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Debt

7 Secrets You Will Not Want To Know About Student Loans

7 Secrets You Will Not Want To Know About Student Loans

This post may contain affiliate links. Check out my Disclosure Policy for more information.

Every since I wrote my post about blind student loan payments, I have been getting a ton of questions about student loans. It is crazy to me that student loan providers are allowed to do the things that they do. It’s absolutely terrible, which is why I think student loans are probably one of the worst debts.

There are so many things people don’t know about student loans, but they let 18 year olds sign their lives away to them. It’s insane! And I was one of them that unknowingly did it! But, I want that to change, I want every person that gets a student loan to know the reality of them.

They can be a tool to use to better your future, but they need to be taken out with education about what these debts really are. Student loans are unlike any other kind of loan, which can ruin people’s financial future.

Related posts:

4 Steps to Decide If Refinancing Your Student Loans Is For You

How Student Loans Impacted My Credit

A Honest Review: Round Up To Zero

How to Pay Off Debt on a Low Income

1. Minimum payments on student loans don’t need to cover all of the interest.

This is what separates student loans from most other loans. Most loans, you are at least covering the interest that accrues throughout the month. Student loans are completely different. You can be making your minimum payment, but not paying off your interest every month. This will cause your loan to grow and grow and you will never pay it off.

This is why you need to stop making blind student loan payments and check to see if you are paying off at least your interest every month. If you aren’t, you need to make a change in order to ever pay off your student loans.

2. Your student loan interest deduction on your taxes is making you lose money.

We all get wrapped up in tax deductions and sometimes it does financially make sense to make certain money moves that allow you another deduction. But, being able to deduct your student loan interest every year is not helping your financial picture.

I have heard so many people tell me they aren’t rushing to pay their student loans off because they get a tax deduction. You get to claim $2,500 every year, but add up how much you lose every single month to your student loans. Think about how much you’d be saving in a year if you just paid them off. I know for myself, I’d be saving about $40k, way more than the $2,500 I get to deduct.

3. Your family will still be responsible for your student loans if something happens to you.

There are some programs in place for federal loans and some private loans as well, but most student loans are not forgiven in the event that the borrower passes. The crazy part about this is that with most other debt, there is a tangible item attached to the debt. For example, if you have a car loan, your family can sell the car to help with the debt associated with it, similar to a house and a mortgage. With student loans, your education will not help pay for that cost if you pass.

This is important to keep in mind, especially if your parents or other family member cosigned your student loans.

4. Your wages can be garnished, if you’re delinquent on your student loans.

This is a vicious cycle. You can’t afford your monthly payment on your student loans, your wages are then garnished. If a recent graduate has an entry level job and can’t afford their monthly payment, it will be hard to get ahead when their wages are garnished. This is super important to keep in mind if you’re struggling to make your payments each month.

If you are delinquent, they can also garnish any social security benefits, disability benefits, or federal refund checks.

5. In some states, you can lose your driver’s license for not paying your student loans.

This is different in every state, but it’s something to keep in mind. This is yet another vicious cycle. If you lose your driver’s license, it then may be hard for you to get to work, if you live in an area that doesn’t have public transport.

6. In some states, you can have your professional license suspended for not paying your student loans.

This would prevent you from working in the field that you took the student loan out for. Which would prevent you from making a payment on your student loans potentially. This would prevent you from turning things around and getting back on track to paying your student loans.

7. You can be sued for not paying your student loans.

In the event that you are not paying your student loans, you can be sued by the company. This happens much more frequently with private student loans because they don’t have programs in place to help borrowers afford their monthly payment. However, they also don’t have programs that can grow your student loans, like I mentioned in number 1.

I encourage all of you to get educated about your student loans. Ask questions, do research, know what your student loans mean. If you haven’t taken any out yet, but are thinking about it, understand the reality of them and consider alternate plans. If you’re struggling to make your payments, get on a budget and get on a better financial path, so you don’t have to deal with any of what I mentioned above. How have you helped yourself to learn more about student loans?

 

Debt

Why Tax Deductions Shouldn’t Change Your Debt Free Journey

Why Tax Deductions Shouldn't Change Your Debt Free Journey

This post may contain affiliate links. Check out my Disclosure Policy for more information.

