DEBT, CREDIT, DISASTER

"Credit and debt - the good can lead to bad...can lead to really ugly."

Credit and debt are not bad financial tools. They can be means to accomplish financial goals.  It’s the mismanagement of them that may land you in a very deep pothole on the Paseo Dinero and create an unhealthy financial future. 

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Debt
This is what you owe when you’ve bought something now and promise to pay for it later. In the financial world, there is such a thing as good debt versus bad debt.

Good debt is something incurred for an investment purpose that is likely to gain value over time, like student educational loans and home-owner mortages.

Bad debt is something incurred for an immediate or short-term use and the item likely loses value over time - auto loans, purchases bought on installment, leases on apartments and houses, and credit card purchases. This kind of debt is know as consumer debt.

The very second you use the credit card or sign the auto loan papers, you are in debt until you pay the balance in full.

Can you relate with these virtual students in this video?

 

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How much debt is too much debt? Many financial experts say that any debt is too much. While very good advice, it might not be realistic so it's important to understand how much can you afford in debt. This is called a debt-to-income or 28/36 ratio. What the ratio says is that no one debt should be more than 28% of your gross monthly income and all of one's monthly debt payments to include any loans, installment, and credit card debt payments, combined should not exceed 36% of your monthly gross income. (This ratio includes rent or mortage payment.)

Debt load analyzer can help you find out about your debt load and if it's too much.

Take the life or debt quiz. You might be surprised about yourself.

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Student Loan Debt

If your debt right now includes student loan debt, you must think toward the future because you are deferring loan repayment until you graduate. So, you must think about what type of job you are aiming for and what the salary will likely be. Using the above 28/36 ratio, let's see what your maximum debtload can be in this example:

$36,000 annual salary divided by 12 months = $3,000 gross monthly salary (this is before any taxes and insurance are deducted)

28% of $3,000 = $840 is the maximum I can have as a single debt payment and

36% of $3,000 = $1080 is the maximum I can have for all debt payments combined.

Now, I have to manage my student loan repayment that I'll have once I graduate and my "future debt" . I start with the $500 student loan repayment, which then gives me $580 to consider other consumer debt payments, such as a car loan, but my rent payment is $450. So I really only have $180 for a car payment!

Another rule of thumb that you can apply is that your debt payments (student loan, installment-like auto loan, and credit card payment) should be no greater than 15% of your take-home pay (after taxes and insurance are deducted). (This one excludes rent or mortage payment.)

Since your student loan payment will be with you for up to 20 years after you finish school, it should be no higher than 28% of your gross annual salary. This is where you need to decide if taking on more student loan debt will enrich or bankrupt your future.

Another consideration is that student loan repayment starts 6 months after you either graduate or stop-out of college. Just because you don't graduate doesn't mean you don't repay your student loans!

More on Student Loan Repayment at thisAdventures in Education site.

Check to see how much you have in student loan debt through the NSLDS Student Access system.

Read more about College Debt.

View more about Tackling Student Loan Debt.

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UTSA Student Loan Debt

Seniors who graduated in 2009 had averaged just over $23,000 in student loan debt, not far off the national average of nearly $24,000. Let's gain some perspective on financial aid awards, the types of student aid offered in an award package, and whether all or partial acceptance is best.

FIRST and foremost, you need to find out how much you really will NEED for an academic year at UTSA. If you don't take the time to do this, you may accept more than you really need and then owe more for future repayment.

Estimate your college expenses and make a budget using these Rowdy Cents interactive tools:

Online STUDENT EXPENSE ESTIMATOR and online BUDGET CALCULATOR

Financial Aid Types

Here are the types of financial aid included in an award package. They do vary according to estimated family contributions and the amounts, too. You will want to consider accepting each in the following priority order listed. Not everyone will get all of these.

1. Grants & Scholarships- accept firts and all amounts offered as no repayment required - a gift (although they might require you to perform at a certain academic level if reawards are available)

2. Work Study - accept if you would like to work part-time on campus. This is good because research shows that students with these positions are more likely to stay in school and graduate.

3. Perkins Loan, if awarded by the school, has the lowest fixed interest rate and the repayment time (to the school) is shorter, thus overall interest accrued is less. Accept only the amount you determine you need.

4. Subsidized Stafford loan - the government pays the interest for you while you are in school, and it's a low, fixed interest rate. Accept only the amount you determine you need.

