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How to Conquer the Most Common Debt Problems


A whopping 35 percent of Americans have a nonmortgage bill that is 180 days or more overdue and is in collections, according to the report “Delinquent Debt in America” released by the Urban Institute in July. The average total amount in collections is $5,178 per person. Debt in collections can remain on your credit report for up to seven years, and if you don’t check your report regularly, you may not even realize you have an unpaid bill in there.

If you’re facing a debt situation, get proactive. Learn how to bring it under control and fix your finances as fast as possible. Here’s some help with the most common types of debt:

Student Loans

Chain&BallThe average graduate’s student loan debt has risen to $29,400, according to the latest Project on Student Debt report from The Institute for College Access & Success. While student loans have advantages over other types of debt, such as lower interest rates, longer deferment periods and more flexible repayment policies, they can be tough to pay off while you’re making the transition to the work force, buying a house and building a family.

The best way to manage student loan debt is to keep it from piling up in the first place, using strategies such as savings funds, grants, scholarships and internships. If you’ve already got obligations to pay off, the Department of Education’s Federal Student Aid site provides a guide to various repayment options, including consolidation, deferment, forbearance and forgiveness.

Credit Cards

The average American owes $4,501 in credit card debt with a revolving utilization debt-to-limit ratio of 30 percent and a 0.43 incidence of late payments, according to Experian’s latest State of Credit report, published in November 2013. The higher your debt-to-limit ratio goes, the more negatively it impacts your credit score, and FICO experts advise keeping your balance between 10 to 20 percent of your limit for an optimal rating while taking care to avoid late payments.

When you find your balance has gotten too high, designate a portion of your monthly budget toward reducing your debt. If you receive regular payments from a structured settlement or annuity, consider selling your future payments to a company like J.G. Wentworth for a lump sum of cash now. You could then use this money to help pay down your credit cards.

Mortgages

The average mortgage debt stands at $37,952 around the country, according to the Urban Institute’s report, with regional variations from $24,605 in some parts of the South to $54,573 on the Pacific Coast. The best way to prevent mortgage debt is to first carefully consider how much house you can afford. If necessary, you can find a country-specific mortgage calculator to help you get the info you need in the correct currency since some people do buy houses in other countries. Figure out how your projected mortgage payments stack up against your monthly gross income and your debt-to-income ratio. The Federal Home Loan Mortgage Corporation provides an online guide to help you navigate these numbers, and the Department of Housing and Urban Development offers additional information on financing options.

If you’ve already got a mortgage and you’re having trouble keeping up with payments, the FTC outlines various repayment strategies you can pursue, including applying for a loan modification under the Making Home Affordable Modification Program, as well as other alternatives to default and foreclosure, such as reinstatement and repayment plans.

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Eeks! Poor Choices With Student Loan Funds Can Damage Your Wallet


Broke GuyApproximately 60 percent (12 million) of the nearly 20 million students attending a four-year college or university in the United States on an annual basis take out student loans to cover their costs. 37 million borrowers who currently are, or were, students have an outstanding loan balance, with federal and private student loan debt looming at or more than one trillion dollars. The amount of loan balance outstanding per capita is a little more than $24,000, with 1% owing $200,000 or more; 3% owing between $100,000 and $200,000; 10% owing between $54,000 and $100,000; and, 25% of borrowers owing $28,000 to $54,000.

Student loan dollars are typically sent to the financial aid department of a college or university and used to offset the cost of tuition, fees, room and board and other associated costs. If the amount borrowed exceeds the amount needed to meet your expenses as a student, the remainder balance will be given in the form of a check. This may take place either at the beginning of the year in a lump sum payment or at the beginning of each semester, as funds are disbursed to the institution.

The Student Loan Conundrum

The problem with the way student loans are disbursed to you as a student is that it creates a false sense of wealth. Imagine an 18 to 19 year old student who has never seen a check for $1,000, $5,000 or $10,000 dollars. It becomes tempting to use these funds to invest in a new wardrobe, killer shoes or a brand new entertainment system for their dorm room. The unfortunate downside to this type of use of excess student loan money is the negative effect it will have on your future financial habits and your ability to qualify for other types of loans, such as home and auto. What is the true cost of those $99 shoes and did it lead you to become a member of “Generation Debt?”

Typical Student Loan Expenditures

With their newfound wealth, where is the money from student loans going if it isn’t being used to pay for school or being invested for the future? For some borrowers, excess student loan money is being used to fund a lavish lifestyle and the excess of youth, without regard to the future and what may come. Cars, parties, vacations, starting a business are some of the more typical expenditures made by students with their excess funds. Such spending is well within the rules as there is no current monitoring performed by the U.S. Department of Education or a school’s financial aid or bursar’s office once these funds have been distributed to the student.

