Money Management

Debt May Outlive A Student. What Then?

October 18, 2014 By Twila Van Leer

Who is responsible for a student's school loan debt if the pass away? — Who is responsible for a student’s school loan debt if the pass away?

Young people are expected to live long enough to pay off student debt, but it happens sometimes that they don’t. Parents or other survivors may find themselves assuming debt for which they are not prepared.

Federal students loans are automatically cancelled upon the death of the recipient, but private lenders are not required to forgive such debt. Seeking relief through bankruptcy is not an option in most cases.

Consider the case of a California couple whose daughter died of liver failure before her education debt was paid. The parents took on the care of three grandchildren and because they cosigned on the private student loan they had to assume the daughter’s debt, which she had acquired to attend nursing school. Over the next five years, the balance ballooned to $200,000 and the lender would not forgive the debt, news outlets reported.

The odds of a 27-year-old dying are less than 1 percent, according to the Commissioners Standard Ordinary Mortality Table, but that is small comfort to the California parents whose loss has been complicated by their daughter’s residual debt.

Outstanding student loan debt in the United States has reached an all-time high of $1.3 trillion. Just to earn a bachelor’s degree, the total in loans is likely to reach almost $30,000, the Project on Student Debt at the Institute for College Access & Success, Oakland, Calif., reported.

Most private student loans require a co-signer. About 90 percent of such loans issued in 2011 had co-signers, the Consumer Financial Protection Bureau reported.

Sallie Mae, the country’s largest private lender, offers a Smart Option Student Loan that automatically forgives the debt if the primary signer dies. This lender also has a provision that lowers the interest rate on a regular loan if the parents or some other credit-worthy co-signer must assume the debt. Loans made before 2009 are not covered by the provision, but Sallie Mae may choose to forgive the debt under particular circumstances.

Attorneys with the National Consumer Law Center, Boston, believe there are too few safeguards for students and co-signers who take out student loans. “Ideally, there should be some kind of relief for borrowers in that situation,” said Persis Yu, a staff attorney with the center. The double-whammy of losing a young person pursuing higher education and then being required to repay student loans is “salt in the wound,” he said.

Yu suggests a life insurance policy on the student is the best option to protect co-signers from the financial pain. A policy covering the amount of the loan would pay the debt in full. That provision would spare people already suffering the loss of a family member the additional burden of financial stress related to student loans. Or you could go the safe route and go for the federal loans. Whichever route you choose, wise planning will help in the long run.

So, What Are Rich People REALLY Like?

October 16, 2014 By Twila Van Leer

Having a lot of money doesn't mean you can ignore your finances. Money management skills are just as critical for the rich and famous as for you and I. — Having a lot of money doesn’t mean you will keep it. Money management skills are just as critical for the rich and famous as for you and I.

We identify them by their designer bags, expensive footwear and sunglasses and luxury vehicles and make all kinds of assumptions about them. How far off the reality are we?

In fact, according to those who know, they aren’t all big spenders and they don’t all have immaculate financial records. They don’t all live in palaces and throw non-stop parties. A fair number of them have money they don’t know how to manage.

Consider these facts and see if there is anything you can learn about managing your resources:

Some of the rich rent, don’t own, their residences. The renters include Diane Keaton, Meg Ryan and Jane Fonda. Queen Latifa rented 4,700-square foot digs in Atlanta for $10,000 a month. Probably not a reasonable example, but proof that people who change residence quite often could find renting a better option.

Just because people have money is no surety that they know how to manage it. Often they have accumulated their wealth through very hard work and expert use of innate talents. In most instances, they protect what they have amassed by hiring financial advisors to oversee the details. For instance, Mark Zuckerberg, who started Facebook while still in college, relies on Divesh Makan for financial advice.

Perfect credit? Naw. Having lots of money creates a terrible temptation to spend it. Not every celebrity has a credit rating that would make Mom proud. Lindsay Lohan, whose escapades with the law have been notorious, reportedly owed $600,000 in credit card debt at one time, a load that would required some $15,000 monthly in payments. Your credit rating will reflect your spending choices, so beware. On the other side of the scales are many rich folk – Zuckerberg, for instance – who practice frugality and dress like the masses. Warren Buffet, third richest man in the world, with income of some $37 million per day, lives in the home he purchased in 1958 for $31,500.

