Want to Roll Your Student Loans Into Your Mortgage? Here’s What to Consider

It can be a good option for some people, but for others it's just trading old debt for new.

It’s a question as old as debt itself: Should I pay off one loan with another loan?

“Debt reshuffling,” as it’s known, has garnered a bad reputation because it often amounts to just trading one debt problem for another. So it’s no wonder the news that Fannie Mae would make it easier for homeowners to swap student loan debt for mortgage debt was met with some caution.

It’s awfully tempting to trade a 6.8% interest rate on your federal student loan for a 4.75% interest rate on a mortgage. On the surface, the interest rate savings sound dramatic. It’s also attractive to get rid of that monthly student loan payment. But there are things to consider.

“One thing we stress big time: It worries me, taking unsecured debt and making it secured,” said Desmond Henry, a personal financial adviser based in Kansas.  “If you lose your job, with a student loan, there is nothing they can take away. The second you refinance into a mortgage, you just made that a secured debt. Now, they can come after your house.”

The Cash-Out Refinance

The option to swap student loan debt for home debt has already been available to homeowners through what’s called a “cash-out refinance.” These have traditionally been used by homeowners with a decent amount of equity to refinance their primary mortgage and walk away from closing with a check to use on other expenses, such as costly home repairs or to pay off credit card (or student) debt. Homeowners could opt for a home equity loan also, but cash-out refinances tend to have lower interest rates.

The rates are a bit higher than standard mortgages, however, due to “Loan Level Price Adjustments” added to the loan that reflect an increase in perceived risk that the borrower could default. The costs are generally added into the interest rate.

So what’s changed with the new guidelines from Fannie Mae? Lenders now have the green light to waive that Loan Level Price Adjustment if the cash-out check goes right from the bank to the student loan debt holder, and pays off the entire balance of at least one loan.

The real dollar value savings for this kind of debt reshuffle depends on a lot of variables: The size of the student loan, the borrower’s credit score, and so on. Fannie Mae expressed it only as a potential savings on interest rates.

“The average rate differential between cash-out refinance loan-level price adjustment and student debt cash-out refinance is about a 0.25% in rate,” Fannie Mae’s Alicia Jones wrote in an email. “Depending on profile [it] can be higher, up to 0.50%.”

On $36,000 of refinanced student loan debt — the average student loan balance held by howeowners who have cosigned a loan — a 0.50% rate reduction would mean nearly $4,000 less in payments over 30 years.

So, the savings potential is real. And for consumers in stable financial situations, the new cash-out refinancing could potentially make sense. Like Desmond Henry, though, the Consumer Federation of America urged caution.

“Swapping student debt for mortgage debt can free up cash in your family budget, but it can also increase the risk of foreclosure when you run into trouble,” said Rohit Chopra, Senior Fellow at the Consumer Federation of America and former Assistant Director of the Consumer Financial Protection Bureau. “For borrowers with solid income and stable employment, refinancing can help reduce the burden of student debt. But for others, they might be signing away their student loan benefits when times get tough.”

Risking foreclosure is only one potential pitfall of this kind of debt reshuffle, Henry said.  There are several others. For starters, the savings might not really add up.

Crunch the Numbers. Alllll the Numbers…

“You don’t just want to look at back-of-a-napkin math and say, ‘Hey, a mortgage loan is 2% lower than a student loan.’ You’ve got to watch out for hidden costs,’ Henry said.

Cash-out refinances come with closing costs that can be substantial, for example. Also, mortgage holders who are well into paying down their loans will re-start their amortization schedules, meaning their first several years of new payments will pay very little principal. And borrowers extending their terms will ultimately pay far more interest.

“We live in a society where everything is quoted on a payment. That catches the ears of a lot of people,” Henry said. “People think ‘That’s a no brainer. I’ll save $500 a month.’ But your 10-year loan just went to 30 years.”

There are other, more technical reasons that the student-loan-to-mortgage shuffle might not be a good idea. Refinancers will waive their right to various student loan forgiveness options – programs for those who work public service, for example. They won’t be able to take advantage of income-based repayment plans, either. Any new form of student loan relief created by Congress or the Department of Education going forward would probably be inaccessible, too.

On the tax front, the option is a mixed bag. Henry notes that student loan payments are top-line deductible on federal taxes, while those who don’t itemize deductions wouldn’t be able to take advantage of the mortgage interest tax deduction. On the other hand, there are caps on the student loan deduction, while there’s no cap on the mortgage interest deduction. That means higher-income student loan debtors who refinanced could see substantial savings at tax time.

In other words, it’s complicated, so if you’re considering your options, it’s probably wise to consult a financial professional like an accountant who can look at your specific situation to see what makes the most sense. (It’s also a good idea to check your credit before considering any refinancing or debt-consolidate options since it’ll affect your rate. You can get your two free credit scores right here on Credit.com.)

As a clever financial tool used judiciously, a cash-out student loan refinance could save a wise investor a decent amount of money. But, as Henry notes, the real risk with any debt reshuffle is that robbing Peter to pay Paul doesn’t change fundamental debt problems facing many consumers.

“The first thing to take into consideration is you still have the debt,” he said.

Image: monkeybusinessimages

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How Weight Loss Helped This Couple Pay Down $22,000 of Debt

Photo courtesy of Brian LeBlanc

About two years ago, Brian LeBlanc was fed up. The 30-year-old policy analyst from Alberta, Canada, had struggled with his weight for years. At the time, he weighed 240 pounds and had trouble finding clothes that fit. He decided it was time to change his lifestyle for good.

LeBlanc started running and cutting back on fast food and soft drinks. He ordered smaller portions at restaurants and avoided convenience-store foods. About a year into his weight-loss mission, his wife Erin, 31, joined him in his efforts.

“The biggest change we made was buying a kitchen food scale and measuring everything we eat,” Brian says. “Creating that habit was really powerful.”

Over the last two years, the couple has shed a total of 170 pounds.

But losing weight, they soon realized, came with an unexpected fringe benefit — saving thousands of dollars per year. Often, people complain that it’s expensive to be healthy — gym memberships and fresh produce don’t come cheap, after all. But the LeBlancs found the opposite to be true.

Erin, who is a payroll specialist, also managed their household budget. She began noticing a difference in how little money they were wasting on fast food and unused grocery items.

