Student Loan Debt Musings

$23,000+ Per Student... and Rising


When people ask why the economy is not picking up faster... or why more homes aren't selling, there are two simple answers:

1. Unnecessary government intervention in the markets (note the careful use of the word 'unnecessary')
2. Overwhelming debt

I won't talk about #1 today... I'll save that for another day :)  but I will present some additional information that has just been released by the Federal Reserve Bank of New York regarding student loan debt (which, in this case, really is a big steaming pile of #2).


According to the Quarterly Report on Household Debt and Credit, which has a TON of great information about the debt/credit usage of Americans, the total student loan debt in the US is now greater than the total outstanding debt on credit cards AND auto loans!  Yikes!!


The total student loan balance in the US now totals about $870 BILLION ($870,000,000,000)  more than the $693 billion of total credit card balance and the total auto loan balance of $730 billion.  In addition, almost 10% of all outstanding student loans are in arrears.


Given the current state of the economy, there are more and more people 'going back to school' which means that this balance is expected to increase in the near future.  


The average outstanding student loan balance per borrower is more than $23k, and more than a quarter of all student debt holders owe more than $25k.  The median amount owed is a slightly more manageable $13k (meaning half owe more than $13k, half owe less).


If someone is already paying a huge percentage of their income on accumulated debt (credit cards, auto loans and now student loans) their chances of financing a home or investing for the future are greatly diminished.  This does not bode well for younger Americans... Nor for the overall economy.

Credit Card Usage and Musings

I was struck the other day by something I saw on CNN.com regarding the fact that credit card usage, and credit card availability, are both on the rise.


The thing that jumped out at me was this quote in the report:

Credit card mailings have surged 85% since the beginning of 2010 to 1.3 billion credit card offers in the third quarter of 2011, according to analysis conducted by research firm Mintel Compermedia.

Let's spell that out: 1,300,000,000 credit card offers in THREE MONTHS.  According to the US Census, there are 308,745,538 people living in the U.S.  24% of them are under the age of 18 and so, supposedly, shouldn't receive credit card offers.  That leaves about 234,647,000 adults.  That means that, on average, EVERY SINGLE ADULT in the United States of America is receiving about 2 credit card offers PER MONTH via US Mail.


Plus store cards, plus non-mail offers... plus, plus, plus.  Remember, credit cards are a great financial tool if used correctly... but these banks aren't handing out cards out of the goodness of their hearts.  They know that if the amount loaned isn't paid off every month, that they will make good money on the interest charges.  


Be careful out there! 

Contract for Deed is a BAD IDEA

The next generation of predatory lending

Contract For Deed – also known as an Installment Sale Agreement, Seller-Financed Purchase Agreement, Land Contract or ‘Lease-to-Own’ Arrangement – is an alternative to traditional mortgage financing where the seller of the property finances the sale, rather than a bank or third-party lender.  

When buying a home on a contract for deed, the buyer agrees to a sales price and a monthly installment plan, and a portion of the monthly payment is applied to the purchase amount.  Only when all of the conditions of the contract have been met does title to the property transfer from the original seller to the new buyer.

The terms of a Contract for Deed can vary dramatically from one agreement to the next and the payment may (or may not!) include principle, interest, interest-only payments and, in most cases, a sizeable balloon payment with the full amount of the outstanding balance due within a few years of starting the contract.

Contract for Deed is being marketed as an alternative method of homeownership for buyers with less-than-perfect credit as a way to bypass the tougher credit standards of banks.  If Contract for Deed is the only way you can access homeownership – you are NOT READY to be a homeowner.  You should work with a non-profit housing counselor to repair your credit, access programs to save for a down payment, learn about governmental and non-governmental programs that are available to help with costs and otherwise get prepared for homeownership.

Here’s a sample Contract for Deed arrangement that is NOT out of the ordinary:

Click To Enlarge 

What is the buyer agreeing to?

• Original purchase price of $157,900
• ‘Down payment’ of $1,3000 – NOT applied to principal
•  Monthly payment of $1,300
• 10% of monthly payment goes toward principal ($130 mo / $1560 yr) 
• Purchase price INCREASES 5% every year after the second year
•  The entire outstanding amount is due  in four years (balloon payment)

What does this really mean?

