How to Raise a Kid You Won’t Have to Cut Off in 20 Years

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Today’s young people are more likely than previous generations to live with their parents, according to a 2017 analysis from the Pew Research Center. In 2016, 15 percent of 25- to 35-year-olds lived in their parents’ home, compared to 10 percent of Gen Xers in 2000.

Even when kids move out, it’s not uncommon for them to receive financial support from their parents. In fact, 62 percent of Americans age 50 and older gave a relative money in the last five years, with the largest sums often going to adult children, according to a 2017 Merrill Lynch retirement study.

Parents may not find those statistics encouraging, but the good news is there are ways to teach kids how to be financially responsible, and it involves raising the bar by asking kids to do more in the way of financial responsibilities. Studies have shown that when more is expected of a child (or anyone), they actually perform to that level of expectation. The same can be said of how they deal with money.

Don Roork, a Certified Financial Planner at AssetDynamics Wealth Management, has noticed a pattern with kids, adults and money. “Kids learn good money habits from just watching and being around their parents,” says Roork.

Roork also points out that money lessons aren’t always explicit verbal lectures on finance. “Kids watch mom and dad making good financial decisions, and voilà — the kids’ money behavior matches their parents’,” says Roork.

So when it comes to raising financially independent adults, it becomes clear that it’s important to start when they are kids. Here are some ways personal finance experts recommend easing your children — gently and kindly — into financial adulthood by weaning them from the family wallet.

Set expectations

As soon as your child begins asking for things like toys, restaurant meals or trips to the movie theater, they are ready to learn about the money it takes to support these wants. When a child expresses a desire for something beyond the basics, start the conversation then and there about how they’ll soon be responsible for these “luxury items.”

Of course, you don’t have to start charging them rent (not a bad idea, though), but you will want to follow up your expectations with actions.

For example, if your family goes out to eat, your child can pay for their meal or contribute to a portion of the bill. These expenses can be age appropriate and should increase over time as your child earns more money. They can start with things like snacks at the movies and move up to cellphone bills and car insurance.

Financial adviser Jamie Pomeroy of Financial Gusto says this should all start with communication: “Sitting down with your child and having a clear and frank conversation about who’s paying for what, can pay huge dividends.”

Another good exercise would be to show them prices on things they’ll need as adults, like a home or a car. Molding their expectations around what it takes to live will only help them down the road.

To drive this point home, Pomeroy suggests laying out a real plan designed to increase financial responsibility. “Make sure that you and your child are on the same page about what expenses they are responsible for, what you’ll continue to pay for (for now), and then introduce them to a budget to help them manage those expenses,” he says.

Create a reward system

Get-out-of-debt guru Dave Ramsey warns against giving kids an allowance and instead recommends that money given to a child should be tied to actions, like completing chores or other household projects. The idea is to get kids ready for the real world by emulating it with a system of compensation tied to work.

CFP Jeff Rose of Good Financial Cents says, “One of the first steps in teaching your kids financial independence is giving them responsibilities around the home that are both paid and unpaid.”

Ramsey is also a proponent of giving children the opportunity to earn more money in “commissions” when they find extra things to do or take initiative in solving problems around the house.

Teach them personal finance

Many kids are shocked when they get into the real world and finally begin grasping the finite nature of money. Mom and Dad spring for everything, so why would money ever run out?

Clint Haynes, CFP of NextGen Wealth, says there’s a fix for this. “Make it a point to sit down with your kids and show them what your budget looks like, how it works, and why it truly is the foundation to personal finance,” he says.

When your child asks for candy at the store, don’t deflect them with, “We don’t have the money.” Instead, let them know that the money you have available isn’t earmarked for candy, showing them how a budget works in real life.

Other lessons you can teach early on include those around saving, compound interest and even giving.

Brian Hanks, a CFP out of Idaho, has an experiment he urges his clients to conduct with their children once they are high school seniors. He suggests parents hand over their checkbook and have their kid cover all the family’s expenses for the entire school year.

“Paying a family’s bills is eye-opening, and your teen starts to develop new money habits,” Hanks says.

Let them earn real money

You can start by giving your kids an allowance that is tied to performance: completing chores, excelling in school, and having a good attitude can factor into their “compensation.” Be sure to enforce the association between what they do and how they are compensated. Once they can work legally, you can taper off their allowance.

Ed Snyder, CFP at Oaktree Financial Advisors, says children who have jobs will be more thoughtful about their spending and better with money in general. “Working will help them think through their spending and hopefully be more responsible,” he says.

Keep in mind kids don’t always have to wait until they are 16 to get a job. They can start a business or participate in gigs that allow kids under 16 to work with a permit, like modeling or acting.

Challenge them

Not only should your kids be responsible for expenses and make their own money, Eric Jansen of AspenCross Wealth Management says kids should be challenged in their money habits.

“Set up 90-day savings and spending challenges as a fun way to help them better understand and manage the trade-offs between spending money on what they want and what they need,” Jansen says.

No-spend or savings challenges are great ways to teach lessons about money while showing your child what they are capable of if they focus on their goals.

You can even create competitions among siblings, like seeing who can save the most money.

Trust the process

Sound like a lot of work? It is! Financial independence doesn’t happen overnight.

“Some of these [money] lessons may click sooner in some kids than in others — even within the same family,” says Snyder. “Don’t give up hope. … Just keep showing them good examples and teaching them good old-fashioned financial lessons.”

Be patient, be kind, and be confident that the lessons you are teaching them will serve them well into adulthood.

The post How to Raise a Kid You Won’t Have to Cut Off in 20 Years appeared first on MagnifyMoney.

6 Bad Money Habits That Could Wreck Your Finances — and How to Break Them

Bad spending habits — everyone has at least one of them. Maybe for you it’s adding “just one more thing” to your shopping cart, or repeatedly getting slapped with overdraft or late payment fees.

These bad habits may seem innocuous at first but could easily turn into financial self-sabotage.

“Breaking a habit like these can be really difficult because these habits have developed over the years, and they provide us with psychological comfort and safety,” says Thomas Oberlechner, founder and Chief Science Officer at FinPsy, a San Francisco-based consulting firm that integrates behavioral expertise into financial services and products.

Oberlechner says the key to overcoming a bad money habit lies in knowing when you’re using the impulsive, right side of your brain — as opposed to the focused, concentrated left side — in financial decision-making.

“It’s really about psychological experience. It’s about behavior. If we understand the role of emotion, then we have a chance to fix it,” Oberlechner says.

Once you understand yourself and can identify your bad habit, Oberlechner adds, then you can create a plan “that turns your impulsive or unconscious behavior into the healthy financial behavior that [you] actually want.”

Of course, breaking any bad habit is easier said than done.

MagnifyMoney spoke to financial professionals to hear how they and their clients broke their bad habit. See if any of their hacks could help you break yours.

Bad money habit #1: Spending money as soon as you get it

The solution: Automation

If you’re constantly feeling broke just a few days after you receive a paycheck, you may be guilty of this bad money habit. One way to make sure you hold onto some of your cash is to use what the behavioral finance community calls a “commitment device” to lock you into a course of action you wouldn’t choose on your own, like saving your money.

In this case, the device is automation. Automating your savings won’t help you stop siphoning money from your checking account the same day your direct deposit clears, but it can make sure you save what you need to first. Check with your bank or the human resources department at work to have a portion of your paycheck automatically sent to a savings account instead of putting the entire sum in your checking account.

You should automate your bills and credit card payments for the pay period, too. Once your obligations are automated, “you can be impulsive with your play money,” says Oberlechner.

Bad money habit #2: Reaching for your credit card all the time

The solution: A cash diet

Paying for everything you buy with a credit card can be good practice if you pay off your card every month. If you’re chronically swiping your credit card for things you can’t afford to pay off by the next billing cycle, leave your card at home and use cash instead.

When you don’t pay off your card each billing cycle, you rack up interest charges on everyday purchases, and that may cost you a lot more money in the long run. If you’re using more than 30 percent of your total credit limit each month, you may also be harming your credit score.

To break your habit, leave your credit card at home and use cash or a debit card for your purchases.

“Take a certain amount of cash and say ‘I can spend no more than that,’” says Vicki Bogan, an associate professor at Cornell University in Ithaca, N.Y., who researches behavioral finance. “If you have a huge [spending] problem, try to limit yourself so that you only have access to a certain amount of money.”

If you really want to challenge yourself, you can try going on what’s called a spending freeze, where you stop spending any money on non-essentials for a period of time. On top of helping you save money, the freeze can help you notice how much money you may be wasting simply because you’re always pulling out your credit card. After your freeze ends, you may be less inclined to swipe your credit card.

Another rule that could help you break your swiping habit is the $20 rule. The financial rule of thumb is simple: Anytime your purchase is less than $20, pay in cash, not credit. The $20 rule forces you to think about whether or not a purchase is worth swiping your card for. Chances are, if what you’re buying costs less than $20, it’s not something you’d be OK paying interest on.

Bad money habit #3: Spending beyond your means

Solution: Budgeting

If you chronically spend beyond your means each pay period, you are likely digging yourself into debt. Get a handle on this habit by understanding how much money you have coming in and how much you can afford to spend on a monthly basis. You can use budgeting apps like Mint or YNAB to make that part easier. These tools can also help you identify the spending categories that are costing you more than you might realize.

Oak Brook, Ill.-based certified financial planner Elizabeth Buffardi tells MagnifyMoney that after examining one of her client’s expenses she found the client was spending a lot of money at drugstores picking up snacks and little things after work. So the client gave herself a budget of $10 per drugstore visit to save money.

“We’ve been seeing her spending at drugstores go down steadily over the last few months,” says Buffardi.

Buffardi had two other clients who struggled with overspending because they loved to shop online. They both created boundaries for themselves when it came time to pay for the items in their online shopping carts. One client decided to buy a certain amount of gift cards that she could use on a given site.

“If she spent all the gift cards in the first day, then she was done until the next paycheck. If she wanted something that was more expensive than the amount she had on the gift cards, she had to hold off on other purchases in order to purchase the more expensive item,” says Buffardi.

The other client simply removed her credit card number from her payment profiles so it would be more difficult to make thoughtless purchases. Her theory, Buffardi tells MagnifyMoney, was that if she was forced to stop and pull out her credit card before she could make the purchase, it might slow her down and give her time to think about the purchase she is about to make and — maybe — stop some purchases from happening.

Bad money habit #4: Always buying lunch from a restaurant

The solution: Plan your lunches a week in advance

If you’re losing $10-$15 a day to the local deli during the workweek, remember this: You don’t have to buy lunch if you bring it to work with you. However, organizing your day so that you actually have time to prepare and pack your lunch may be where you struggle.

Leave room in your busy schedule to pack your lunch in the mornings, or during the evening when you may have more time to yourself.