Photo courtesy of Brian LeBlanc

“Before, we always had the best intentions of going to the grocery store and buying all the healthy foods. But we never ate them,” she says. “We ended up throwing out a lot of healthy food, vegetables, and fruits.”

Before their lifestyle change, Brian and Erin would often eat out for dinner, spending as much as $80 per week, and they would often go out with friends, spending about $275 a month. Now, Brian says if they grab fast food, they choose a smaller portion. Last month, they only spent $22 on fast food.

What’s changed the most is how they shop for groceries, what they buy, and how they cook. Brian likes to prep all his meals on Sunday so his lunches during the week are consistent and portion-controlled. They also buy only enough fresh produce to last them a couple of days to prevent wasting food.

Shedding pounds — and student loan debt

Photo courtesy of Brian LeBlanc

Two years after the start of their weight-loss journey, they took a look at their bank statements to see how their spending has changed. By giving up eating out and drinking alcohol frequently, they now spend $600 less a month than they used to, even though they’ve had to buy new wardrobes and gym memberships.

With their newfound savings, the LeBlancs managed to pay off Brian’s $22,000 in student loans 13 years early. Even with the $600 they were now saving, they had to cut back significantly on their budget to come up with the $900-$1,000 they strived to put toward his loans each month. They stopped meeting friends for drinks after work, and Erin took on a part-time job to bring in extra cash. When they needed new wardrobes because their old clothing no longer fit, they frequented thrift shops instead of the mall.

When they made the final payment after two years, it was a relief to say the least.

Now the Canadian couple is saving for a vacation home in Phoenix, Ariz., which they hope to buy in the next few years, and they’re planning to tackle Erin’s student loans next. They’re happy with their weight and lives in general, but don’t take their journey for granted.

“There were times we questioned our sanity and we thought we cannot do this anymore,” says Erin. But they would always rally together in the end.

“There are things that are worth struggling for and worth putting in the effort,” Brian says. “Hands down, your health is one of those things.”

How Getting Healthy Can Help Financially

Spending less on food isn’t the only way your budget can improve alongside your health. Read below to see how a little weight loss can tip the scales when it comes to your finances.

  • Spend less on medical bills. Health care costs have skyrocketed in the last two decades, but they’ve impacted overweight and obese individuals more. A report from the Agency for Healthcare Research and Quality stated that between 2001 and 2006, costs increased 25% for those of normal weight — but 36.3% for those overweight, and a whopping 81.8% for obese people. The less you weigh, the less you’ll pay for monthly health insurance premiums and other expenses.
  • Buy cheaper clothes. Designers frequently charge more for plus-size clothing than smaller sizes. Some people claim retailers add a “fat tax” on clothes because there are fewer options for anyone over a size 12. It might not be fair, but it’s the way things are.
  • Save on life insurance. Your health is a huge factor for life insurance rates. Annual premiums for a healthy person can cost $300 less than for someone who is overweight.
  • Cut transportation costs. Biking or walking to get around is not only a cheap way to exercise — it’s a cheap way to travel. You’ll be saving on a gym membership and limiting gasoline costs in one fell swoop. Bonus points if you go the whole way and sell or downgrade your vehicle.

The post How Weight Loss Helped This Couple Pay Down $22,000 of Debt appeared first on MagnifyMoney.

Debt Buyers Reveal Just How Far They’re Willing to Go to Settle Unpaid Debts

Tens of millions of Americans are pursued by debt buyers, speculators who buy the rights to collect their overdue bills. Yet few consumers realize this growing segment of the collection industry may offer them a chance to slash their delinquent debts by as much as 75%.

A MagnifyMoney investigation examined the business practices of debt buyers as detailed in disclosures to their investors. Here’s how the game is played:

  • Buyers purchase massive bundles of unpaid consumer debts with face values that often total billions of dollars. Those are the bills that banks, credit card companies, and other creditors give up trying to collect.
  • Those debts are bought at deeply discounted prices, averaging roughly 8 cents on the dollar.
  • The buyers only expect to recover a fraction of the original amounts owed. Their target is to recover from 2 to 3 times more than they paid.

The bottom line: Debt buyers can turn profits that meet their goals by collecting merely 16% to 24% of the original face values. That knowledge can be useful to savvy debtors who choose to negotiate a settlement for less.

Debt buyers “absolutely” have more flexibility in negotiating with consumers, says Sheryl Wright, senior vice president of Encore Capital Group, the nation’s largest debt buyer. Encore offers most debtors a 40% discount to settle, according to the company’s website.

“There could be an advantage in terms of negotiating a favorable settlement,” says Lisa Stifler of the Center for Responsible Lending, a nonprofit consumer advocate. “Debt buyers are willing to – and generally do – accept lower amounts.”

Stifler warned that debtors should be cautious in all interactions with debt buyers and collectors. (See “Tips to fight back against debt buyers and debt collectors” later in this article.)

In the world of debt buying, the numbers can vary. The price of bad debt portfolios ranged from 5 to 15 cents on the dollar during the past two years, according to corporate disclosures of debt buyers. The variables include the age of debt, size of account, type of loan, previous collection attempts, geographic location, and data about debtors – plus shifts of supply and demand in the bad debt marketplace.

What remains constant is the debt buyers’ goal of recovering 2 to 3 times more than the purchase price they pay for the accounts.

It is a different business model than that of traditional debt collection agencies, contractors that pursue bills for a percentage of what they recover. In contrast, debt buyers may often be more willing to wheel and deal to settle accounts with consumers.

Debt buyers raked in $3.6 billion in revenue last year – about one-third of the nation’s debt collections, according to the Consumer Financial Protection Bureau’s latest annual report.

Information is scarce on the inner workings of hundreds of debt buyers who operate in the U.S. An accurate count is not available since only 17 states require buyers to be licensed.

Of the more than 575 debt buyers that belong to the industry’s trade association, only three are publicly traded entities required to file disclosures last year with the federal Securities and Exchange Commission. MagnifyMoney looked into reports from two of those companies and found telling insights into an industry typically secretive about its practices.

An “Encore” of unpaid bills

Encore owns nearly 36 million open accounts of consumer debt in the U.S. through its subsidiaries Midland Credit Management, Midland Funding, Asset Acceptance, and Atlantic Credit & Finance.

During 2016, Encore invested $900 million to buy debt with a face value of $9.8 billion – or 9 cents per dollar. On average, the corporation recovers 2.5 times more than it pays for debt portfolios – the equivalent of 22.5 cents per dollar owed, according to its annual report to the SEC.

