Financial Advice

Trump to Kill Student Loan Interest Deduction

Attorney Jay Fleischman wrote a great piece that needs more exposure. Jay talked about how the scant proposed tax reform would impact anyone claiming an interest rate deduction for student loan interest paid. And when I say impact, I mean eliminate the tax deduction.

As it stands now, the IRS allows student loan debtors to deduct student loan interest paid on qualified student loans.

According to the IRS, the current deduction is “You may deduct the lesser of $2,500 or the amount of interest you actually paid during the year. The deduction is gradually reduced and eventually eliminated by phaseout when your modified adjusted gross income (MAGI) amount reaches the annual limit for your filing status.”

“You can claim the deduction if all of the following apply:

  • You paid interest on a qualified student loan in tax year 2016;
  • You’re legally obligated to pay interest on a qualified student loan;
  • Your filing status isn’t married filing separately;
  • Your MAGI is less than a specified amount which is set annually; and
  • You or your spouse, if filing jointly, can’t be claimed as dependents on someone else’s return.

A qualified student loan is a loan you took out solely to pay qualified higher education expenses that were:

  • For you, your spouse, or a person who was your dependent when you took out the loan;
  • For education provided during an academic period for an eligible student; and
  • Paid or incurred within a reasonable period of time before or after you took out the loan.”

For more information see IRS Form 970.

What You Can Do

As Jay suggested in his article, “If you think this sounds like a raw deal, now’s the time to contact your Congressional representatives and let them know. Tell them you want them to vote against the 2017 Tax Reform for Economic Growth and American Jobs. Let them know the tax reform proposal will hurt you financially, and that you oppose it.”

Steve Rhode
Get Out of Debt GuyTwitter, G+, Facebook

If you have a credit or debt question you’d like to ask, just click here and ask away.

This article by Steve Rhode first appeared on Get Out of Debt Guy and was distributed by the Personal Finance Syndication Network.

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Financial Advice

Why Co-Signing a Loan Could Delay Your Retirement

MoneyTips

We all want to help our children get the best start in life, and for many that includes helping them avoid excessive debt. That can lead you to co-signing student loans (or other credit sources) to help your children qualify for credit. You can then teach them how to manage debt responsibly. Isn’t that desirable?

It certainly can be — but even the best son or daughter has occasional bouts of immaturity or mental lapses, and when you co-sign for a loan, you can be the one that pays for those mistakes. A new survey by LendEdu digs into the experiences of parents who co-signed private student loans for their children, and the results suggest a surprising level of concern and/or regret.

Approximately one-third of parents reported not fully understanding the risks of co-signing, and those risks are significant. “Co-signing for a loan is one of the most dangerous things you can do for your credit,” says Gerri Detweiler, Head of Market Education for Nav. “You are agreeing to be 100% responsible for that loan if the other person doesn’t pay, and the lender is under no obligation to tell you that the person you co-signed for isn’t making the payments.” Essentially, if you do not check up and verify that payments are being made, you can be faced with unpaid bills, financial penalties, and seriously compromised credit.

When you co-sign for a loan, the loan also affects your credit report and your overall debt-to-income ratio. Should your child make overdue payments or fail to make payments at all, your credit score is adversely affected. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips. The amount of co-signed debt affects your ability to qualify for the best interest rates, or even qualify for credit at all, because of the higher risk that you present to lenders.

The LendEdu survey found that higher risk assessment to be justified. Over 34% of co-signers’ children have failed to make a payment on time, and a similar amount reported that co-signing a student loan hurt their ability to qualify for financing (mortgages, auto loans, etc.). Almost 36% of co-signers report negative impacts from payment patterns. Nearly 57% of co-signers believe that their credit score has been adversely affected by the loan, and over half (51.2%) believe that co-signing for student debt has put their own retirement in jeopardy.

Regarding second thoughts, 35% of respondents expressed regret at co-signing their child’s student loan, and 34% would not co-sign a student loan if they had the opportunity to do it again (although one wonders why some respondents apparently regret the experience but would still do it again).

One step you can take to protect yourself is to ask for a co-signer release clause that allows you to remove yourself as a co-signer after your child has demonstrated a history of on-time payments — but these clauses are not always available. It also requires regular on-time payments, which is certainly not a given according to the survey results.