Melville, N.Y.- based certified financial planner David Frisch says he packs his lunches in the evening because he knows he runs late in the morning. He puts together everything but the dressings and sauces he plans to eat while making dinner, so lunch is already 90% done, then he adds the last 10 percent in the morning.

Frisch suggests setting a budget for how much you’d like to spend on food per pay period, then tracking how much money you typically spend on the convenience of frequently going out to lunch. Again, a budgeting app can be handy here to easily identify places where you spend the most.

Compare that amount to how much you spend on food for entertainment purposes, like going out to dinner with friends over the weekend and for your necessities, like eating lunch to fuel your workday.

“If you are spending so much money on convenience, you have that much less money to spend on everything else,” says Frisch. If you’re spending money from your food budget for convenience purposes, you may be more reluctant to go out on Saturday night for dinner.

If you’re already packing your lunch, but purchase a second lunch because you’re still hungry or you no longer want to eat what you packed, try packing a larger meal or having leftovers for a second lunch.

Bad money habit #5: Ordering out for dinner because you’re too tired to cook

The solution(s): Prep when you have time/energy; try meal delivery services

It’s easy to spend more than $50 getting dinner delivered three to four days out of the week, or buying groceries that go to waste because you’re too tired to cook. Oberlechner suggests doing some of the “work” of making dinner when you know you have more energy.

“If you’re too tired to cook in the evening, replace the spontaneous behavior by preparing dinner in the morning. So in the evening you don’t have the work of preparing anything,” he tells MagnifyMoney.

Another hack Oberlechner suggests is making a little extra dinner for the days you know will be especially long, when you won’t want to cook dinner. For example, if you know Tuesday is a really long day but Monday is not, cook a little extra on Monday and have those leftovers for dinner on Tuesday.

If cooking dinner simply isn’t a habit for you, you can try a meal kit service like Blue Apron, Plated, or HelloFresh to get interested in cooking, suggests Brooklyn, N.Y.- based certified financial planner Pamela Capalad. She tells MagnifyMoney she’s advised many of her clients to sign up for a meal kit service, then transition into grocery shopping and cooking at home regularly.

Generally, the services cost about $10 to $15 per serving and can serve up to four people.

Bad money habit #6: Letting your kids throw extra things in your shopping cart

The solution(s): Shop solo or lay ground rules early

Frisch says he and his wife solved this problem with their now 15-year-old triplets when they were four years old.

“Up until they were four we couldn’t bring them to a supermarket because it was impossible for my wife and I to watch three kids at the same time,” says Frisch. The easiest recommendation, he says, is to have somebody watch them at home while you go do the shopping. You may spend some money on a sitter, but you are also saving money without an eager child sneaking candy and toys into your shopping cart as well.

If an extra set of hands at home isn’t available, then try to set ground rules before you go to the store. For Frisch, that meant allowing the triplets to get one — just one — extra item at the store.

When a child wanted to add something “extra” to the cart, Frisch or his wife would say, “If you want this now, then you have to put the other one back.”

“Ultimately what happened was they kind of had to make a decision as to which one they would really get,” says Frisch.

The triplets quickly realized they could all benefit from working together.

“They actually started to communicate and say ‘if you get this and I get this, we can share,’” Frisch told MagnifyMoney. “They just figured out that if they all got one thing and shared, they ultimately all got more than they would have.

The post 6 Bad Money Habits That Could Wreck Your Finances — and How to Break Them appeared first on MagnifyMoney.

6 Career Strategies for People Who Are Coping With Depression

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Jana Lynch was 27 years old when she was formally diagnosed with depression. The illness wasn’t severe enough for her to start seeking regular treatment until eight years later, when a panic attack at work sparked a series of events that changed her career — and her finances — forever.

At the time, Lynch was working full-time for a social service agency. “Not only was my anxiety and depression through the roof, making it hard to get out of bed, concentrate on tasks, meet deadlines, communicate with coworkers, and remember meetings, but the nature of my job made it a dangerous environment for my mental health at the time,” she says.

Rather than resign outright, she decided to take a four-month leave on short-term disability. A break, she thought, might help. But when the time came to return to work, the same issues began to surface again. In the end, she chose her mental health over working full time.

“Looking back, it was a terrible choice because of the impact on my long-term personal finances,” she says. “But in the moment, it was the best decision for me and my family.”

Lynch’s story is not unique. In a 2004 study that followed workers over the course of six months, researchers found workers with depression dropped out of the workforce at a rate of 12 percent compared to only 2 percent of their peers.

While depression may force affected workers out of active employment at higher rates, it is also true that those who become unemployed are more likely to show signs of depression — three times more likely, according to a 2010 NIH study.

Thomas Richardson, a leading researcher at Solent NHS Trust, one of the largest community providers in the UK’s National Health System, notes that there is most definitely a correlation between unemployment and depression, but that causation is not as easy to pin down.

“In research such as this it’s always a case of chicken and egg: Which came first?” he says. “A lot of research is only at one time point, so it’s hard to say which came first.”

Some research shows losing your job impacts depression because it makes it hard to cope financially, but other studies suggest it has little impact.

“I think it probably works both ways and is a vicious cycle,” Richardson continues. “Someone becomes depressed, struggles at work, and loses their job. This then exacerbates their depression further.”

6 Strategies to Manage Depression and Work

Abigail Perry, author of Frugality for Depressives, had already been formally diagnosed with depression as a part of a bipolar disorder when unrelated chronic fatigue forced her out of traditional employment.

“I thought I’d be nothing but a burden for the rest of my life,” says Perry. “I wondered who would ever want someone who couldn’t pull her own weight financially, and I became suicidal. A lot of therapy and medication management doctor visits later, I finally started believing that I might have worth despite not being able to work.”

Those struggling with balancing their career and depression need not lose hope.

Richardson notes that many are able to develop coping strategies, allowing themselves to stay in the workplace. He’s developed six key strategies that his research has revealed to be helpful to workers with depression.

1. Intentionally look for work you enjoy.

“Try and do a job you enjoy or are interested in,” Richardson encourages. “If not possible, then try and focus on those bits of your job you do enjoy.”
Allyn Lewis, lifestyle blogger and storytelling strategist from Pittsburgh, Pa., has learned this technique through the course of building her business.

Diagnosed with a depression that was further fueled by her father’s suicide when she was a teen, Lewis never truly entered the traditional workforce, but has found self-employment to suit her disability.

Her motivating enjoyment comes from the community-based aspect of her business.

“Telling my story and talking openly about my anxiety, depression, and the loss of my dad is what keeps me active in my career,” says Lewis, 26. “That might sound strange, but when I keep my mental health journey to myself, it feels like it’s all about me. And if I’m having a down day, week, or month, what’s it matter if I do the work or get the things done? But, by talking about my mental health and using my own story to raise awareness, it makes it something that’s much bigger than myself.”

2. Don’t push yourself too hard.

“Don’t push yourself too hard at work,” says Richardson. “Acknowledge when you are struggling. It’s best to slow down early on than to keep going until you crash.”

Lewis learned this lesson through experience.

“Back in the day when I owned my own public relations firm, I would take on any client, under any circumstance, for any amount of money, and I’d make any accommodation or request they asked for. I ended up overbooked, underpaid, and at a point that was way beyond burnt out,” Lewis says.

“I kept trying to push my anxiety and depression aside to pretend like it wasn’t getting in the way, but the best thing I ever did was starting to tune into what my mental health was telling me. Only then was I able to shift into a business model that worked for me.”

3. Ask for help — and know your rights.

Richardson recommends going to your manager or supervisor for access to resources when your symptoms become too much to bear. If you work at a larger company, it may be more appropriate to get in touch with your human resources department.

This can seem intimidating, as you don’t want to give your superiors any reason to question your work ethic or your ability to provide value to the company.

But Perry, who now works full time in a remote position, notes that depression is covered by the Americans with Disabilities Act (ADA). This means your employer cannot fire you because of your disability — in this case, depression — and that they have to provide reasonable accommodations in order to allow you to do your job.

“Even if you don’t ask for accommodations, you need to make it clear that your absences or other work difficulties are based on a real medical condition,” Perry says. “Imagine being a supervisor with an employee who takes a lot of sick days, or may be easily agitated by interpersonal interaction or additional stress. In a vacuum, that’s a problem employee. Understanding the context, that’s someone who is doing their best to be a good employee despite a disability.”

4. Keep a healthy perspective on your career goals.

“It’s easy in a career to focus on goals, but this makes you vulnerable to depression,” says Richardson. “If you don’t get that promotion it might really impact you and lead to self-critical thoughts which fuel depression.”
He recommends instead harkening back to why you enjoy your work and the current position you’re in.

Lynch, who currently works as a freelance writer and editor, relates to the depression that can be felt when career expectations aren’t met.
“I try hard not to get angry at myself if I didn’t do as much as I’d like, or if my inbox isn’t bursting with inquiries,” says Lynch, “which is hard to deal with when you like to work and tie your work to your self-worth. But depression makes it difficult to look for clients. It’s a horrible, vicious cycle that I deal with only by telling myself this is temporary. It will get better at some point.”

5. Nurture hobbies and social contacts.

Lynch and Lewis both note exercise as a way of sustaining a healthy hobby. Lewis teaches yoga, and Lynch regularly attends a gym. While not the primary goal, a side effect of going to the gym or studio happens to be spending time with other people of similar interests.

Nurturing hobbies and maintaining social contacts are important from Richardson’s research — even if doing so initially feels overwhelming.

6. Practice mindfulness.

Finally, Richardson recommends practicing mindfulness, even when you’re not in the throes of depression. Emerging research suggests that mindfulness may not only alleviate depression, but could prevent relapses.

Richardson has produced a free mindfulness resource, which can be accessed here.

Depression and Your Finances

Career and finance often go hand in hand, so it’s no surprise that the ripple effects of depression can often extend into your finances as well.

By understanding and confronting these challenges head-on, there are strategies you can use to protect your finances as you learn to manage depression.

In a recent study published in the British Psychological Society’s Clinical Psychology Forum, Richardson studied people with bipolar disorder as they were going through a depressive episode. During these episodes, he found four key ways that their finances suffered.

Missing bills

Lynch notes that before she set up automatic payments, she would have trouble remembering pay upcoming bills. She’d get her statements, but ignore them. This led to unnecessary costs like late fees.

Richardson’s study finds that this behavior is typical for depressives. It found that missing bills was a financial manifestation of avoidant coping behaviors. In order to avoid being late on charges you may not know or remember exist, it’s important to get in the habit of confronting  through that pile of mail as you establish the habit of paying through automation.

Poor planning

“It can be harder to keep track of your finances when things get tough,” relates Perry. “Monitoring spending, keeping up with due dates — it’s exhausting even in good conditions. If you spend more because of depression, or if you simply don’t keep as close of an eye on things, your budget could take a big hit.”