• If this were a traditional mortgage (30 year, 5% Fixed Rate), the homebuyer would have a monthly payment of about $848.00 (Note: The monthly payment is HIGHER under the Contract for Deed!)
• If this were a traditional mortgage arrangement, the homebuyer would have paid off over $10,000 of principal in the first four years ($10,290, to be exact), and would have just $147,610 left on the mortgage.
• Under the Contract… because the purchase price increases by 5% per year after the second year, the homebuyer actually owes $167,450!  Almost $10,000 MORE than the original purchase price!

Click To Enlarge

PLUS… As if negative amortization and/or paying too much for a house wasn’t enough, Contracts for Deed have another series of dangers for buyers:

• Seller retains title:  Until the contract is fulfilled, the seller retains title to the property and can, if they choose, continue to accumulate debt/liens against the property.
• Repair obligations: the ‘buyer’ is responsible for all maintenance, repairs and upkeep on the property. 
• Foreclosure of seller’s mortgage: there are little-to-no protections for ‘buyers’ if the ‘seller’ is unable to make THEIR mortgage payment and loses the home to foreclosure.  Any attempt to recoup sunk costs would be expensive and mostly ineffective.
• Default payments: if the ‘buyer’ defaults on the Contract payments, they have NONE of the protections that a buyer would have in a traditional mortgage arrangement under foreclosure law.  A default can result in a rapid eviction and loss of any equity that may have accrued.
• Follow-up financing:  The ‘buyer’ will have to find traditional financing by the time the balloon payment comes due (“Entire purchase price due” in the sample contract above).  This means that the buyer must have improved their credit to the point of being mortgage ready AND the property must also meet the lenders guidelines. 
• Property Taxes / Insurance: Unless the contract states otherwise – and it more than likely won’t – the ‘buyer’ is responsible for paying property taxes and maintaining adequate insurance on the property.
• Loss of First-Time Homebuyer Assistance: When seeking financing to pay off the balloon/outstanding contract amount, the buyer will not qualify for any grant or assistance funds that may be available to low- to moderate-income buyers.

All-in-all, buying a home on Contract for Deed is a BAD idea for buyers.  Once again… if you think this is your only route to homeownership… don’t be afraid to ask for help.  There are non-profit housing and development organizations that offer workshops, counseling and other programs to help prepare you for homeownership.  For a list of trustworthy organizations throughout the country, visit NeighborWorks America, here.

There are also a number of reasons why SELLING your home on a Contract for Deed is a bad idea... but that's a post for another day. 

What's your opinion of Contracts for Deed?  Let us know in the comments, below.  THX!




UDPATE:  This post was chosen to be included in the "Carnival of Personal Finance" hosted on 11/14/2011 by RetireBy40.  THANK YOU!!

Finding Discounted or Free Theater Tickets

The DollarMusings (DM) family loves the theater!  We try to go often and have been known to see as many as 5 or 6 shows a year.  However… as anyone who loves 'the stage' knows, a night at the theater can be an EXPENSIVE undertaking.  Many of the ‘Broadway Run’ shows, even here in the upper Midwest, can easily cost more than $100/person and even off-off-off-Broadway community shows can cost $25 or $30/person. Certainly not for the faint of heart.  


However… there are ways to reduce your expenses and still enjoy great theater!  Here are our suggestions for finding cheap or even FREE theater tickets.  Read through to the end… because we’ve saved the best for last! 

• Social buying sites like LivingSocial, Groupon and Scoutmob.  Many people are familiar with the big ‘social buying sites’… however, you might also want to check out your local professional associations, to see if they have any group buying or social buying networks.  The local Realtor association has an ‘offer a day’ email where members can buy items as giveaways to their clients… or use for themselves.  Check to see if any association you belong to has a similar group-buying arrangement.  Theater tickets don’t appear often on these sites… but we've found  2-for-1 deals… especially at a couple of dinner theater venues near us.
• Your work.  Yup, you read that right… many large employers have discount tickets for local venues, including theaters, available only to employees.  Most of the time you have to order tickets in advance and only for a specific number of shows, but the savings can be rather dramatic... especially if the corporation you work for is also a funder of the theater or production company.
• Ebay and Craigslist.  Most people don’t think about checking online sales or auction sites when they want to go to the theater, but we've found some amazing prices (especially on last-minute ticket purchases) through these sites.  Check out our earlier post on “Finding it First on Craigslist” to see how you can quickly and easily set up an RSS feed to always know when someone lists an item for sale that contains the name of your favorite theater, playhouse or a show you’d like to see.
• Dress Rehearsals.  Traditionally theaters and playhouses offer discount tickets for the final dress rehearsals of a show before they open to the general public.  In the past, these tickets were generally sold at a huge discount, but lately we've seen that the discounts have been drastically reduced and even eliminated at some of our favorite places.  Check out their websites or sign up for their electronic newsletter to learn about any discounts they might have.  Don't be afraid to call and ask either!
• AAA (Updated).  An astute reader (Thanks @Cindy!) reminded us that AAA offers discounts at thousands of locations throughout the country... and that many theaters, especially ones located in tourist destinations throughout the country, offer AAA discounts for members.

