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Richard Barrington

It’s late May, and a new crop of students is preparing to go on to college. One of my less pleasant memories was the agonizing process of securing financing so I could pursue my degree. Though it’s many years later, I’d like to share what I learned that can make paying student loans more manageable and less onerous.

Of course, it was much easier when I went to college than it is now. Even adjusted for inflation, college education was much less expensive then and student loans were a better deal.

The interest rates were actually fairly similar to today’s; but I attended college back when mortgage rates were around 15 percent, so low, single-digit student loan rates represented much more of a discount.

Because student loan debt was less burdensome when I graduated, despite the fact that I took on the debt in a desperate and disorganized way, I was able to pay my loans off early, within five years. These days, the financial stakes are higher, and it takes more planning to make student loan debt manageable.

How to reduce student loan debt

Here are some things students and their parents should consider to reduce student loan debt in the first place:

  1. Consider value for your education dollar. Education is a wildly inefficient market. By that, I don’t mean that the schools themselves are disorganized. What I mean is that if you think of education as a consumer market with heavy competition for student dollars, it is amazing how wide the cost differences are. Even if you excuse the cost of elite colleges as the price you have to pay for a premium product, looking at more run-of-the-mill colleges one finds huge cost differences — sometimes representing tens of thousands of dollars a year — which do not seem generally to correlate with differences in quality. The nice thing about inefficient markets is that they make bargains available, but only to discerning consumers who take the time to shop around. Cheap should not be your primary criterion for choosing a school, but value for money should be high up on your list.
  2. Understand the qualifications needed for what you plan to do. One reason it is not out of place to think of education as a consumer market is that there is so much hard selling of degree programs these days. Often times, colleges heavily advertise degree programs that relate to a trendy career choice, but those degrees do not represent the full qualifications necessary to compete in that field. Don’t just choose a degree program because it sounds like something you’d like to study; think ahead to what you would like to do for a living, and then work backward to identify the degrees necessary to get hired in that field.
  3. Know what the market is for your planned career. Speaking of thinking ahead, research what demand there is for your planned career. The Bureau of Labor Statistics is a good source for information on hiring trends by occupation. I’m not saying you can’t choose more of a niche field because it is something you love, but you should know what your odds of making a living in that field are before you spend time and money preparing for it.
  4. Explore all your financial aid options. The federal government has a program called Free Application for Federal Student Aid, or FAFSA. This is a good clearing house for information and application materials for several types of student financial aid, so you can find the resources you need and choose the best ones for your situation.
  5. Prioritize your financial aid types. If there are grants or scholarships available — sources of aid that don’t require repayment — make the most of those before you borrow money. Then, choose federally-backed student loans first, because these offer good loan terms and some repayment flexibility. Private student loans should be your last priority.
  6. Use savings resources wisely. If you have saved money for college, put it in vehicles that will make it available when you need it and yet earn you the most interest in the meantime. You’ll find that if you are able to plan six months or more ahead, you can find CD rates that will do better for you than what you could earn in a savings account.
  7. Check how your repayment schedules add up before you borrow. Every loan you sign up for will probably provide a repayment schedule, but the reality check is to see how those repayment schedules add up as you take on multiple loans. Graduating students are often shocked by the burden they are facing, but there is no excuse for taking on obligations you won’t be able to meet.
  8. This time is too expensive to waste. Don’t be intimidated by the financial responsibility facing you, but respect it and use it for motivation. Blowing off classes and prolonging your time in school is an awfully expensive luxury. Getting your degree on time can save you a great deal of money.
  9. Remember the bigger picture cost of failing to pay. There is a lot of resentment among recent graduates about the financial burden they’ve taken on with student loans, and this is often expressed as talk about not paying back those loans — either by taking advantage of government forgiveness programs, lobbying for student loan relief, or simply defaulting. Just remember that every student who fails to pay back a loan makes it harder for subsequent students to get those loans. If you approach taking on and paying back loans responsibly, you can make the system work for you and future generations of students.

When you think about it, financing college represents a sort of hand-off of responsibility from the parent’s generation to the student’s. The parent often helps pay for college and guides the student in finding and organizing financing. In the long run though, it is the student left making the student loan payments for years to come — often until he or she has kids and has to start thinking for their college education.