In that disclosure, the San Diego-based operation details how it tries to get debtors to pay.

Encore boasts that its proprietary “decision science” enables it “to predict a consumer’s willingness and ability to repay his or her debt.” It obtains “detailed information” about debtors’ “credit, savings or payment behavior,” then analyzes “demographic data, account characteristics and economic variables.”

“We pursue collection activities on only a fraction of the accounts we purchase,” stated Encore. “Consumers who we believe are financially incapable of making any payments … are excluded from our collection process.”

The rest of the debtors can expect to hear from Encore’s collectors. But the company knows most won’t respond.

“Only a small number of consumers who we contact choose to engage with us,” Encore explained. “Those who do are often offered discounts on their obligations or are presented with payment plans that are intended to suit their needs.”

While the company offers most debtors discounts of 40% to settle, relatively few take advantage of that opportunity.

“The majority of consumers we contact do not respond to our calls and letters, and we must then make the decision about whether to pursue collection through legal action,” Encore stated. In its annual report, the company disclosed it spent $200 million for legal costs last year.

In a written response to questions from MagnifyMoney, Encore refused to reveal the number of lawsuits it has filed or the amount of money it has recovered as a result of that litigation.

“We ultimately take legal action in less than 5% of all of our accounts,” says Wright. If Encore has sued 5% of its 36 million domestic open accounts, the total would be roughly 1.8 million court cases.

Portfolio Recovery Associates has acquired a total of 43 million consumer debts in the U.S. during the past 20 years. Behind Encore, it ranks as the nation’s second-largest debt buyer.

Its parent company, PRA Group Inc. of Norfolk, Va., paid $900 million last year to buy debts with a face value of $10.5 billion – or 8 cents on the dollar, according to its 2016 annual report. Its target is to collect a multiple of 2 to 3 times what it paid.

It is a high-stakes investment. The company must satisfy its own creditors since it borrows hundreds of millions of dollars to buy other people’s unpaid debts. PRA Group reported $1.8 billion in corporate indebtedness last year.

PRA Group declined an opportunity to respond to questions from MagnifyMoney. In lieu of an interview, spokeswoman Nancy Porter requested written questions. But the company then chose not to provide answers.

Asta Funding Inc., the only other publicly traded debt buyer, did not respond to interview requests from MagnifyMoney.

Tips to fight back against debt buyers and debt collectors

All types of bill collectors have a common weakness: They often know little about the accounts they chase. And that’s a primary reason for many of the 860,000 consumer complaints against collectors last year, according to a database kept by the Federal Trade Commission.

Be sure the debt is legitimate first

In dealing with collectors, you should begin by questioning whether the debt is legitimate and accurate. You can also ask who owns the debt and how they obtained the right to collect it.

In 2015, Portfolio agreed to pay $19 million in consumer relief and $8 million in civil penalties as a result of an action by the CFPB.

“Portfolio bought debts that were potentially inaccurate, lacking documentation or unenforceable,” stated the CFPB. “Without verifying the debt, the company collected payments by pressuring consumers with false statements and churning out lawsuits using robo-signed court documents.”

One unemployed 51-year-old mother in Kansas City, Mo. fought back and won a big judgment in court.

Portfolio mistakenly sued Maria Guadalujpe Mejia for a $1,100 credit card debt owed by a man with a similar sounding name. Despite evidence it was pursuing the wrong person, the company refused to drop the lawsuit.

Mejia countersued Portfolio. Outraged by the company’s bullying tactics, a court awarded her $83 million in damages. In February, the company agreed to settled the case for an undisclosed amount.

Challenge the debt in writing

Within 30 days of first contact by a collector, you have the right to challenge the debt in writing. The collector is not allowed to contact you again until it sends a written verification of what it believes you owe.

Negotiate a settlement

If the bill is correct, you can attempt to negotiate a settlement for less, a sometimes lengthy process that could take months or years. By starting with low offers, you may leave more room to bargain.

Communicate with collectors in writing and keep copies of everything. On its website, the CFPB offers sample letters of how to correspond with collectors.

As previously noted, debt buyers generally have more leeway to negotiate settlements since they actually own the accounts. A partial list of debt buyers can be found online at DBA International.

In contrast, collection agencies working on contingency may be more restricted in what they can offer. They need to collect enough to satisfy the expectations of creditors plus cover their own fee.

As part of a settlement, the debt buyer or collector may offer a discount, a payment plan allowing the consumer to pay over time, or a combination of the two.

“Through this process, we use a variety of options, not just one approach or another, to create unique solutions that help consumers work toward long-term financial well-being and improve their quality of life,” says Encore’s Wright.

A settlement doesn’t guarantee the debt will be scrubbed from your credit report

To encourage settlements, Encore recently announced that it would remove negative information from the credit reports of consumers two years after they paid or settled their debts. Traditionally, the negative “tradelines” remain on credit reports for seven years.

“We believe the changes in our credit reporting policy provide a tangible solution to help our consumers move toward a better life,” says Wright.

However, Encore’s new policy does nothing to speed up the removal of any negative information reported by the original creditor from whom the company bought the debt.

Check your state’s statute of limitations on unpaid debts

Before any payment or negotiation, check to see if the statute of limitations has expired on the debt. That is the window of time for when you can be sued; it varies from state to state and generally ranges from three to six years.

If the statute of limitations on your debt has expired, you may legally owe nothing. If the expiration is nearing, you can have extra leverage in negotiating a settlement. But be careful: A partial payment can restart the statute in some states and lengthen the time a black mark remains on your credit record.

Respond promptly if the company decides to sue

If you are sued over the debt, be sure to respond by the deadline specified in the court papers. If you answer, the collector will have to prove you owe the money.

If you don’t timely answer the complaint, the burden of proof may switch to you. A judge may enter a default judgment against you – or even sign a court order to garnish your paycheck.

Seek help from a lawyer or legal aid service if you have questions, but be careful of where you turn for help. The CFPB warns consumers to be wary of debt collection services that charge money in advance to negotiate on your behalf. They often promise more than they can deliver and get paid no matter what happens.

The post Debt Buyers Reveal Just How Far They’re Willing to Go to Settle Unpaid Debts appeared first on MagnifyMoney.

9 Ways to Get the Most Out of Your Credit.com Account

Here's how to use the tools at Credit.com to get your financial life in order.