This time of year everyone is figuring out their taxes, filing their tax returns, making sure they get all of their tax deductions, and waiting on their tax refunds. It comes with this time of year. There is a huge personal preference to get a large refund or a small refund. I outlined why I plan to make myself get a smaller refund, but I understand why some people like a larger refund.

Currently, I get a larger refund because when I originally did my paperwork at work, I had no idea what I was doing. If I’m being totally honest, I’ve just been too lazy to change it! I plan to change it when I get a new job though.

A lot of times people get wrapped up in the tax deductions and it can be overwhelming. Lately I’ve been getting asked a lot about my debt free journey, especially by friends and family. Most of the comments I’m getting are surrounding my student loan tax deduction and not getting it when I pay off my student loans.

I try really hard not to eye roll at this, but it can be very difficult. Yes, I’ll lose my tax deduction when they are paid off, but I’ll get to keep all of that money. My friend shared this article with me that does a wonderful job explaining the math behind this, if you’re into that kinda thing like me!

Why Tax Deductions Don’t Matter

Okay, that’s being a bit dramatic. But, it isn’t exactly wrong. Yes, tax deductions are nice, but they shouldn’t dictate how you manage your finances. You should never do something solely because you’ll get a tax deduction for it, or it will lower your taxable income.

If your money move that you are making adds something else to your financial picture, then absolutely go for it! But, I wouldn’t make a move solely because you get a tax deduction. For example, I’ve literally heard people say they don’t want a higher income because it will push them into a higher tax bracket. That’s insane!!!! Taxes and tax deductions should not dictate your money moves, keep them in mind, but don’t let it sway you this much.

Let’s go back to my student loan interest tax deduction and losing that tax deduction once I’m debt free. The tax deduction would lower my taxable income by $2,500, but I’ll then be able to pocket and invest the $40k a year I’m currently paying towards my loans. Even if I just put it in a high yield savings account, that money would give me a nice return each year.

What you should do instead.

Pay off those pesky student loans! Put that money back into your budget because student loans are evil! I outlined why they are and how blind student loan payments will cause you to pay so much more on them, here. I encourage you to sit down, track your expenses, get that zero based budget going. Send all of your extra money to debt, after you have your emergency fund, and get those things out of your life for good!

If you need help with this, comment below, I love helping people get their budget set up and be sure to get my Google sheets template to help you get started with your own budget.

Don’t fall into the tax deduction trap.

It can be easy to listen to others when they are talking about finances. Don’t be afraid to be a little weird! If I listened to the vast majority of people, I’d still be drowning in $201k of student loans, instead of only $85k (HA!). But in all seriousness, the long term benefit of not having student loans definitely outweighs the small tax deduction I’d get every year, or not if my income increases. So, let’s get moving on freeing ourselves of student loans! I’d love to hear your experiences, have people told you not to pay off your student loans for the tax deduction?

 

Money Management

Why a Smaller Tax Refund is Better

Why a Smaller Tax Refund is Better

This post may contain affiliate links. Check out my Disclosure Policy for more information.

Tax season is upon us, friends! Being a personal finance nerd, I love this time of year. I love getting my documents together and seeing where I am at in comparison to where I was at the end of the previous year. It’s awesome to see how I have progressed on my big money goals.

Normally, I get a pretty large refund and it’s nice to get that big check to apply to debt, but the reality is that it just doesn’t make sense! The money you get in a tax refund check is just the money that the government took from you throughout the year. This is money that should have been in your back pocket throughout the year, it’s the money that you overpaid.

However, you should make sure that you get some sort of tax refund each year, this way you don’t have to owe taxes. You should figure out what you need to claim in order to get a small tax refund. This will allow your paychecks to be larger throughout the year and you still won’t owe at tax time.

There are a few things you can do when it comes to tax refunds to make sure you are prepared to file.

1. Check out the withholding calculator and fill out your W-2 correctly to get a small tax refund.

The truth is that sometimes it’s easier to just claim 0, just a big refund and call it a day. But the reality is that there are resources out there for us to use, so we don’t have to do this. Plus, like I said before, a large refund just means that you overpaid every single month. This is money that can be in your pocket every month!

