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What to Do If You Can’t Afford Your Student Loan Payment

The average amount that college graduates owe in student loans continues to rise—topping $25,000 according to the most recent data—while job prospects for new graduates are bleak to say the least. Students generally have a six-month grace period after graduation to allow them to find a job before the first payment is due. But since jobs are scarce and the minimum payment can be frighteningly high, that grace period can feel like far too little time.

Whether you are a recent graduate who is unsure how you will pay back your student loans, or someone several years out from attaining your degree who is having a financial setback, there are ways of mitigating the payment problem without defaulting. Here are the options available to you if you can’t repay your student loans:

What to Do If You Can’t Afford Your Student Loan Payment

1. Change your repayment plan.

Generally, you can expect a standard repayment plan of equal monthly payments for ten years. Should that monthly payment prove too high, you have a few ways to continue making payments at a lower rate.

The Graduated Repayment Plan offers you a set amount of time (often up to two years) to pay low, interest-only payments before they increase to the standard principal and interest payments. This plan can be a good place to start for recent graduates who are able to secure some kind of job, but are not yet making the full amount they expect their degree to garner in the future.

The Extended Repayment Plan also lowers your payments, but increases the term during which you will pay. You can extend your term to anywhere from 12 to 30 years. While this will make your monthly cash flow easier, you will end up spending a great deal more in interest over the life of the loan.

The Income-Contingent, Income-Sensitive, and Income-Based Repayment plans take your gross income, family size, and student debt burden into account in determining your monthly payment.

With the Income-Contingent plan, which is only available to Direct Loan borrowers, your payments are adjusted with changes in your income, and your loan term can last up to 25 years. Any outstanding balance on the loan after 25 years is discharged, although you are still responsible for taxes on the written-off amount.

The Income-Sensitive Plan is for FFELP borrowers and determines a monthly payment based upon a percentage of your income. The loan term is for 10 years.

The Income-Based Repayment Plan is available to both Direct Loan and FFELP borrowers and caps monthly payment at a lower percentage of income than the Income-Sensitive Plan

Recognize that any changes to your repayment schedule will end up costing you more in interest. Be sure to change back to the standard schedule as soon as you can afford it—it will save you a great deal.

2. Consolidate

If you have loans from multiple lenders, consolidating them all under one umbrella loan can help to reduce your interest rate and potentially lower your monthly payment. It will also give you only one lender to negotiate with, making any potential problems much easier to navigate.

3. Forbearance and Deferment

Depending on your circumstances, you may just want some kind of break from payments. If you are simply facing a financial downturn, you can request a forbearance of your loan for a specified amount of time—usually a year. During this time, interest will still accrue on your account but you do not owe a monthly payment.

My husband and I each put our student loans on forbearance for about nine months when we moved across the country, as we were carrying two mortgages and I had left my job for the move. We started paying the loans again as soon as our finances were back in order to avoid any more interest accruing.

If you are returning to school, entering military service, or facing disability or unemployment, you can request that your loans go into deferment. For the duration of your deferment, if you qualify for federal interest subsidies, the government will make the interest payments on your behalf, meaning your outstanding balance will not go up.

4. Loan Forgiveness and Cancellation

Those individuals who go into teaching or public service may be able to have all or part of their loans forgiven or cancelled. This is not an easy route to no payments, however, as these programs require as much as 10 years of on time monthly payments and specific criteria for the teaching or service to qualify. If you are a teacher or public servant, find out if you could qualify here. Additionally, the military forgives student loans under certain circumstances.

The Bottom Line

Student loans are like relationships: communication is important! No matter what difficult financial situation you find yourself in, talk to your lender about your options. As long as you are making a good faith effort to pay back your loans, your lender will make an effort to work with you.

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From A to Z: Transitioning from Soldier to Civilian

As an Active-Duty service member, we tend to take things for granted – food, shelter, and even that direct deposit on the 1st /15th. When things are suddenly wrenched away from us – for whatever reason, it can come off as a stiff punch to the gut. Leaving many wondering how they’ll survive in the “real world,” and questioning the rationale behind their departure. But the fact remains, as a member of the United States Armed Forces, you’re an individual with a unique resolve and acumen for survival. In preparation for your departure, a few key elements should be addressed.

