Joe sent me a question about priorities. He feels his chosen career path is not one destined for the big bucks, but in pursuit of said career, he has racked up some debt. Fair enough, that’s a common situation. He also has some decent retirement investing options laid out in front of him by his employer.
The perennial question is whether it is worthwhile to wait before taking advantage of his employer’s matching retirement contributions in order to to use what cash he has available to pay off debt.
His full email and my response follow. Please feel free to add in your opinion in the comments. I am not a financial advisor and I know I have readers who have experienced all kinds of situations and have infinite wisdom as a collective. [click to continue…]
According to the Motley Fool UK, the Consumer Credit Counseling Service (CCCS) has stated that unless parents are in the fortunate position to provide their children with “absolute financial support” during higher education, that students must accept debt as a fact of life. (Students Must Accept Debt, Motley Fool UK.) The rising cost of a college education contributes to this, of course, as does the necessity of a degree for the “best” career paths — those with the highest earning potential.
In general, individuals with a college education will earn more over their lifetime (though there are notable exceptions), justifying the extra expense up front. The best of both worlds is then to limit the expense where possible, and therefore the debt, and still earn that worthwhile degree.
Here are some options beyond loans for students whose parents are not in the position to provide “absolute financial support.” If these can be combined, the student will have less exposure to debt.
Get scholarships. It is possible for scholarships to pay for your entire college education, but not easy. Most scholarship programs require students to excel in a certain area, academic or extracurricular, and the chances of exceling at enough different areas is low. Some scholarships are based on your ethnicity, as well. If you’re a minory, you may be in luck. Start with the College Board’s Scholarship Search.
Find grants. Grants are the next best things to scholarships. In general, the funds are more limited, and are based mostly on need rather than academic prowress. Grants are also used to encourage students to undertake certain disciplines. For example, as teaching is often an unattractive profession — this comes and goes in phases — grants (and loan forgiveness) are occasionally offered to those studying education. Here’s a good overview of what may be available.
Attend a low-cost college. Attend a public university rather than a private university. Still, rather than a public university for four years, spend two at a community college and finish the degree at a public university. Take into account that the connections you make at college and the degree you receive, in some disciplines, may have an effect on the first job you receive out of college. That first job — if you continue your entire life on that same career path — can affect your earnings over your lifetime. (My first job was for a non-profit organization earning about $550 a week. I could have done that without a fancy bachelor’s degree from my private land-grant university.)
Take advantage of work-study programs. If you qualify, a work-study program is a way to earn income that can be used for paying college and living expenses while still earning the degree. This is my less favored option, as to make the most of the educational process, the stress of a job can be distracting from the true goal of the four years. Not all college jobs are created equal; A minimum-wage job at the university library, would not be too distracting at all, unlike a higher-paying job at the local strip club (not endorsed by the Federal Work-Study program).
Corporate sponsorship. My current company offers significant tuition reimbursement — enough to cover public university tuition in many cases — for those employees earning the bachelor’s degree. Other corporations provide the same benefits. There may be a requirement that the degree be in a field related to the company’s business or the division. For example, a financial services company may require a degree in business, accounting, finance. If you work in the company’s human resources department, you may need to earn a degree in human resources to qualify for reimbursement.
The company will pay the school in advance of each semester, so you do not have to deal with loans at all — though college aid advisors recommend getting a federal loan and using the reimbrusement to pay back the loan immediately. This ends up costing more thanks to origination fees. It also opens up the chance of not using the reimbursement to pay off the loan.
Other options. If I remember correctly, I could have gone to Princeton University for free, if I had been accepted. That benefit would be awarded to me because my mother worked there for the time I was going to college. I didn’t apply to Princeton as they surprisingly do not have a strong undergraduate music program and I probably didn’t have the GPA. (I later discovered, as an undergraduate playing in ensembles when home over the summer with Princeton graduate students, that I might have received a better education and had exposure to better peers in my chosen field than where I was.)