This is why my first suggestion is to head over to the IRS website and check out their withholding calculator this will allow you to quickly see where you stand. After you finish the withholding calculator, you will have a better idea of what you should be claiming on your W-2 so that you get a small tax refund and more money in your wallet every month!

2.Organize your documents as you receive them.

The best thing I ever did for myself was create a specific place for my finances. I have everything in a folder for my taxes and add to it as my documents start rolling in. This makes filing my taxes so much easier. When I have all my documents ready, I can easily sit down and file them.

I used to be a hot mess with my tax stuff. Things would be everywhere and it would take me forever to find everything to file. It honestly was something I dreaded doing every single year, until I started keeping my paperwork organized. Organization is definitely key in filing your tax return.

This is especially important if you have complicated taxes or something that you need to keep track of throughout the year. For example, as a teacher I would be able to claim $250 I spent for my classroom, I’d need to keep my receipts throughout the year for this. Organization made this super easy for me!

3. If taxes aren’t taken from your pay, make sure you create a sinking fund for this!

I can’t stress this enough! If you have a profession that does not take taxes from you, you absolutely NEED to create a sinking fund for this. Taxes are not an emergency, we know they happen every single year, we need to prepare for our taxes. Tax time should not derail our finances, it should be a simply file and pay, if we aren’t paying taxes throughout the year.

By creating a sinking fund, tax time will be a breeze because you will already have the money in your account to pay your taxes. My suggestion is to take at least 30% out of any pay you receive and put it into a sinking fund for taxes. If you don’t need this much at tax time, then you can choose what to do with this money.

The easiest way to do this would be to budget for it every month, this should be a line item in your budget. If you need help with this, you can subscribe to my email list to get a PDF of my budget template, or you can purchase my Google sheets template that has the math formulas already inputted for you.

Remember a smaller tax refund means that you are claiming the right number on your W-2!

I feel like a lot of times people brag about their big tax refunds when in reality, it just means they are giving their money away each month for that big check. By changing your number on your W-2, it will allow you to get that money throughout the year, instead of in a large check once a year! Have much are you getting in your tax refund?

Debt

When to Slow Down Debt Payments

When to Slow Down Debt Payments

When you’re paying off debt it can be difficult to slow down the process. I know for myself, I am so focused on paying off my debt that I sometimes need to be brought back to reality. It’s important to remember that a debt free journey is part of a bigger plan.

For myself, my bigger plan is to be able to live a life I love without having to think about money. But that also means that sometimes I need to not focus so heavily on my debt free journey and think about the reality of life. When you’re so focused on paying off your debt and the life you will live after your debt is gone, this can be difficult.

Sometimes, it’s important to slow down or stop extra debt payments all together. It depends on your life and what your goals are, but sometimes it needs to happen for what makes sense in the long term.

1. Unexpected life events would require you stopping extra debt payments.

This can be a long list and really depends on what your income is. But, any unexpected events, like job loss, or medical issues, could mean slowing down or stopping extra debt payments all together. If you’re single, this would definitely require you to stop making extra debt payments. But, if you have another income to rely on, it’s possible that this wouldn’t be the case.

My suggestion for any unexpected life events, is to stop extra debt payments and hoard any extra money. The reason this is important is because there is so much unknown in these events, for example, the recent government shutdown. Anyone who experienced the shutdown knows that the end is unknown. This means that you don’t know when you will be paid.

This is why it is important to stack any money you have coming in, even if you have a bit extra at any given time to throw at debt. That extra money will be there once you get through this unexpected event. Once things have settled down, then you can assess your finances and make an extra debt payment.

2. Any unknowns in the future could slow down your debt payments.

If you’re unsure about things in the future, you may want to consider slowing down or stopping your debt payments. This could be something like your job security being unknown, you may want to stop making payments or at least slow down.

This could also be something that you’re planning to do. For example, I am right now unsure of where I’ll be working and am planning to move this year. So, I am not stopping my extra debt payments, but I am slowing it down to put more money into my emergency fund to plan for it. This way I will have extra money to cover the unknowns of the second half of this year. Once things get settled for me, I can assess my finances and make an extra debt payment.