That passing down of financial responsibilities between generations makes this an ideal time to work together to find and plan educational financing, so the older generation can share what they’ve learned and the younger generation can step up and make informed decisions about the process rather than just going along for the ride. Given the nature of the challenge involved, both an older person’s knowledge and a younger person’s eye to the future can bring valuable perspective to the process.

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In chemistry, a catalyst is something that triggers a reaction — but the nature of the reaction itself depends on having the right elements in place to respond to the catalyst.

What brought to mind that tattered remnant of high school chemistry was thinking back on buying my first house.

I’ll explain how I got from home-buying to chemistry — and, in the process, hopefully share some pointers about what elements should be in place when you buy a home and what catalysts might trigger you to react to those elements.

The chemistry of home-buying

The reason I’m talking about home-buying in terms of chemistry is that there is more to buying a home than pure dollars and cents. Don’t get me wrong. The financials are important, and I’ve written a fair amount about some of the financial aspects of home-buying. However, what is equally important is your personal outlook.

Generally, the elements of your personal situation fall into place bit by bit over time, and you might not really notice how they are developing. It can take a catalyst to set everything in motion.

In my case, the catalyst was simple: Our landlord tried to raise our rent by $50. That doesn’t sound like much today; but at the time, it was 12.5 percent of the rent we were paying previously. More than that, it was a catalyst to us. We realized that renting meant being subject to that unpredictability every year when the lease term ended.

Once that catalyst sparked the idea of buying a home, all the right elements were in place for us to follow through on our decision. My career was progressing well, I had gotten married and we planned to have kids, and we had family roots in the area. If it hadn’t been for that catalyst, though, I’m not sure how long it would have taken for it to occur to us to buy a house. So, we have our landlord to thank.

Here’s how the chemistry of home-buying might come together for you.

How to know if it is time to buy a house

Here are some of the right elements for buying a home:

  • Career stability. This does not necessarily mean that you plan on staying in the same job, but that you have in-demand skills and that there is a healthy job market for those skills within commuting distance of the house you plan to buy.
  • Commitment to your area. It could come down to the weather, family and friends, arts and entertainment, or all of the above, but you need to figure out where you want to be for the long haul. It’s okay to be restless when you are young, but it is better if you aren’t that way after you buy a house.
  • Clarity about your household. It might take several years before you start to have clarity on what your household will look like in the future: Will you marry? Do you expect to have kids? Will elderly parents come live with you at some point? The more clarity you have about the size of your household in the years ahead, the easier it is to know what kind of home to buy, though it is always wise to make choices that build in a little flexibility as well.
  • Knowing yourself. Life plans and personal tastes take a while to evolve. Don’t rush into home-buying unless you have a good handle on what you want for the long term.
  • Affordability. This is an entirely different area of discussion; but if the dollars and cents don’t add up, not all the elements for buying a home are in place.

Catalysts can help you decide

Given the right elements, what can trigger you to act on them? Here are some possibilities:

  • A jump in rents. As I mentioned, that did it for us. It changes the current comparison between renting and owning costs, and makes you think about stabilizing your housing expense for the future.
  • Low mortgage rates. You should look at today’s mortgage rates as an opportunity that might not always be there. If home-buying is in your future, you might want to accelerate the timing to take advantage.
  • A change in household. Getting married or having a baby might mean you have to find a bigger place anyway, so you might think about doing that by buying.
  • A strong raise in pay. A meaningful bump-up — beyond the standard annual cost-of-living type of adjustment — could not only give you the financial means to buy a home, but it might also be a sign that your career is well enough on track for you to make that kind of commitment.

In short, besides the math of affordability, buying a home comes down to the chemistry of your personal situation. Perhaps if we had known so much was riding on math and chemistry, we all would have paid more attention in high school.

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The Federal Reserve sure gets a lot of media attention. And yes, the discussion of when and if the Fed is going to raise interest rates can get a little tedious, but it still probably deserves some of your attention because interest rates are woven so deeply into the fabric of household finances.

The Fed finally raised rates at the end of 2015, but you might not be familiar with all the background. The Fed had sunk rates to unusually low levels as a response to the Great Recession. Why? Low interest rates help stimulate growth by making borrowing cheaper, and they also support asset prices from housing to the stock market.

At the same time, rates can’t stay near zero forever. When interest rates are too low, it can encourage inflation. It also leaves the Fed with very little room to lower rates the next time the economy enters a recession.

By the way, as you have probably noticed if you’ve been looking at savings account or CD rates over the past five years, current monetary policy also leaves savers with precious little interest earned on their deposits.