You may have to resort to frequent checks with the lender to verify that payments are being made on time. In that case, see if the lender will send you a copy of the bill or otherwise notify you of the payment status. Remember, it is also in their best interests that payments are made on time and in full.

We won’t say that you should never co-sign a student loan, or any other type of loan, but we do strongly advise that you make sure that you understand the risks before you do so. Keep in mind that your son or daughter has far more years to dig out of student loan debt than you do to generate fresh retirement funds to make up for any losses.

Let the free MoneyTips Retirement Planner help you calculate when you can retire without jeopardizing your lifestyle.

This article by Moneytips first appeared on Moneytips.com and was distributed by the Personal Finance Syndication Network.

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Financial Advice

Thinking About When You’ll Claim Social Security Benefits is Time Well Spent

How much will you receive from Social Security when you claim your retirement benefits? If you don’t know, you’re not alone. According to a recent study, one in five people are guessing how much their Social Security retirement benefit will be each month.  

As it turns out, your prediction might be off by quite a bit. According to a financial literacy paper, thirty percent of Americans couldn’t even guess the amount of their monthly benefit, even though most of them were less than two years away from being eligible to claim Social Security. Another working paper found that 82 percent of pre-retirees don’t understand how the age at which they claim will permanently affect the amount of money they will collect each month for the rest of their life. 

Here are several reasons why you shouldn’t guess your Social Security benefit amount.

  • The age you start your benefits has a permanent effect on the amount of money you’ll receive each month. Your estimated benefit amount changes based on the age you claim. Your monthly benefit can be reduced by as much as 30 percent if you claim at the earliest possible age of 62. For example, if you expect to receive a monthly benefit of $1,000 at age 67, but claim at 62, you will only get $700 each month for life. 
  • It’s likely to be your largest source of income for the rest of your life. Social Security is particularly important for the growing number of beneficiaries aged 80 and older for whom it accounts for 70 percent or more of their income. Also, with employer-provided pensions shrinking in popularity, your Social Security retirement benefit is likely to be your only source of lifetime income that is adjusted for inflation. Not only do many Americans overestimate their benefit amount, they may underestimate expenses in retirement. Many retirees will have increased health costs in their later years, and many carry mortgages and other debts into retirement.
  • Waiting to claim your benefits can help you protect the financial security of your surviving spouse. A third of married people approaching retirement do not know how much their spouse would receive in benefits, nor do they realize how one’s decision to claim will affect the other. Timing is especially important if one spouse consistently earned more than the other. For married couples, the longer you wait to claim your Social Security retirement benefits, the more your spouse could receive in survivor benefits if you die.

Why guess your benefit amount when you can estimate when the right time is for you to begin claiming them? Our Planning for Retirement tool will help you estimate your monthly benefit amount at different ages. You can shift back and forth between the different ages as you navigate your decision to start receiving benefits. Begin planning with our retirement tool or check out Ask CFPB for more information for older Americans.

If you’d like to learn more about some of the research we included in this blog post, take a look at our snapshot on older consumers and mortgage debt.

This article by was distributed by the Personal Finance Syndication Network.

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Financial Advice

Making the Decision to Rent or Buy

Rent versus buy signs - blog header image

Becoming a homeowner can be a great decision for many people, but it isn’t the right choice for everyone. Homeownership makes sense for different people at different stages of their lives. If you’re not sure whether you should make the move to buy your own home, it makes sense to consider both your personal and financial goals.

Buying a home is one of the largest financial decisions most people make and it’s also a big personal decision. Some people buy because they want more space, the freedom to decorate and renovate, or because they want to live in a particular school district. Many people become homeowners because they want to build equity and have stable housing costs. On the other hand, some people rent for the flexibility of knowing they could move if they needed to, or because they’re not ready to take on the financial and maintenance responsibilities that come with homeownership, or because it is more financially advantageous in their circumstances. Here are some common financial considerations to keep in mind as you decide whether or not owning a home is the right decision for you right now.

Keep reading to understand:

Understand when you will—and won’t—build equity

At some point, someone has probably told you that if you rent, you’re “throwing away” money. When people say this, they’re usually talking about the opportunity to build wealth in a home over time by building home equity. If you rent, you won’t build wealth in your home over time.