It is more important to plan for these unknowns when you know they are coming, then to simply hope things go according to plan. Hopefully the money you save up won’t be needed, but in the event that it is needed, it will be nice to have.

3. Needing to cash flow necessary expenses.

Life happens and sometimes you need to purchase things that wasn’t planned for, think car or house problems. It is better to slow down or stop debt payments to cash flow the purchase, then to go into more debt to purchase something. It’s pretty counter productive to being sending extra money to debt, but going into debt at the same time.

One way to avoid this is to cash flow the expense, meaning you send all extra money until you have the cash saved up for the purchase. If it is an expense that won’t be needed for a while, you can also start a sinking fund for it.

Everyone is different and decides what is considered a necessary expense, but it’s important not to go into debt for these things, if it can be avoided.

Keep in mind your long term goals when planning your debt free journey

Everyone wants to get out of debt quickly, but life happens and sometimes our plans don’t work out. It’s important to remember what you have planned for the long term, then to make extra debt payments. Sometimes, it makes much more sense to slow down or stop extra debt payments to get through a specific situation life has thrown at you. Just remind yourself of your long term goals in these situations. Have you had to stop or slow down extra debt payments?

Money Management

3 Things You Can Do Today to Get Your Finances Together

3 Things You Can Do Today to Get Your Finances Together

This post may contain affiliate links. Check out my Disclosure Policy for more information.

When it comes to personal finance, it can sometimes feel overwhelming. This is especially true if you don’t know where to start. Trying to tackle your finances in one swoop is bound to lead you to failing.

Not because you can’t do it, anyone can do this, but it’s a lot to do in a short period of time. Just like with any big task, it’s good to start small and break it down into more manageable parts.

This is exactly what I recommend you do, if you’re just starting out at getting your finances together. There are a couple things that you can easily do in one day to immediately get your finances to a better place.

1. Track your expenses to manage your finances better.

The very first and most important thing to do is to start tracking your expenses. If you use any kind of card, you can easily pull your bank statements and look at the previous month to see where your money went.

I always suggest printing it out and highlighting for each specific category. For example, groceries, eating out, shopping, personal care. You can really make any categories you want and works for you. No one set of categories works for all and your budget will reflect the things that you value once you cut down on your expenses.

If you have always used cash, you can either use your receipts from the last month or start tracking your expenses today. Ideally, you want a month of expenses to get a realistic picture of how much money you spend in a given month.

2. Write out a draft budget to manage your finances.

This is going to be life changing for you once you create and execute a budget. Drafting it out for the first time can be overwhelming, but just get it down somewhere.

You can do this on paper or on the computer, whatever works best for you. If you subscribe to my newsletter, you’ll get my PDF to help track expenses and budget for free. If you’re more of a computer person, you can purchase my Google sheet templates that have all the formulas in for you already!

The important part about your budget in this stage is to just get your income and expenses down on paper. Write out your actual budget, don’t write out the one you want to have. Write out your actual income, write out the actual amount you spent on Chipotle. This will be eye opening and why it’s so important.

Once you have a draft of your budget, you can start looking at habits that you have. I wouldn’t suggest making any drastic changes, but maybe a few to give you some extra cash flow. Find the things you don’t value as much and cut those first. If you’re a follower of KonMarie, then you’ll get the whole sparking joy thing. Anything that doesn’t spark joy just has to go!

3. Emergency Fund.

If you don’t have an emergency fund, you need to get one set up ASAP! An emergency fund is arguably the most important thing when it comes to managing your finances. Without it, you set yourself up for disaster in the event of the unexpected.

I always recommend you to have at least 1 month of expenses saved up at any given time, at a minimum. Once you have a month, I’d switch to focusing on debt, but still contribute to your savings. Personally, I contribute $25-$100 every month depending on where I am in life. Right now, there is a lot of unknowns for me in my future, so I’m contributing more while paying off debt.

I recommend having your savings somewhere that is easy to get to, but not too easy. For example, I have an account with an online savings bank called Ally. I prefer it to a regular bank because it earns me more interest and is a little harder to get to. If I’m going to be having money sitting around, I want it to be working for me!