Chances are if you’re reading this you’re ready to take control of your financial life. Well, we want to make sure you’re getting the information and help you need to do it. That’s why we’ve put together a list of nine ways you can make the most of your Credit.com account.

1. Download the Credit.com App

Download the Credit.com app for iPhone and get updates on your latest credit score information while you’re on the go. You’ll also have access to the latest news and information from Credit.com’s blog.

2. Begin Tracking & Improving Your Credit Scores

Included with your account is a recommended plan to improve your personal credit scores. It shows you in what areas your scores could improve and offers guidance on how to achieve an attainable goal. And if you run into problems, don’t worry. You can reset your action plan at any time so you can get guidance on your real-time credit situation.

3. Get the Latest News

Besides helping you track and improve your credit, our credit experts offer regular articles on ways to cut back on your spending, get better terms on your credit cards, save money on a wide variety of everyday purchases and more. You can check the latest news on our app or on our website.

4. Follow Us on Facebook & Twitter

Beyond our daily articles, you’ll get bonus information through our Facebook and Twitter pages. And be sure to watch for our live chats on Twitter where we discuss a variety of financial topics.

5. Use Our Financial Tools

Want to know how long it will take you to pay down your credit card debt? We have a calculator for that. We also have financial tools to help you figure out the lifetime cost of your debt and how much house you can afford.

6. Get Help Fixing Your Credit

Is your credit in need of some professional help? Not sure if it is? Check out the free consultation provided by our partner Lexington Law. You can also look at getting help from a credit repair company, like our partner CreditRepair.com. Lexington Law and CreditRepair.com also have iPhone and Android apps.

7. Use Our Interactive Calculators

We’re not just about helping you improve your credit, we’re also here to help you find the best rates and terms for your particular credit standing. Whether you’re looking for a personal loan, a mortgage loan or even student loans, our tools can help you find the right product to fit your needs.

8. Compare Credit Cards

Finding the right credit card can be daunting. That’s why we’ve compiled numerous expert guides for helping you choose which cards are right for you. Do you need a rewards card? A balance transfer card? Which cards do you even qualify for? We provide you with answers so you’ll know what to look for when applying, and offer tips for the application process.

9. Ask Us Questions

Our credit experts genuinely want to help you get the guidance you need. Something isn’t clear? You want further information? Ask your question on Twitter, our Facebook page or in the comments section of our blog articles.

Image: Geber86

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Creditor Gets a Judgment Against You — Now What?

overdraft fees

It’s a scary prospect: a creditor securing a judgment against you — which is probably why we get so many reader questions about the issue. A judgment represents a legal obligation to pay a debt, meaning a creditor or collector sued you over an outstanding debt and won. But that court win isn’t necessarily written in stone. Judgments can be appealed, reversed, amended or, at the very least, settled for less, depending on the circumstances and what you do next. (First step: Consider visiting a consumer attorney. Some offer free consults —and many will represent you for free if they think a collector has broken the law.)

If you’re dealing with debt collectors and facing a judgment — or are already (perhaps unexpectedly) saddled with one — we’ve pulled together answers to all the major questions that may be on your mind and where you can go from there.

How Does a Creditor or Collector Get a Judgment Against You?

In order to get a judgment against you, the creditor or collector must take you to court. If you don’t respond to a summons, or if you lose, the court will issue a judgment in favor of the creditor or collector. The judgment will be filed with the court, and once that happens, it is public record. That means it will likely end up on your credit reports as a negative item. (You can check your credit for judgments by viewing your free credit report summary on Credit.com.)

How Are Judgments Collected?

One of the main reasons you want to try avoid getting a judgment against you is that creditors may have additional ways to collect once a judgment has been issued. As we mentioned earlier, depending on your state’s laws, they may include going after your bank accounts or other property, or trying to garnish your wages. But as the saying goes, “you can’t get blood from a stone.” As the National Consumer Law Center points out in its book, “Surviving Debt:”

Even if you lose a lawsuit, this does not mean you must repay the debt. If your family is in financial distress and cannot afford to repay its debts, a court judgment that you owe the money may not really change anything. If you do not have the money to pay, the court’s judgment that you owe the debt will not make payment anymore possible.

If you aren’t sure what a judgment creditor can do to collect from you, it’s a good idea to consult a bankruptcy attorney who can help you understand what may be at risk if you don’t pay. The attorney can explain what property you own is “exempt,” or safe from creditors. You can also check out this article on how to get out of debt.

Can a Judgment Be Reversed?

Yes. In certain circumstances, you can ask the court to re-open a judgment or you can formally file an appeal. t’s also possible to have the terms of a judgment altered. And, with a few exceptions, a judgment can be discharged in bankruptcy. However, laws (and the timelines for their implementation) vary by state, so, again, if a creditor secures a judgment against you, it can be in your best interest to consult a local consumer attorney. You can find more about your legal rights post-judgment here.

Can I Settle a Judgment?

The answer to this question is often “yes.” Most judgment creditors know it is often difficult to collect judgments, especially if the debtor doesn’t have wages that can be garnished or assets they can go after. If you are able to get a lump sum of money from, say a relative, you may be able to offer that to the creditor to pay off the judgment. Just make sure you get any agreement in writing before you pay. Make sure the agreement spells out all the terms of the settlement, including the fact that you will not owe any more money after you make the agreed upon payment.

Can I Avoid a Judgment?

Another option is to settle the debt before it goes to court. The creditor may be willing to settle for part or all of the money you owe. Of course that only works if you can manage to pull together money to pay them. If you can, make sure you have a written agreement from them that states they will not pursue the debt in court if you make the payment as agreed. Then check with the court to make sure the matter has been dropped.

How Long Can Judgments Appear on Credit Reports?

Unpaid, they can remain on your credit reports for seven years or the governing statute of limitations, whichever is longer. Once judgments are paid, they must be removed seven years after the date they were entered by the court. But soon those parameters are changing: Beginning in July, the credit bureaus will exclude judgments that don’t contain complete consumer details or have not been updated in the last 90 days. (Wondering how long other stuff stays on your credit report? We’ve got you covered here.)

How Long Can Judgments Be Collected?

There is a specific time period for collecting judgments, and it also varies by state. This “statute of limitations” is often 10-20 years long. In addition, in most states it can be renewed. For that reason alone, it’s best to try to avoid getting a judgment against you in the first place. And if it does happen, it’s best to try to resolve the debt.