5. Unsubsidized Stafford loan - although you pay the interest while going to school, it is still a lower, fixed interest rate loan. Accept only the amount you determine you need.

6. Parent Plus loan - helps parents assist with their student's educational costs, parents must apply; decision based on credit history; fixed interest rate and interest accrues while student in school.

7. Alternative loans are private loans and are riskier with higher interest rates that may be variable rates. Typically the interest is paid by the student while in school. Use this type of loan only if you have exhausted all other avenues to money AND shop for the better interest rates - look for fixed rather than variable rates. Accept only the amount you determine you need.

More details about Types of Financial Aid are found through the UTSA Financial Aid Office. Also, view their tutorials about how to access and read your awards on your ASAP account.

Student Debt News can tell you more about what is happening nationwide.

Credit Cards and Debt
The usage of credit cards by students is very troublesome! Reports indicate that graduating college seniors average having 3- 4 credit cards and nearly $3000 in credit card debt. AND the longer you are in college, the higher the credit card debt!

First-time college students are likely to get, on average, 16 credit card applications sent to them during their first year in college. But a new law enacted in 2010 requires accountholders to be 21 or older, OR have a co-signer who is, and may reduce the offers. If you get applications and don't want them, immediately SHRED them to deter identity theft.

Consumer's Guide to Credit Cards by the Federal Reserve has interactive tools and features to help you understand more about using credit cards.

Here are 3 behaviors with credit cards that might get you BURNED if you don't change.

You use a credit card to buy pizza for your friends. It is probably time to put your plastic on a diet and use cash (or your debit card). And this is very true if you aren't paying off the bill when it comes due.

You make a purchase with a credit card because you really, really want it and you KNOW you don't have the money or WON'T have the money when the bill comes due. Delay buying it until you do have the money AND, better still, pay with cash when you do.

You pay your tuition and fees with a credit card thinking you can pay it off over time. Explore every pathway to scholarships and grants possible (go to Educate for Affordability tips), cut spending to save money, take a part-time job and take school slower.

Here's some water for the FIRE - Download the Money Smart Podcasts from the GO page that will give you valuable tips about buying on CREDIT!

Debit Cards vs. Credit Cards

Debit cards are not credit cards and they don't incur any debt. Debit cards attach directly to your checking or savings account. Although you can use them like a credit card, the purchase amount is electronically taken out of the linked account, usually within 24 hours.

When you use a debit card as a "credit" card, the merchants are charged by their banks for processing the transaction. Recently laws changed (10/2011) and regulated the amount that banks can charge to a lower cost. Now banks are starting to pass this loss onto the consumer by charging a monthly or per transaction debit fees. Not all banks are considering this, so be sure to check with your bank before you are surprised by your monthly statement.

A huge mistake that debit-card holders make is to exceed their bank balance with a purchase. This is an overdraft and comes with a hefty fee. The fee owed the bank becomes a debt. You can opt out of overdrafts now. (Check with your financial institution.) If you do opt out of the overdraft service, it is even more important to keep up with your bank balance because your purchase will be "declined" at the register if you exceed your balance at the time.

Remember - only YOU can prevent the Overdraft Fire! Keep track of your spending!

 

From Debt to Disaster

Mismanaging debt can lead to difficulties of various kinds like

* A low credit score that can impact your future buying power and lifestyle

Don't Flush Your Credit Down the Drain

* Not graduating with a degree or one in a timely manner that can limit your earning power over time and financial options.

CLIMB the hill faster to a degree.

* Worrying about your finances can lead to health issues like stress, illness, and depression, as well as relationship issues like separation and divorce. Also worry and stress about finances could lead to increased use of alcohol or drugs that can impair your ability to think clearly about your finances.

- Filing bankruptcy may be the only way out of the financial mess, but not one to be considered lightly, especially as a young adult, and it doesn't solve the student loan debt issue.

Strategies on coping with too much consumer debt are discussed in this America Saves newsletter.

If you are feeling stressed, depressed, or suicidal over your financial situation, GET HELP NOW. Seek a professional health counselor. (UTSA students can use the Counseling Serviceson campus.) You may also want to seek help from a Debt Management/Credit Counseling service. The Texas Attorney General's web site has guidance for finding reputable services. Don't believe every ad you hear or see, check it out first!

I need my road to financial stability to be paved with good financial choices. Adding debt upon debt leads my financial road into a big, deep pothole and it's really hard to climb out!