It’s going to take a combination of all of the above to completely avoid debt when it comes to paying for higher education. I believe it can be done, but in some cases, such as working and maintaining eligibility for scholarships, may put too much of a strain on the student.
I’d like to hear stories from anyone who has managed to graduate with a bachelor’s degree without incurring any debt. What choices did you make and were there any sacrifices? Please feel free to share.
Here’s an example of a recent question and answer session, but I’m only including a portion of the answer.
Question: Two months ago I co-signed a car loan for my son and now he is not making the payments. I don’t need another car, how can I get out from under this one without ruining my credit?
Answer: This is a life lesson on why you should not cosign for a person, even though you were only trying to help. You will not be able to “get out” from the debt. In order to keep your credit in line, you need to consider paying the payments until your son can start resuming the payments himself. A stern conversation with your son may be in order.
If you’ve watched television late at night, as I do when I’m trying to come up with things to write about here on Consumerism Commentary, you might come across Gary Coleman pitching cash loans. Here’s the commercial I keep seeing (embedded video). If you can’t see it, here’s the direct link.
Arnold’s talkin’ ’bout CashCall, which provides immediate cash loans in states where they are legal. These aren’t quite “payday loans,” which are expected to be fully paid back within a couple of weeks. These are long term loans, and if payments are made monthly, they would extend four or eight years. Look at these ridiculous rates. As a resident of New Jersey, I would not “qualify” for a loan, but here is what I would be paying if I lived in Pennsylvania and qualified for these loans.
What the website doesn’t tell you is how much money you’ll actually pay for the “benefit” of immediate cash, including the $75 origination fee. Their chart should look more like this, but then maybe people would not be nearly as interested in these products.
Desperate times call for desperate measures. Gary Coleman is living proof of that adage. All the more reason to cover yourself by having a stash of accessible cash or highly liquid savings — or at least, available credit — for emergencies.
By the way, the situation is worse if you live in Nevada.
Donna Freedman’s MoneyCentral article reminds me of an issue with which I consistently fail each time I’ve made the attempt over the last few years. In the article, the author provides some success stories for those who have saved money by “brown-bagging” their lunch rather than buying each day.
Here is one example:
“I never really noticed how much money I was putting down the drain,” said Lizz Johnston, a secretary from Texas who kept bread, peanut butter, soft drinks and other basics at work. She saved about $200 in restaurant meals, plus the cost of the gas she would have used to drive 10 miles each way to the nearest lunch joint. She’ll throw the savings against credit card debt.
I have to face the truth: I don’t like spending time preparing my food. The supposed motivation of saving about $5 a day, or $100 a month, is apparently not enough to get me to better plan my shopping excursions and spend some time Sunday nights preparing my lunches for the week. Perhaps I am just lazy, but whatever the reason, I struggle.
At the end of last year, I set a goal to keep my groceries and dining out down to $200 a month combined, and packing my lunch would be a big part of this adjustment. If I were to accompish this goal, I’d be saving up to $200 a month, which would be a nice portion of my coming rent increase.
Rather than packing my lunch, I go out to eat every day with several of my coworkers. While this option is usually less than our company’s cafeteria, it’s definitely more expensive than what I could be doing myself. In addition, while I really enjoy my coworkers, it’s not like spending my time with them will enhance my advancement opportunities here.
Part of me wants to accept failure and go on with my current spending pattern. I believe being responsible amout money includes accepting your limitations. On the other hand, I don’t want this to be a limitation. It should be easy! Anyone should be able to prepare their lunch ahead of time, theoretically.
$200 a month is $2,400 a year, and that is some significant dough that will go a long way in paying for more necessary expenses or saving for the future.
If I want to do this, I need to break it down. If I pack my lunch one day a week, without making any other changes, I might be able to save $20 a month. At that amount, it doesn’t even seem like it’s worth the effort.