The Cost of Student Loans

Resisting the temptation to use your student loan money in a frivolous way can result in major savings in the long run. Here is a simple illustration of how saving a portion of your excess student loan funds can save you on interest alone:

You borrow a total of $50,000 toward your education costs to fund a 4-year bachelor’s degree (which took 5 years to obtain) at $10,000 per year. You only needed $5,000 toward your education costs, yielding a windfall of $5,000 each year you worked on that degree. You begin to repay the loan at the end of the fifth year under a standard loan repayment schedule of 10 years. You will pay back the $50,000 borrowed, plus an additional $16,600 plus in interest (at a hypothetical 6% loan interest rate). In addition to this, add a 6% interest to all purchases made with your loan money (or, an additional $60 in interest for every $1,000 worth of purchases).

Now, pretend that you set aside half of your newfound money ($2,500) each year in an interest bearing account (at 6.5% compounded monthly) over the five years before you start paying back the loan amount. Instead of an interest payment of $16,600, you have a lump sum amount of $15,247 to apply toward your loan balance, lowering the balance to $34,000 and some change and a total interest of $11,547. You trimmed your interest costs by nearly one-third by setting aside merely one-half of your excess distributed funds. It goes without saying, but using money earned from a part-time job on extra purchases (rather than loan money) will eliminate the need to pay of interest on those expenditures.

Making Wise Choices with Student Loan Funds

Making better choices about student loan funds and how to use them will make life easier for you and improve your financial future. There are great tools that can help you determine how much interest you will pay, the amount of loan payments you will make and counseling programs that can help you avoid the pitfalls of generations before you. Consider this: those with the most student loan debt currently are those who can least afford that debt. Information from the Pew Research Center and Federal Reserve that 58 percent of student loan debt outstanding is held by households with a net worth that is less than $8,500.

Understand that learning about money and the cost of money are important life lessons to learn as early as possible. Regardless of whether you are a person who comes from financial means or who has never been exposed to large sums of wealth, poor finance decisions may provide an immediate benefit but become a lifelong detriment. Instead, take the time to educate yourself about your loans and the consequences of your spending—it’s a move that your future self will surely appreciate.

This article was contributed on behalf of Smart PrePaid Electric, your number one choice when looking to cut down on your home or apartment bills. Check out their website today and see how they can help you save more!

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The Psychology Of Student Debt Management


Education budgetEveryone knows that college tuition is on the rise and that the students who are in college today are some of the most heavily indebted of all students. The excitement of getting into a university is often tempered by the knowledge that an extreme amount of debt is coming. The student loans do not have to be paid off right away, so this is different than a home loan or a car loan, but this is still something that hangs over a new student’s head and makes it difficult to grasp their finances properly while still at an institution of higher learning.

Student Spending

One thing that is interesting about the physiological impact of all of this debt is that it does not necessarily have the impact that you would assume. For example, you would think that owing a lot of money to a lender would make students want to spend less, minimizing their debt and keeping things in check as much as possible. They would look for cheap housing, cut back on food costs, save on energy expenses, and do other things of this nature. They would try to prepare to pay off what they owe by not making it any worse than it has to be.

However, the opposite is often true. Students feel crippled and overwhelmed by the amount of debt that they face. Most of them have never even held down a full-time job before. They have not purchased homes or new cars. The numbers that they are seeing – many schools cost at least $100,000 for a four-year program – are bigger than anything that they can wrap their heads around. They know that they are going to owe a lot, but they feel like anyone else feels while looking at the national debt: The numbers are so big that they don’t seem real.

This causes many students to just give up, in a sense. They continue to spend heavily in college, taking out more loans and not saving money anywhere. They spend everything that they can from their part-time jobs, and some of them even take the money right out of their savings accounts. Rather than holding onto this and figuring that they can use it to offset some of the debt, they just use it however they want. When they get out of college, they are in far more financial trouble than they have to be.

This happens because they cannot imagine owing more. If they owe $200,000 and they do not even have a job lined up, what difference does it make if they owe $210,000 or $220,000? It all looks the same. However, this thought process is very destructive. It can increase debt, rather than limiting it, and cause problems that are going to last for years to come.

Keeping Calm

The key to success is to stay level-headed and rational. Students need to be calm and realize that they are going to be able to get out of debt, but that it is going to take work. They must shake off this feeling that they are so far buried in debt that it does not even matter anymore. Instead, they need to channel the energy and emotion that they have into positive action.

When they do this, students can set themselves up for a successful future. They can get rid of the debt that they do have and keep from compiling more. They can make college as inexpensive as possible. As they work at this, they may even find grants and scholarships that can help them to stay out of massive debt in the first place.

About The Author:

Today’s guest article comes from Ryan Ayers, a writer who creates informative articles in relation to education. In this article, he describes the psychology of student debt and aims to encourage further study with an online masters degree in applied psychology.

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