Financial Planning Series: Phase II

Phase II-Optimize

By: Anitra Blue-Francis

Last week we focused on protecting your earned income. This week we will focus on optimizing your income. This will help you find the best ways to pay down any debts, freeing your money up for other goals. Eliminating all debt, but especially credit card debt, as quickly as possible can have huge financial benefits. First, you can save money by paying less in interest. Second, your credit score may go up, which would make it easier (and less expensive) to borrow money in the future. Start by completing a monthly budget. Identify all debt, i.e. personal loans, student loans, credit cards, etc. Note the current balance and interest rate of each debt. Today we will focus our attention on the most common debt my clients have-credit card and student loan debt. 

Credit cards

The hard part of debt elimination is understanding how you got in debt. The easy part of this process is knowing how to get out of and stay out of debt. We all know that life comes at us fast. If we are not prepared for the unexpected or make bad decisions with our money, then we will have to swipe the credit card or borrow money to address the unexpected expense. Most likely the debt accumulated because of a lack of emergency funds available and/or living beyond your means. Working with a financial advisor can help you identify and prioritize your goals and define a budget to follow to avoid making the same mistakes. 

First, complete a monthly budget to highlight your fixed expenses (rent/mortgage, utilities, car payments, childcare, auto insurance, personal insurance, etc.) and note discretionary expenses (dining out, vacation/travel, hobbies, recreation, groceries, etc.). Noting the difference between your necessities and desires are important so you can make the best decision on a monthly basis on how to spend your earned income. 

Then, I recommend listing all the debt in order from the highest interest rate to the lowest interest rate. Focus on paying the minimum payment on the debt with the lowest interest rate and making aggressive payments on debt with the highest interest rate. Consider opening a credit card with a very low or zero percent promotional interest rate for a period of time. For example, find a credit card that will offer a 0% (or a much lower interest rate than on current credit cards) interest rate for 6 months to 18 months that will allow balance transfers from one credit to another credit card. Apply for the credit card, open the account but do not activate the credit card. You are only using the account as a tool to transfer credit card balances from one credit card with a high interest rate to the new credit card with a much lower interest or zero percent interest. This will allow you to get ahead of the debt by aggressively making payments with all payment going towards principal and not interest. Be sure to eliminate the transferred debt before the promotional period ends to avoid back interest charges.  

Student loans

Some reports show that 94% of parents feel the burden of student loan debt and nearly half of them (45%) don’t have a plan to manage the debt. 

Identify what type of student loan you have. Is it federal or private loan? A federal loan is funded by federal government and a private loan is funded by a bank, credit union, state agency or school. The type of student loan will determine what type of loan repayment options are available. There are 6 different loan repayment options: repayment plans, forgiveness, federal consolidation, private consolidation, deferment and forbearance. 

1. Repayment options
1. Standard repayment- Loan is expected to be paid in 10 years. Payments are scheduled to be paid within 10 years, with a minimum $50 payment per month. Interest rates can vary based on type of federal loan. 
2. Graduated- Loan is expected to be paid in 10 years. Payments are scheduled to increase over the length of the repayment schedule. The largest payment will never be more than three times the size of the smallest payment. 
3. Extended- Loan objective is to make lower payments and stretch them out over a period of time longer than 10 years, typically 25 years. 
4. Income-driven- Loan payments are calculated as a percentage of their discretionary income. Discretionary income is based on a formula that compares your income to the poverty guidelines for their family and state. 
1. Income-Base Repayment Plan (IBR)- generally 10% of your discretionary income if you are new borrower on or after July 1, 2014. If you are not a new borrower on or after July 1, 2014, your repayment will be 15% of your discretionary income but will never exceed the 10-year standard repayment plan amount. 
2. Pay as You Earn (PAYE) Repayment Plan-generally 10% of discretionary income but never more than the 10-year standard repayment plan amount. 
3. Revised Pay as You Earn (REPAYE) Repayment Plan- generally 10% of your discretionary income
4. Income-Contingent Repayment Plan- payment will be the lesser of 20% of your discretionary income or what you would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted according to your income. 
2. Loan Forgiveness Programs
1. Public service loan forgiveness 
1. Available for individual who work for a qualifying entity such as a government organization (federal, state, local or tribal) or a 501(c)(3) not-for-profit organization. 
2. Loan payment for 10 years while employed by a qualifying organization, the balance of your loan may be forgiven. 
3. The 10 years do not have to run concurrently. You can work for a qualifying organization for a few years, leave the program and then return at a future date. 
2. Teacher loan forgiveness 
1. Must be a new borrower, teach full-time, and work in a low-income elementary or secondary school, or educational service agency for five consecutive years. 
2. $5000 to $17,500 can be forgiven
3. Federal Consolidation. Not only can consolidation reduce monthly payments down to a single monthly payment. It may also offer opportunities to refinance balances at a lower interest rate. 
4. Private Consolidation and Refinancing. Working with a bank, credit union or lending agency to receive a new loan to pay off old loans. 
1. Can combine both private and federal loans. 
2. Your credit history and other factors will determine loans available for refinance. 
3. May not always be in your best interest so compare loan maturity and cost of refinancing outweighing the benefit. 
5. Deferment 
1. Payments are temporarily delayed. 
2. Economic hardship, inability to find full-time work or a period of active-duty military
3. Consider making interest only payments during deferment to avoid principal balance from increasing significantly during this time.
6. Forbearance
1. Payments are ceased or reduced for as much as a year.
2. You may request forbearance up to 3 times for a maximum of three years total. 
3. Two types-discretionary and mandatory. 

Sometimes the weight of debt can be overwhelming. Some have considered bankruptcy. Please note student loans are rarely removed from personal liability when filing for bankruptcy. In order for student debt to be considered for bankruptcy you must file a separate request (a lawsuit called an adversary proceeding) and prove that if they are required to keep their student loans, it would create an undue hardship. 

Your premature death or your inability to earn an income due to a disability will have a direct impact to your student loan repayment plan. In the event of death, all federal loan balances are discharged. However, the canceled payments would be treated as taxable income for you or your estate. Private loans are not forgiven in the event of your death or disability. Co-signers may be responsible for paying off the loans. Disability income insurance provides income to help cover ongoing loan payments (or taxable income for canceled payments) if you (or your co-signers) can’t make the payment. Life insurance can help cover the loan (or estate income tax) if you pass away. 

In the final segment of this financial series we will discuss how to Grow….Tune in next week. 

For more information on how to secure your financial future, visit www.anitrablue.nm.com and/or dial 504-620-4749 to schedule a 15 minute phone consultation.