At this point, I don’t plan on buying groceries again until I’ve moved into my new apartment, so I won’t be making my lunch for at least another few weeks. For when I do, I found one good tip in the article that might make the difference for me. The article suggests buying prepackaged salads and pre-cut fruits and vegetables. They’re more expensive but less time consuming than buying salad ingredients and making the salad yourself, for example.
At the root of the issue is motivation. Self-motivation for me is very difficult because I am always operating on at least the two levels, the motivator and the motivatee. My brain seems to think such a psychological structure is ridiculous and therefore ignores my own attempts at motivation. Anyone have any tips?
Unfortunately, I don’t have this particular “problem” at the moment. But if I had, CNN Money can provide some suggestions (43 of them) for dealing with the unexpected income.
1. Best return with no risk: Pay off your highest-interest credit card debt
2. Best 12-month return (risky): Vanguard Growth Index fund
3. Best 12-month return (riskier): 200 shares, Tech Select Sector SPDR
4. Best 12-month return (riskiest): 2,500 shares, Cygne Designs
5. Best long-term returns: T. Rowe Retirement 2045
6. Best long-term returns: T. Rowe Price funds split
7. Best long-term returns: Vanguard fund mix
Number one is not an option for me, as I only use credit cards for regular spending that can be covered when the bill is due. Thus, I never pay an interest. I’m surprised that paying off other debt isn’t mentioned anywhere in story. I still have more than $15,000 in student loan debt (from both my undergraduate studies and my master’s degree for which I didn’t always apply my reimbursements to tuition), and I think that would be one of my first choices for an unexpected $5,000.
However, if I’m not buying a house in the next few months, I will be sometime within the next few years, and I’d like to have significant cash ready for the down payment. A certificate of deposit right now could provide guaranteed returns which after tax about match the interest I pay on the student loans.
CNN Money, in their seventh answer, suggests investing the $5,000 with $1,000 in the Vanguard emerging markets ETF, $1,000 in the small-cap ETF, and and $3,000 in the total international stock index. I don’t think that’s a wise allocation. International stocks have had their run and the dollar is at or near all-time lows compared to other currencies. That makes foreign investments more expensive.
I think putting $5,000 in the market right now, with the indexes at or near record highs, is a little riskier than the article leads the readers to believe. That’s why I’ve changed my future 401(k) contributions to be a little more conservative for the time being. I’ll switch my contributions back to “normal” when prices look more like a discount. Even with the changes in my 401(k), I’m still investing in the market in other accounts, so I’m hedging my bets a little.
I’ll look at some more of CNN Money’s suggestions later, perhaps throughout the week as time permits.
If you’re interested in seeing your bottom line decrease each month, here are a few tips courtesy of CNN Money. Personally, I’d rather see my number go up each month, but perhaps that is just me.
Ignore your money. Buying and holding doesn’t have to mean “owning and ignoring.” Asset allocation is one of the best examples of this. If you are 5 years into retirement, and you haven’t changed your asset allocation since you were 30 years old, it may be time to determine what your goals are and change you asset allocation to reflect that. If you invest directly in companies, understand that they change over time.
Buying too much house. “As a general guideline, it’s best not to spend more than 2-1/2 times your income on a home. Your total housing payments should not exceed 28% of your gross income. Total debt payments, meanwhile, should come in under 36%.” According to the first quoted rule of thumb, to afford a $200,000 condominium, in New Jersey or anywhere else, your income should be $80,000.
Driving too much car. “Chris Cooper [financial planner, not actor], has suggested as a rule of thumb that you don’t spend more than 8 percent of your monthly gross income on a car payment…” I think this isn’t looking at the big picture. It’s much more important to find a car that’s reliable and whose life will extend far beyond the time you stop making payments.
Paying the IRS, not yourself. CNN Money strongly suggests self-employed individuals — and anyone can be a self-employed individual — lock away 25% of their self employment income after expenses into a SEP IRA. I recently opened my 2006 SEP IRA, and I think it’s a great idea.