Can Interest Accumulate on a Judgment?

Yes. In most states, interest may be charged on a judgment, either at any rate spelled out in state law, or at the rate described in the contract you signed with the creditor. In addition, the judgment may include court costs and attorney’s fees.

Anything Else I Should Know About Judgments?

A debt collector that threatens to get a judgment against you or to garnish your wages or seize your property may be making an illegal threat. Talk with a consumer law attorney to find out if that’s the case.

And just because you haven’t heard anything about a judgment in a while, that doesn’t mean you should assume it has gone away. It’s possible that the creditor could decide at a later time to try again to collect from you. Plus, an unpaid judgment may prevent you from buying a home or getting credit at a decent interest rate. So it’s a good idea to try to resolve the judgment, either by filing for bankruptcy or by paying off or settling the judgment when you are able to.

Remember, when dealing with debt collectors, it pays to know your rights. You learn more about them in our Managing Debt Learning Center.

Reminder: This post is meant as educational information, not legal advice. Please consult an attorney for legal advice.

This article was updated. It originally ran on January 25, 2012. 

Image: walknboston, via Flickr.com

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3 Easy Ways to Pay Off Your Mortgage Faster

These tips are your ticket to mortgage-free living.

As long as you’re alive, you have to live somewhere and, generally speaking, you have two options: Rent an apartment (or a home) and line your landlord’s pocket; or buy a home, and over time, hopefully line your own.

This premise is one of David Bach’s most important messages. The author of the New York Times bestseller “The Automatic Millionaire,” is a firm believer in the idea that real estate is critical to building wealth. In fact, he says buying a home is one of the three most important actions people can take in pursuit of financial security.

“I’ve been a lifelong proponent of home ownership,” says Bach, author of 11 best selling books. “How do you build real wealth on an ordinary income? It’s not very sexy, but it’s a simple, timeless approach: Buy a home.”

It’s not merely the act of purchasing a home that Bach advocates. The secrets to financial success that he offers in “The Automatic Millionaire,” include urging readers to pay their homes off early via an approach he calls “automatic debt-free home ownership.”

It may sound radical to some, but according to Bach, who spent nine years as a financial adviser at Morgan Stanley, the common denominator among all of his clients who were able to retire early was that they had paid off their homes early.

Here’s Bach’s approach to debt-free home ownership.

1. Establish a Biweekly Mortgage Payment Plan

A biweekly payment plan is exactly what the name implies. Instead of only making monthly mortgage payments, split the payment down the middle and pay half every two weeks.

When you make a payment every two weeks, (instead of just one per month,) you end up making one extra month’s worth of payments annually. In other words, over the span of a year, you’re making 26 half payments, which is the equivalent of 13 full payments.

“By doing this, something miraculous will happen. Depending on your interest rate, you can end up paying off your mortgage early — somewhere between five and ten years early” he says in the book.

Additional Benefits of Biweekly Payments

The biweekly payment approach also saves the homeowner thousands, if not hundreds of thousands of dollars, in interest. (Having a good credit score can help you save on interest, too. If you don’t know where your credit stands, you can get your two free credit scores, updated every 14 days, on Credit.com.)

In his book Bach provides the example of a 30-year-mortgage on a $250,000 home. If the interest rate on that mortgage is 5%, then the interest paid over the life of the loan will be about $233,139. When paid biweekly, the same mortgage instead costs about $188,722 — a savings of more than $44,000.

Establishing a biweekly payment plan merely requires calling your lender. If the mortgage is held by a large bank, they may refer you to a third-party that handles payment processing.

But one critical point Bach makes in the book is this: Before signing onto biweekly mortgage payments ask the servicing company what the fee is for the program and what they do with your money when they receive it. The second question is particularly important because some companies hang onto the extra money you’re putting toward the mortgage and send it to your mortgage holder all at once at the end of the month.

You want the extra payments applied to your mortgage as soon as possible, so that you’re paying down the mortgage faster.

You also cannot just split your monthly mortgage payment in half yourself (without talking to your mortgage holder, bank or other servicing company) and mail in payments every two weeks. The bank may send the extra payment back to you, unsure of what to do with it.

This trick can also work for paying down your credit card balance faster. (Here are some other tips for paying off credit card debt.)

2. Pay Extra Each Month

The next approach to debt-free home ownership outlined in Bach’s book is a plan he calls “No-Fee Approach No. 1.” It involves merely adding 10% to whatever your monthly mortgage payment happens to be. If your monthly payment is $1,342, pay an extra $134 dollars each month. (Sending the bank $1,467 per month instead of $1,342.)

This approach leads to paying off a home in 25 years, instead of 30, saving about $44,000. However, Bach urges making the extra 10% automatic, so that you don’t come up with excuses not to do it. In other words, have the $1,467 automatically deducted from your checking account each month.

3. Make One Extra Payment Each Year

Pick one month each year and pay the mortgage twice. Translation: Send the bank one extra payment a year.

Try doing this with some of your tax refund, suggests Bach. But no matter when you choose to do it, don’t simply send the bank a check for double the normal mortgage amount.

According to Bach this will confuse the bank. He advises writing two checks. Send one in with your mortgage coupon and the other with a letter explaining that you want the money applied to your principal.

The big takeaway according to Bach is that if you don’t buy a home, you won’t get on the escalator to wealth that home ownership provides. He says this message is particularly important for millennials who have been shying away from home ownership.

“The critical point is that one — you can buy a home. Two — you should buy a home. And three — you will be glad that you did,” says Bach.

Image: filadendron

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Parents’ 10 Dream Schools for Their Kids (& the 10 Colleges Students Actually Love)

Spoiler: Parents and kids actually agree on their top choice.

Image: fstop123 

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Why Student Loan Borrowers Are Being Treated Like Criminals

If it sometimes feels like student loan borrowers are treated like criminals, that's because the law actually does.

Student loans are different from almost any other form of borrowing. Unlike credit cards or other unsecured debts, they can rarely be discharged in bankruptcy. (You can learn more about the implications of bankruptcy here.) Legally, it’s better to think of college and grad school debt as akin to a child support payment.