Perry’s insights are congruent with Richardson’s findings. Those with depression have a harder time completing tasks like budgeting because planning ahead is made more difficult. The study also revealed that rational thinking and the ability to remember past purchases in order to log them into a spreadsheet were impaired.

Comfort spending

Perry says that when you’re depressed, you’re more likely to get caught up in comfort spending.

“This could be anything from convenience or junk food, which adds up, or going out for drinks, dinner, or entertainment. Alternately, you may be more likely to spend money on things that you think will make you happy or comforted — from convenience gadgets to home décor to clothes.”
Richardson adds the example of being overly generous with one’s family as an example of comfort spending.

Compounding anxiety

Richardson’s study finds that financial stress compounds anxiety and depression. This stress leads to more dire mindsets, like extreme anxiety and hopelessness.

“As a business owner, there’s always so much pressure around profit,” says Lewis. “Even when you’re up, you never know how long it will last, so you have to keep hustling. When I’m going through a period of depression, this puts me in a cycle of ‘I’m never making enough,’ which is a thought that likes to pair itself with ‘I’m not good enough.’ Depression has a sneaky way of switching my mindset from one of abundance to one of scarcity.”

Lewis’s reports of low self-worth are also common, according to Richardson’s work. Self-criticism over “economic inactivity” was detected in study participants.

Seeking Mental Health Care

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For help developing more coping strategies or getting resources that can help you manage your depression, consider seeking out mental health care services.

“I think all depressives — especially ones who aren’t on medications — should have therapists,” says Perry. “It may take a few tries to find someone you work well with, but then that person will be a great lifeline. Therapists can help you deal with the things that depression makes harder with strategies, workarounds, or just working through past events that are contributing to or causing your current depression.”

Therapy and medication management specialists can be expensive, though. Many regions in America face a shortage of mental health care providers, and the matter is further complicated when you consider that some providers may be out-of-network, bringing copays up even if you are currently insured.

Related article: 5 ways to find lower the cost of therapy

If you can’t figure out how to fit these services into your budget, seek out therapists who offer sliding-scale payment options based on your income. Another affordable resource is public mental health care clinics, though their availability may be limited.

If you have insurance and don’t immediately need medication, keep in mind that a mental health care professional may not have an M.D. or Ph.D. after their name. Licensed Clinical Social Workers (LCSWs) and other counselors often accept insurance and are able to provide therapy, referring you out to a psychiatrist for prescription needs when necessary.

Lynch did seek therapy and go on medication for a while, though she now leans on other coping mechanisms such as avoiding triggers and exercising regularly.

“I recommend it if you feel you need it,” she says. “There is no shame in getting whatever kind of help you need.”

Today, Lynch operates from a place of acceptance. Depression is a part of her life that she has learned to deal with. While she doesn’t categorize herself as what we would consider classically “happy,” she does consider herself to be as content as possible, and actively seeks out happiness within her circumstances.

The post 6 Career Strategies for People Who Are Coping With Depression appeared first on MagnifyMoney.

How to Get ‘Unstuck’ From Your Starter Home

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Andrew Cordell bought his first home at the worst possible time — 10 years ago, right before the housing bubble burst.

He’s not going to make that mistake again.

“We had immediate fear put in us as homeowners,” says Cordell, 40. “We know how dangerous this can be.”

So the small “starter home” he purchased in Kalamazoo, Michigan back in 2007 now feels just about the right size.

“When we bought, we figured we’d get another home in a few years,” he says. “But the more we settled, the more we thought, ‘Do we really need more space?’ We don’t actually need a large chest freezer or a large yard. Kalamazoo has a lot of parks.”

Apparently, plenty of homeowners feel the same way.

It’s a phenomenon some have called “stuck in their starter homes.” Bucking a decades-long trend, young homeowners aren’t looking to trade up — they’re looking to stay put. Or they are forced to.

According to the National Association of Realtors, “tenure in home” — the amount of time a homebuyer stays — has almost doubled during the past decade. From the 1980s right up until the recession, buyers stayed an average of about six years after buying a home. That’s jumped to 10 years now.

Expected Median in Tenure in Home
Source: 2017 National Association of Realtors® Home Buyer and Seller Generational Trends

 

Other numbers are just as dramatic. In 2001, there were 1.8 million repeat homebuyers, according to the Urban Institute. Last year, there were about half that number, even as the overall housing market recovered. Before the recession, there were generally far more repeat buyers than first-timers. That’s now reversed, with first-time buyers dwarfing repeaters, 1.4 million to 1 million.

This is no mere statistical curiosity. Trade-up buyers are critical to a smooth-functioning housing market, says Logan Mohtashami, a California-based loan officer and economics expert. When starter homeowners get gun-shy, home sales get stuck.

“Move-up buyers are especially important … because they typically provide homes to the market that are appropriate for first-time buyers,” he says. When first-timers stay put, the share of available lower-cost housing is squeezed, making life harder for those trying to make the jump from renting to buying.

Getting unstuck from your starter home

There are plenty of potential causes for this stuck-in-a-starter-home phenomenon — including the fear Cordell describes, families having fewer children, fast-rising prices, and flat incomes. But Mohtashami says the main cause is a hangover from the housing bubble that has left first-time buyers with very little “selling equity.”

Buyers need at least 28 to 33 percent equity to trade into a larger home, and often closer to 40 percent, he says. Those who bought in the previous cycle might have seen their home values recover, but many purchased with low down payment loans, leaving them still equity poor.

That wasn’t such a problem before the recession, as lenders were happy to give more aggressive loans to trade-up buyers. Not any more.

“In the previous cycle you had exotic loans to help demand. Now you don’t. [That’s why] tenure in home is at an all-time high,” Mohtashami says. “Even families having kids aren’t moving up as much.”

Fast-rising housing prices don’t help the trade-up cause either. While homeowners would seem to benefit from increases in selling price, those are washed away by higher purchase prices, unless the seller plans to move to a cheaper market.

“You’re always trying to catch up to a higher priced home,” Mohtashami says.

Cassandra Evers, a mortgage broker in Michigan, says she’s seen the phenomenon, too.

“It’s not for lack of want. It seems to be the inability to afford the cost of the new home,” she says. “It’s not the interest rate that’s the problem, obviously because those are at historic lows and artificially low. It’s because to buy a ‘bigger and better house,’ that house costs significantly more than their current home. The cost of housing has skyrocketed.”

U.S. Homebuyers and Student Loan Debt (by Age)
Source: 2017 National Association of Realtors® Home Buyer and Seller Generational Trends

There’s also the very practical problem of timing. In a fast-rising market, where every home sale is competitive, it’s easy to lose the game of musical chairs that’s played when a family must sell their home before they can buy a new one.

“Folks are concerned about selling their current house in one day and being unable to find a suitable replacement fast enough,” Evers says.

Cordell, who lives with his wife and eight-year-old son, says the family considered a move a few years ago and briefly looked around. But they quickly concluded that staying put was the right choice.

“We looked at some homes and we thought, ‘I guess we could afford that. But we don’t want to be house broke’,” he says. “We don’t want to take on so much debt that ‘What else are we able to do?’ What if one of us loses our job? I guess you could say we have a Depression-era sensibility. … Who would want to get upside down on one of these things?”

The Urban Institute says this stuck-in-starter-home problem shows a few signs of abating recently. Repeat buyers were stuck around 800,000 from 2013 to 2014. Last year, the number pierced 1 million. But that’s still far below the 1.5 million range that held consistently through the past decade.

There are other signs that relief might be on the way, too. ATTOM Data Solutions recently released a report saying that 1 in 4 mortgage-holders in the U.S. are now equity rich — values have risen enough that owners hold at least 50 percent equity, well above Mohtashami’s guideline. Some 1.6 million homeowners are newly equity rich, compared to this time last year, and 5 million more than in 2013, ATTOM said.

“An increasing number of U.S. homeowners are amassing impressive stockpiles of home equity wealth,” says Daren Blomquist, senior vice president at ATTOM Data Solutions.

So perhaps pent-up repeat homebuying demand might re-emerge. Evers isn’t so sure, however.

“Most folks I talked with are no longer interested in being house poor and maxing out their debt to income ratios. They seem to be staying put and shoving money into their retirement accounts,” Evers says.

The Cordells are content where they are in Kalamazoo and plan to stay long term. If anything would make them move, it’s not growing home equity but a growing family.

“If we ended up with a second (kid), I suppose we’d have to look,” Cordell mused. “But we have no plans for that.”

4 Signs You’re Ready to Trade Up Your Home

  • YOU’VE GOT PLENTY OF EQUITY: Your home’s value has risen enough that you safely have at least 28 percent equity and, preferably, more like 35 to 40 percent.
  • YOU’RE EARNING MORE: Your monthly take-home income has risen since you bought your first home by about as much as your monthly payments (mortgage, interest, insurance, taxes, condo fees, etc.) would rise in a new home.
  • YOU STAND TO MAKE A HEALTHY PROFIT: You are confident that if you sell your home, you’d walk away from closing with at least 30 percent of the price for your new home — or you can top up your seller profits to that level with cash you’ve saved for a new down payment. That would let you make a standard 20 percent down payment and have some left over for surprise repairs and moving costs that will come with the new place. Remember, transaction costs often surprise buyers and sellers, so be sure to build them into your calculations.
  • YOU CAN HANDLE THE RISK: You have the stomach for the game of musical chairs that comes with selling then buying a home in rapid succession. Also, if you are in a hot market, you have extra cash to outbid others or a place for your family to stay in case there’s a time gap between selling and buying.



The post How to Get ‘Unstuck’ From Your Starter Home appeared first on MagnifyMoney.

Under Pressure: 1 in 5 American Parents Will Go into Debt to Send Kids Back to School

After a long summer break, many parents feel eager to send their kids back to school. But back to school can translate into debt, according to a recent MagnifyMoney national survey of more than 700 parents. More than one in five parents will go into debt to pay for back-to-school expenses. And more than half (55 percent) of parents who are going into debt say they feel pressure to buy new things for their kids during the back-to-school time compared to just 29 percent for parents not going into debt.

It’s no question that back-to-school clothes, supplies, and gear can put a dent in a family’s budget. Almost three in four parents will spend more than $100 on back-to-school supplies this year, and nearly one in four will spend more than $500.

Key insights

  • 55% of parents who are going into debt say they feel pressure to buy new things for their kids for back to school (versus 29% for parents not going into debt)
  • Almost half (44%) of parents are spending over $300 on back to school.
  • Midwest parents are least likely to feel pressure to buy new things for their kids (30%) compared to 43% in the Northeast and 38% in the South and West.
  • Parents in the South are most likely to spend $500 or more on back to school (28%) compared to 25% in the Northeast, 20% in the Midwest, and 21% in the West.
  • 41 percent of parents who feel stress about back-to-school shopping expect to go into debt for back-to-school shopping.
  •  Just 36 percent of parents who will go into debt feel the cost of school supplies required is reasonable. 52 percent of parents who don’t expect to go into debt for back-to-school shopping feel the cost is reasonable.
  • 65 percent of parents going into debt plan to spend $300 or more, compared to 38 percent of those not going into debt. And 37 percent of those going into debt plan to spend $500 or more, versus 21 percent of those not going into debt.