With all kinds of money to toss around, you would think the rich are never in debt. Not so. Sometimes the big paychecks and endorsement income is matched by the same level of debt. Boxer Mike Tyson once owed the IRS $18 million. A whole string of celebrities are in the same boat.

Since money seems to beget money, you’d guess that the rich all come from rich families. Again, wrong. Few of today’s wealthy came from “silver spoon” backgrounds. Though there are well-known names that have a happy-finance history, many of today’s rich are the self-made variety who made good use of the American dream. TV talk show diva Oprah Winfrey, for one, was born into a poor family in Mississippi. Starbucks CEO Howard Schultz grew up in a housing complex for the poor in Brooklyn. Inheritance is not the only road to success.

Bankruptcy is not a foreign term to the rich. Among those who have been through the process – and bounced back – are Henry Ford, Walt Disney, Milton Hershey and H.J. Heinz. Hotel mogul Donald Trump has been through bankruptcy four times, but today he’s worth $4 billion.

Many of the super-rich live on budgets. And though their budgets are inevitably fatter than the common man’s, they are under the same constraints to keep their spending within bounds. Actress Keira Knightley told a Glamour Magazine reporter that she has been limited to a $50,000 annual budget since 2012, although her net worth now is $50 million.

In short, though the differences are on a large scale, the multi-millionaires of the world must obey some basic economic rules just as others do or they find the easy-come, easy-go route in full effect.

Use Credit Wisely

October 2, 2014 By Twila Van Leer

Credit is a fact of financial life for the great majority of Americans. The trick is to manage it so that it doesn’t manage you. A blessing when you’re in control, it can quickly become a nightmare if you are not.

Here are tips for setting up credit, managing it to your advantage and monitoring it.

The natural thing to do, if you have already established a good working relationship with a financial institution, is to use that institution to apply for credit. A secured credit card is a good first step toward expanding into credit. With the card, you can have money deposited automatically. As a rule, the amount of credit that will be offered by the company is equal to the amount you deposit. Keep up the payments regularly and you can convert to a regular, non-secured card.

A good way to ease into credit is to take out a personal loan for a large purchase, say a car, using a co-signer if necessary. Then you begin building a credit history. That history will be the foundation for more credit. It’s easy to feel too comfortable in the knowledge that you can get credit. Be responsible and stay out a trouble with missed or late payments.

You must be 18 to apply for a credit card. Until you reach 21, you will need a co-signer.

Some banks or other financial companies offer cards with a lower limit to help beginners to establish credit.

When you are ready to increase the amount of your credit, think about it carefully. The temptations to use the credit increase with the amount. Be certain you have paid your credit accounts on time for at least six months before looking at expanding.

Keep utilization low. Try to use no more than 50 percent of your available credit. If you max out your card, your debt to loan ratio (how much you owe over how much they will loan you) will be too high to get a good credit score. Having a larger credit reservoir will give you better credit scores. A credit lender looks at those figures when determining if you would be a good risk with more credit. Building loyalty to a particular lender by being responsible increases your chances for more credit, as well.

It is likely that credit will be a factor in your financial dealings throughout your life. You need to protect this asset by reviewing what is in the credit reports prepared by major reporting companies such as Equifax, Experian and TransUnion. The official site where you can get reports is www.annualcreditreport.com. They are required by law to provide you with one report annually free of charge. If you find anything amiss in the reports, deal with it immediately. Have the documentation you need to correct mistakes.

Monitoring your report won’t lower your credit score. Staggering the times at which you obtain a report from the major agencies makes the task less onerous.

Bottom line: do it. Keeping your credit history clean is an important element in your overall money management scheme.

Get Sensible With Credit Card Usage

September 25, 2014 By Sherry Tingley

use wisely — Credit Card Usage Has Lessened Since 2008

Americans seem to have learned something from the Great Recession that began in 2008. Before that landmark crises, they were going mad with credit cards, racking up personal debt that left them hamstrung when the economy went bonkers. Afterward, they became more frugal, financial experts noted. And now, with the crises apparently over, they are using their cards again, but in a less exuberant way.