The $1.3 trillion student loan crisis has many causes, but the slow erosion of consumer rights to gain student debt relief ranks right near the top. That $1.3 trillion debt is truly an anchor for life to the 44 million Americans who owe it. (And not paying those loans can have pretty severe consequences, including serious credit damage. You can see how your student loans affect your credit by a free snapshot of your credit report every 14 days on Credit.com.)

How It All Started 

The trouble began in the mid 1970s, as student loans became common and urban legends around “deadbeat” former students started to spread. In 1976, Congress considered a dramatic change to the nature of student loans — taking them out of the bucket that makes them similar to credit cards or personal loans, and moving them into the bucket that governs criminals like tax scofflaws. Back then, Congress was wise enough to commission a Government Accounting Office study, making such a step permanent.

The study came back showing that fewer than 1% of student loan borrowers had declared bankruptcy. That led Rep James O’Hara (D-Mich.) to say it would be grossly unfair to lump them in with the deadbeats. Soon after, the U.S. Senate voted to strip the provision from a proposed bankruptcy reform bill that made college debt non-dischargeable. But for reasons unknown, a group of Congressmen in the House, led by Rep. Allen E. Ertel (D-Pa.), held firm to their conviction that student loans were creating a moral hazard. They won the day, and non-dischargability of student loans was included in the Bankruptcy Reform Act of 1978.

The 1978 limitation meant students had to try to pay their loans back for at least five years before they could seek relief in bankruptcy court. Even today, critics of the way bankruptcy laws work don’t find fault in that notion — to prevent someone from leaving school and immediately erasing their debt before making an honest effort to earn an income.

However, the 1978 law opened the door for further tightening of the debt noose on borrowers, which happened methodically over the next decades. In 1990, the repayment period before a discharge was extended to seven years. The Debt Collection Improvement Act of 1996 allowed Uncle Sam to garnish Social Security checks. Then, in 1998, the seven-year ban became infinite. Loans made or guaranteed by Uncle Sam to students could never be discharged, with very few exceptions.

Worse still, in 2005, the permanent ban on bankruptcy for student borrowers was extended to private student loans — those that have nothing to do with Uncle Sam. Private banks lending teenagers money for college now hold a “till death do us part” contract.

Times Have Changed

Steven M. Palmer, a Seattle-based bankruptcy attorney who has written about the history of student loans, said it’s important to keep some perspective about what Congress might have been thinking back in the 1970s.

In 1976, tuition, room and board cost an average of $2,275, according to the Department of Education (in current dollars). By 2015, it was $25,810.

“Back then, the cost of education was so much less,” Palmer said. “The total amount of debt was a tiny fraction of what it is today … The system has led us to where we are now, where everyone has to take out student loans. And then they are getting out of school and not able to find jobs.”

For the desperate student borrower, there is an exception to the bankruptcy code, known as “undue hardship.” But practically speaking, that’s legalese for “nearly impossible.” (Disabled borrowers may also qualify for a total disability discharge of their education debt.)

An attempt to discharge a student loan requires a separate legal process from a traditional bankruptcy, called a Complaint to Determine Dischargeability. It’s an adversarial process that can require discovery, depositions and even arguments in court against Department of Education lawyers.

This can cost the debtor 10 times the price of a standard bankruptcy, Palmer said. And an attempt to get free from student loans can easily cost $20,000 to $30,000 in fees — which still may not work. Also, said Palmer, it’s critical to remember that declaring bankruptcy is hardly easy, nor does it erase all a family’s problems.

“Many of my clients have so much they still need to end up paying after bankruptcy, my counseling is often to ask, ‘How will you be better off?’ In some cases, they are really in a terrible spot … really still pretty well screwed after the bankruptcy.”

More Calls for Reform

In 2007, Michigan Professor John A. E. Pottow wrote the definitive history of the issue in an academic paper, “The Nondischargeability of Student Loans in Personal Bankruptcy Proceedings: The Search for a Theory.”

“This is harsh and dramatic treatment, and it is worthy of scholarly attention,” he wrote.

Pottow dispensed with most operating theories using data – that bankruptcy encourages students to commit fraud, or that Uncle Sam is merely protecting taxpayers, for example. He ultimately suggested some kind of income-contingent test, which ties bankruptcy eligibility to a calculation that takes into account school costs and potential post-school income.

“In addition to being attractive theoretically, income contingency could also help a troubling trend,” he wrote. Apparently certain “sub-prime” schools target a financially vulnerable client base by upselling classes and educational programs of dubious worth, confident that they will have repayment leverage through non-dischargeability in bankruptcy. An income-contingent approach might dry up this unwelcome market.”

More recently, in a 2012 report, the Consumer Financial Protection Bureau called on Congress to make bankruptcy available to some student debt holders.

“(It would be) prudent to consider modifying the code in light of the impact on young borrowers in challenging labor market conditions,” CFPB director Richard Cordray said.

Palmer, the bankruptcy lawyer, noted giving such debtors a fresh start wouldn’t only help former students. College debt has been tied to delayed household formation, which can have a domino effect: Young graduates may get married later, start families later, buy homes later, and so on. (If this sounds like you, here’s how to tell if you’re ready to shop for a home.)

Other critics have gone even farther.

David Graeber, author of the book, “Debt: The First 5000 Years,” says the punishing student loan situation is wrecking a generation, and by extension, its future.

“If there’s a way of a society committing mass suicide, what better way than to take all the youngest, most energetic, creative, joyous people in your society and saddle them with, like $50,000 of debt so they have to be slaves?” he said at a talk in 2013. “There goes your music. There goes your culture.”

Image: Jacob Ammentorp Lund

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Interest Rate Hike Incoming: 4 Things You Can Do to Get Ready

For credit card holders, interest rate hikes are never good news. Unfortunately, that’s what’s looming on the horizon.

It’s been widely reported that the Federal Reserve is contemplating an increase to the benchmark interest rate in mid-March, the first of an expected three rate increases in 2017.

Higher interest rates from the Fed ultimately translate into higher interest on your credit card debt and more money out of your pocket.

But that doesn’t have to be the case. Financial advisers suggest a variety of preemptive measures to avoid being impacted by the rising rates, or to at least soften the blow.

1. Pay Off Balances as Quickly as Possible

We’d all pay off our credit card balances now if we could, right? If you don’t have the cash to clear your cards of debt before rate hikes set in, try to pay a little more each month than you typically do, said Aaron Aggerwal, assistant vice president of credit card lending at Navy Federal Credit Union.

