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Debt Reduction

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.


[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.


The realist in me recognizes that the best plan for getting out of debt is any plan that allows someone to achieve that goal. The realist is constantly at odds with the optimist in me, the part of me that wants people to be high achievers, to strive for excellence, and to seek an informed level of knowledge and use that knowledge to make the best decisions for their actions.

The concept of the Debt Snowball always bothered me. In general, paying off any amount of debt with cash flow, whether you follow a specific philosophy, involves three steps.

  1. Pay the minimum amount due to all debts to avoid accumulation or capitalization of interest.
  2. Pay any extra cash flow to the one debt you prioritize the highest.
  3. As you find yourself with fewer minimum payments to make through the elimination of a debt, don’t reduce your total debt elimination payments. Just shift to focus even more on the debt of the next priority.

Dave Ramsey, a very popular personal finance guru who has written several books, sells a seminar called “Financial Peace University,” and has a radio show through which he weaves in “Christianity Lite” into his philosophy, coined the “Debt Snowball” term.

The Debt Snowball plan follows the process outlined above and provides a prioritization plan based on size of debt. The most important debts are the smallest accounts; in this manner, the smallest debts are paid off first, theoretically or allegedly giving those on this path an emotional boost of success, which in turn, theoretically or allegedly provides motivation to continue with the payoff plan.

Here is a more in-depth discussion of the Debt Snowball. And be sure to quickly review where the Debt Snowball fails — the purported “advantages” of the reliance on emotional boost is a disadvantage when time comes for people to stay out of debt once they succeed in paying off debt.

Experts often relate getting out of debt to losing weight. And there’s a good analogy here. The Debt Snowball is like a fad diet. It’s a pervasive philosophy, very popular, and is communicated through a best-selling book (and online classes, in-person seminars, and an array of branded multimedia). People connect with fad diets becauses they tell people what they want to hear. You can eat everything you want, barely exercise, and still lose weight! Read our success stories and view our (Photoshopped) before and after photographs! Likewise, The Debt Snowball tells people they don’t have to change their emotional approach to spending in order to get out of debt.

The path to unmanageable debt is diverse. Households wind up in debt because they habitually overspend on unnecessary items, they have an unexpected hospitalization, they’re victims of a crime or of society, they have an issue with self-control, they have a mental or emotional disorder, or a variety of other reasons. And because these reasons differ, the debt payoff prescription might need to differ.

For emotional spenders, the Debt Snowball deals with the symptoms but not the root cause. Emotional spenders, who are only able to get out of debt when they rely on emotional boosts throughout the debt repayment process, would be more inclined to fall back into old habits after the debt is paid off. Why? Because those habits aren’t old at all. The habits haven’t been addressed and the root cause, for these particular individuals, remains.

I’m happy to see that writers continue to address the differences between the Debt Snowball and other approaches to the prioritization of debt. I compared the Snowball with the Debt Avalanche, as well as with a hybrid approach and an approach that weighs importance on “emotional impact.” All of these should be considered, and there’s a solution for everyone somewhere in the mix.

The Debt Avalanche, a term I coined, describes a debt payoff philosophy that’s been around as long as credit has existed. It’s the mathematical approach to paying off debt, and it ensures that someone who abides by the plan will get out of debt as fast as possible for as little expense as possible.

That, right there, should be the most important emotional impact when it comes to any plan related to money.

You can’t eliminate emotions. All human decisions are made based on emotions, even when they seem logical. The Debt Avalanche doesn’t try to remove the emotional aspect of getting out of debt, it reframes the emotional aspect so that people who practice it get in the habit of making better financial decisions.

If you want to get out of debt, you should want to take the approach that not only gets you there via fastest path possible, the approach that costs the least (after all, this is about money at the end of the day), and that guarantees long-term success with handling your finances (unlike fad diets and their effect on long-term weight management). And that approach is the Debt Avalanche, prioritizing debt accounts by interest rate.

Myth: The Debt Snowball method is better because it emphasizes “quick wins.” Relying on motivation through quick wins is inferior to the motivation one can draw from the healthier knowledge that you would be saving valuable time and money by understanding the mathematics behind debt payoff. If you keep believing the safe, feel-good emotions rule your money decisions, you will continue to make emotionally-driven, potentially dangerous choices when you’re later in a better situation.

Also, there is also scientific study that supports the claim that the Debt Snowball method (the prioritization of debts with the lowest balance first) has a higher success rate than any other designed and coached system or plan.

If you do like the idea of “quick wins” and other psychological tricks, the Debt Avalanche method still pays off better. You still celebrate when you pay off each debt account, and in most situations, that date you pay off that first account would not be all that distant from when it would have been with the Debt Snowball.

You can create your own “quick wins” by setting midterm goals. Choose $100 total paid off, $1,000 total paid off, or $10,000 total paid off as your goal — any amount that is meaningful to you. Yes, it feels good to cut up a credit card when that particular account is paid off in full, and there’s no scientific evidence that particular action or feeling has any long-term effect on anyone’s finances, but you can still take that approach with the Debt Avalanche if it’s important to you!

Celebrate those milestones! If you want an emotional boost to increase your motivation, make your debt pay-off fun. Just don’t spend money to celebrate that would be better spent paying off more debt.

