Poor Student No More

I have applied for and received two credit cards since I’ve been in college. The first I got during freshman year when I purchased some of my text books off of Amazon. There was a special offer (anyone surprised?) that lured me in — it gave me $60 off of my purchase. I could basically buy the books I needed for free.

WRONG.

The special offer wasn’t applicable until after I received the card in the mail. So I paid for my books out of my checking account and after receiving the card, tucked it away for about a year.

I never used the card until one weekend when I went back to New York for the premier of my sister’s documentary. I left my cell phone in my car along with my debt card. Once I arrived at the movie theater, I paid the cab fare with that credit card. This is where it all began.

Honestly, if I had never started using that credit card that day, I probably wouldn’t have gotten another one. I applied for my second card this past March to ensure I had overdraft protection on my checking account. Then I started paying for doctors’ appointment fees, prescriptions and gas on this card. Then it spilled over to dinners and scented candles for my room.

When you purchase items on a credit card, you end up paying much more for them in the long run. Is a $40  framed photograph of Marilyn Monroe to hang on your college room wall really worth the $300 you will end up paying for it over the 4 years it takes you to pay off your credit card? Didn’t think so.

It was a slippery slope, and I tumbled down head first. My balances are not outrageous, but high enough that I have to make monthly payments on these cards. This is not helping my plight to get out of debt — only making it much longer and more difficult. A few weeks ago, I had finally had enough — the cards faced death by scissors.

I always try to pay more than the minimum payment each month, but sometimes cannot afford to because of that particular month’s earnings. Paying more than the minimum payment improves your credit score and will pay off your card in less time, but make sure you do not short yourself for the month’s other expenses. Pay more when you can.

Consolidation is definitely an option, but be careful. Check the interest rates, terms and any other possible options you may have (refer to the earlier post on consolidation).

Stop using the cards — If you can’t pay cash, don’t buy it. Unless of course it is necessary for your survival.

Come up with a payment plan and try to stick to it for as many months as possible. It’s ok it you can’t follow the plan every now and then, but make sure you budget for your credit card payment plan as often as possible.

Credit isn’t evil and it’s not even a bad idea –  unless you are a college student. Remember what happened to the U.S. economy at the end of 2008? Don’t get yourself into a situation in which you are calling your family and friends asking for an economic bailout.

One more tip — if your credit cards are higher interest than your student loans, pay these off first. Pay off your debts in order of interest rates (highest to lowest).

Peace, love and loans,

Jess

I had student loans from 2 private companies - Bank of America and SalllieMae, as well as federal loans.  Debt consolidation seemed like a great option for me once I graduated - to put all of my loans into one neat little package that would reduce my ever-accumulating interest and help me to pay off my loans quicker.   I could have easily jumped into the Grand Canyon of debt had I not done my research.  Here’s what you absolutely need to know about student debt consolidation:

• If you already have a not-so-great credit history, seriously reconsider consolidating.  You will probably end up paying much higher interest rates, and though your monthly payment may be lower, you’ll end up paying much more in the long run.  Focus on paying your current loans’ interest on-time every month.  Create an action plan to try to pay a little more than the minimum payment each month - this will gradually improve your credit score.  The better your credit score, the lower the interest rate you will be offered on consolidation.

• Most consolidation companies charge fees for services you can actually do on your own, like negotiating better terms on your already existing loans.  Don’t let consolidation companies scare you.  Do your research and figure out what kind of interest rate and payment plan would be best for your financial needs, then call your loan company.  You can negotiate interest rates and prioritize your payments so you pay off highest-interest loans first on your own.

• If you absolutely think you must consolidate your debt, I would recommend first going to a resource like MSN money debt consolidator.  Since you don’t have to pay anything, it’s pretty much non-biased, and you can more objectively decide if you need to consolidate.

• Don’t consolidate private and federal loans together.  This may seem obvious, but you definitely don’t want to lose the advantages that the federal loans offer.

• Make sure you understand the terms of the consolidation.  Don’t just check the “accept” box - this isn’t iTunes, it’s your financial future.  Call and speak with a representative that can help explain things to you.  Make sure you won’t end up paying more in the end.

This should help guide you in consolidation, which can be a helpful and efficient tool for getting out of debt.  But always be an informed skeptic!

I began reading Rich Dad, Poor Dad based on a recommendation from my boyfriend.  Before reading this book, I despised money — I hated the inequality it created, the manipulation it took to get it, the corruption it perpetuated, and the waste it produced.  However, this book granted me the ability to change my opinion greatly.  The main theme: Make your money work for you, don’t work for your money.

Based on this book, the constant financial discussions with my entrepreneur boyfriend and my own financial struggles, I realized that I needed to figure out how to earn a passive income before I graduated.  I want the financial independence to follow my passion in life — I do not want to be limited by debt and the need for a steady paycheck and health care.  I made the decision to take action and began thinking about and discussing my options.  I knew I had to act quickly.

So here’s my action plan for getting out of debt within 12 months:

1. Create a website designed to provide info on my own personal journey out of student debt.  Provide value to others in a similar situation.
2. Through website traffic and advertising, generate income.
3. The better my blog, the more traffic.  More traffic = more income.

Sound simple?  It is.  If you want to get out of debt and start earning a passive income (an income that eventually becomes guaranteed without you having to work), there are so many ways to do it.  First, brainstorm ideas for a product or service that provides some value to others.  This is the most important part - it must provide some kind of value that others demand. Find a medium to transfer that value to others and begin your work.

In my personal case, I decided that student debt, loans and consolidation would be my particular topic.  There are probably thousands upon thousands of other students who, just like me, don’t really know the impact debt can have or how to get out of it for that matter.  Then, I decided that the best way to explain this process was to chronicle my own journey through a blog on my own website.

When I first took out a student loan, I had no idea what I was getting into.  All I knew was that I was going to get money to pay for college that I didn’t have to pay off until I graduated.  What I should have known are these basic facts:

There are two types of student loans - government loans and private loans

Government Loans

• Government loans are need-based, determined by the Free Application for Federal Student Aid (FAFSA).  The deadline for filing a FAFSA is generally February 15 and must be done every year.

• There are five kinds of federal loans: Stafford loan (goes in the student’s name), Perkins loan (college is the lender rather than government), PLUS loan (goes in the parents’ names), Graduate PLUS loan (allows graduate students the amount and terms of the PLUS loan), and Consolidation loan (combines all student loans into one).  For our purposes, we will concentrate on the Stafford Loan.

• Federal loans must be repaid with interest, but typically have low interest rates and offer flexible repayment terms (such as deferment).  If the Stafford loan is subsidized, it means the government will pay the interest on the loan while you are enrolled in school and during periods of deferment.  If it is unsubsidized, it means that you must either pay the interest or let it be added to your loan principle.

• The Stafford loan has limits to what you can borrow.  It starts at around $5,000 and increases for each year you are in school by about $1,000.  (1st year - you can borrow $5,500, 2nd year you can borrow $6,500, etc.)

• The interest rate on Stafford loans is fixed at 6% for subsidized and 6.8% for unsubsidized.

Private Loans

• A non-federal loan from a private lender, like a bank or credit union.  These often have variable interest rates and require credit checks.

• Most students need a co-signer to have enough credit-worthiness.

• Most of these offer lower interest rates that credit cards and repayment deferment options until after graduation.

Private loans can be helpful, flexible and affordable, but government loans are better in terms of interest rates and flexibility.

Using myself as an example, I have:

• $15,054 in Federal loans with 6.5% interest on half of the funds
• $25,154 in Private loans with an average interest rate of 8%.

Grand total:  $40,208