AND NOW… we've saved the best for last… and will share with you how we score FREE theater tickets on a regular basis.

• Volunteer.  Many smaller venues and community theater playhouses operate on small or non-existent budgets and rely on volunteers to operate the box office, design/print the ‘playbill’ or work as ushers during performances.  We volunteer, as a family, to work as ushers for a show, and once everyone has been seated, are allowed to sit in any unsold seats, or, if the show is sold out, they’ll let us pull in a handful of fold-out chairs in the back.  It’s certainly not front-row exclusive seating… but for free: beggars can’t be choosers. :-)

Do you have any other ways you've been able to score deeply discounted theater tickets?  Share your experiences with the rest of us!  Click on the “Thoughtful Opinions” button below.

Who REALLY Are The 1%?

I've been watching, with a heavy dose of skepticism, the highly-touted Occupy Wall Street (OWS) movement... and as someone who works in the world of communications, I have to say their media coverage is AMAZING compared to how relatively small their numbers are.


Their message - as muddled as it appears to be - is that the top 1% -  the fat-cats on Wall Street - are making so much money, and control so much of government, that the rest of us (the 99%) have to rise up and take back what is, supposedly, ours.


I decided to see who REALLY makes up the top 1% of wage earners in the U.S... and I think the answer may surprise a lot of people:

Click To Make Huge!  Feel Free To Distribute!

That's right.  According to Jon Bakija of Williams University, Adam Cole of the Office of Tax Analysis for the US Dept of the Treasury and Bradley T. Heim of Indiana University, those fat-cats on Wall Street only make up FOURTEEN PERCENT of the top 1% of wage earners in America.  


Not only that... for generations, the vast majority of Americans didn't look at the top 1% and say "We need to tear them down!  They're making too much!"  The vast majority of us would have said... "Wow!  Some day I'd like to be in the top 1%!"  If this is no longer the case... I think America is in much worse shape than we thought.


Now... if the participants in the OWS movement were to focus on one of the MAJOR problems with the current economic situation in America: the fact that large corporations are in bed with an ever-expanding government - and that government needs to shrink, and shrink dramatically for us to see any kind of recovery - I'd sign up to 'Occupy' something too!

Click To Enlarge.  Feel Free to Distribute!

Crony Capitalism - where the government tries to pick the winners (Solyndra, anyone?) and punish the losers (Gibson Guitars)... is NOT Capitalism.  I've said it before... we need to stop bailing the failing!


The true role of Government in relation to business is to make sure that ALL participants are on an even playing field... not tipping the field in one direction or another.  Shrink the size and influence of the government, including a dramatic simplification of the tax code - and we'll finally see the economic recovery we need!  

Complaints About Your Bank? Do Something About it!

The personal finance / economics blogs and even the national press have all been ‘afire’ over the past few weeks with the news that major national banks, including Bank of America, are planning on raising debit-card fees.  


While the need for banks to increase fees to replace lost income was an ENTIRELY predictable result of the Durban Amendment to the Dodd-Frank Act… you’d think that Bank of America was holding newborn kittens and baby seals hostage by the outrage expressed in the articles and blog posts.


I have a suggestion for BoA customers – or customers of ANY BANK – that is gouging you with new fees (or old fees, hidden fees, low-balance fees, high-balance fees, beautiful people fees, ugly people fees or ANY fees):


VOTE WITH YOUR FEET! FIND ANOTHER BANK!  
(Or better yet, a local Credit Union).


I know it’s easier to complain than to actually DO SOMETHING about bank fees – or poor customer service – but it’s your hard-earned money.  If enough account holders moved their money… these lenders would learn and would change their ways.  

---

I think this attitude has a lot to do with why so many American families struggle with money.  We like to complain and moan and groan… but very few of us actually ACT on our grievances and make a change. We hope that change will happen – or be imposed by someone else.