Officially, the Great Recession ended over six years ago, meaning the current economic expansion is already longer than the average post-World War II expansion. So why did the Fed wait so long and only raising rates in small increments?

Historical view of federal lending rates

This is a chart that shows a historical view of the federal funds rate

Credit: St. Louis Federal Reserve


Consider market rates while the Fed calms investors

For much of the past six years, the economic recovery seemed fragile and halting. More recently though, the Fed seems overly concerned with not upsetting stock market investors.

The bottom line, though, is that when the Fed takes action market interest rates are likely to follow the same trend line.
What are market interest rates? These include investment yields on the bond market as well as the type of interest rates you encounter frequently in everyday life, such as deposit rates at banks and rates charged to borrowers on things like mortgages and credit cards.

Here’s where interest rates could affect you

Specifically, what does all this mean to you? Here are some examples of how you might be affected by rising interest rates:

  1. Buying a home could get more expensive. Recent years have seen record low mortgage rates, but any lender making long-term loans is going to be very sensitive to signs that inflation is on the rise. When mortgage rates start to rise, they can move very quickly.
  2. Selling a home could get more difficult. On the other side of the ledger, if mortgage rates make buying more expensive, would-be buyers will have less money to put into the price of the home — and that could come out of your end of the deal.
  3. Even renting could become more expensive. Higher interest rates could affect your housing costs even if you don’t plan on owning a home. Landlords are affected by higher mortgage rates, and you can expect them to pass on whatever costs they can to their tenants.
  4. Credit card debt could get more expensive. Carrying a balance on your credit card is very costly — such balances are charged an average of 13.49 percent, according to recent Federal Reserve figures. If inflation continues to rise, expect that number to go up too.
  5. You could finally start to earn some income on your deposits. The plus side of higher rates is that people who have been earning next to nothing in savings accounts and other deposits could finally start to earn a decent rate of interest again.

Some of the impact you can’t do anything about, but there are ways you can prepare for rising interest rates nonetheless.

What should you do about rising rates?

Since interest rates can start to rise with or without the Fed’s intervention, here are some things you can do to be prepared:

  1. Refinance while you have the chance. Mortgage rates have been rising and could go even higher if inflation continues to firm up. If you haven’t taken advantage of the opportunity to lock in a lower mortgage rate, now may be your last chance. If you can afford a higher monthly payment, consider refinancing to a shorter mortgage to get an even lower rate. This will cost you less interest in the long run because you will be paying interest over fewer years. Also, if you have an adjustable rate mortgage, it might be a good idea to refinance to a fixed-rate loan before rates rise much more.
  2. Be decisive about buying a home. No one should rush into buying a home; but if you have thought it through and were planning to move ahead, you might want to bump it to the top of your list of priorities. Getting in before mortgage rates rise could save you money for years to come.
  3. Shop actively for savings account and CD rates. When interest rates start to rise, some banks are going to react sooner than others. When it comes to savings account and CD rates, you want to look for the banks that raise rates first and farthest. A rising rate environment is a time when some active shopping for bank rates can really pay off.
  4. Keep CD maturities short. Speaking of CDs, keep maturity dates on the short side so that you can roll them over more frequently as rates rise. You might consider a CD ladder so that you will have money coming available for reinvestment regularly. An alternative is to look for CDs with relatively mild penalties for early withdrawal, so you can continue to earn the higher rates of CDs with a longer term and yet break out of the CD at a reasonable cost should rates rise sufficiently.
  5. Pay down credit card balances. You should be trying to do this anyway, but think of rising interest rates as added motivation.

The bottom line is that when interest rates rise, savers win and borrowers lose. That is yet another reason you should strive to get yourself more on the saver side of the equation.

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[Editorial note: This offer was last updated on July 13, 2016.]

Are you still wrestling down holiday debt?

Zero-interest balance transfer credit card offers can help you meet this challenge, but only if you know what to look for. Otherwise, you will end up paying interest anyway, which is exactly what the credit card companies hope will happen.

Time to pay the piper

According to a Consumerism Commentary analysis of Federal Reserve figures, since 1989, Americans accumulated an average of nearly $30.3 billion in new credit card debt in the final three months of the year. In the first three months, they paid down an average of $24.1 billion in credit card debt.

Chart depicting rise in revolving consumer credit from 1989 to 2014

Click on the image to the left, and you can see that Americans run up more holiday debt than they repay after New Year’s Day.

