Who Do You Owe?

The student loan program is actually a federally-backed funding of money to students who could not otherwise afford the costs of college.  The actual loan, however, is given through a private financial institution, and, like any normal debt, must be paid back in full or in the form of monthly payments.  The beauty of these loans is that interest is not charged on them until the individual is no longer a full-time student, either through graduation or dropping out of college prior to graduation.   And, the interest rates on these loans are typically much lower than a conventional personal loan.  If you have student loans, you must make arrangements for repayment upon leaving college.  If you have huge debt, however, you may want to explore options for repayment that will be less painful.

Paying Now

Certainly, if an individual has secured great employment and the student loan debt is not exorbitant, it would be wise to set up payment arrangements right away and to begin to chip away at that debt.  This debt does appear on one’s credit report, and regular payments will be reported just as with any other debt.  So, if payments are beginning immediately, it is important to make them on time in order to maintain a good credit score.

If the debt is substantial and there is still the desire to begin repayment, some individuals consider a consolidation loan.  This wraps all student loan debt into one large loan, and the payment is typically lower than the individual loan payments would have been.  A word of caution here:  the new interest rate is likely to be higher, so the debt will end up costing more.

Paying Later

Almost anyone can obtain a deferment on student loans.  Deferments mean that, for a period of time, no payments will have to be made, and, in most instances, interest will be suspended.  Deferments are automatic for those who enter military service or who go on to graduate school.  For other types of deferments, there will be more justification needed, but, in most all cases, they are granted.  Be certain to complete the proper forms, for no deferment will be granted without the correct application for it.

The reasoning for obtaining deferment is pretty sound.  It is anticipated that, as an individual progresses in his/her career, income will steadily increase, and the repayment will become much less painful.  If an individual enters a career with a relatively low initial salary but anticipates that advancement will occur quickly, deferring loans is probably a wise course.  Doctors, for example, enter their profession as interns and then residents.  Income is typically tiny compared to the anticipated income once these first career phases are over.  It makes sense to defer loan payments in this instance.

A word of caution:  A deferred student loan still appears on the credit report.  While there is no payment indicated, the total amount borrowed is shown.  In the past, potential lenders did not look at deferred student loans when analyzing an individual’s total debt, but this is no longer true.  It may be difficult to qualify for a mortgage loan, therefore, if the student loan debt pushes the total debt amount beyond what a lender will allow.

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The Holiday Temptation

With all of the monthly expenses throughout the year, it is difficult to set aside the extra money that is most assuredly required for Christmas.  And when family giving is rather extravagant, it is difficult to be the one who has to “cut back” and do less than others.  With all of the holiday hype, however, including new products, glamorous options, and the bombardment of catalogues and internet advertising, it is easy to sit on the telephone or the computer and rack up credit card debt, buying expensive gifts for everyone on one’s list.  Visiting the mall can be just as dangerous, because the holiday spirit catches on and the atmosphere is spent, spent, and spent.

Here Come The Bills

In January, the bills come in, and there is the shock of exactly how much debt has been accumulated and how long it will take to pay it off making the minimum payments on each of several credit cards.  And all of this must be done before next Christmas, because the spending will have to occur all over.  Thus the cycle begins of debt for one’s entire lifetime

Paying the Piper

Paying off the Christmas debt needs to be a matter or both organization and self-discipline.  It is time now to write down each credit card amount total.  Divide each of the totals by the minimum payment required, and you will get a number of months.  Begin with the smallest number of months, and put as much onto that bill as possible while be certain to make the minimum payments on the others.  Once the first card is paid off, take that payment and add it to the minimum payment you have been making on the second one.  Continuing this pattern, you will pay off the cards with as little interest as possible given the circumstances.  Any income tax refund or “windfall” of money must be spent on these bills and not on any luxury or unnecessary items you may want right now. 

Avoid the cycle

Though it may be difficult, it is important to develop some type of savings plan for Christmas.  Open a savings account specifically for Christmas and nothing else.  Throughout the year, put something into this account each month. The more cash you have for next Christmas, the less you will have to put on a credit card.  As well, it would not be unseemly to suggest to family and friend that everyone cut down on the gift giving in future years.  After all, many of them may be doing just as you are and regretting it later.  Christmas can be just as fun with small gifts or with name-drawing among adult family members and reserving the larger expenditures for one’s children or immediate family.