I suggest looking into savings accounts today and choosing where you want to keep your emergency fund.

Your finances won’t change today, but they can start to change today.

Finances are an everyday thing, not just a set it and forget it. You need to actively be doing something for your finances everyday, even if it’s just tracking your expenses or updating your budget. Your finances are a never ending journey, but it’s great to get started on these 3 things today. If you are trying to get your finances together long term, I have the perfect guide to get you started! What steps have you taken recently to get your finances together?

Money Management

How to Prepare for a Furlough

How to Prepare for a Furlough

This post may contain affiliate links. Check out my Disclosure Policy for more information.

Last week I posted about saving money during a government shutdown. This is to help the many people that are struggling to make ends meet currently while not being paid. The reality of our government is that a furlough can happen at any time and with little notice. Not enough to prepare at least.

That’s why I’m sharing with you how to prepare for a government furlough because realistically, it’s going to happen again. Why not take this experience and learn from it. Make sure that you’re never in a situation that you are struggling again.

Yes, this is the longest government shutdown we have ever had, but it definitely is not the first. This means that we can and should prepare for this because it’s going to happen again.

Realistically, everyone should follow this advice because it makes for financial security in the event of something unexpected happening. Anyone can have a situation arise that throws their world upside down leaving them scrambling, not just from a furlough.

1. Track your expenses & make a budget.

The very first thing you need to do is track your expenses for a month and create a budget. By tracking your expenses, you are seeing exactly where your money is going. This allows you to easily see your expenses in a given month. It also makes it much easier to determine your expenses that are not fixed, like groceries.

Once you have tracked your expenses, you need to create your budget. Start with your income and then list your fixed expenses, followed by your other expenses like groceries. I recommend a zero based budget, you can find a post that outlines how to get this set up here & how to budget on a variable income here. I also have created some easy templates on Google Sheets to track your expenses and create your budget, with the formulas all done for you!

2. Save your emergency fund for a furlough.

Once you have created your budget, all of your leftover money needs to be heading towards your emergency fund. This is why I recommend a zero based budget, at the end of the month, you zero out your budget by sending all left over money to whatever money goal you are working on. This will allow you to quickly save your emergency fund because you have budgeted every penny in your budget.

Any extra money you have come in during this time, like refunds or bonuses, goes to your emergency fund. This should be kept in an account that is somewhat easy to get to in the event of an emergency, I keep mine in a savings account with Ally. I recommend at least 3 months of expenses in your emergency fund, but you can find out more information about it here.

3. Lower your minimum expenses for a furlough.

The best part about budgeting is that you can easily see exactly where your money is going every single month. The goal is to get your required minimum expenses to be as low as possible. The reason this is important is because when you are in another furlough situation, you don’t want to need to use your emergency fund. By having low or no required payments each month you are allowing yourself to go longer without using it.

There are many ways to lower your expenses, I wrote all about it here, but I also recommend finding ways to have low housing costs and minimum to no debt. Paying off your debt means that you won’t owe money when another furlough happens, you’ll be able to stretch your money much further.

Paying off debt obviously doesn’t happen over night, I’m still paying off my $201k after over 3 years, but I am down to $88k now. It takes time, but with a plan in place, you can do it. I recommend creating a debt payoff plan using undebt.it, this will allow you to create a plan and help you execute it. Another recommendation would be to refinance your student loans for a better interest rate, you can use my referral link to get $200 when you refinance!

We know that another government shutdown will happen and I want you to be prepared for it! By executing these steps, you will be prepared for when you experience another furlough and won’t be put in a terrible situation. I’d love to hear from those impacted by this government shutdown and how it has affected you. 

Debt

Why You Need to Stop Making Blind Loan Payments

Why You Need to Stop Making Blind Loan PaymentsThis post may contain affiliate links. Check out my Disclosure Policy for more information.

There are so many terms with student loan payments and really anything financial. The real tricky part is usually a Google search doesn’t even really help you, at least not quickly. Most of the time, you need to have some background knowledge about student loan payments to navigate your way through the answers.

Unfortunately, this is why you hear stories all the time about people borrowing X amount of student loans and now owe 3X after making all their loan payments on time. The world of debt and student loans is scary misleading and filled with unknowns, if you don’t understand the small print.