Preparing for the Military to Civilian Transition

Prepare in advance. What is it that the Boy Scouts of America say? “Be prepared?” Well, for whatever reason you’re leaving the military – be it voluntary, retirement or due to medical issues, anticipate your departure. Know your separation date and start preparing in advance. Inform family members, friends, possible employers, and whomever you feel in need of that precious information, in the loop. Also, know where you’re going. Once you are out, you’re out. Base privileges generally expire; you surrender room keys and Active-Duty identification. It’s a smart idea to have civilian I.D. readily available, along with pre-arranged accommodations.

Keep track of your service records. Similarly, it would behoove a soon-to-be civilian, to gather all records prior to separation. Military service records document where, when, and who you served with. Be it the streets of Fallujah, Edwards Air Force Base, or Joint Base Pearl Harbor, these reports essentially provide proof of service. School certificates, copies of your security clearances, and miscellaneous recommendations from Commanding Officers and/or supervisors should be collected prior to exiting the main gate. Shortly after separation, a service person should receive a DD-214 – probably the most important of all military records.  It is a service member’s official release or discharge from Active Duty. Make several copies and if possible, scan them digitally.

Medical Records – also a must have. This packet details all the sprains, colds, and ingrown toenails a service member may have incurred while Enlisted/Commissioned. These injuries may seem trivial at the moment, but further down the line, they may (unfortunately) come back to haunt you. Aside from physical pain from your ailments, medical bills in the civilian world can be quite costly.  Assure you’ve made copies of your medical records – preferably several. The Veterans Administration uses these files to determine your Disability Rating. A subsequent percentage assignment follows, equating to potential monetary compensation – and hopefully life-long medical care.

Although you may have served your country honorably, you need to have the documentation to back it up. When transitioning from Active Duty to civilian, assure to collect all your records – the financial and medical benefits are plentiful.

Over the next few days, we will share with you some tips on making the military to civilian transition, with the goal of giving you the tools and resources you need to better prepare for this major life event.

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Can Your Investment Returns Make REDUX a Good Retirement Option?

We previously wrote an article about the pros and cons of taking the military REDUX retirement option. Service members who joined the military after August 1986 are eligible to choose from one of two retirement plan options: the High 36 retirement system (also called High-3) and the REDUX (CSB) retirement option, which gives eligible military members the opportunity to receive a$30,000 Carer Status Bonus when they achieve 15 years of service. This Career Status Bonus comes at a cost, however. Military members who elect to receive the bonus also receive a reduced pension in retirement and a reduced annual Cost of Living Adjustment (COLA).

Here is what a military pension looks like under the The High-3 Average Retirement System and with REDUX:

  • High-3: No bonus; REDUX: $30,000 Career Status Bonus.
  • High-3: 50% at 20 years, plus 2.5% per additional year; REDUX: 40% monthly retirement at 20 years, plus 3.5% per additional year.
  • High-3 & REDUX: *Maximum monthly retirement benefit 75% of base pay at 30 years.
  • High-3: COLA = CPI; REDUX: COLA = CPI -1%.

*The maximum retirement pay of 75% can be exceeded under limited circumstances; these are general guidelines. CPI = Consumer Price Index.

The COLA percentage makes all the difference. On the surface, it appears as though REDUX may come out ahead when a military member stays to 30 years, since they would receive 75% of their base pay and the $30,000 Career Retention Bonus. But it still fails to take into account the decreased COLA, which is 1% lower. Think of it as settling for a 1% lower pay raise each year while your peers automatically receive a larger raise. Since raises are cumulative, it doesn’t take long for the raises to exceed the difference in the Career Retention Bonus (especially when you take taxes into consideration). Note, there is a one time adjustment at age 62 to bring the cost of living in line with the non-REDUX option, but the rate remains at CPI-1%, and the gap again widens.

Is REDUX a Good Option if You Invest the Bonus?

This is a popular question, and one I will answer with another question: Can you beat the stock market?

I don’t mean, can you find a winning stock and turn a few hundred dollars? Anyone can get lucky. I am asking if you can consistently beat the stock market year in and year out for decades. Can you take that $30,000 bonus, deduct taxes from it (leaving you with just over $24,000 or so, depending on your tax bracket), and turn it into hundreds of thousands of dollars?