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The Debt Cycle

Reaching adulthood involves becoming financially responsible for oneself.  If adequate training and practice has occurred, an individual moves into adult life with the concepts of work, earning a salary and paying bills.  If training has been inadequate or the individual has an impulsive behavior pattern, the concepts get a bit twisted, and the result can be overwhelming debt.

Causes of Debt

The following are typical causes of excess personal debt:

1. Inability to defer gratification.  Society bombards individuals with the trappings of the good life.  New cars, beautiful homes, the latest technology, fashionable clothes, luxury dining and vacations are all touted as being indicative of the individual who knows how to “live.”  It is difficult to admit to oneself and to others that you cannot afford these things, and so credit is used to buy, buy, buy.
2. Failure to establish a budget.  It is incredible how many people go from payday to payday without thought to how and where the money is spent.  When they run out, credit is used to “make it” until the next payday.  The result is debt that rarely gets paid off, and minimum payments become a fact of life forever.
3. Sometimes, circumstances put otherwise responsible people into debt, usually major health problems or loss of career late in life.  In these instances, credit sometimes has to be used just for necessities.

Breaking the Cycle

There are some very basic steps which must be taken when someone falls into categories 1 or 2 listed above.

1. Get some budget and debt counseling.  There are a number of non-profit organizations that will assist debtors with establishing a livable budget and developing a plan for eliminating debt in an organized, progressive manner.  Debt consolidation may be an option, but it should be considered carefully and only used when the credit cards are cut up and the accounts closed.
2. Establish your own plan for eliminating the debt.  This will involve not only setting a strict budget but, as well, a progressive plan for paying off the current debt.  Begin with the smallest debt and pour as much on it as possible until it is gone.  Go on to the next, adding all of the money used to pay off the first debt to the regular payment on this one.  Progress through each debt in this manner and commit to no more debt until everything is paid off.  This plan is not fun and may take a few years, but the rewards will be nightly sleep and no more stress in personal lives.
3. Consider a second part-time job.  While this is not always possible, if one has the energy and the additional few hours a day or on weekends, the entire amount from this additional job can be used directly toward debt elimination.  

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What Qualifies as Debt

A debt is any obligation of an individual to pay another individual or entity for loaned money, or for the purchase of goods or services.  The most common types of debt are mortgages, car loans, credit card or other revolving debt (e.g., personal loans), medical bills, and student loans.  The wise consumer looks carefully at all of the details of a debt contract before entering into the agreement.  The difference between good debt and bad debt involves several factors.

Amount of Debt

Before entering into any debt, be certain that the amount being borrowed or the credit limit on a credit card is a total with which you can live.  If you make $45,000.00 a year, incurring $30,000.00 in non-mortgage debt is not responsible.  Payments will be far greater than you can afford, even if they are stretched out over a prolonged period of time.  Be certain that the amount of non-mortgage annual debt is no more than 20% of your total income.  Too much debt is bad debt.

Interest Rate

Interest rates vary greatly and are usually dependent upon the borrower’s credit score and income.  The greater the risk, the higher the interest rate is likely to be.  Further, an individual with poor credit usually cannot obtain credit from reputable, established traditional sources.  Often, loans will have to be obtained from finance/loan companies which work only with poor credit risks.  Interest rates are likely to be exorbitant.  If your credit is poor and you must seek non-traditional sources for loans, that is, other than established credit card companies or banking institutions, then your debt is bad debt.  You will be paying terribly high interest rates.

Penalties

A thorough understanding of any penalties involved in the repayment process is critical.  A traditional, reputable creditor will usually have penalties involved for late payments and, in the case of mortgages, a pre-payment penalty.  There may also be provisions that if payments are late, a higher interest rate will be charged from that point forward.  With less traditional loan sources, late payments may be treated in a predatory manner, that is, there may be severe penalties and an extremely large increase in interest rate.  Any debt that has severe late payment penalties and exorbitant interest rate increases is a bad debt.

Nature of the Debt

Bad debt can also be defined as debt incurred for luxury items which places the debtor into an untenable credit position.  This type of bad debt is not the fault of the creditors per se, but, rather, the lack of self-discipline on the part of the debtor.  Luxury items should never be purchased on credit but only as cash is available to pay for them.  In this way, credit will be available for emergencies and necessities when a cash crunch occurs.

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