That’s why I’m writing about this. I don’t want there to be any more stories like the one I shared above. I don’t want people signing up for different payment plans or forbearance or deferment and not knowing the whole picture. These plans all have significant implications to your financial future and need to be carefully considered from every single angle.

The main reason we hear those stories is because people sign up for forbearance, deferment, income driven repayment plans, or something of the like. These are usually offered when a person can’t make their minimum payment and a lot of times are used to solve a problem quickly. However, I caution you to use these quick fix options for your loan payments because they carry major consequences in the long run.

Student Loan Forbearance & Deferment

Student loan forbearance and deferment can be requested when minimum loan payments can’t be made. It can be used as a fix to avoid default on your loans. However, you may be responsible for all interest that accrues on your loans during the time of forbearance or deferment. You will need to find out the details from your loan provider to find out how it works for your situation.

It is super important to find out what happens with your interest during the time you are in forbearance or deferment. The reason this is so important is because if you are responsible, then you will either pay it each month, or it will be capitalized at the end. What this means is that your interest will be added to your principal, ultimately making your student loans larger.

If your interest will be capitalized at the end, this will increase your principal and interest will accrue on your new principal balance. This increases your monthly interest amount because more interest will accrue each day. This ultimately will make it even more difficult to pay off your student loans in the long run.

Income Driven Repayment Plans

If you have the option to do an income driven repayment plan, it can be an option to be considered, but you need to be sure you understand the implications of it. Every plan is different and you need to make sure that you follow your plan exactly and find out exactly what this plan means in the long run.

Some plans allow you to be on a plan for 10 years and after all on time payments, the rest is forgiven. However, this means that you will have a payment for 10 years and if your income increases significantly, you will need to have a minimum payment that reflects that.

The other issue with income driven repayment plans is that most plans do not pay off the interest each month. Your interest will capitalize and your student loan principal will get bigger, similar to what I explained with deferment and forbearance. This needs to be carefully used because it can end up costing you so much more down the road.

However, income driven repayment plans can be used as a great tool. I currently have my federal student loans in one while I pay off my private loans. The reason I did this is because my minimum payments were going to be $600 and my loans accrue about $300 in interest every month. Even though my payment currently is $250, I always make sure to pay off the interest on them while I focus on paying off my private loans. This allows me to pay off my private loans faster and keep my federal loans from getting larger.

Refinancing

Refinancing your student loans can be a great tool to use, especially if you are struggling to make your payments each month. Of course, you need to make sure you understand the implications of refinancing though. If you need help deciding if refinancing is for you, I wrote a post that walks you through deciding, you can find it here.

Typically when you refinance you are changing something about the terms of your loan. The principal is staying the same, but your length and interest rate is typically changing, which changes your minimum payment.

If your credit score and salary has increased significantly since you took out your original private loan, I think it’s a great idea to look into refinancing. The reason being that chances are you will qualify for a better interest rate, which may lower your payment each month and total amount you pay in the long run.

For example, I refinanced my private student loans to save me money in interest. I did this by lowering my interest rate, shortening the life of my loan, and increasing my minimum monthly payment. Refinancing can be a great tool to save money in interest when done properly. I refinanced with Earnest and recommend them, if you would like to refinance your loans, you’ll get $200 with my referral link when you qualify!

However, with refinancing you need to be careful that you don’t end up adding more to what you are going to have to pay in the long run in interest. If you need to lower your monthly payment, this may be an option for you, just know that you may increase the amount you pay throughout the life of your loan.

Changing habits, tracking expenses, and budgeting may be a better option when you can’t make your loan payments.

These are all options when you can’t afford your monthly payment, but they all carry some pretty signifiant baggage that can hurt you financially in the long run. I highly suggest reflecting on your spending habits, tracking your expenses, maybe adding a side job and getting on a budget instead of utilizing some of these to lower your payment. If you need help setting up a budget, I have a template for you! The reason I suggest this is because you will allow yourself to change your financial future in a positive way by doing this. By utilizing some of these, you potentially hurt your financial future. I want to hear from you! What are your thoughts on these student loan programs?