Pressure to spend

The survey indicated that for parents expecting to take on debt, back-to-school shopping is fraught with negative emotion. Nearly a third (33 percent) of parents who expect to go into debt for back-to-school shopping feel the cost of expected school supplies is unreasonable. Just one in five parents who won’t go into debt feel the same way. With school supplies pushing one in five families into debt, it’s no wonder that so many feel the costs are unreasonable — that’s especially true for families already carrying credit card debt into the back-to-school season.

According to the 2015 Report on the Economic Well-Being of U.S. Households, 31 percent of American households carry credit card debt all year round, and 27 percent of households carry credit card debt from time to time. A MagnifyMoney analysis showed that households carrying credit card debt have an average balance of $7,700. Adding several hundred dollars to an existing credit card debt can make the whole debt feel unmanageable.

In the survey, taking on debt is one of the leading indicators for feeling back-to-school shopping stress. Parents taking on debt were nearly three times as likely to feel that back-to-school shopping was stressful compared to those who were not. A third of parents going into debt feel that back-to-school shopping is stressful, but just 12 percent of parents not going into debt feel the same.

The stress doesn’t come just from crowded malls and added debt. Instead, it comes from social pressure to take on debt and buy new things for kids. Over half (55 percent) of parents who are going into debt feel pressure to buy new things for their kids during the back-to-school time frame. Less than three in 10 (29 percent) parents who aren’t going into debt feel that same pressure.

The pressure to go into debt for kids doesn’t just occur during back-to-school time. Almost half (46 percent) of all moms admit to going into debt for child-rearing costs, according to the 2015 Cost of Raising a Child survey from BabyCenter.com. The pressure to give kids better lives (and better school supplies) can lead parents to make expensive decisions, including going into debt.

Store cards and debt

Most parents, 93 percent, use traditional credit cards or cash to pay for back-to-school items. Only a small percentage plan to use retail credit cards (like the Target RedCard) to pay for back-to-school items. However, parents going into debt are more than three times as likely to use store credit cards as parents not going into debt (15 percent vs. 5 percent).

With coupons, points, and cash rewards, store credit cards can feel enticing, but the interest rates on store cards are damaging.

Retail credit cards have notoriously high interest rates. Currently, Target REDcard and the Walmart Credit Card have interest rates of 22.9 percent, and the Kohl’s credit card is 24.99 percent.

Financing $300 on a store credit card (with a 22.9 percent APR) means that a parent will spend $38.50 on extra interest if they pay off the loan over the course of the year compared to a regular card.

Real Cost of Back-to-School Spending on Store Credit Cards (22.9 percent APR)

$100 in back-to-school spending $300 in back-to-school spending $500 in back-to-school spending
Paid off in 3 months $103.83 $311.52 $519.20
Paid off in 1 year $112.83 $338.50 $564.17

Source: MagnifyMoney.

Overall, 33 percent of parents use traditional credit cards to pay for back-to-school items, including 37 percent of parents planning to take on debt. These parents will likely yield substantial interest rate savings by choosing to use a traditional credit card rather than a store card. Currently, the average interest rate on a credit card is 14 percent, according to the Federal Reserve Bank of St. Louis, but people with decent credit can find plenty of 0 percent APR interest rate offers.

Avoiding cards and debt

Parents who avoid debt tend to avoid plastic altogether. Over three in five (63 percent) parents who don’t expect back-to-school debt won’t spend on credit or retail cards.

As a group, avoiding plastic seems to keep spending down as well — 62 percent of parents who eschew plastic will spend less than $300 on back-to-school supplies. By comparison, just 53 percent of parents using plastic will spend less than $300.

Only 31 percent of parents who are avoiding debt will spend on a credit card and reap rewards points or cash back options. It might seem like this group is missing out on good deals, but they may just focus their attention on bigger saving opportunities. Two-thirds of parents who won’t use plastic this season will take advantage of back-to-school sales.

Survey methodology

MagnifyMoney.com commissioned Google Consumers Surveys to obtain online survey data with 700 parents living in the United States with children going back to school. Interviews were conducted online via Google Surveys in English during August 5-8, 2017. Statistical results are weighted to correct known demographic discrepancies. The margin of sampling error was plus or minus 5.3 percentage points for the 702 people who said they felt stress during back-to-school shopping.

 

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What Should Your Teen Do With Their Summer Earnings

Source: iStock

According to a 2017 survey released by the National Financial Educators Council, 54% of respondents (all 18 years and older) said a course in money management in high school would benefit their lives. Another survey — the most recent from the Program for International Student Assessment — reports that only about 10% of U.S. 15-year-olds are proficient in personal finance matters, falling in the middle among the 15 countries studied. The message is clear: Young Americans need to learn more about money and managing it wisely. One way to start them off is giving them hands-on experience with their own money. Enter the summer job.

Having a summer job can be a good introduction to adulthood for many reasons: The discipline, submission to management, team work, and a regular paycheck are just a few of the things a teenager will get used to with their first summer job.

It’s also a good way to introduce kids to the real world of money. Though the money your teen earns is technically theirs, as a parent, you should use summer job earnings as an opportunity to help your kids form good habits with money. There’s no better time to show them the value of money than in the crucial years before they’ll be saddled with obligations like student loans, car notes, and mortgages.

Here are a few ways to make sure your teen will get the most out of their money-making experience that will keep them money savvy for years to come.

Pay their fair share

Once your teen begins making money, you’ll to want consider how they can begin to cover certain expenses. You’ll be tempted, no doubt, to let your teen keep their hard-earned money for themselves. Trust this process. If the goal is to raise money-smart kids who become even savvier adults, there will have to be simulations of the real world that include actually paying for things

If your teen uses the car, consider having them cover a portion or all of their car insurance bill. Another option is to have them contribute to their cellphone bill or even some of the Wi-Fi they use.

Having expenses is a real part of life, so it’s better to help them understand that now rather than later when ignorance isn’t so blissful.

If the thought of making your child pay for expenses bothers you, consider a different approach: Teach them about the costs of everyday life by asking them to cover their portion of a bill, but take that money and put it away for them. You can save up all that money and, as a nice gesture, give it to them when they need it most, like when they go away to college or finally leave the nest to launch out into the real world.

Open bank accounts

Source: iStock

While many families do not have access to or elect not to participate in the traditional banking system — it’s estimated that 27% of U.S. households are unbanked or underbanked — you’d ideally want to get your teen familiar with banks and how they work. Though check use has been on the decline since the mid-1990s, it’s still important for teens to learn how to write a check, along with keeping a checkbook register. Sure, this practice probably won’t last long, as electronic payments and money management apps continue to grow, but this approach gives your kids the gist of how to keep track of their cash flow.

While your teen has a bank account, you’ll also get them used to understanding how a debit card works. They’ll get familiar with how easy it is to swipe for things they want, yet how difficult it can be to replenish their account with the money they’re making at their job.

Finally, you’ll want to make sure that your teen opens a savings account. In most states, a person can open a bank account when they become 18. For younger teens, many banks have special teen or kid accounts that a child can share with their parents. Co-owned checking accounts can be opened as young as 13, while custodial savings accounts can be opened at any age.

Developing good habits around saving and managing money takes time and some getting used to. So using their summer earnings would be a perfect opportunity to get into the groove of budgeting for expenses and managing money through a bank account.

Set money goals

Once money starts to flow into your kid’s hands, seize the moment and get them to see the bigger picture. Summer money is great, but paying for life will take much more than what your teen earns from a few hours of work in a bike shop. Begin to show them the cost of things like college, cars, homes, and luxuries like vacations or hobbies.

Once you compare the costs with their summer job earnings, it should help them come to conclusions about how money works: The more you have, the more you can do. The idea is to inspire them to increase their earning potential with tools like education or savings to invest in income-producing assets.

Another result of these conversations could be your teen realizing they’ll want to start saving up for life sooner than later. They may decide to put away money for the purpose of paying for school or their first condo.

Ron Lieber, New York Times financial columnist and author of the book The Opposite of Spoiled, says parents should prompt their kids with an immediate goal like having a college fund. “The best thing to do is to use any earnings to begin a conversation with parents about college, if your teen plans on going,” Lieber says.

Lieber suggests questions to guide the conversation:

  • How much of your college expenses will be covered by parents versus the child?
  • How much have the parents saved for the child’s college expenses?
  • How much are kids/parents willing to borrow or spend out of their current income?

According to Lieber, “The answers to these questions may cause a teen to save everything, if they think it will help them avoid debt in their effort to attend their dream college.”

No matter how temporary their summer job is, you’d do well to use it as a springboard for more conversations about money. Whatever their long-term money goals are, it’s never a bad idea to start working toward them early on.

Learn compound interest

While your teen is making all of those big money goals, you could drive the point home with a lesson in compound interest. Using a compound interest calculator, you can show your teenager many scenarios where interest can either work for or against them.

Run scenarios around savings for big-ticket items versus financing them. The math will speak volumes:

*Example APRs are used. APR will vary on factors like individual credit score, loan amount, and bank requirements.

In the above scenario, you’d end up paying a total of $226,815 in interest. That same amount ($226,815) invested for 30 years with a moderate 3.5% return yields over $636,000!

Seeing these numbers in action should motivate your teen to start a savings habit that they will maintain throughout adulthood.

If they are really excited about the prospects of compound interest working on their behalf, encourage them to open their own IRA to begin investing themselves. This way, they’ll not only understand the theory of investing but also get hands-on experience with it. After all, the time value of money works even better when you’ve got more time. Investing as a teen could set the stage for copious returns later on in life.

Create a budget

Making money can be the fun, somewhat easy part of a summer job. Figuring out how to spend it can be difficult. Make your teen prioritize needs and wants by learning to create a budget. A good practice would be to have your teen make a list of things they’ll spend money on versus how much money they will bring in. You could also introduce them to a money-management app — here are some of the best ones.

This will help them understand the finite nature of money and how their current cash flow stacks up against their current earnings.

Have fun

According to Brian Hanks, a certified financial planner in Salt Lake City, “Don’t be concerned if your teen ‘blows’ a portion of their earnings on things you consider to be worthless.” Hanks goes on to say that it’s better to make money mistakes as a youngster: “Everyone needs to learn tough money lessons in life, and learning them as a teen when the consequences are relatively small can save bigger heartache down the road.”

A summer job should be fun and low-stress, but it can also be used as a learning experience that prepares your teen for the real world. If your teen turns out to be a terrible budgeter or extreme spendthrift, give them more than a summer to learn better ways. Remember, they’ll have the rest of their lives to continue grasping and mastering money concepts.

