According to Forbes, there are over 44 million student loan borrowers who owe more than $1.4 trillion dollars in debt. Yes, trillion. That sum is staggering, and for many the monthly minimums you're required to pay back on your loans is unmanageable. Over 1 million borrowers default on their student loan payments every year. By 2023 the U.S Department of Education estimates that around 40% of borrowers will go into default.
What happens when you default on your student loans?
Defaulting on your student loan payments means you haven't been able to make a single payment towards your debt for about a year. The debt for the total amount of minimum monthly payments you've missed gets sent to collections. Your credit takes a nosedive.
By the time your student loan goes into default, your credit score will have dropped at least 60 points. If you didn't start off with great credit in the first place, your rating after defaulting will likely be considered "very poor", making it harder to get a mortgage or qualify for decent interest rates. According to research from the Urban Institute, record high student loan debt is part of the reason millennials aren't buying homes.
Saving for a home mortage Shutter stock
When you go into default on your loans, some states will even go so far as to suspend your driver's licenses . And because of high interest rates, the total amount you owe in student loans after defaulting increases by about 10%. When you're already having trouble paying your monthly minimums, that increase can be devastating.
Is there a way to get rid of your student loans for good?
When you're unable to pay back other types of debts (your mortgage, a bank loan, etc) you're allowed to file for bankruptcy. Filing for bankruptcy on student loan debt however has historically been extremely difficult. It isn't impossible though.
In 2005, congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act. Under the exception, borrowers have to prove their student loans are causing them undue hardship in order to include the debt in bankruptcy filings. What qualifies as "undue hardships"? That's the problem. Congress didn't define the term and courts are left to interrupt it.
Adam Minsky, a lawyer who recently spoke to The Huffington Post, says you need to prove three different factors to the courts. You're unable to maintain a minimal standard of living, based on your current income and expenses, if you're forced to repay your loans. You have made decent efforts to try to repay your loans. Other factors out of your control, that may continue for a long time, are affecting your ability to pay.
Minsky claims, the most successful way of filing for bankruptcy on your student loan debt is to go the route of an adversary proceeding. This essentially means you're suing your student loan lenders for the amount that you owe. Adversary proceedings can be a long and expensive process, but if you can prove your student loans are unmanageable, you might just get rid of your student loans for good.
Borrowers who successfully sued and won were either unemployed, had a medical condition, or could prove their income had dropped from the last year. If you fall into any of these three categories you have a decent chance of winning. 40% of borrowers who file for bankruptcy and include their student loan debt get all or at least a portion of it removed.
Student loan repayment appShutterstock
If you don't want to file for bankruptcy but need help navigating your student loan payments, consider trying a loan repayment app. Apps like ChangED and The Student Loan Hero consolidate all federal and private student loans, and come up with a plan to pay it off as quickly as possible. You can even sync you bank accounts and credit cards to save the change on your purchases. ChangED deposits that change into the app and sends an automatic extra payment to your loans every time it reaches $100.
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When you take out a loan for a car, charge something to your credit card, or get a personal line of credit, there is going to be an interest rate that applies to your loan.
A lot of different factors go into what you will be charged, including your own personal credit score. But even those with flawless credit still see a minimum charge that they can't get around. That all goes back to the Federal Funds Rate.
One thing consumers rarely realize is that all of our banks are lending money to each other every night. Banks are legally required to maintain a certain percentage of their deposits in non-interest-bearing accounts at the Federal Reserve to ensure they have enough money to cover any withdrawals that may unexpectedly come up. However, deposits can fluctuate and it's very common for some banks to exceed the requirement on certain days while some fall short. In cases like this, banks actually lend each other money to ensure they meet the minimum balance. It's a bit hard to imagine these multibillion-dollar financial institutions needing to borrow money to tide them over for a bit, but it happens every single night at the Federal Reserve. It's also a nice deal for those with balances above the reserve balance requirement to earn a bit of money with cash that would normally just be sitting there.
The Federal Reserve
The exact interest rate the banks will charge each other is a matter of negotiation between them, but the Federal Open Market Committee (FOMC) (the arm of the Federal Reserve that sets monetary policy) meets eight times a year to set a target rate. They evaluate a multitude of economic indicators including unemployment, inflation, and consumer confidence to decide the best rate to keep the country in business. The weighted average of all interest rates across these interbank loans is the effective federal funds rate.
This rate has a huge impact on the economy overall as well as your personal finances. The federal funds rate is essentially the cheapest money available to a bank and that feeds into all of the other loans they make. Banks will add a slight upcharge to the rate set by the Fed to determine what is the lowest interest that they will announce for their most creditworthy customers, also known as the prime rate. If you have a variable interest rate loan (very common with credit cards and some student loans), it's likely that the interest rate you pay is a set percentage on top of that prime rate that your lender is paying. That's why in times of low interest rates (it was set at 0% during the Great Recession), a lot of borrowers should go for fixed interest rate loans that won't increase. However, if the federal funds rate was relatively high (it went up to 20% in the early 1980's), a variable interest rate loan may be a better decision as you would be charged less interest should the rate drop without the need to refinance.
The federal funds rate also has a major impact on your investment portfolio. The stock market reacts very strongly to any changes in interest rates from the Federal Reserve, as a lower rate makes it cheaper for companies to borrow and reinvest while a higher rate may restrict capital and slow short-term growth. If you have a significant portion of your investments in equities, a small change in the federal funds rate can have a large impact on your net worth.
Whether you're leaving a job involuntarily, departing for something new, or just want to prepare for the unknown, it is smart to understand all your options regarding your 401k.
Frugal gifting often gets a bad reputation. However, this shopping method does not make you cheap — it makes you practical. Frugal gifts often avoid waste and overspending and can be just as meaningful (if not more so) as any other present.
With the National Retail Federation predicting each consumer this holiday season to spend upwards of $1,000 on holiday gifts amidst an economic recession —this year might be the perfect time to reconsider your spending budget. We've formulated the ultimate list of frugal gift-giving ideas to get you started.