“If your minimum payment is $30, but you can afford to put down $40, that small bit will make a big impact down the road,” Aggerwal said.

2. Transfer Balances to a Zero-Interest Credit Card

There are varying schools of thought regarding the wisdom of transferring balances to credit cards with zero-interest introductory rates.

Michael Foguth, of Michigan-based Foguth Financial Group, said it’s a savvy approach when the alternative is paying interest on your debt each month.

“Play these companies against themselves,” he said. “If you’re a consumer and you have a balance on a credit card, and you’re paying an interest rate on that balance, go out and find someone who will buy your business…Why pay 3% when there’s zero out there? When zero is out there, go after zero.”

However, Foguth urges consumers to research various offers and figure out which one is best when considering a balance transfer. Ideally, it’s one that does not charge a transfer fee.

Also be sure to check your credit score to see if you can qualify for a balance transfer card. You can view two of your scores free, updated every 14 days, on Credit.com.

Kerri Moriarty, of Boston-based Cinch Financial, also advises consumers do the math before jumping into a zero-interest balance transfer.

“Before you make the decision to transfer…calculate how much you will have to pay each month to get rid of the debt before the zero interest expires,” Moriarty said.

If you can’t pay the debt in full before that zero interest elapses, it may not be a good idea. Often the regular interest rates for these cards are higher than what you’re paying on an existing card, Moriarity said.

What’s more, balance transfer cards are designed to get you hooked. You start spending money at zero percent and forget to stop when the introductory rate is gone.

3. Consider Using a Home Equity Loan to Pay Credit Card Balances

Another option Foguth suggests is taking a home equity loan to pay your credit card debt before the interest rate hikes take effect.

There are two big reasons why this makes more sense financially than leaving the debt on a credit card. The first is that the interest on a home equity loan is tax deductible, Foguth said. The second reason is the lower interest on home equity loans.

“The interest on credit cards is often 15% to 20% and on a home equity loan it’s around 4%,” said Foguth.

But again, you must be disciplined.

“You don’t want to go back out and rack up $50,000 of debt,” Foguth said. “If you’re going to take money out on your home, you have to pay the monthly bill.”

4. Utilize Your Cash Rewards to Make Even More Credit Card Payments

One last suggestion from financial experts to help pay down your debt as quickly as possible – use your cash rewards to make additional payments, if you have a cash-back credit card.

This approach isn’t likely to make a huge dent in the average American’s credit card debt, but as Aggerwal noted earlier, every little bit counts.

Image: sturti 

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How Did Student Loan Debt Reach $1.4 Trillion? Blame Russia (Sort Of)

There are other reasons, but the era of the student loan began with the launch of Sputnik.

American consumers owe mountains of debt, but one of these mountains looms large over all the others: student loans. It’s astonishing to consider: Add up every auto loan in the country, and total student loan debt is bigger. Add up every credit card bill in the country, you only get about three-quarters of the way up the student loan mountain. Only mortgage debt is greater, but those with mortgages have homes to show for their debt. These days, many Americans aren’t really sure what they got in return for their oppressive student loan bills.

There is little disagreement that adult life in America without a college degree is a struggle, and it’s only going to get harder as the economy continues to modernize and manual labor continues to be devalued. So it’s imperative that America figures out how to educate its young people without bankrupting them — but it’s important to understand how we got here.

A History Lesson

In some ways, you can blame the Russians. Sputnik, and the Space Race, specifically. The federal government first got into the student loan business as a direct result of the USSR’s successful launch of Sputnik into orbit, and widespread fear that America was losing the Space Race. In fact, the law that created student loans was called The National Defense Education Act.

America has lent money to teenagers ever since, with the good intentions of helping them compete in the global economy. Today, some 44 million Americans owe student loan debt — a majority of college students graduate with at least some debt, and the class of 2016 had an average student loan debt of $37,000.

But even before the National Defense Education Act went into effect, America had committed to helping young kids who showed promise get college degrees. The federal government’s first real foray into pushing people towards college was The Servicemen’s Readjustment Act — the GI Bill — passed at the end of World War II. Colleges swelled as America repaid some of its debt to the Greatest Generation through free or discounted college.

By the 1950s, there were calls to extend what was generally considered a wildly successful program. But three terms in a row, a Senate-passed measure to increase federal funding for college died in the House. Then, on October 4, 1957, the Soviets sent shock waves through the country with their successful launch of Sputnik into space. That day Sen. Lister Hill (D-Alabama), chair of the Education and Labor Committee, read a memo from a clerk with a clever idea.

“Perhaps if they called the education bill a defense bill they might get it enacted,” recounts a Senate history page on the subject.

Hill latched onto the idea and National Defense Education Act was born.

Despite widespread public opinion demanding government action “in the wake of Sputnik” (the Senate history page’s words), House members were still resistant, calling federal college grants “socialist.” Other critics worried that the legislation interfered with the long-held principal that states and local communities were responsible for schooling. As debate progressed, supporters in the Senate offered a compromise: Much of the aid offered would come in the form of low-cost loans instead of grants.

That argument won the day. Dwight Eisenhower signed the National Defense Education Act in September 1958, 11 months after Sputnik’s launch. Uncle Sam was now a bank for college students.

Uncle Sam Becomes a Direct Lender to Students

NDEA loans are generally considered precursors to subsidized loans that became known as Perkins Loans.

That because it wasn’t long before the NDEA was expanded, and its inherent encouragement of defense-friendly subjects dropped. An amendment to the law signed by Eisenhower in 1964 increased funding, raised borrowing limits, and struck the provision that special consideration should be given to students who showed proficiency in math, science, engineering, or foreign languages.

By 1968, America had spent $3 billion extending student NDEA loans to 1.5 million undergraduate students.

In other words, Uncle Sam’s role as a direct lender for higher education was fairly well established by the time Lyndon Johnson’s Great Society ideas took hold. In 1965, the Higher Education Act included a further expansion of both loans and grants, this time aimed at lower-income Americans. The HEA established what we now know as the Free Application for Federal Student Aid (FAFSA), and directed the Department of Education to administer lending. Thus, the Guaranteed Student Loan (precursor to the Stafford Loan) was created.

HEA loans were different than NDEA loans in an important way, however. Students borrowed from banks, with the federal government acting only as a guarantor. That made Uncle Sam a co-signer, expanding the kind of funding available. (Since then, Congress has vacillated between preferring the co-signer role, and the banker role. Today, most federal loans are direct loans, but that could change again.)