Home equity is the difference between the market value of your home and the amount of money you owe on it. Essentially, it’s the wealth you hold in your home. The equity in your home grows over time as you pay down the balance of your mortgage. If the market value of your home increases, your equity will also increase. If the market value of your home decreases, your equity will also decrease.

Buying a home is a long-term financial commitment and you will build home equity by paying down your mortgage over time. In the first several years of your mortgage, you build equity slowly. That’s because your monthly mortgage payments primarily go towards interest in those first years of ownership—not towards building equity. That’s why you shouldn’t depend on being able to sell your home to get out of a mortgage, especially in the early years.

If you hold on to your home for many years, the share of your monthly payment that goes towards paying down the principal—and building equity—increases, and the share that goes to paying interest decreases. That means that the longer you’ve had your mortgage, the faster you build equity with your monthly payments. But remember: your home equity also goes up or down as the market value of your home increases or decreases.

If you decide, or need, to move and sell your home within the first few years of owning it, it’s possible that after paying the transaction costs of selling the home, you will not have any more equity than you started with. In fact, you may even have less equity than you started with. Keep in mind that if home prices go down instead of up—as they did from 2007-2012—you could lose some or all of your equity, including the initial down payment, when you sell.

rent versus buy infographic

Understand how having a mortgage will—or won’t—affect your taxes

You may have heard that owning a home will help you save money on your taxes. For many homeowners, that’s true. But for some homeowners, it’s not. The home mortgage interest deduction

allows homeowners to deduct some or all of the interest they pay on their mortgage from their federal income taxes.

You can only deduct your mortgage interest if you itemize your deductions. You have a choice when filing your tax return. You can itemize deductions—including the mortgage interest deduction—or you can use the standard deduction. If you take the standard deduction, you won’t get to deduct your mortgage interest. If you already itemize your deductions, you will most likely save money on your federal taxes by adding the mortgage interest deduction, and any applicable state or local property taxes , to your existing deductions.

Factoring in the home mortgage interest deduction in making the decision to buy or rent is complicated. While the tax deduction may help make the monthly payment affordable, remember the amount of your interest will go down over the life of your mortgage, and so the tax deduction will also go down. For some buyers, having the deduction will help make the cost of the mortgage more affordable during the first years of the mortgage. For others, if the deduction does not equal or exceed the standard deduction allowed, there may not be a tax benefit. Consult a tax professional for more information.

Understand when owning a home is a better value than renting—and when it’s not

If you’re using a mortgage calculator to decide how much you can afford to spend on a home, you may be significantly underestimating how much you’ll have to pay each month. That’s because many mortgage calculators only factor in the principal and interest payments. While principal and interest usually make up the majority of your monthly mortgage payment, you will also need to pay:

  • Homeowners insurance
  • Property taxes
  • Mortgage insurance, if applicable
  • Condo or homeowner association fees, if applicable
  • Maintenance costs

To make sure you’re making decisions based on actual numbers, research how much you can expect to pay each month for these additional costs. Add those monthly amounts to the principal and interest payment from your mortgage calculator to find out how much you can expect to pay for your total monthly payment. Property taxes and condo fees in particular, can add hundreds of dollars to your monthly mortgage payment. If you don’t have a specific home in mind yet, browse for-sale listings for similarly-priced homes in neighborhoods you are interested in. You can also visit the website of the county auditor, county assessor, or other local entity responsible for property taxes.

We also recommend budgeting and saving up for inevitable home maintenance and repairs. These can cost hundreds or thousands of dollars depending on what you need to fix. If something important breaks—for example, a pipe bursts, and it wasn’t caused by something you are insured for, you will have to pay to get it fixed right away. For things like cracked windows, broken dishwashers or clogged toilets, you’ll either need to fix it yourself or pay a professional. When you rent, your landlord is generally responsible for the property and takes on the risks. When you buy, you take on these risks and responsibilities.

One resource you might consider using is The New York Times’ free “Is It Better to Rent or Buy?” calculator . This tool can help you assess the financial tradeoffs of renting versus buying based on your financial situation and the length of time you expect to own your new home.