And that is assuming you remain in the military for 30 years and max out your pension at 75%. If you retire at 20 years and receive a 40% pension, then you will potentially need to turn the Career Retention Bonus into millions of dollars to make up the difference in lost earnings between the High 3 retirement plan and the REDUX option.

Taxes are bigger than you think

Keep in mind when making these calculations that taxes are an important consideration. Unless you receive the lump sum payment of $30,000 in a tax free zone, you will need to pay taxes on the $30,000 income you receive, which leaves you with much less than $30k to begin your investments. In virtually every case, you would need to far exceed market returns to beat the difference between the REDUX and High-3 retirement systems. Then you need to take into account the taxes which will be assessed on your investment earnings, since you won’t be able to shelter the entire $30,000 in retirement accounts.

Don’t gamble with retirement

You can argue for investing all day long, but if you are a good enough investor to beat consistently beat the market for decades, you are among the top 0.001% of investors in the world and should be on Wall Street or working for Warren Buffett. The simple fact is that is not likely the majority of people will be able to do that. But why would you want to risk it anyway? The purpose of a pension is to earn a secure income, not gamble.

Without changing anything, a military retirement is worth millions. By the time you factor in health care and other benefits, it is worth several million dollars.

A military retirement pension is a stable income stream and anything you can do now to increase your retirement payments will have a lasting and cumulative effect on your retirement security. On the flip side, anything you do now that potentially decreases your retirement income reduces your long term security.

You can think of your retirement plan as very secure bonds in your investment portfolio – the reason you invest in bonds is for a more stable income stream. If you want (or feel you need) more risk, then use your other investments to satisfy that need. Since your pension is considered ultra secure, you may be able to take more investment risk in the rest of your portfolio including in your retirement accounts like your Thrift Savings Plan, IRA, 401ks, or taxable investments. (that isn’t to say you should take more risk, just that you can make a case for it more easily than you can with taking a reduced pension so you can play the stock market).

When is REDUX a good idea? There may be limited circumstances when it makes sense to take REDUX, but in most cases, the math never works. If you are considering taking the REDUX retirement option, I highly recommend meeting with a financial planner who understands the ins and outs of this retirement plan. Sit down with the planner and run the numbers several times. Here is a High-3 and CSB/REDUX Comparison calculator provided by the DoD. Run your situation through different scenarios and see how it looks.

Why does the government offer REDUX?

The reason REDUX is offered is simple: it saves the government millions of dollars every year in reduced pension payments, and since military pensions often last decades, the potential government savings each year can top hundreds of millions of dollars. If this wasn’t a good option for the government, they wouldn’t offer it in the first place.

But don’t take their word for it, or my word for it – run the numbers yourself. One resource to use is the REDUX calculator, which can help you better understand how much you can earn with each retirement system. Then you can use this information to determine how much your investments would need to earn to make it worth taking the REDUX option

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Are Gift Cards the Perfect Christmas Presents?

One of my favorite gifts to give and receive is the gift the card. It allows the recipient to get what he or she wants, while at the same time conveying that you’ve thought things through a little bit when it comes to choosing the present.

Giving gift cards can also help you keep your Christmas gifts relatively inexpensive — while still being respectable. Here are some of the reasons I like gift cards:

Show your thoughtfulness: A generic gift card from Visa doesn’t really show your thoughtfulness. However, a gift card from a place you know the recipient will like does show thoughtfulness. A gift card to a favorite store, or the restaurant he or she has been dying to try out shows thoughtfulness while still allowing the recipient flexibility in spending.

Save money with discount gift cards: Not only can you should your thoughtfulness, but you can also find discount gift cards. Many web sites offer you the chance to get gift cards for less than their face value, allowing you to stretch your gift-giving dollar (or allow you to save money on every purchase if you plan well). One of the best places to buy and sell gift cards is Plastic Jungle, which offers hundreds of gift cards at substantial discounts, sometimes as much as 10-30% off face value.