Recently released Federal Reserve data showed a 9.7 annual percent increase in the amount of credit extended to customers. Revolving credit – bank-issued credit cards and retail store cards – showed an annual rate increase of 7.4 percent. Those numbers were almost three times higher than the 2.5 percent hike recorded in June. And for all of last year, the increase was only 1.3 percent. Even that was an improvement over 2009 and 2010, when growth was flat – as in most sectors of the economy.

The outlook for future growth is promising. CardHub, a website for consumers looking for the best deals in cards and rates, is looking for a $41.9 billion net increase in credit card debt this year. That’s 8 percent more than in 2013 and 14 percent over 2012.

But the growth shows a more cautious use of credit cards, according to Theodore Iacobuzio, vice president of global insights for MasterCard. He believes the unfettered love affair that kept people using their credit cards freely before the recession is over. “They’re not going back to how they used them before,” he said.

Pre-crisis, average American households had about seven credit cards, not counting debit and store cards. Now, they’re using the cards as tools to pay off debt and they’re paying off that debt faster than before.

Wish fulfillment has taken a backseat to the use of cards to help manage the new economic realities in many families. That’s reflected in the record low numbers of those who are delinquent in payments. Two factors are at play here, the first being the fact that many Americans have gone to great lengths to cut their credit card debt and are not replacing it with new debt. The second effect is from a greater number of consumers who defaulted during the economic crisis and cannot replace their credit cards. From April through June this year, only 2.25 percent of credit card accounts were in arrears. That’s the lowest since the Federal Reserve began tracking the figure in 1991.

Many consumers are playing it safe with prepaid cards from outlets such as WalMart and Green Dot. They have the advantage of being able to check their balances online or via text messages and avoid the fees often associated with cards issued by banks.

That option helped many Americans through the recession, especially those who were having a tough go in the job market.

Although the difficulties the recession created were a headache for many American families and came on too fast for pre-planning, they may have forced a more reasonable approach to debt. Consumers who got burned are being more careful of the flames and thinking twice before they blithely take their credit cards out of their pockets.

Know the Rules About 401(k) and IRA Withdrawals

September 22, 2014 By Twila Van Leer

For millions of Americans, 401(K) and/or IRA accounts figure largely in their retirement plans. But the two methods of saving are regulated by different rules and knowing those rules is important when you are ready to take money out of the accounts.

A 401(k) may be involved in your employment compensation package and many employees want to take money from that savings when they leave the company.

The Internal Revenue Service imposes a 10 percent penalty for early withdrawal of IRA savings if you are under the age of 59.5, but the rule does not apply for 401(k) plans. For the latter, the rule does not apply if you are over 55 years of age, so you don’t have to wait until you have passed your 59.5 mark to take out the money.

However, if you do withdraw from your 401(k), you will have to pay taxes on whatever amount you take.

There are several categories of employment that qualify 401(k) holders to avoid the early withdrawal fee as early as 50 years of age. These include public safety employees such as policemen and firefighters, and emergency medical service providers for states or municipalities who leave the service in or after the year they turned 50.

There are publications that will help you determine how best to manage your retirement accounts. IRS Publication 575, titled Pension and Annuity Income, is one of these. It is online at www.irs.gov. It contains sections on separation from service and other specific elements of how to manage income from the retirement plans.

IRAS have different qualifying rules. You face an early withdrawal penalty if you take money from your IRA before you are 59.5. Any money you take out before then is subject to a 10 percent penalty and also is taxable. An exception may be possible under Section 72(t) of the Internal Revenue Code, but that requires that you commit to a series of substantially equal periodic payments.

Because the rules differ and are complex, financial experts advise that you involve an accountant at the outset. When you finally are serious about withdrawing IRA funds before you have reached the required age, you may need advice, because once you have chosen a formula, you are required to keep the same method.

A distribution form will ask you to choose among several formulas for receiving payments and whether or not it qualifies for an exception from the IRS penalty. Your chosen accountant or IRA custodian probably will have information, including a pamphlet that sets out the IRS requirements. The tax form that you may have to file in the process – Form 5329 – also outlines the guidelines for exclusions. Another resource is “Retirement Topics, Exceptions to Tax on Early Distributions” an IRS chart that shows exceptions to the 10 percent penalty. In addition, the IRS Publication 590 delves into individual retirement arrangements. It is free by calling 1-800—TAX-FORM.

Again, a word to the wise. Get expert help. Tax issues are not the category on which you want to do the do-it-yourself thing.