What’s the best way to utilize your financial planner? How should one take advantage of lower interest rates? TODAY financial editor Jean Chatzky and CNBC’s Carmen Wong Ulrich offer advice on these issues, plus wise words about investing and paying down debt.
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Q: I am a student about to graduate with about $38K plus in student loan debt. I need to know if there is any way I can possibly work with my debtor when I graduate, because the job market is not looking very promising. Upon graduation I will be receiving a degree in finance and am worried it may take a while to land a job. — Josh, Florida
Carmen Wong: Josh, if you have federal student loans you’re in luck — federal loans have a couple of options for you when and if you’re unable either to pay at all or to pay less than your current minimum:
Extended repayment pulls out the life of your loan from, say, 12 years to as much as 30, lowering your monthly bill. However, keep in mind that you will pay much more in interest by making your loan “live” longer.
Graduated repayment takes some of that interest-edge off by extending your loan but raising what you pay every couple of years or so, hopefully as your income goes up. You can also file for deferment of your loans, where you don’t pay at all while interest accrues, if you’re suffering economic hardship, but it’s easier to file for forbearance, which will also delay your loan payments if you file economic hardship and/or your monthly payments equal more than 20 perent of your monthly income.
There is also, as of July 1, a new income-contingent plan called income-based repayment which caps your payments to a lower percentage of your income than previous plans. Now, if you have private loans, you have little chance to hold off on payments. Private loans act like credit cards — they are due every month no matter what. You can apply to consolidate your private loans into a federal loan, though chances these days are more slim as federal funds for consolidation have dried up … The best thing you can do is be proactive — call your lender before you fall behind and see what plan works best for you. Do your research at sites like FinAid.org and remember, federal loans don’t land in your mailbox until four to six months after graduation, so you have some time.
Q: Any type of help from the stimulus package or housing bill to help homeowners who are making their payments on time but can't take advantage of their interest rates? We bought our house at a peak in the market in May 2007 and now the appraised value has dropped by almost $50,000. So almost all equity we had, either through our down payment or have built over the two years, is gone,which seems to make refinancing while still avoiding PMI very tough to do. What should I do? — Shawn, Pennsylvania
Carmen Wong Ulrich: As long as you’re not more than 5 percent underwater, meaning you don’t owe more than 105 percent of what your home is currently worth, and you have a mortgage backed or guaranteed by Fannie Mae or Freddie Mac, you can apply to refinance under the new Housing Act.
Head to FinancialSecurity.gov to look into all the paperwork you’ll need to complete and have ready to bring to your lender, who will make the decision as to how to refinance. The Housing Act is in effect for three years, so if you’re a bit over that 5 percent rule, the housing market may come up enough in the next three years that you can apply later. However, if you’re much more than 5 percent underwater, and you’re able to make your mortgage payments with no hardship, you’ll have to wait until the market rebounds enough for you to have at least 20 percent equity to refinance. Remember though, if you have an interest rate at or below 7 percent, you’re in good shape — this is a 30-year loan. Interest rates will go up again and will make that 7 percent look fantastic.
Q: I am 27 years old and planning on going back to school and hopefully buying a home within the next two years. Currently most advice is being given to people already severely in debt, dealing with losses in retirement or children going off to college. I am none of the above. I want to know what steps I can take before any of these issues are out of hand. Should we talk with a financial planner to find the most effective way to save for a home and deal with my existing school debt and possibly increasing that debt? We want to start out lives armed with knowledge and not doubt. — Loren, Kentucky
Jean Chatzky: Good for you. Information, particularly of this type, is power. There is absolutely no reason that your debt needs to get out of hand, though you need to balance the amount of debt you take on for school with the wish about buying a house. Yes, housing prices are inexpensive right now. But saddling yourself with both student loan debt and housing debt may be too much to handle.
If you can’t afford it — or if you’re entering a field where the salary post graduation will not give you a significant enough pop to make it worthwhile — consider a less-expensive school or, start now to look for grants and scholarships. And let the ratios be your guide as well when it comes to buying a house, particularly while you’re in school. You may find you can’t afford to do both. Lastly, for that financial planner: I’d go to www.NAPFA.org or www.GarrettPlanningNetwork.com. The former is a network of fee-only financial advisers, the latter of financial advisers (also fee-only) who charge by the hour.
Q: I live in Michigan and I work in the auto industry. I’m worried about losing my job, I don’t have much money in savings and I live paycheck to paycheck. I currently have a home equity credit line, with $15,000 available, that I plan to use as my safety net in the event I need cash. If the economic conditions worsen, my fear is that the bank will slash my credit limit. I was thinking I should move this money and put it in my savings account and just make the monthly payments for the next few months. Interest rates are at about 2.75 percent. If I don’t take the money now and my bank cuts my credit line, I could be in serious trouble. — Mike, Michigan
Jean Chatzky: Actually, Mike, that isn’t a bad idea at all right now. You’re right that banks are slashing credit lines, and if you don’t have a savings account, a HELOC can do in a pinch. Right now HELOCs (average rate for a $50K HELOC is 5.14 percent, which will cost you roughly 3.4 percent after taxes) are at very low interest rates, and the interest is tax-deductible. Even though you’ll be making payments each month, they’ll be rather low, and the tax break means you’ll end up paying about 1 percent a month to do this — because the money you’ll earn on a money market is about 2 percent and change. Also, HELOC debt isn’t interpreted the same way credit card debt is on your credit report, so you won’t do much damage to your credit score.
That said, I want you to use this situation as a lesson — this is exactly why having an emergency fund is important. If you’re worried about a layoff, you need to start living lean and banking any savings in a liquid savings account each month. Even $20 or $30 a month adds up over time.
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