Easy to send to distant loved ones: Another reason I love gift cards is the ease with which you can send them. You can drop them in an envelope, and pay regular postage. Give a gift card online, and there is no shipping at all; you don’t have to worry about it going astray or arriving late. You can send your love to distant loved ones quickly and conveniently.

Giving gift cards can be a way to improve your holiday shopping experience, and complete your transactions with ease, while also not having to worry about whether or not the recipient is receiving a duplicate gift.

Are Gift Cards Always the Best Presents?

Gift cards do have their down sides, though. For one thing, there might be terms and conditions that cause problems. For the most part, the rules in the Credit CARD Act prevents a lot of former abuses, but there are still some things to watch out for. Read the fine print when you purchase a gift card to understand the terms and conditions.

Also, realize that some gift cards come with fees for activation. When you purchase an American Express gift card, or a Visa gift card, you usually have to pay a fee up front. The recipient doesn’t pay a fee, but you do. If you buy 10 gift cards, your $3.95 activation fee for each adds up to $39.50! That’s extra spending on holiday gifts. Instead, look for gift cards that don’t come with activations fees.

Understand, too, that some people don’t like receiving gift cards. Even if you go through the effort of trying to provide a unique experience with a gift card, some recipients still feel as though gift cards are a bit impersonal. Be aware of recipient preferences as you complete your Christmas shopping.

What do you think? Are gift cards good Christmas presents?

Buy, Sell, and Trade Gift Cards

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Financial Tips to Start the Year on the Right Path

The end of the year is a great time to review your financial situation and start planning for the coming year and beyond. This is also a great time to take advantage of some financial opportunities before the year closes, such as year end tax deductions and retirement plan contributions. You may also find that your personal and financial situation may have changed, so you may need to adjust your previous financial plans. Let’s take a look at a few things you can do to close out the year on a high note and start the new year on the right path.

Take Stock: Review Your Personal and Financial Situation

Path to Financial Freedom

Are you on the right path?

A lot can happen in a year – your employment situation may have changed, you may have moved to a new location, you have gotten married or had children, or you may have lost a loved one. These are all major changes and can affect the way we go forward. Take some time to reflect upon how your personal and financial situation has changed and think of ways you can create a new financial plan to meet your changing situation.

This is a good time to involve your family members and discuss your short and long term goals. This includes things such as buying a home, paying for education, getting out of debt, planning for retirement, or taking a family vacation. All of these things may be possible if you can plan for them in advance and create a plan to achieve them. This plan could include creating a budget, generating more income, relocating, finding a new job, paying off debt more quickly, investing more, or making certain sacrifices. Remember, your situation is unique, so you and your loved ones will need to create a plan specific to your needs.

More year end money moves

Taking stock of your financial situation and looking at the big picture is always a good idea. But there are also several smaller things you can do which can save you a lot of money in the long run and set you up for a brighter financial future. Some of these tips are below:

Prepare for Next Year’s Taxes

There are multiple ways you can save money on your taxes at the end of the year. Some tips include making retirement plan contributions, donating to charities, taking business deductions, selling investments to capture losses, prepaying deductible expenses such as child care, making certain home improvements, and more. Here is a list of year end tax planning tips.

Max out Retirement Contributions

One of the most important things you can learn about retirement planning is this: You only get one shot at contributing to your retirement plans. This message is important in two ways – the first is that you are only young once, and the sooner you invest, the longer you have for compound interest to work its magic. The second reason this is important is because retirement contributions are limited by the calendar year. Once the contribution deadline is gone, you can no longer contribute for that year. Take advantage of your opportunity to contribute to your retirement plans while you can. Here are the IRA contribution limits, TSP Contribution limits, and 401k contribution limits.

Review your insurance coverage

The end of the year is also a great time to review each of your insurance policies. You should consider the type and amount of each insurance policy, and think about whether or not it still makes sense for you. For example, you may need more or less insurance if you have gone through any major life events, including moving, getting married, getting a new job, etc. Once you determine the right level of insurance, it’s a good idea to compare insurance policies by getting free insurance quotes. These articles may be helpful: How much life insurance do military members need?, Save money on auto insurance rates, Save money on your homeowner’s insurance.