Not surprisingly, college attendance soared, more than doubling from 1960 to 1970 (from 3.5 million to 7.5 million).

The Higher Education Act requires reauthorization every five years, each one a chance for Congress to change the law. Many of those provisions have been intended to expand the opportunities afforded by it. The 1972 Equal Opportunity in Education Act, known as Title IX, was passed to prevent discrimination based on gender. That same reauthorization also created the Student Loan Marketing Association (Sallie Mae), designed to encourage lending. In the 1980 reauthorization of HEA, PLUS loans were created, ultimately allowing parents to borrow money from Uncle Sam to pay for their kids’ college.

As Enrollments Rise, So Do Tuitions

Each loan expansion meant college attendance continued to expand, hitting 10.8 million by 1983. Today, it’s 20 million.

With more customers, and more funding, it should be no surprise that college tuition has soared right along with them. According to the College Board, annual tuition at a public (state) college averaged $428 in 1971-72.  This year, it’s $9,648. During that same span, private tuition rose from $1,883 to $33,479.

So it should be no surprise that a chart showing the total outstanding student loan debt looks like a picture of the steep side of Mt. Everest. In 1999, former students owed $90 billion. By 2011, that figure had grown to $550 billion, an astonishing 550%. Since then, student loan debt has more than doubled … again.

In fact, student loan debt is the only kind of consumer debt that has grown since the recession.

Other Factors in Rising Tuition Rates

It’s important to note, however, that while one theory holds that the history of ever-widening availability of credit has led directly to higher tuition costs and higher debt, that’s not the only possible explanation. Higher education advocates also point to reduced state government spending on state colleges. As one example, Ohio State received 25% of its budget from the state in 1990. By 2012, that percentage had fallen to 7%. Students, often via borrowed money, must pay the difference.

F. King Alexander, president of Louisiana State University, painted a bleak picture in testimony before a Senate committee during 2015. More generous federal loan programs created in the 1950s and 60s had an unintended consequence: They nudged budget-crunched state governments towards a dark solution.

“State funding for higher education sits currently around 48% to 50% below where it was in 1981,” he said. “It was assumed that any new federal funding policies would simply supplement state funding, not replace it.”

But, today, states are ”getting out of the higher education funding business, to the point that the federal government has now become the primary funding source,” Alexander said. And while schools, states, and the federal government argue about the higher math of higher education, many students are left with personal education budgets that just don’t add up. To put a fine point on it, attorney and student loan expert Steven Palmer offers this sobering example:

“In 1981, a minimum wage earner could work full time in the summer and make almost enough to cover their annual college costs, leaving a small amount that they could cobble together from grants, loans, or work during the school year,” he says in a blog on the topic. “In 2005, a student earning minimum wage would have to work the entire year and devote all of that money to the cost of their education to afford one year of a public college or university.”

A Longstanding (But Growing) Problem

It’s important to note that burgeoning student loan debt — and the inherent problems those bills present to borrowers and their families —  did not go unnoticed until recently. In fact, back in 1987, a New York Times article summarized the issue in a paragraph that sounds an awful lot like something Vermont Sen. Bernie Sanders might have said during the 2016 Democratic Party primary races.

The growth of the problem is affecting not only individual lives, some authorities believe. They say the burden of debt is also chasing many students away from poorly paid public service jobs and forcing others to defer the start of a family and the purchase of a home or car, with economic and social consequences that have not been measured … Such cases worry education officials and other experts, who say that record borrowing for college threatens the financial stability of a generation of young people and their families.

At the time the article was written, the average debt for public college graduates was $7,000 ($15,000 in 2017 dollars). Since then, college tuition has risen at about four times the rate of inflation, and student debt, right along with it.

How Do We Fix Those Inherent Problems?

President Donald Trump did discuss the student loan problem on the campaign trail; his most significant proposal involved slightly more expensive, but also more generous income-based repayment plans for debtors. His plan would require 12.5% income contributions, but provide loan forgiveness earlier. The timetable for such a proposal is unclear.

The newly-minted head of the Department of Education, Betsy DeVos, said during confirmation hearings that the (then) $1.3 trillion in student loan debt is “a very serious issue,” but didn’t indicate support for any particular solution. In her testimony, there is this tea leaf:

There is no magic wand to make the debt go away. But we do need to take action. It would be a mistake to shift that burden to struggling taxpayers without first addressing why tuition has gotten so high. For starters, we need to embrace new pathways of learning. For too long, a college degree has been pushed as the only avenue for a better life. The old and expensive brick, mortar, and ivy model is not the only one that will lead to a prosperous future.

A comprehensive solution will almost certainly require another reauthorization of the Higher Education Act. The last reauthorization was signed by George W. Bush in 2008. It has been temporarily extended since then — Congress punted on a reauthorization during election season, which means it is overdue for another overhaul. DeVos told the Senate that she’s ready to get to work on that.

“I look forward to working with Congress and all stakeholders to reauthorize the Higher Education Act to meet the needs of today’s college students,” she said. The Education Department did not immediately respond to Credit.com’s request for comment as to whether there were any updates regarding DeVos’ plans since she testified.

Many issues remain on the table: Stakeholders are already arguing about enforcement of new rules against for-profit schools and the future of government direct lending vs. “co-signing” for borrowers. But the $1.4 trillion, 70-year-old problem is now an elephant in America’s living room — and no administration can make debt like that simply disappear.

What Can Students Do? 

While solutions to the systemic student loan problem are unlikely to come to fruition overnight, there are some steps struggling borrowers can take to stay current on their payments — and to preclude that debt from harming their credit. (You can see how your student loans may be affecting yours by viewing two of your free credit scores, updated every 14 days, on Credit.com.)

Federal student loans borrowers, for instance, can apply for a deferment or forbearance if they’re temporarily unable to repay those bills post-college. They can also apply for an income-based repayment plan that can help lower monthly payments to an affordable level. Private student loan borrowers may also have these options available to them, but it varies by lender and there may be fees attached to certain requests. (It’s best to ask about these options ahead of time — you can find more about vetting private student lenders here.)

There are also ways to lower the cost of your college education before and while in school. These options include looking into scholarships and grants, working part-time while taking classes and attending community college for few years before transferring to a four-year institution — more on how to pay for college without building a mountain of debt here.

Image: Geber86

 

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