This problem is made worse by the fact that they also run up debt in the second and third quarters of the year.

As a result, credit card debt increased four-fold over those 25 years, to nearly $890 billion.

Balance transfer credit cards – what to look for

What adds to this problem is that the debt accumulates interest, often at high rates. Zero-interest balance transfer credit cards can help, by buying you some time to pay off your debt without interest. However, it is important to know what to look for when considering an offer:

  1. Does the offer apply to your credit profile? Credit card companies advertise their most attractive terms, but these only apply to the most attractive customers – those with strong credit ratings.
For example, a current offer being marketed by Chase Slate can help a consumer save with a $0 introductory balance transfer fee, a 0% APR for 15 months on purchases and balance transfers, and a $0 annual fee. (Chase Slate) That’s over a year of 0% APR for balances transferred within the first 60 days — but the cream of the crop of balance transfer offers are only available to those with great credit. If your score is above 740, you are considered to have prime credit and can probably choose from any offer that’s out there. At the other end of the spectrum, if your credit score is below 620, you are considered sub-prime and probably won’t get the best credit card terms.
  1. How long does the zero interest offer last? These offers are temporary, so compare to see which ones give you the longest interest-free period. Those periods can range from a few months to over a year, so it does make a big difference.
People assume that, when the time expires, they can always roll any remaining balance into a new zero-interest balance transfer credit card, but opening new accounts frequently can damage your credit rating. Ultimately, this could make new zero-interest offers unavailable to you.
  1. What is the interest rate after the initial period? Chances are you will incur interest charges eventually, either on the unpaid portion of your transferred balance or on new purchases. So, it is important to compare rates you would be paying after the zero-interest period runs out.
  1. Is there a fee for transfers? Keep in mind that these fees, which are often 3% – 5% of any transferring balance, will reduce the savings of the zero-interest period. Compare to see which cards have low transfer fees.
As mentioned above, Chase Slate® is one notable example of a card that is offering a $0 introductory balance transfer fee, a 0% introductory APR for 15 months on purchases and balance transfers, and a $0 annual fee as a part of its introductory offer.
  1. What is the credit limit? Make sure the limit is high enough to allow you to consolidate your existing credit card debt, or at least a meaningful portion of it.

The ultimate question: What is your repayment plan?

After you’ve asked all the right questions about different credit card offers, you have to ask yourself one very important question: What is your plan for paying down that debt? You need a budget with a payment plan that lets you project how long it will take you to pay off your credit card balances, preferably before any zero-interest offers run out.

One way or another, the build-up of debt is a problem that won’t be solved by simply moving it around. The best balance transfer credit card offers can help you pay off your debt less expensively with zero interest, but the clear goal must be to pay off that debt completely.

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Best Online Savings Accounts of 2017

by Richard Barrington

The best high-yield online savings accounts offer strong interest rates and great customer service, making them a popular option for savers. In addition, studies show online savings accounts often come with lower fees. Read More “High-yield” is, unfortunately, a bit of a misnomer these days. A decade ago, interest rates were 4 percent and 5 percent among […]

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Retirement Planning and Advice

by Richard Barrington

Retirement does not always go the way people expect. While no two experiences are exactly the same, over time it seems that people’s financial situations in retirement tend to fall into one of a few distinct categories. As you think ahead to how you want your retirement to go, keep the following categories in mind. […]

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6 Ways Your Bank is Ripping You Off

by Richard Barrington

The Occupy Wall Street movement seems to have faded away, but it is fair to say that banks are still not very popular institutions. Fairly or unfairly, the prevailing impression many folks have is that bankers are fat cats who make their fortunes at the expense of ordinary people. However, instead of being mad at […]

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Metrics for your household finances

by Richard Barrington

It’s the heart of the baseball season and, whereas 20 years ago talk about the sport would have centered on the All-Star Game, the trade deadline, and how the pennant races were shaping up, now the chatter is filled with terms like “Wins Above Replacement” and “Defense-Independent ERA.” For better or worse, advanced metrics have […]

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The Best Credit Cards in 2017

by Richard Barrington

With hundreds of credit cards available today, it’s difficult to find the best credit card for your particular situation. Whether you need a travel rewards card or a great cash-back card, the best offers are getting more difficult to find. Today’s credit card offers tremendous rewards as credit card issuers make a concerted effort to […]

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