Start a Plan to Get Out of Debt

Debt is the number one killer of financial goals. Early retirement, buying a home, paying for college, and other large financial goals become more difficult, if not impossible, when you have too much debt. Getting out of debt can be difficult, but it isn’t impossible. It all starts with a plan, and the dedication to stick through the plan. If you don’t know where to start, then I recommend beginning with these tips for getting out of debt.

Do you have any other tips to end the year on a high note?

photo credit: monkeywing

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Save Money on Every Purchase

I’m a big believer in never paying retail unless you have to, and thankfully, you can almost always save money when you shop – both online and offline. And today, I’m going to show you can save hundreds, or possibly even thousands of dollars every year without being an extreme coupon clipper!

Save Money on Every Purchase

The following tips are easy to do, don’t take much time, and never cost you anything:

Coupons = easy savings. Yes, I just told you that you don’t need to be an extreme coupon clipper to save money, and you don’t. But it doesn’t hurt to check there first, since coupons can be a quick and easy way to save money if you were already planning a purchase. The easiest place to find coupons without spending a lot of time is in the Sunday paper, and the weekly circular you probably find in your mailbox each week.

Unfortunately, there aren’t always coupons for your favorite purchases. That’s when I recommend the following methods for saving money: Ebates, Plastic Jungle, and cash back cards. Let’s take a look at each of these in more depth:

Ebates – save money when you shop online

Ebates is an online shopping portal that gives users cash back to shop through their site. How does it work? It’s simple: All you need to do is sign up for an account, then do your shopping through their website. To make it easy, Ebates has partenered with over 1,200 retailers, and they often feature specific coupons and savings you won’t find anywhere else. Once you locate the store in their website, just click on the link and you will be sent to the store. Then you just shop as you normally would. Once you make a purchase, you will receive a portion of the sale as cash back in your Ebates account – there are no points to count, no hoops to jump through, etc. Once you reach a certain level, they send you a check. It’s quick, easy, and free to sign up for an Ebates account, and for a limited time you can get a bonus gift card of up to $10 once you make your first purchase of over $25.

Does it work? You bet! I’ve been using Ebates for about 4 years now and have received over $500 cash back in that time – all from purchases I was planning on making anyway.

Join Ebates for Free

Get a Bonus Gift Card when you sign up for a free Ebates account and spend $25!

Ebates is only good for online shopping, but that’s OK. We’ve got another way you can save when you shop at brick and mortar stores – gift cards. How can you save money by using gift cards? It’s actually quite easy – buy them at less than face value!

Plastic Jungle – buy and sell gift cards

Plastic Jungle is another site I love to use when I want to save money. Plastic Jungle is basically an auction house for gift cards. They buy gift cards at less than face value from customers who want cash for their gift cards, then they sell them at a discount to other customers (you can think of it like a currency exchange). The savings for the gift card buyers can be substantial – you can often save 10-30% off the normal face value of the gift cards. I almost always go to Plastic Jungle if there is a large purchase I am planning on making in the near future, especially if it is something I can only get at a brick and mortar store. For example, the last time I had a big home improvement project I bought a gift card to Lowe’s at a 10% discount. Add that savings on top of a military discount, and you can save a lot of money!

Some of the stores featured at Plastic Jungle include: Amazon, Best Buy, Home Depot, Lowe’s, Kohl’s, Sears, Target, JC Penney’s and more. The inventory changes frequently, since they can only sell gift cards to the stores they have in stock. The best time to shop is right after the Christmas season or after major holidays such as Mother’s Day and Father’s Day. But there are almost always great cards year round. Visit Plastic Jungle to save money on gift cards.

Buy, Sell, and Trade Gift Cards

Save money on every purchase with a cash rewards debit or credit card

If you want to take this a step further, you can also get cash back virtually every time you make a purchase by using a cash rewards debit card or credit card. The good news is, you can even stack your discounts when you use a cash rewards card. For example, you can shop online using Ebates to get a percentage cash back from Ebates, and get a percentage cash back for shopping with your rewards card! Most of these rewards are in the 1-2% range, but some of the best cash rewards credit cards offer cash back in the 5% range for select categories.

Here are some recommendations for saving money with cash rewards debit and credit cards:

PerkStreet Financial(SM) MasterCard® Debit Card

Do you have more tips for saving money on every purchase?

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