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Auto Loan Interest Rates and Delinquencies: 2017 Facts and Figures

Led by a prolonged period of low interest rates, consumers now have a record $1.2 trillion1 in outstanding auto loan debt. Despite record high levels of issuance, the auto lending market shows signs of tightening. With auto delinquencies on the rise, consumers are facing higher interest rates on both new and used vehicles. In particular, over the last three years, subprime borrowers saw rates rise faster than the market as a whole. MagnifyMoney analyzed trends in auto lending and interest rates to determine what’s really going on under the hood of automotive financing.

Key insights

  1. Overall auto delinquency is on the rise, and the first quarter of 2017 saw near record levels of new auto loan delinquency rates.54
  2. Interest rates are on the rise, with average new car loan rates up to 4.87%, 60 basis points from their lows in late 2013.2
  3. The average duration of auto loans (new vehicles) is a record 67.37 months, reducing the monthly payment impact of higher interest rates.31

Facts and figures

  • Average Interest Rate (New Car): 4.87%2
  • Average Interest Rate (Used Car): 8.88%3
  • Average Loan Size New: $29,3144
  • Average Loan Size Used: $17,1805
  • Median Credit Score for Car Loan: 7066
  • % of Auto Loans to Subprime Consumers: 31.34%7

Subprime auto loans

  • Total Subprime Market Value: $229 billion8
  • Average Subprime LTV: 113.4%9
  • Average Interest Rate (New Car): 11.05%10
  • Average Interest Rate (Used Car): 16.48%11
  • Average Loan Size (New Car): $28,09912
  • Average Loan Size (Used Car): $16,02613
  • % Leasing: 25.9%14

Prime auto loans

  • Total Prime Market Value: $717 billion15
  • Average Prime LTV: 97.91%16
  • Average Interest Rate (New Car): 3.77%17
  • Average Interest Rate (Used Car): 5.29%18
  • Average Loan Size (New Car): $32,15319
  • Average Loan Size (Used Car): $20,77820
  • % Leasing: 37.4%21

Auto loan interest rates

Interest rates for auto loans continue to remain near historic lows. As of the first quarter of 2017, interest rates for used cars was 8.88% on average. The average interest rate on new cars (including leases) is 4.87%. However, the low average rates belie a tightening of auto lending, especially for subprime borrowers.

New loan interest rates

Consumer credit information company Experian reports that the average interest rate on all new auto loans was 4.87%, up six basis points from the previous year.24 The small interest rate increase masks a larger underlying tightening in the auto loan market for new vehicles.

During the last year, lenders tilted away from subprime borrowers. Just 10.88% of new loans went to subprime borrowers compared to 11.41% the previous year. The movement away from subprime borrowers led to a smaller increase in new car interest rates compared to if car rates had stayed the same.25

Across all credit scoring segments, borrowers faced higher average borrowing rates. Subprime and deep subprime borrowers saw the largest absolute increases in rate hikes, but super prime borrowers also saw an 18 basis point increase in their borrowing rates over the last year. The average interest rate for super prime borrowers is now 2.84% on average, the highest it’s been since the end of 2011.27

When comparing credit scores to lending rates, we see a slow tightening in the auto lending market since the end of 2013. The trend is especially pronounced among subprime and deep subprime borrowers. These borrowers face auto loan interest rates growing at rates faster than the market average. Consumers should expect to see the trend toward slightly higher interest rates continue until the economic climate changes.

Even with the tightening, interest rates remain near historic lows, but that doesn’t mean consumers are paying less interest on their vehicle purchases. The estimated cost of interest on new vehicle purchases is now $4,223,29 up 42% from its low in the third quarter of 2013.

Growth in interest paid over the life of the loan stems from longer loans and higher average loan amounts. The average maturity for a new loan grew from 62.5 months in the third quarter of 2008 to 67.4 months in early 2017.31 During the same time, average loan amounts for new vehicles grew 14.7% to $29,134.32

Used loan interest rates

Over the past year, interest rates for used vehicles fell by 35 basis points to 8.88%. The drop in average interest rates came from a dramatic increase of prime borrowers entering the used car financing market. In 2017, 47.4% of used car borrowers had prime or better credit. The year before, 43.99% of used borrowers were prime.34

On the whole, borrowers in the used car market face nearly identical rates to this time last year. Super prime and prime borrowers saw upticks of 15 basis points and 4 basis points, respectively. This brought the average super prime borrowing rate up to 3.56% for used vehicles, and the prime rate to 5.29%.36

On the other end of the spectrum, subprime and deep subprime borrowers saw their interest rates fall by approximately 10 basis points year over year. Despite the decrease, interest rates for these borrowers are up a dramatic 250 basis points (2.5%) from their 2008 rates.

Although average interest rates on used vehicles continue to fall, the estimated interest paid on a used car loan rose $12 from the previous year to $4,046. The increase in overall interest is part of a larger trend. Over the past four years, estimated interest on used cars was 8.4%. Almost all of the increase comes from longer average loan terms (61 months vs. 57 months),38 leading to more interest paid over the life of a car loan.

Auto loan interest rates and credit score

As of March 2017, the median credit score for all auto loan borrowers was 706.40 A credit score of 706 is just shy of the prime credit rating (720). This is the highest median rate since the first quarter of 2011.

In the first quarter of 2017, just 31% of all auto loans were issued to subprime borrowers compared with an average of 35% over the past three years.

Total auto loan volume decreased dramatically between 2008 and 2010. During that time, subprime and deep subprime lending contracted faster than the rest of the market. Since early 2010, auto lending as a whole is near prerecession levels. However, subprime lending has not completely recovered. In the first quarter of 2017, banks issued just $41.5 billion to subprime borrowers. That’s $6.7 billion less than the average $48.2 billion of subprime auto loans issued each quarter between 2005 and 2007.

Loan-to-value ratios and auto loan interest rates

One factor that influences auto loan interest rates is the initial loan-to-value (LTV) ratio. A ratio over 100% indicates that the driver owes more on the loan than the value of the vehicle. This happens when a car owner rolls “negative equity” into a new car loan.

Among prime borrowers, the average LTV was 97.91%. Among subprime borrowers, the average LTV was 113.40%.44 Both subprime and prime borrowers show improved LTV ratios from the 2007-2008 time frame. However, LTV ratios increased from 2012 to the present.

Research from the Experian Market Insights group46 showed that loan-to-value ratios well over 100% correlated to higher charge-off rates. As a result, car owners with higher LTV ratios can expect higher interest rates. An Automotive Finance Market report from Experian47 showed that loans for used vehicles with 140% LTV had a 3.03% higher interest rate than loans with a 95%-99% LTV. Loans for new cars charged just a 1.28% premium for high LTV loans.

Auto loan term length and interest rates

On average, auto loans with longer terms result in higher charge-off rates. As a result, financiers charge higher interest rates for longer loans. Despite the higher interest rates, longer loans are becoming increasingly popular in both the new and used auto loan market.

The average length to maturity for new car loans in 2017 is 67.37 months.48 For used cars, the average is 61.12 months.49 The increase in average length to maturity is driven primarily by a concentration of borrowers taking out loans requiring 61-72 months of maturity.50

In the first quarter of 2017, just 7.1% of all new vehicle loans had payoff terms of 48 months or less, and 72.4% of all loans had payoff periods of more than 60 months.51 Among used car loans, 18.5% of loans had payoff periods less than 48 months, and 58.3% of loans had payoff periods more than 60 months.52

Auto loan delinquency rates

Despite a trend toward more prime lending, we’ve seen deterioration in the rates and volume of severe delinquency. In the first quarter of 2017, $8.27 billion in auto loans fell into severe delinquency.54 This is near an all-time high.

Overall, 3.82% of all auto loans are severely delinquent. Delinquent loans have been on the rise since 2014, and the overall rate of delinquent loans is well above the prerecession average of 2.3%.

Between 2007 and 2010, auto delinquency rates rose sharply, which led to a dramatic decline in overall auto lending. So far, the slow increase in auto delinquency between 2014 and the present has not been associated with a collapse in auto lending. In fact, the total outstanding balance is up 33.4% to $1.167 billion since 2014.57

However, the increase in auto delinquency means lenders may continue to tighten lending to subprime borrowers. Borrowers with subprime credit should make an effort to clean up their credit as much as possible before attempting to take out an auto loan. This is the best way to guarantee lower interest rates on auto loans.

Sources

  1. Quarterly Report on Household Debt and Credit May 2017.” Total Debt Balance and Its Composition: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 17, 2017.
  2. State of the Automotive Finance Market,” New Car Average Rates – Page 25, from Experian.TM
  3. State of the Automotive Finance Market,” Used Car Average Rates – Page 25, from Experian.TM
  4. Board of Governors of the Federal Reserve System (US), Average Amount Financed for New Car Loans at Finance Companies [DTCTLVENANM], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVENANM, July 17, 2017.
  5. Board of Governors of the Federal Reserve System (US), Average Amount Financed for Used Car Loans at Finance Companies [DTCTLVEUANQ], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVEUANQ, July 18, 2017.
  6. Quarterly Report on Household Debt and Credit May 2017.” Credit Score at Origination: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 17, 2017.
  7. Quarterly Report on Household Debt and Credit May 2017.” Auto Loan Originations by Credit Score, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 17, 2017.
  8. Calculated metric: “State of the Automotive Finance Market” Loan Balance Risk Distribution Q1 2017 – Page 5, from Experian,TM and “Quarterly Report on Household Debt and Credit May 2017.” Total Debt Balance and Its Composition: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 17, 2017.(3.76% of All Loans Are Deep Subprime + 15.94% of All Loans Are Subprime)X ($1.167 trillion in Auto Loans)
  9. U.S. Auto Loan ABS Tracker: January 2017,” from S&P Global Ratings. Accessed July 17, 2017.
  10. State of the Automotive Finance Market,” New Car Subprime Average Rates, Page 25, from Experian.TM
  11. State of the Automotive Finance Market,” Used Car Subprime Average Rates, Page 25, from Experian.TM
  12. State of the Automotive Finance Market,” Average Loan Amounts By Tier, Page 19, from Experian.TM
  13. State of the Automotive Finance Market,” Average Loan Amounts By Tier, Page 19, from Experian.TM
  14. State of the Automotive Finance Market,” % Leasing By Tier, Page 16, from Experian.TM
  15. Calculated metric: “State of the Automotive Finance Market” Loan Balance Risk Distribution Q1 2017 – Page 5, from Experian,TM and “Quarterly Report on Household Debt and Credit May 2017.” Total Debt Balance and Its Composition: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 17, 2017.(41.7% of All Loans Are Prime + 19.74% of All Loans Are Super Prime)X ($1.167 trillion in Auto Loans)
  16. U.S. Auto Loan ABS Tracker: January 2017,” from S&P Global Ratings. Accessed July 17, 2017.
  17. State of the Automotive Finance Market,” Average Interest Rate Prime Rating (New Car), Page 25, from Experian.TM
  18. State of the Automotive Finance Market,” Average Interest Rate Prime Rating (Used Car), Page 25, from Experian.TM
  19. State of the Automotive Finance Market,” Average Loan Amounts By Tier, Page 19, from Experian.TM
  20. State of the Automotive Finance Market,” Average Loan Amounts By Tier, Page 19, from Experian.TM
  21. State of the Automotive Finance Market,” % Leasing By Tier, Page 16, from Experian.TM
  22. Graph 1 – Auto Loan Interest Rates, data compiled from historic Experian State of Automotive Finance Reports.
  23. Graph 2 – Average New Vehicle Interest Rates, data compiled from historic Experian State of Automotive Finance Reports.
  24. State of the Automotive Finance Market,” Average Interest Rate Prime Rating (New Car), Page 25, from Experian.TM
  25. State of the Automotive Finance Market,” New Loan Risk Distribution, Page 15, from Experian.TM
  26. Graph 3 – % of New Car Loans Issued to Subprime Borrowers, data compiled from historic Experian State of the Automotive Finance Market Reports.
  27. Average Interest Rate by Credit Score, data compiled from historic Experian State of Automotive Finance Reports.
  28. Graph 4 – Average Interest Rate by Credit Score (New Car Loans), data compiled from historic Experian State of Automotive Finance Reports.
  29. Calculated metric: Total Interest over the Life an Auto Loan (New Car).
    1. Board of Governors of the Federal Reserve System (US), Average Amount Financed for New Car Loans at Finance Companies [DTCTLVENANM], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVENANM, July 17, 2017.
    2. Board of Governors of the Federal Reserve System (US), Average Maturity of New Car Loans at Finance Companies, Amount of Finance Weighted [DTCTLVENMNM], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVENMNM, July 18, 2017.
    3. Average New Car Interest Rate, data compiled from historic Experian State of Automotive Finance Reports.

