the answer.  (She got it right, and went on to win the $1 million.)

No matter.  Anyway, there are far better ways to pay down your mortgage than betting it on the outcome of the Super Bowl.

• Pay half of your monthly mortgage payment every two weeks. This is called “biweekly mortgage acceleration.”  Do you catch why this is faster?  “Every two weeks” is a little bit more frequently than “twice a month.”  Do this for a year and you’ve snuck in an extra mortgage payment.  Fifty-two weeks in a year means 26 two-week periods, or 13 four-week periods.  Neat, no?  Just don’t pay for the privilege of doing this; there’s no need to.
• Round your payments up to the next $100. This is what we’re doing at the moment.  It’s not a huge amount extra, but it’s better than nothing extra.  That, and the round figures are more aesthetically pleasing.  Make sure that the extra payment is going toward principal.
• Refinance your mortgage to lower your (fixed) rate.  If you’re looking to pay off your mortgage, then you’re probably also looking to stay in your house for a while.  If your rates are in the 5% arena, check to see if you can lower your mortgage rates with a refinance.  Thirty- and 15-year fixed-rate mortgages are below 5% as of this post.  Run through a few simple considerations for when to refinance your mortgage and look for a lower rate.
• Take some gains (or cut some losses) in your index funds, and apply the proceeds to your mortgage. If you enjoyed the ride up the past year, consider taking some of your gains and apply them to your mortgage balance.  Or, if you’re tired of watching your investments whipsaw, sell and apply the proceeds to your mortgage, and avoid paying a lot of interest by knocking a hefty chunk off of the mortgage principal.  It’s trading something uncertain (investment appreciation) for something certain (saving a sure amount of interest at your current mortgage rate).
• Contribute more if you have a substantial emergency fund. I’d watch getting too cash-poor in this economic environment.  Paying down a mortgage aggressively can make you cash-poor.  If the cash flow stops suddenly (job loss) then the money that was used against the mortgage is locked up.  That money can’t be touched again without some kind of home equity line of credit, and this will be hard, if not impossible, to get without current income.  How much is a substantial emergency fund?  That’s up to you, but I’d consider no less than six months’ worth of living expenses to be substantial.

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Here’s his premise:    Buying the plasma, leasing the convertible, and living way beyond your means rocks.  Paying off your debts rocks. Score a win-win!  Likewise, gorging yourself on sweet, fatty, high-calorie foods feels great.  Dropping all of that weight feels great.  Score another win-win!

I’ll take it a step further.  Getting on I-95 in a stolen Porsche, flooring it, smashing into seventeen cars, and getting featured on World’s Wildest Police Videos is a blast!  Getting out of prison in seven years when you got five to fifteen for good behavior?  Wow, what an accomplishment!  Three-bagger win-win!

Uhhh, no.  Let’s break this down, shall we?

• A felony will follow you around for the rest of your life.  You’ll be locked out of a whole bunch of jobs.  You won’t be able to be in constructive possession of a firearm.  You won’t be able to vote.  It’s definitely better to never have committed a felony than to have served your time for one.
• Obesity has lasting consequences.  First off, losing 10% of your weight and keeping it off for five years is a bit of a long shot: twenty to one.  Beyond that, your heart has worked harder carrying that extra weight around, so it will probably fail you faster.  Being fat costs you money. Even after you take the weight off, you can’t, um, win for losing:  pollutants that were stored in your flab are now in your bloodstream.  It’s definitely better to never have been fat than to get fat and then take it off.
• Likewise, getting deep into consumer debt leaves life-long financial scars.  It handicaps saving for college, saving for emergencies, saving for a house, saving for retirement.  If the debt was bad enough, it could mean a short retirement, or none at all.  Missed opportunities.  Strained relationships.  Hobbled philanthropy.  Lower standard of living.  Broken dreams.  It’s definitely better to never have been in debt than to get into trouble and then bail yourself out.

Now, of course, I’m not being quite fair: getting out of debt is a good thing, losing weight is a good thing, walking the straight and narrow is a good thing.  Getting out of messes is better than not getting out of them.  But let’s not get into messes just to say we got out of them, m’kay?

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Debt settlement is a process in which you and your creditor agree to reduce the overall debt in exchange of a lump sum amount of money. This lump sum amount that you pay to your creditor is considered as payment in full. Creditors may not agree for a settlement as long as you continue to make minimum monthly payments. However, when you are unable to make payments at all your debts may continue to increase due to the late fees and ongoing interest. Thus, in order to get out of your knee deep debt situation you may go for debt settlement.

When to go for settlement

If you are able to pay off your debt with the help of a debt management program, it will hurt your credit score less than your settlement might do. If you are unable to pay off your debt even with the help of debt management program, you should consider settlement. Your inability to pay off your debt may lead you to opt for bankruptcy; however, you must realize bankruptcy may hurt your credit score much more than settlement might do. Thus, settlement may be a better alternative to bankruptcy.