Focus on the the debt payoff goal. Run a quick calculation to determine how much you’ll be saving by sticking to the Debt Avalanche method rather than the Debt Snowball. The amount of time and money you’ll save may not be much. In fact, the financial advantage of the Avalanche over the Snowball would be zero in one specific and unlikely instance, when the list of your debts, from highest interest rate to lowest interest rate, matches exactly the list of your debts from smallest balance to largest. In that case, add to your projected savings the cost of Dave Ramsey’s books that you don’t need to buy. Put your debt payoff date on a calendar and plan to celebrate it like an anniversary.

Don’t forget the real reason. Money management doesn’t exist solely in a vacuum. There are reasons people want to be debt free and to grow their wealth. Having a big number on the bottom of a balance sheet is not one of these reasons. Looking at an ATM receipt with any particular number is not a reason. People want to build wealth so they can live their lives on their own terms with the freedom to spend time and energy doing something meaningful. Getting out of debt is the first step along this road to financial independence.

The Debt Snowball is popular because of the following reasons.

  • It’s a contrary approach to logic, and people like thinking there’s something better out there than logic.
  • It tells people exactly what they want to hear: you don’t have to change the way your brain works to get out of debt.
  • The Snowball is part of a “philosophy.” Those who accept the philosophy see themselves as insiders with core values that don’t exist outside of the “club.”
  • The philosophy offers a confirmation of pre-existing notions about the nature of money and the financial industry.
  • The movement features an enigmatic leader in Dave Ramsey, a great motivational speaker who earns quite a bit of money from marketing his own brand of math.

The realist in me just wants to see more people get out of debt and understands that any method for doing so is a “net positive.” But when it comes to building financial independence over the long-term, of which getting out of debt is only a part, so much depends on doing more than just the minimum. People must strive for excellence in everything they do in order to see extraordinary results, like financial independence.

The Debt Snowball is a realization of mediocrity. It lets people get away with weak excuses for wasting time and money. That approach says someone doesn’t feel confident enough to take steps towards debt freedom without a “crutch” of quick wins, even though those quick wins aren’t much different emotionally from what you can get out of a superior plan. The quick wins have just been marketed better.

Photo: Flickr


This is a guest article by Donna Freedman. Donna has been a staff writer for MSN Money and Get Rich Slowly. She now lives and writes the frugal life in Anchorage, Alaska for Money Talks News and her own blog, Surviving and Thriving.

Got debt? Do something about it.

That’s the focus of a new debt management campaign from personal finance guru Mary Hunt and Chase Slate®. The “Do Something About Debt” program is a 15-day series of tried-and-true tactics, advice and personal encouragement.

Each year plenty of people resolve -– and fail -– to pay what they owe and to adopt smarter spending habits. Hunt can identify, because she’s always been candid about her own financial low point: more than $100,000 in unsecured debt and interest. It took her and her husband more than 13 years to make good on their obligations.

But pay it back they did, and Hunt vowed to use her new-found knowledge to help keep others from making the same mistakes. She also swore to help those already in debt to recover and learn to live fully and joyously without overspending.

“People need to have a goal: to go on the offense against debt,” says Hunt, author of some two dozen books plus the popular Debt-Proof Living website and Mary Hunt’s Everyday Cheapskate blog.

The new campaign began January 16 and continued through January 30. All the articles are remaining up at the Do Something About Debt site, so you can catch up any time you like.

The usual personal finance tools are included, such as creating a budget, understanding interest rates, the pros and cons of credit, planning for irregular expenses, avoiding certain financial missteps and examining your money attitudes. But Hunt is adding a new weapon to her arsenal: the Chase Slate® card, with a zero-percent APR on balance transfers.

Those who qualify can save with a $0 introductory balance transfer fee, a 0% introductory APR for 15 months on purchases and balance transfers, and a $0 annual fee. Plus, they’ll receive their monthly FICO® score for free. That means they could pay off their existing credit card debt without interest for 15 months when they transfer the balance within 60 days of opening their account.

Not everyone who falls into debt has been out joyriding with the family card. Illness, layoff and natural disasters can send even the most responsible person into the red. Or maybe you truly don’t understand how it all happened. Maybe no one ever talked with you about debt except to say, “Sign here for your car loan/credit card/student loan.”

The bad news is, you’re still on the hook for what you owe. The good news? Using Hunt’s tips and, maybe, consolidating current debt onto a Chase Slate® card could help you work your way back onto firm financial footing.

“This is not some kind of a freebie. You’re going to have to come up with a plan to pay,” Hunt says. “But sometimes we just need an extra break. (Debt) is not ideal –- but that tree falling on your house wasn’t ideal, either.”

While optimistic in tone, the program is tempered by a strong dose of realism: There are no quick fixes, but there are sure fixes –- if you are willing to do the work.

“That’s a powerful message: that you can do something about it,” Hunt says.

Curtis Arnold, senior editor at, included Chase Slate® on his best balance transfer credit cards list, saying the card is an example of “what can happen when banks build long-term partnerships with customers who want to become debt-free.”

[Editorial note: The Slate® from Chase balance transfer credit card offer was last updated on July 13, 2016.]

Photo: Flickr/reynermedia


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