    Calculated Total Interest is Amortized Interest as a function of Average Amount Financed,a Average Interest Rate on New Cars,c and Average Length to Maturity of new car loans.b

  30. Graph 5 – Estimated Interest on New Car Loan.
    1. Board of Governors of the Federal Reserve System (US), Average Amount Financed for New Car Loans at Finance Companies [DTCTLVENANM], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVENANM, July 17, 2017.
    2. Board of Governors of the Federal Reserve System (US), Average Maturity of New Car Loans at Finance Companies, Amount of Finance Weighted [DTCTLVENMNM], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVENMNM, July 18, 2017.
    3. Average New Car Interest Rate, data compiled from historic Experian State of Automotive Finance Reports.

    Calculated Total Interest is Amortized Interest as a function of Average Amount Financed,a Average Interest Rate on New Cars,c and Average Length to Maturity of new car loans.b

  31. Board of Governors of the Federal Reserve System (US), Average Maturity of New Car Loans at Finance Companies, Amount of Finance Weighted [DTCTLVENMNM], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVENMNM, July 18, 2017.
  32. Board of Governors of the Federal Reserve System (US), Average Amount Financed for New Car Loans at Finance Companies [DTCTLVENANM], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVENANM, July 17, 2017.
  33. Graph 6 – Average Used Vehicle Interest Rates, data compiled from historic Experian State of Automotive Finance Reports.
  34. State of the Automotive Finance Market,” Used Car Loan Risk Distribution, Page 15, from Experian.TM
  35. Graph 7 – Lending By Credit Score Q1 2016 vs. Q1 2017 “State of the Automotive Finance Market,” Used Car Loan Risk Distribution, Page 15, from Experian.TM
  36. State of the Automotive Finance Market,” Average Loan Rates By Credit Tier (Used Cars), Page 25, from Experian.TM
  37. Graph 8 – Average Interest Rate by Credit Score (Used Car Loans), data compiled from historic Experian State of Automotive Finance Reports.
  38. Board of Governors of the Federal Reserve System (US), Average Maturity of Used Car Loans at Finance Companies, Amount of Finance Weighted [DTCTLVEUMNQ], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVEUMNQ, July 17, 2017.
  39. Graph 9 – Calculated metric: Estimated Interest on Used Car Loans.
    1. Board of Governors of the Federal Reserve System (US), Average Amount Financed for Used Car Loans at Finance Companies [DTCTLVEUANQ], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVEUANQ, July 18, 2017.
    2. Board of Governors of the Federal Reserve System (US), Average Maturity of Used Car Loans at Finance Companies, Amount of Finance Weighted [DTCTLVEUMNQ], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVEUMNQ, July 17, 2017.
    3. Average Used Car Interest Rate, data compiled from historic Experian State of Automotive Finance Reports.

    Calculated Total Interest is Amortized Interest as a function of Average Amount Financed,a Average Interest Rate on New Cars,c and Average Length to Maturity of new car loans.b

  40. Quarterly Report on Household Debt and Credit May 2017.” Credit Score at Origination: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 17, 2017.
  41. Graph 10 – Credit Score at Auto Loan Origination “Quarterly Report on Household Debt and Credit May 2017.” Credit Score at Origination: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 17, 2017.
  42. Graph 11 – % of New Loans Issued to Subprime Borrowers. Calculated metric from “Quarterly Report on Household Debt and Credit May 2017.” Auto Loan Originations by Credit Score ((<620+620-659)/Total Lending), from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 17, 2017.
  43. Graph 12 – Auto Loan Origination by Credit Tier “Quarterly Report on Household Debt and Credit May 2017.” Auto Loan Originations by Credit Score, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 17, 2017.
  44. U.S. Auto Loan ABS Tracker: January 2017,” from S&P Global Ratings. Accessed July 17, 2017.
  45. Graph 13 – Average LTV at Auto Loan Origination “U.S. Auto Loan ABS Tracker: January 2017,” from S&P Global Ratings. Accessed July 17, 2017.
  46. Understanding automotive loan charge-off patterns can help mitigate lender risk,” from Experian.TM Accessed July 17, 2017.
  47. State of the Automotive Finance Market Q4 2010,” Pages 25-26, from Experian.TM
  48. Board of Governors of the Federal Reserve System (US), Average Maturity of New Car Loans at Finance Companies, Amount of Finance Weighted [DTCTLVENMNM], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVENMNM, July 18, 2017.
  49. Board of Governors of the Federal Reserve System (US), Average Maturity of Used Car Loans at Finance Companies, Amount of Finance Weighted [DTCTLVEUMNQ], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVEUMNQ, July 17, 2017.
  50. State of the Automotive Finance Market,” Percentage of new loans by Term, Page 22, from Experian.TM
  51. Calculated metric: “State of the Automotive Finance Market,” Percentage of new loans by Term, Page 22, from Experian.TM
  52. Calculated metric: “State of the Automotive Finance Market,” Percentage of new loans by Term, Page 22, from Experian.TM
  53. Graph 14 – Average Auto Loan Length to Maturity (Months).
    1. Board of Governors of the Federal Reserve System (US), Average Maturity of New Car Loans at Finance Companies, Amount of Finance Weighted [DTCTLVENMNM], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVENMNM, July 18, 2017.
    2. Board of Governors of the Federal Reserve System (US), Average Maturity of Used Car Loans at Finance Companies, Amount of Finance Weighted [DTCTLVEUMNQ], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DTCTLVEUMNQ, July 17, 2017.
  54. Quarterly Report on Household Debt and Credit May 2017.” Transition into serious delinquency (90+ days): Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 17, 2017.
  55. Graph 15 – New Severely Delinquent Auto Loans (90+ Days) “Quarterly Report on Household Debt and Credit May 2017.” Transition into serious delinquency (90+ days): Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 17, 2017.
  56. Graph 16 – % of All Loans Severely Delinquent “Quarterly Report on Household Debt and Credit May 2017.” % of Balance 90+ Days Delinquent: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 17, 2017.
  57. Quarterly Report on Household Debt and Credit May 2017.” Total Debt Balance and Its Composition: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed July 17, 2017. (Q1 2014 compared to Q1 2017.)

The post Auto Loan Interest Rates and Delinquencies: 2017 Facts and Figures appeared first on MagnifyMoney.

5 Smart Ways to Lower the Cost of Therapy

Source: iStock

Sasha Aurand has had to scramble for four years to find high-quality mental health care she can afford on her salary from running a website on psychology and sex.

The 25-year-old New Yorker suffers from post-traumatic stress syndrome, depression, and anxiety, and has no health insurance.

“So I’ve always had to find other solutions,” she tells MagnifyMoney. Aurand originally sought help for these conditions while still a college student in Indiana. But after the school’s counseling center referred her to a private practice she couldn’t afford, she researched, asked around, and found a community health clinic where a therapist helped her for $20 a visit.

After graduating from college, Aurand moved to New York, where she briefly had health insurance, enabling her to see what she describes as a “phenomenal psychiatrist” for depression medications. But her insurance ended, and she could no longer afford the psychiatrist’s $350/hour fee.

Aurand is not alone, having to be resourceful finding doctors and therapists in her price range. According to the 2016 State of Mental Health in America report, one out of five American adults with mental illness report they are unable to get the treatment they need, often due to cost. And with an uncertain health care climate in Washington, the challenges are unlikely to ease soon.

Although the Senate failed in its recent attempt to repeal the Affordable Care Act — an effort, says Colin Seeberger, strategic campaigns director for Young Invincibles, “that would have allowed states to opt out of the ACA’s essential benefits, such as substance abuse and mental health coverage” — there’s still some instability in the insurance markets as a result.

In such a confusing environment, how can you find the help you need at a price you can afford?

Here are a few options if you’re looking for affordable therapy options:

1. Work with a therapist-in-training

If you live near a university with a graduate psychology program, it most likely has an in-house clinic. You can see a trainee at one of these clinics for a reduced fee. Yes, the therapists are students, but each one is closely supervised by a seasoned, licensed professional.

Pros: “Because the therapists are still in school, they’re up to date on the latest developments in psychology,” says Linda Richardson , Ph.D., a psychologist who works with the National Alliance on Mental Illness in San Diego. “You’ll also have the advantage of two heads being better than one.”

Cons: Most trainees work at these clinics for a year or less. If you find someone you like, they’re eventually going to leave.

2. Don’t be afraid to ask about sliding scales or reduced cash fees

After losing her insurance, Aurand went back to her $350/hr psychiatrist and “explained the situation and asked if there was anything she could do,” she says. The psychiatrist agreed to see Aurand for $100 a visit as long as Aurand paid in cash. Aurand now sees the doctor every three months.