How to settle your debts

When you go for settlement you may either get help of a settlement company or you may do it yourself. If you owe a small amount of debt, you may negotiate with your creditors all by yourself without taking any professional help. But if you have a lot of debt and you need to settle your debts, going for a settlement company will be a good idea. A settlement company has more experience to settle your debts and provide you with a much better offer by negotiating with your creditors than you would have managed to get on your own.

How to find a good settlement company

You will find an enormous number of settlement companies who may be eager to help you but you must be careful before you choose.  Some settlement companies are not even legitimate.  If you are not conscious of scams while choosing the company, you may also have to face scams, worsening your financial situation instead of improving it.  A good company will review your finances in detail and will provide you with solutions which may help you to become debt free as soon as possible.

What questions to ask your settlement company?

Here are some of the questions you must ask your settlement company before making a decision:

1. What fees do you charge? Find out if the majority of fees that your company extracts is based on performance and results.  The fees of such companies are generally collected in the beginning months of the program and are collected before your settlements are complete.  Be careful not to opt for those companies who base their fees upon a percentage of your debt and do not depend on results.
2. Are you a member of TASC? TASC (The Association of Settlement Companies) is the largest association of trade settlement companies.  The companies who are members of TASC agree to comply with the rules laid down by it.
3. Do you get commission? If you find that your salesperson gets a commission you must reject that company.  Acceptance of commission by your salesperson may mean that he may avoid or ignore some important information.
4. How will you manage my creditors? Find out if your settlement company will stop all collection calls from your creditors and deal with their harassing calls on your behalf. Ask them if you have any chances to get sued by your creditors. If the answer is yes to both of the questions your settlement company is telling you the truth.

When you are in debt, settlement may seem the only way out to get out of all your debts quickly. However, you must be careful enough that along with reducing and paying off your debts, settlement also damages your credit score.

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Would I have cut bait had I found out that by spouse-to-be’s debt load was in six figures?  Alison Brooke Eastman’s fiance did. He supposedly knew going in that his betrothed’s debt was in six figures (“over $100,000″) but finding out that the amount was actually $170,000 was too much.  He broke off the engagement just three days later.

This was a wise thing for him to do. Love looks past a lot of things, and I’m not saying that love and commitment can’t look past $170,000 worth of debt — most of it  for a bachelor’s degree in photography — but those $1,100 checks, month after month, until February of never, are a constant source of friction.  It’s a big rock in the budget for a good chunk of the marriage, and it displaces retirement savings, college savings, even emergency funds.  Marriage is challenging enough without knowingly going in at a financial handicap.

This is the dark side of full financial disclosure. Talking about money can do wonders, sure, but it can’t accomplish miracles all by itself, and it’s just the beginning of fixing any problems.  Sometimes, however, the truth just plain hurts so badly that it’s also the end; it’s better (for the person less in debt, anyway) to call the whole thing off and to be more pragmatic in searching for a mate.  (Succeeding by this benchmark isn’t trivial, though, as the average student graduates with something north of $20,000 in debt.)

Talking about net worth usually isn’t appropriate for first dates, but it shouldn’t be first mentioned on the honeymoon, either.  At that point, it’s no longer her debt, or his debt, but their debt.  If dealing with “your joint debt” doesn’t sound appealing, then find out about it sooner rather than later.

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One piece of advice he gives to people who’ve dug themselves into a deep hole is to sell off a lot of the stuff that got them into the hole in the first place using yard sales, Craigslist, eBay, whatever — especially if it’s gotten so bad that the mortgage payments are behind.  Some of the big things may have to go, like “the flat-screen TV, boat, or Harley.”  Depending on how imminent the consequences are, some really tough decisions may need to be made.

But taking a different spin on this, it could also work to sell a lot of little stuff — whether it be shoes, DVDs, Hummel figurines, books, salt and pepper shakers, comic books, whatever.  Stuff that might have brought some pleasure at one time, but now just takes up space.  Or maybe it still brings pleasure, but needs to go to because bills are due.  A nice collection of DVDs can be sold as a lot on eBay for a few hundred dollars (or more).

If the stuff is more of the “now just takes up space” kind, then there’s a nice fringe benefit:  having that stuff gone literally frees up some of your brain power.  We moved recently and I didn’t do as good a job pitching things before I moved.  I got rid of several boxes of books and magazines that weren’t doing anything productive.  (At one point I was going to sell them, but that’s starting to fall through.)  My shoulders felt lighter after doing that, and it was one less thing I had gnawing at me and sapping my mental energy.

Selling stuff is a great way to raise cash to pay off bills and reduce debt.  Some of the prized possessions may (painfully) end up going, but try starting with the low-hanging fruit — stuff that doesn’t really do that much anymore — and enjoy the extra space and extra piece of mind along with the extra cash.