• We complain about bank fees… but don’t change banks
• We complain about credit card debt… but don’t cut up our cards
• We complain about not having enough savings… but don’t make changes in our budget

Have you ever found yourself complaining about a situation… but then never took any action to change it?  How about the opposite?  Have you found yourself in a situation where, instead of complaining, you acted on it?  Let us know in the comments section… click on the [Thoughtful Opinions] link below!

Gullible Christians

One of the reasons I started this blog was to vent my frustrations about the general lack of understanding of basic financial and economic principals by the vast majority of the people around me. 


I am a VERY active member in my local church and my job allows me to have contacts and connections with a LOT of local churches, and so many of the ‘people around me’ are Christian believers.  


It is especially disheartening to see the lack of personal finance knowledge by the average Christian, when SO MUCH of scripture is dedicated to teaching us how to make the best use of our money… both for the good of God’s kingdom, as well as for our OWN good.


Before I get into my rant… I will state that I make an effort to support local, Christian-owned businesses and services whenever feasible.  I really respect the local small business owner that takes the risk of starting their own business, especially in this economic climate, and if they are a believer… even better.


That said… just because someone claims to run a ‘Christian Business’ or advertises to or through churches, or includes an ixthus window cling on the back window of their delivery truck… do not expect me to support you blindly.


I know of a LOT of salespeople, agents and dealers out there that that like to use churches and Christian organizations as a home-base for their less-than-honest dealings.  For years during the housing boom I saw real estate agents and mortgage brokers advertising strictly through churches to find their clients to sell them either a home or a mortgage product that they couldn't afford – while using the church as cover to gain the trust of their victims, er, clients.   


I’m now hearing about a number of insurance salespeople using local churches to sell unnecessary (and expensive) insurance products – and even offering pastors a ‘commission’ for the sales.  (Life insurance for babies, credit card payment insurance, etc.)


Over and over again I see churches and church-members being taken advantage of by investment scams or buying unnecessary products all because they are sold or marketed by ‘a brother or sister in Christ.’  for example:


Here, here, here or here


Just because someone claims to be a fellow believer – or even if they’re a friend of, or endorsed by, your Pastor…  BE CAREFUL!!   (Yes, go ahead and attack me in the comments section, I’m ready for it!)




Here are some simple rules to remember when you’re investing or when purchasing a financial product (insurance, mortgage, etc.):


#1: If you don’t understand it… don’t invest in it!  These simple words from investment giant Warren Buffet actually just echo Solomon’s truth from thousands of years ago.  Proverbs 19:2 states: “It is not good for a person to be without knowledge, and he who hurries his footsteps errs.”   Too many Christians fall prey to slick sales people because they just don’t understand the product or investment risks.


# 2: Increased returns ALWAYS mean increased risk.  There is NO SUCH THING as a risk-free investment.  If anyone is promising you a guaranteed rate of return (other than an FDIC-insured bank account, Certificate of Deposit or treasury note, which, at current rates, would be anything above 1 or 2%)… THEY ARE LYING.  


I don’t care if they’ve had a great track record in the past (so did Bernie Madoff and Enron)… NO ONE can guarantee a risk-free high rate of return.  If they try and sell it to you… RUN AWAY!  Lock up your wallet, your bank accounts, close the door and RUN AWAY!!


#3: Diversification is key.  Ecclesiastes 11:2 tells us to “divide your portion to seven, or even to eight, for you do not know what misfortune may occur on the earth.”  Basically… we should NEVER put all our eggs in one basket.  It’s so hard to hear of hardworking Christians who have been swindled out of their ENTIRE LIFE’S SAVINGS because they invested everything they had in a scam, an investment they didn’t understand, or even in an investment that made sense… but simply lost money.  


If you have your entire retirement plan is your house… something’s wrong.  If you have all of your investments in one stock… something is VERY wrong.


#4: There is no SECRET road to riches.  ANYONE who claims to be able to know some secret way to beat the market, or a little-known way to make money… RUN AWAY.  




Following a few basic rules should help you avoid becoming a victim.


Basically… the old cliché – CAVEAT EMPTOR (“Buyer Beware”) is the message of the day.  Even if the seller/agent is a brother or sister in Christ...  BE CAREFUL OUT THERE!

Woohoo! First Carnival of Finance Inclusion!

DollarMusings is excited to have been selected to participate in this weeks "Carnival of Personal Finance" over at the "Boomer and Echo" blog.