Many therapists offer a sliding scale based on a patient’s income. If you find a therapist you like, let him or her know your financial concerns and inquire about paying a lower fee. Another option is to check out Open Path Psychotherapy Collective, a nonprofit that lists therapists who offer a few weekly sessions at a lower rate. There’s a one-time $49 fee to join the collective; therapists in the collective charge $30 to $50 per session.

Pros: With a sliding scale, you get all the benefits of good, one-on-one therapy at a lower rate.

Cons: If you don’t reassess the financial arrangement occasionally, says Erika Martinez, a psychologist in private practice in Miami, Fla., “a therapist can become resentful or frustrated with a client,” especially if your income rises. To avoid this, discuss payments every few months to see if an adjustment is needed.

3. Consider group therapy

According to the American Psychological Association, group therapy works as well as individual therapy for many conditions, such as depression, PTSD, and bipolar disorder — and for a fraction of the price. Martinez, for example, charges $150 an hour for individual therapy but only $65/hour for a group session.

Pros: There’s a lot of power in knowing you’re not alone. “When you share about your struggles in group where others have the same concerns, and you feel their empathy, that’s incredible,” says Martinez.

Cons: Some people aren’t comfortable speaking about emotional issues in a group. Also, you have to share the therapist’s attention with others.

4. Try online services & therapy apps

There are many online tools, including Breakthrough.com and Betterhelp.com that offer individual therapy sessions with licensed therapists over the phone or via a secure, HIPAA-compliant video for considerably less than an in-office visit. Rates vary, but if you search, you can find someone affordable.

Several California-based therapists (among the most expensive in the nation) on Breakthrough.com, for example, offer sessions for as low as $55 an hour. A note of caution: Choose someone licensed in your state. In case of an emergency, a therapist can only help secure needed services if you’re in the same state.

Pros: You can get high-quality, one-on-one therapy without ever having to leave your home, office, or pajamas — and at a reasonable cost.

Cons: Insurance often doesn’t cover phone or video sessions. “Also, you can’t fully see the nonverbal language of the therapist,” says Martinez. “And the Internet connection can be bad.”

Better Help App. Source: iTunes

Therapy apps — which allow you to text or chat with a licensed therapist — are becoming increasingly popular. Among the many available are Betterhelp.com, Talkspace.com, and iCounseling.com. Studies in both The Lancet and the Journal of Affective Disorders have shown that online therapy is an effective way to get help, and many services start for as little as $35 a week.

TalkSpace app. Source: iTunes

Pros: You can get help anytime, anywhere, even while sitting in a business meeting or on the subway. Also, it’s a good option for people afraid to walk into a therapist’s office.

Cons: Chat and text therapy, which are not covered by insurance, are inappropriate if you’re feeling suicidal or have severe mental illness. And some people find the technology alienating. “I tried one of these apps a few years ago,” says Aurand, “ and I just missed the human interaction of seeing a therapist in person.”

5. Tap into community resources for free or discounted counseling

You can find psychological and psychiatric care at public mental health clinics, which offer services for free or on a sliding scale, based on your income. Organizations devoted to helping survivors of sexual assault and domestic abuse also offer a wide range of services, including free counseling. And religious organizations, such as Jewish Family Services, often offer therapy on a sliding scale. The best way to find resources in your community, says Richardson, is to dial the information hotline, 211, on your phone or look online at http://www.211.org.

When her PTSD flares up and she needs to talk to a therapist, Aurand supplements her psychiatrist visits by going to a community health clinic, the Ryan/Chelsea Clinton Community Health Center, which offers a sliding scale based on her income and charges $100-$125 a session.

Pros: You can find good care for low or no cost.

Cons: The demand at public health clinics is huge, and staffs are often overwhelmed. “There can be long waiting lists, especially for individual counseling,” says Richardson. “You may have better luck if you’re willing to join a group, such as anger management, that fits your needs.”

The bottom line

When it comes to finding affordable mental health care, persistence is the key. “It can be really daunting, especially if you’re not feeling well or don’t have insurance and think you can’t get help,” says Aurand. “But if you take the time and do your research, you’ll find someone who wants to help you. There are a lot of good therapists and psychiatrists out there, and it’s not necessarily all about the money.”

The post 5 Smart Ways to Lower the Cost of Therapy appeared first on MagnifyMoney.

With the Fate of Public Service Loan Forgiveness Uncertain, Here are Tips for Confused Borrowers

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More than half a million Americans are working toward Public Service Loan Forgiveness (PSLF), a program that eliminates federal student loan debt for people with jobs in the public sector. But the proposed 2018 White House budget reportedly calls for ending PSLF for future borrowers — and even current participants’ status could be in doubt, with a lawsuit claiming the government has reversed previous assurances given to certain borrowers that their employment qualifies.

Final decisions have not yet been made in either scenario. But even with this uncertainty, there are steps both current borrowers and interested potential future PSLF participants can take to make themselves as secure as possible.

First, a quick primer on PSLF: The program began in October 2007 under George W. Bush, and it wipes clean the remaining federal student debt for qualifying borrowers who have made 120 payments, or 10 years’ worth (more information is available at StudentAid.gov/publicservice). So the earliest any public service worker could receive loan forgiveness under PSLF is October 2017.

“The idea is to avoid making debt a disincentive to choosing public service,” explains Mark Kantrowitz, a student loan expert and publisher at college scholarship site Cappex.com. “Think about a public defender. They might make $40,000 a year, but they’ll incur $120,000 in debt for law school. That debt-to-income ratio is impossible, so PSLF makes that career path possible — and attracts people who might have otherwise taken high-paying private-sector jobs.”

Public Service Loan Forgiveness — on the chopping block?

At this time, the biggest threat to the future of PSLF is President Donald Trump’s 2018 White House education budget proposal. The budget proposal would eliminate PSLF — citing costs — and replace all current income-based repayment/forgiveness plans with a single income-driven system. While existing borrowers would be grandfathered into PSLF, any new students who take out their first federal loans on or after July 1, 2018, would not qualify. Still, all of this can happen only if Congress passes the budget — and it remains to be seen whether this section will pass as currently written in the proposal.

If you’re one of the more than 550,000 borrowers who is already working toward forgiveness — that is, you have already taken out at least one federal loan and/or you’ve completed school and are working in public service — the proposed cancellation of PSLF won’t affect you. Again, if the program is cut, it will impact only students who take out their first federal loans on or after July 1, 2018.

But even existing borrowers working toward PSLF can’t fully relax. As first reported by The New York Times, the Department of Education added a serious wrinkle by sending letters to people saying their employment was no longer eligible for PSLF, after the borrowers had confirmed with their loan servicer that they qualified. Four borrowers and the American Bar Association have filed a lawsuit against the department, and the case is currently in progress.

That may leave many workers questioning whether or not they will ultimately be eligible for loan forgiveness after all — even if they work in the nonprofit or public sector. MagnifyMoney has spoken to experts and reviewed the rules of the program to help.

How Can I Be Sure I Qualify for Public Service Loan Forgiveness?

Qualifying for PSLF depends on meeting several specific requirements, so the first step in determining your eligibility is to make sure your loans and employment check all the boxes.

1. Your student loan must qualify for forgiveness.

PSLF provides forgiveness only for federal Direct Loans:

  • Direct Subsidized Loans
  • Direct Unsubsidized Loans
  • Direct PLUS Loans—for parents and graduate or professional students
  • Direct Consolidation Loans

Note that loans made under other federal student loan programs may become eligible for PSLF if they’re consolidated into a Direct Consolidation Loan, but only payments toward that consolidated loan will count toward the 120-payment requirement. And, according to ED, parents who borrowed a Direct PLUS Loan “may qualify for forgiveness of the PLUS loan, if the parent borrower—not the student on whose behalf the loan was obtained—is employed by a public service organization.”

2. You must be enrolled in the right type of repayment plan.

You must be enrolled in one of the Direct Loan repayment plans, some of which are income-based. The umbrella term for these plans is income-driven repayment plans, which include the Pay As You Earn and Income-Based Repayment plans. While payments under other types of Direct Loan plans, like the 10-year Standard Repayment Plan, do qualify and count toward your 120 payments, you’ll want to switch to an income-driven plan as soon as possible — because if you stick with a standard 10-year repayment, you’ll have paid off your loan in full after 10 years with nothing left to be forgiven under PSLF. Check the official PSLF site for more details. And note that private loans, including bank loans that are “federally guaranteed,” do not qualify.

3. You must make 120 on-time payments while employed full time by an eligible employer.

If you drop to part-time work, those payments won’t qualify. You must also be employed full time in public service at the time you apply for loan forgiveness and at the time the remaining balance on your eligible loans is forgiven. After you make your 120th payment you’ll need to submit the forgiveness application, which the Department of Education says will be available in September 2017.

4. Your employer must count as a public service organization.

This is the big one, and the most complicated step of the process for some borrowers to figure out. While the Education Department does address types of employers that fit under the PSLF program, there are some gray areas.  Broadly, the types of employers that qualify include governmental groups, not-for-profit tax-exempt organizations known as 501(c)(3)s, and private not-for-profits. That last category includes military; public safety, health, education, and library services; and more.

Pro tip: Certify that your employer is included in the program every year.

Each year and whenever you change employers, you should fill out and send an Employment Certification form to FedLoan Servicing. The form isn’t required to be submitted on an annual basis, but it’s highly recommended to fill it out annually so there are no unhappy surprises down the road.  It also helps you keep track of progress toward your 120 payments and gives you a chance to find out whether there is any change to your eligibility status.

What if you fear your job’s eligibility is unclear?

The validity of that FedLoan Servicing certification form is at the center of the lawsuit against the Department of Education. Although it’s important to have your employer’s eligibility certified by the department, the Education Department has said the form isn’t necessarily binding and the eligibility of employers can possibly change. As The New York Times put it, the department’s position implies “that borrowers could not rely on the program’s administrator to say accurately whether they qualify for debt forgiveness. The thousands of approval letters that have been sent … are not binding and can be rescinded at any time, the [DOE] said.”

That puts existing borrowers in a tough spot, says Joseph Orsolini, CFP and president of College Aid Planners: “[PSLF] is sort of an all-or-nothing in that you can’t apply for the forgiveness until you’ve already done your 120 payments. So to have someone choose this career path and work for years only to be told, ‘never mind, you no longer qualify even though we said you did,’ it would be hard for them not to see that as reneging on a deal.”

That possibility is “terrifying” for Frances Harrell, 35, a preservation specialist who works for a nonprofit that supports small and medium-size libraries in caring for their collections. She completed a library graduate school program in 2013 and emerged with a total of about $125,000 in debt, including her undergraduate loans.

“Everyone I know is in public service, and we all saw the Times article [about the PSLF lawsuit] and flipped out,” says Harrell, who currently lives in Gainesville, Fla. “I felt like I had been dropped in a bucket of ice. We’re making life decisions based on this understanding, and it feels so precarious not to have any true confirmation that we’ll get the forgiveness in the end.”