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• Steadfast Finances runs through several thought-provoking quotes on debt and paying interest.
• Debt Eagle show how to do debt settlement yourself.
• Silicon Valley Blogger warns about refund anticipation loans.
• The Smarter Wallet discusses the Dave Ramsey cash-only diet.
• Do You Dave Ramsey? does the emergency fund baby step.
• Ask Mr. Credit Card shows how to use credit cards for a debt repayment plan.

Thanks!  If you have debt-reduction related questions (or any other money questions, for that matter!) ask them over at Cash Commons.

Have a great week!

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• Make extra payments on the debt with the lowest balance first. This is the method advocated by Dave Ramsey and his followers.  The main advantage of this method is a psychological one: it eliminates one of those bills the fastest, and provides positive dragon-slaying feedback the most quickly.  The main disadvantage is that it does not take the interest rate of the debt into consideration, and hence the amount of money needed to pay off all of the debt is higher, and it takes longer to do so.
• Make extra payments on the debt with the highest interest rate first. This is a straight number-crunching, cost-minimizing approach.  The advantage of this method is that the least amount of interest is paid.  The main disadvantage is that the first “dragon slaying” is farther off, and motivation to continue has to come within.
• Pay only the minimum amounts on the debts and stash as much cash as you can. This method isn’t really a debt reduction strategy but more a protective mechanism, and was recently endorsed by Suze Orman.  The key idea is that times are especially uncertain these days, and having a bolstered emergency fund is more valuable than paying off debt aggressively, because a bolstered emergency fund buys you time.  While this is being done, of course, the debts remain, and the interest expense is the costliest.
• Accelerate payments on the debt that has the shortest fuse. This is a bit different strategy, but it may have some merit.  Liz Pulliam Weston’s article on how to not pay your bills discusses ways to minimize the damage of having too much month relative to your paycheck.  She lists the debts that have the shortest fuses — the time period of delinquency after which bad things happen like repossession, credit score hits, and foreclosure.  Of the debts she lists, car loans have the shortest fuse. Lenders can repossess the car the next day in some cases.  Mortgages and home equity lines of credit are next, then unsecured debt, and finally student loans.

So, might it make sense, given the choice, to try to eliminate those short-fuse debts first?  It could even be argued that things would really fall apart quickly without a vehicle.  Job loss could be imminent if you couldn’t show up for work, no?

In any case, doing something proactive is better than doing nothing beyond the minimum, in any case.  Hunker down!

Thanks to Gather Little By Little for including this post in the Carnival of Personal Finance.

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If only money grew on trees … life would certainly be easier! But of course, it doesn’t. So when money is tight, what can you do to relieve some of the stress?

Well, some people start buying more lottery tickets. But the odds of winning are so small that you might as well throw your money out the window. Others start using credit cards. But someday you’ll need to pay those credit card bills, so making them even bigger will only make things worse.

There are some real ways to make your life easier without doing anything drastic or illegal. So here are five hidden ways to find extra money – even when money is tight:

1. Sell stuff. As they say, one person’s junk is another person’s treasure. So look in your basement, your attic, your bedroom drawers. And sell anything you don’t use. You can go to your local consignment store to sell clothing and household items, or a pawn shop to sell other valuables. Or use Craigslist.org to sell your stuff online (it’s easy and it’s free!)
2. Write down a list of all your expenses and cross off all the “extras.” Then take the list and stop buying all of those extras, things like coffee, lunch (bring your own), snacks, magazines, newspapers – be creative and you can probably save yourself between $50-$100 a month. Maybe more!
3. Start a business or get a part-time job. Even if you don’t want to work long hours at a second job, you can find something “light” to give you a little extra spending money. Like working on a Saturday at a local store you like to visit. Or finding one lawn to mow or house to clean in your neighborhood. Or start a tutoring business. Or even start an online business you can do in your spare time.
4. Shop around for all monthly bills, insurance, etc. You might be pleasantly surprised at how much money you can save by shopping around. And not just when you need a new coat or pair of shoes. You can shop around for cell phone service, car and home insurance (if you’ve been with the same company for more than a few years you might save a few hundred dollars), electric service, credit card interest rates and annual fees, heating oil delivery. Or you can switch to cheaper plans for cell phone and cable TV, and raise your insurance deductibles.
5. If you got a tax refund, have your employer take out less. It definitely feels a lot better to get a tax refund than to owe Uncle Sam money. But if you get a big refund year after year, something’s wrong. Do you realize you’re letting the IRS hold your money throughout the year? You might be losing out on a nice treat come refund time, but it’s usually better to get your money sooner rather than later.

The good thing about these tips is that they can help you later even when money is not tight. Just like credit card debt that seems to sink you deeper and deeper into a hole over time, these strategies will help your savings account grow bigger and bigger!

So don’t get discouraged – get to work and before long you’ll be in much better shape financially!

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