Your Questions

Busy this week with the fall semester; this is a quick posting from one of the online sections (I'm also in the classroom).

 

Here are some of my thoughts about the questions that you’ve asked in the discussion boards and your first messages to me.  I’ve also included information about other common questions that students have at the beginning of the course.

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401(k)

401(k) and 403(b) plans, named for the sections of the federal income tax code that govern them, are employer-sponsored retirement funds.  If you think that your employer might offer a retirement plan, contact your human resources representative for guidance.  Hopefully they can arrange for you to meet with a qualified advisor who represents the plan.  If your company does not offer a retirement plan or if you are self-employed, there may be other options such as an Individual Retirement Account (IRA).

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I have limited direct experience with employer-sponsored retirement plans, as I have been self-employed most of my work life and only two of my employers (as I recall) have offered them.

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Some retirement plans allow you to self-direct your investments, and others may offer a menu of mutual funds from which the employee may select.  There’s a lot to be said about mutual funds, but overall I’m wary.  If you’re considering a mutual fund – either in an employer-sponsored plan or on your own – Investopedia has a terrific tutorial beginning at http://www.investopedia.com/university/mutualfunds.

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If your company offers matching funds, most advisors suggest contributing at least the percentage necessary to receive the full match, say 3% - 6%.  But whatever you invest into a retirement account, think of it as just that – for your retirement.  Don’t put so much into the account that you’re incurring credit card debt or paying the electric bill late!  If you’re struggling to make ends meet and are tempted to make a hardship withdrawal (or even borrowing from it), carefully consider all other options first.  Another concept that you will want to understand is vestment.  For example, all of the employer match may not be your money immediately.  For most plans you have to be with the employer a number of years before you’re fully vested.

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If you have a 401(k) and switch employers you’ll want to consider your options.  Read, "Misleading Advice Is Rampant on 401(k) Rollovers, GAO Finds".  Just a note here – cashing out, if the amount is substantial, can be costly.

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Credit Reporting

Credit reporting and scoring is a topic that we could likely develop an entire course around. There’s an eye-opening CBS 20/20 segment from February, “40 Million Mistakes: Is your credit report accurate?”  Make some popcorn, sit down with loved-ones, and enjoy.  The report mentions what certainly appears to be criminal activity in the credit reporting industry.  It looked like the Ohio Attorney General was planning to pursue the matter, but I haven’t heard more about it.

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Nevertheless, lenders do use credit reports and/or scores to make the decision whether to lend and if so, at what rates.  Today, prospective landlords, insurance companies, and even employers may make decisions about us based on this information.  Fair or unfair, right or wrong, that’s the way it is for now.

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The textbook introduces credit reporting in the fifth chapter, but some corrections are needed.  Page 116 of my edition states that your credit report includes your “future credit history.” Though lenders do use your credit report for predictive purposes, your future credit history cannot be included in your credit report since it doesn't yet exist.  Pages 114 and 117 indicate that your credit report includes your income history, but it does not.

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Establishing credit in the first place can be difficult.  MSN Money has an informative article, “How to build credit from scratch”.  But be aware that debt is still much easier to acquire than it is to be rid of, so please tread carefully.  Consider all alternatives to borrowing, and if you make the decision to borrow, then borrow no more than you need.  Read and understand the terms and conditions of any agreement before you commit.  Avoid credit card debt entirely, and minimize debt on depreciable assets such as a car.

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In our debt society, far too many spend their lives in servitude to the big banks.  It just doesn’t have to be that way.

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Rebuilding credit after bankruptcy can actually be easier than first establishing it, especially if there is such as a mortgage or auto loan that was reaffirmed.  But neither building nor rebuilding happens quickly; it takes patience, persistence, and diligence.  Focus first on making sound financial decisions rather than chasing an elusive credit score.  Pay bills on time and borrow no more than is needed, and a respectable credit score will likely follow.  The Fair Isaac Corporation (the FICO people), has scoring information at http://www.myfico.com/.

 

Student debt

Student debt is a major national problem today, and I doubt that anyone has a simple solution.

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Unfortunately, it is easier to qualify for a student loan than a credit card, and even commuting students borrow living expenses in addition to the direct costs of education.  The fact is that only the wealthy can afford to pay back high student loan debt, but then they’re not the ones taking it on.

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Like credit cards, high LTV mortgages, or any other debt, it’s far easier to avoid in the first place than to pay off.  But for many millions of Americans it’s too late for that advice to be of much help.

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At the end of last year, nearly $25 billion was 30 or more days delinquent. According to Equifax, $3 billion of student loan debt was written off by U.S. banks during the first two months of 2013, up more than 36 percent from last year.

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But “written off” (or “charged off”) does not mean that the debt is forgiven - it’s just an accounting entry for the lender.  The creditor (or a collection agency) will still try to collect, and collection efforts include wage garnishment and interception of tax refunds and Social Security payments. The debt can follow you to your grave.

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Though easy borrowing for higher education has certainly made it more accessible to the masses, instead of making it more affordable, it has placed millions of Americans into a lifetime of debt servitude.

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On the other hand, some students graduate with little or even no debt, sometimes leaving them with hundreds per month in discretionary income. Instead of being saddled with debt, they’re free to save toward a more dependable car, a home or retirement, they can spend it at a local restaurant or furniture store, or they can donate to charities that they hold close to their hearts.  They do this by working hard during college and spending frugally, and they borrow no more than is absolutely needed.  Debt avoidance is the key.

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Even if a student’s loans are in deferment now, for planning purposes it’s useful to incorporate repayment into the budget.  This is especially true if you will be graduating soon, but even now any unsubsidized portion of your debt is accruing interest.

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The other day I ran across this from the U.S. Department of Education: "Don’tget discouraged if you are in default on your federal student loan".  This explains repayment options, and is a useful planning link even if your loan is in deferment for now.  This page also includes a link to the Federal Trade Commission that explains how to secure your no-cost annual credit report.

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In discussion of “Good Debt” versus “Bad Debt”, student loans and mortgages are often included on the “good” side.  My opinion is that there is no such a thing as good debt, there is just some that may turn out not as bad as others.  If used for such as real estate, or education, or for a business startup, for example, it may turn out well, or it may not.  Carrying credit card debt from month to month can only be good for the credit card company.  One of the better articles on good v. bad is at Investopedia.

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During the fall semester an attorney visited our classroom, and he explained that student debt – even if it’s on a credit card – is difficult or impossible to discharge in bankruptcy.  The Consumer Financial Protection Bureau reports, "According to data from the Department of Education, federal student loan debt isn’t growing just with new originations – with so many borrowers unable to keep up with interest payments, debt is growing even for many who have left school."  . . . "Student loan borrowers are sending big payments every month to their loan servicers rather than becoming first-time homebuyers."  In her 2013 State of Higher Education Address, Indiana Commissioner for Higher Education Teresa Lubbers stated, “In Indiana . . . our student loan default rate has increased by 35 percent over the past three years.”

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My advice is to pay out of pocket all that you can and borrow only what is needed, certainly no more than for tuition, books, and direct college expenses.

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Borrowing is the antithesis to investing.  Those who continually strive to save as much as possible and borrow as little as possible will, over a lifetime, create far greater wealth for themselves and loved ones.

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Recent Investment Fraud

Just yesterday the Indy Star had an article, “Noblesville investment adviser's 'charade' squandered millionsof dollars, SEC says”  This is much good that has come from Noblesville folks; unfortunately this is a report about the bad!

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Other questions

If you have other questions about such as home buying, paying on time and late fees, and other topics, some of these may be answered later in the course through your assignments.  Whatever is not, ask and I’ll do my best to answer.