Go on over and check out this week's Carnival (scroll down ALMOST to the bottom to see the link to DollarMusing's series on "This is Why We're Broke"

This was our first submission to a carnival, and we're excited just to see our blog included with some of the blogs we read on a regular basis (many of which are included in our blogroll over on the right).

Woohoo!!

Lesson learned: send a better explanation of the post/series next time... a one liner doesn't get much visibility.  :-)

Europe: It's Time To Be Scared

Used Under Creative Commons License
Capture Queen

To my friends, family and acquaintances in Europe:


Be afraid.  Be very, very afraid.


The European Banking system is reaching a tipping point – on the verge of complete collapse - and if some of the continent’s largest banks are not carefully dismantled or dissolved, the entire continent, and thus, the world, is staring at an economic threat so huge it will make the US housing collapse look like child’s play.  


Think I’m being melodramatic?   There are banks in Europe that have already begun to fail whose assets are LARGER than the Total Annual Gross Domestic Product of the entire COUNTRY that is trying to rescue them.  Yes… you read that right… there are failing European banks that are BIGGER than the ENTIRE ECONOMY in the country where they’re located.


Take a look at this scary chart:

CLICK TO ENLARGE

There is ONE BANK per country (two in the case of Italy) whose assets surpass the GDP of their host country.


I’m not saying that all of the banks listed are in danger of collapse, but it may only take one to have the entire world economic system come unraveled like a poorly knit sweater. 


Are you ready to be really scared now?  Rumors are circulating that Dexia - - yes, the bank whose assets are 89% larger than the entire GDP of BELGIUM - -will soon need ANOTHER bailout.  


France and Belgium will be bailing out Dexia again - - even though Belgium’s debt to GDP is over 100%, and France’s is about 90%.  Where is this money going to come from?  Yes monsieur taxpayer – vous (you / tú / dich).  


Privatizing gains and socializing losses is one way to guarantee that you’ll get more of the same.  STOP BAILING THE FAILING!  (I like the sound of that :-)  


Is it time to stock up on gold, guns and ammo yet?  :-/




UPDATE: Chart replaced.  Astute reader @David_Eaton pointed out an error in the Bank Assets column... change does not affect the important column - - the fact that these banks are larger than their host countries entire economy.  

This Is Why We're Broke 2

OK... I came across another article this weekend that speaks to this blog's new, but hopefully ongoing, series "This Is Why We're Broke".  


LivingSocial, the online "coupon"/deal aggregator, conducted its first "Dining Out" survey of consumer behavior related to - what else? - dining out and restaurant choices.


While the survey itself shows some interesting information about the dining habits of restaurant-goers from different cities throughout the US... one of the numbers really stood out to me:

• According to the survey, The average American eats 4.8 meals per week in restaurants or 249 total restaurant meals per year (both dining in and carry out).

Come again?  At the same time that we as a nation are holding more than $2.5 TRILLION dollars in consumer debt, we have enough money to eat out, on average, 5 times per week???  (Yes, I'm aware it's an online survey - not completely reliable - but still!)


Let's take a look at these numbers.


Assuming a VERY conservative meal price of $10 per person, this works out to $48 per week, $208 per month, $2,496 per year, $24,960 a decade - - TO EAT OUT!


This is why we're broke.


Let's assume you can make your own food at home for about 1/2 the cost of eating out.  (This is EXTREMELY generous, as at the DM household, it costs less than 1/3 of the price of eating out, and we're trying to eat more healthy-Whole Foods-granola-nutty-crunchy-foods).


If we were to take 1/2 of that money, $1,248 per year, and invest that in a plain-vanilla retirement account or low-risk bond or note gathering just 4.0% interest, we would have saved over $17,000 in 10 years.  That's the cost of a VERY NICE used car!


Thanks to the "magic" of compound interest, here's what that same $1,248 per year looks like at 4% over a longer period:

• 10 Years: $17,430
• 20 Years: $41,384
• 30 Years: $76,842
• 40 Years: $129,327

Making your lunch at home - or cutting down the number of times you eat out - to just half, could save you over ONE HUNDRED AND TWENTY NINE THOUSAND DOLLARS by the time you retire.

Finding financial balance doesn't mean you have to eat rice and beans - or avoid any and all unnecessary expenses.  It does mean being mindful of how you're spending your money - and the long-term effects of those decisions.