Christopher Razo, 22, who this month will begin classes at Chicago’s John Marshall Law School, plans to take advantage of PSLF while working toward his dream of becoming a state attorney. (Photo courtesy of Christopher Razo)

Harrell has also dealt with confusion from loan servicers and other experts — and based on incorrect advice, she nearly consolidated her loans in a way that would have reset the clock on her years of payments.

Christopher Razo, 22, who this month will begin classes at Chicago’s John Marshall Law School, is relieved that he is enrolling before the 2018 uncertainty begins. Razo is one of Orsolini’s clients, and he plans to take advantage of PSLF while working toward his dream of becoming a state attorney.

“[PSLF] is complex as it is, so my initial thought was, ‘Wow, great timing for me that I’m starting in 2017,’” Razo says. “But I understand the program affects way more than just me. [PSLF] gives you comfort to pursue public-service goals without having to make your employment about the money. I’m optimistic that [lawmakers] will see the good in the program so it can continue.”

When in doubt: Follow the ‘3 phone call rule’

While borrowers may think their loan servicer has all of the answers, Harrell’s situation isn’t uncommon, says Orsolini. He recommends “the three phone call rule”: Call three times and ask the same question, documenting whom you spoke to and when.

“These programs are complicated — which is one of the issues that critics [of PSLF] bring up — and you don’t always get the right information,” Orsolini says. “Before you plan your whole life around the [first] answer you get, you have to double- and triple-check that it’s right.”

If you’re taking out your first qualifying loan on or after July 1, 2018, Orsolini says “there’s not much to do besides hurry up and wait” to see what happens with the White House budget as it relates to PSLF.

“The important thing to remember is that a proposal is just a proposal, and these don’t always see the light of day,” Orsolini adds. “It doesn’t do any good to be overly worried, but you’ll want to keep a close eye on the news.”

Other types of loan forgiveness, cancellation, or discharge:

PSLF isn’t the only option. But not all types of federal student loans offer the same forgiveness, cancellation, or discharge options. See the chart below and check out StudentEd.gov pages here and here for more details.

Still, borrowers should know Trump’s desire to streamline federal programs into a single option means some of these loan types and forgiveness plans could be changed or canceled as well.

The post With the Fate of Public Service Loan Forgiveness Uncertain, Here are Tips for Confused Borrowers appeared first on MagnifyMoney.

How to Master the College Enrollment Process and Avoid ‘Summer Melt’

As many as 40 percent of college-bound students never make to campus their freshman year thanks to a phenomenon called “Summer Melt.” The term was coined by researcher Karen Arnold in 2009 to describe what happens when high school seniors get accepted into postsecondary institutions but still fail to enroll.

Students susceptible to summer melt, many of whom are often low-income and first generation college students, may get stuck on one or more of the steps required to complete enrollment. These steps can be as simple as filling out housing applications, taking placement tests and attending summer orientation — but the most common culprit behind summer melt is the financial aid process.

“A lot of the reason why students struggle over the summer is wrapped up in the process of accessing financial aid and following through with the financial aid that they are offered,” says researcher Lindsay Page , who co-authored the book, “Summer Melt: Supporting Low-Income Students Through the Transition to College”.

Making a mistake on the Free Application for Federal Student Aid, or FAFSA, or missing important financial aid deadlines could mean little or no scholarship or grant money for at-risk low-income students, who may not be able to attend attend school without the aid.

Here are a few steps students and their families can take to make sure they don’t fall prey to summer melt.

Reach out to school counselors and nonprofits for help

Dejah Morales, 19, could easily have fallen into the summer melt trap. As a first generation college student, the East Boston, Mass. teen told MagnifyMoney she wasn’t sure how to navigate the college matriculation process. But rather than giving up, she sought help from nonprofit organizations with experts on hand to guide her.

“I wanted to go find help because I knew all of the paperwork that is filled out needs to be done correctly because it affects how much [money] you get for financial aid and anything that has to do with you living on campus,” Morales said.

She started by contacting her high school college admissions counselor, who turned her on to a program offered by Bottom Line, a Boston, Mass.-based nonprofit that helps low-income and first-generation students get through the college application process and provides additional support when students are in school. Bottom Line made sure she correctly completed the application process in order to become a student. The nonprofit also has offices in Chicago, New York City, and Worcester, Mass.

For first generation college students like Dejah Morales, 19, (pictured above) getting accepted to college is only half the battle. Completing the enrollment process is the next hurdle. Photo courtesy of Dejah Morales.

When it came to sorting outout the nitty-gritty details of securing financial aid, Dejah turned again to her high school’s resources. All Boston-area high schools are staffed with a counselor from uAspire, a nonprofit that helps college-bound students get the information and resources they need to complete the college admissions and financial aid process.

“Submitting your actual [income verification] paperwork to the school was the hard part. And then having to get my parents tax information was always a struggle especially my dad since he wasn’t living with me,” says Morales. The uAspire counselor assisted her through the entire process.

Even if your school doesn’t have dedicated college counselors on staff, there are many free programs dedicated to helping students navigate the college financial aid process. Check out national non-profits like the College Goal Sunday Program hosted by the National College Action Network, or Reach4Succes. Also, students and families can contact their school counselor’s office for access to local resources.

Know your national AND state FAFSA deadlines — and submit your forms early

In order to get access to financial aid — that includes federal grants like the Pell grant and federal student loans — students and families absolutely MUST fill out the Free Application for Federal Student Aid (FAFSA).

That’s why it is so crucial to stay on top of deadlines to submit your FAFSA. If you miss the deadline, your options for financing school become incredibly limited.

Check out our guide on how to get through the FAFSA smoothly >

What’s more, federal grants and scholarships — ‘free’ money for school that you don’t have to pay back — are typically doled out on a first come, first serve basis. That means the later you wait to submit the FAFSA application, the less likely those funds will be available to you — even if you qualify for the aid.

There are two deadlines to keep in mind: the national FAFSA deadline and your state FAFSA deadlines.

State FAFSA Deadlines:

Your state may have set a different FAFSA submission deadline to qualify for state-specific aid. Check here to find your state’s deadline.

Get your parents on board early

Joe Orsolini, CFP and founder of College Aid Planners, says the majority of financial aid issues he sees occur just weeks before the fall semester begins are a result of parents not getting involved early on. Even small mistakes, like entering an incorrect social security number or miscalculating a parent’s income, could mean delays in receiving aid.

“The parents never really sat down with the kid and asked, ‘Hey. where is the rest of this money coming from?’” says Orsolini.

You’ll need to have important documents like your parent’s taxes and income from the past two years and your social security number on hand to complete the FAFSA form. Those can be difficult to get hold of when you don’t live with one or both your parents or if your parents don’t fully understand what they are being asked to provide.

Easy mistakes that can throw off your FAFSA submission

Incomplete e-signature. The FAFSA can also trip you up on seemingly-easy steps, like providing an e-signature. If you don’t provide the e-signature correctly, or think you hit ‘submit’ but didn’t, you may waste valuable time waiting for an email that won’t come until you sign the form properly.

Missing mistakes on your Student Aid Report. About two weeks after you submit the form, you should receive a Student Aid Report which gives you basic information about your eligibility for federal student aid along with your Expected Family Contribution – what your family is expected to pay. The SAR also includes a four-digit Data Release Number (DRN), which you’ll need to allow your school to change certain information on your FAFSA.The SAR also lists your responses to the questions on your FAFSA, so be sure to review it and correct any mistakes.

Income verification notifications. After you receive your SAR, check to see if you’ve been flagged for ‘income verification’ as about 1/3 of students are required to verify their parent’s income with additional proof to complete the FAFSA process. The government usually follows up on students who are more likely to qualify for the federal Pell grant or other grant-based aid, Page says. If flagged for income verification, you’ll have to submit verification to each school you apply to, and the schools may have different paperwork and processes.

Missing deadlines in e-mail. When you create and submit the FAFSA, you give the Education Department your email address. The Education Department will email you, so you need to check the inbox of the email address you provided for correspondence. Create your FAFSA account using an email account you check regularly. Turn on your email notifications on your devices so you won’t miss any emails reminding you to submit your FAFSA form or letting you know if something went wrong somewhere in the process.

Formally accept your financial aid awards

After submitting your FAFSA, you will receive a student aid award letter from your college. But your work isn’t done there. You’ll have to sign online to officially accept the aid (student loans, grants, work-study programs, etc). Typically, that will be facilitated through your college’s website.

If you applied for federal work-study, this is when you’ll decide if accepting it is best for your circumstances. Work with a financial aid counselor at the college if you need help weighing the pros and cons of accepting or denying any aid you’ve been offered.

Don’t forget to sign your Master Promissory Note. In order to receive federal student loans, you must sign a Master Promissory Note. The MPN is a legal document you must sign saying you promise to repay your loan(s) and any accrued interest and fees to the U.S. Department of Education. If you miss this final step, you won’t actually get any of the federal loans you’ve been assigned.

Log into your school’s student portal ASAP

Income freshman likely have access to a student portal provided by their college or university. There, you’ll likely find a checklist of important steps to complete before you can officially enroll.

The list may include important financial aid actions like accepting grants and scholarships or signing your Master Promissory Note.

Contact your school’s financial aid counselors early

If you’re not sure what your next steps should be in the financial aid process, you should reach out to the school you’re planning to attend. Call or send an email to the financial aid or admissions offices at your school if you are concerned about receiving the aid you need or get stuck completing all of the steps in the process.

In the future, your college may be the one reaching out to you first, as Georgia State University did with it’s Fall 2016 freshman class. The school experimented using a “chatbot” to send a control group of incoming freshmen alerts about the enrollment process.

The chatbot ‘nudged’ students to remind them of things they needed to do, like signing their MPN, or accepting scholarships, but it could also respond to students’ questions or help them get in contact with a human if asked or if it couldn’t answer the question.

“We saw our melt rate drop from 18% to 14%,” says Scott Burke, the school’s’ Associate Vice President and Director of Undergraduate Admissions. “That was 300 more students in our freshman class in fall 2016 than in fall 2015.”

Don’t forget your high school resources

Like Morales, high school seniors can still ask their high school counselors for help after they’ve graduated. Don’t hesitate to reach out with questions you may have about your transcripts or other parts of the financial aid process.

High school counselors, like Morales’ uAspire counselor, are usually equipped to answer many of the questions you may have about the financial aid process or with the FAFSA, but they may not be able to answer more college-specific questions. For example, your high school counselor could help you navigate your way through Loan Entrance Counseling, but may not be able to explain the process you need to go through to accept any awarded scholarships or grants from the university.

If a high school counselor can’t answer your questions, they generally direct you to the proper entity or person who can.

The post How to Master the College Enrollment Process and Avoid ‘Summer Melt’ appeared first on MagnifyMoney.