Always getting what you want. Wait, isn’t it a good thing to get what you want? Nah, accumulating things just ads to clutter and can lead to spending more than you earn, which leads to uncontrollable debt. Delay gratification, maybe.
Letting your assets linger. CNN Money begins to channel Robert Kiyosaki, and stresses the importance of *income-producing assets* and their benefit over *expense-generating assets.* Net worth is not always the best indicator of financial health. Cash flow is more important in some cases, so assets that assist your cash flow are ones to hold and assets that send money out the door should be eliminated.
Letting your debt lie. If you have debt, pay it off. Try to take advantage of better rates whenever you get the chance. CNN Money suggests switching an adjustable rate mortgage to a fixed rate and moving credit card balances from a high-interest card to one with lower interest.
All this week, Consumerism Commentary will be featuring guest bloggers. In this post, NCN from No Credit Needed hearkens back to elementary school fire safety seminars and applies the familiar mantra towards debt. In addition to his main blog, NCN manages the No Credit Needed Network and the No Credit Needed Podcast.
Many of you will recognize the phrase “Stop, Drop, Roll” from your elementary school fire-safety classes. Every year, one of the local firefighters would come to my school, and talk about what to do in the event that my clothes caught on fire. I was to STOP what I was doing. I was to DROP to the floor. I was to ROLL around to smother the fire. I have forgotten many of the things that I learned in elementary school, but I will forever remember the phrase “Stop, Drop, Roll.”
I bring this up because many of you are on “fire.” You are in debt “up to your eyeballs,” you are afraid, and you don’t really know what to do. May I suggest that you “Stop, Drop, Roll.”
Stop.
Stop whatever you are doing and THINK about the direction of your life. Two years ago, I realized that I had bee working for 14 YEARS and that I had a negative net worth, $11,500 worth of debt, and less than $500 in the bank. I had to STOP what I was doing and deal with the situation. You cannot change directions without first stopping to turn around.
Drop.
So, I DROPPED what I was doing. I decided that I would discontinue the behaviors that were causing me to go into debt. I would drop borrowing money, drop using credit cards, drop living without a plan, drop arguing with my spouse about money, and drop ignoring my finances. (If you were on fire, wouldn’t you DROP whatever you were doing to deal with the fire? YES!) In the firefighters’ example, I was the one who was supposed to “Drop.” In our example, the extraneous bad habits that are sapping our strength get “Dropped.” Imagine that you are going to run up a hill. Is it easier to run up the hill unencumbered, or with a 50 pound sack of rocks tied around your waist? I had to DROP the behaviors and the attitudes which were “tied around my waist.”
Roll.
Now that you have STOPPED to think about where you are, and DROPPED those things which were holding you back, you are ready to ROLL. I will use myself as an example. Two years ago, I had $11,500 worth of debt. Today, I am debt free. I had no savings, now I have a fully-funded emergency fund. I was not saving for retirement or college. This year, I plan to save 60% of my gross income. How did all of these things “happen?” I stopped to consider where I was, I dropped my bad habits, I turned around, made a plan, focused, found some accountability, and began to ROLL in a new direction. Once you decide to change your future, and to be INTENTIONAL about your decision making, you can see dramatic results.
NCN says: “I’d like to thank Flexo for allowing me to contribute this guest post. I’m a HUGE fan of his blog and he’s always supported my sites. Personal Finance Bloggers ROCK!” You can read more about getting out of debt and spending wisely at No Credit Needed. NCN will also be hosting the Carnival of Personal Finance tomorrow morning!
Email this article
Print this article
Get scholarships. It is possible for scholarships to pay for your entire college education, but not easy. Most scholarship programs require students to excel in a certain area, academic or extracurricular, and the chances of exceling at enough different areas is low. Some scholarships are based on your ethnicity, as well. If you’re a minory, you may be in luck. Start with the 