Remember that calculators may make assumptions about future economic conditions, such as the rate of home price growth. These assumptions can have a big impact on the calculator’s results. Try several different scenarios to see a range of possible outcomes.

This article by was distributed by the Personal Finance Syndication Network.

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Financial Advice

20 Genuinely Fun and Frugal Activities (And 5 Traps to Avoid)

In a society that values materialism over responsibility in many cases, the frugal among us get a bad rap. Some think of us as “cheapskates” who will short them on a split bill while others consider us to just be “buzzkills” who are never willing to go out and have some fun if it involves spending a few dollars. Despite these assertions, I’m here to tell you that living a frugal life doesn’t have to be boring.

Although I’ve been known to enjoy a nice quiet night in, my wife and I are hardly shut-ins. In fact, we make a point to go out for our “Together Tuesday” date nights in addition to whatever we have planned for the weekends. At the same time we’re very mindful of how much we’re spending and how that money could be put to better use. As a result, we’ve gotten to be more or less experts on the topic of finding inexpensive entertainment.

What follows is a list of activities that you can enjoy without spending a fortune or awkwardly mooching off of others. While I’ve broken down my list down into categories for whom these suggestions would likely appeal to most, the vast majority are really suitable for just about anyone — as I can attest to, having personally done all of these. I’ve also included a few things that might sound like a good idea on the surface but could actually backfire.

So without further ado, here are 20 thrifty activity ideas (and five things to avoid):

Fun Activities for Families

When you have kids, entertainment isn’t just a nice thing to have, it’s pretty much needed to maintain sanity. Of course, family outings also require a lot more cash seeing as there are more people to pay for. That’s why these ideas are some of the more expensive suggestions on my list but are still thriftier than the alternatives:

Attend free/cheap local events

Beyond the big fairs and festivals put on by states or counties, many cities host their own special events. In addition to the big gathering, be on the lookout for movies in the park, farmer’s markets, and other fun activities you can take the kids to without spending a ton. This is especially true in the summer when the need for family activities increases, but you’re likely to find events all year round.

Enjoy discounted activities

Want to take your kids somewhere fun but don’t want to pay full price? Be on the look out for discount opportunities on sites like Groupon or Living Social, especially during the “off-season” times. Plus, zoos, amusement parks, state fairs, and other local events tend to partner with grocery stores or other retailers to offer discounted tickets, so keep an eye out for those.

Bake and decorate cookies

If there are two things kids love, it’s sweets and art. With some flour, sugar, food coloring, and a few other key ingredients, you and your kids can enjoy some creative fun decorating and baking your own cookies at home. Just be sure to bake from scratch to help save money compared to box mixes and pre-made doughs — this includes making your own icings. Of course, a warning: depending on how old your children are, your kitchen will be a disaster after this… but it’s probably worth it.

Invest in a theme park passes

I know what you’re thinking — theme parks aren’t cheap. And you’re right, except that season passes can actually be a great value if you and your family enjoy amusement park rides and live close enough to take advantage of them on a regular basis. A word of warning, however: be sure to get a pass that includes parking otherwise visits will end up costing you big time. Additionally, be sure to either fill up beforehand or bring snacks with you so you can avoid the overpriced park food.

Go to a college or minor league game

Attending pro sporting events can be awfully fun but they can also cost a pretty penny. On top of the already high price of admission, food, drinks, and souvenirs are all extremely expensive. Instead consider attending college match-ups, minor league games, and other local sports events that won’t cost you as much and will still provide nearly the same level of entertainment. Plus, if you live in Florida or Arizona, MLB Spring Training games are always a good time at an affordable price.

Activities For Couples

No one wants to seem boring to their partner. That’s why we often spend hundreds on “romantic” evenings, gifts, and surprises lest our loved ones look elsewhere for excitement. However there are still several fun things that couples can do together that don’t post a major threat to your joint accounts: 

Make a special dinner in

While eating out at a fancy restaurant is a go-to for many couples, it’s clearly not the most frugal way to spend an evening. Instead, take a trip to the store with your partner and plan the perfect meal to make yourselves. The Internet is rife with inspiration to help you build your menu — you can even tailor your recipe to what you have on hand. I should warn you not to get carried away with buying ingredients you’ll only use once or that are too pricey, but even with a bit of a splurge, you’ll probably still be saving compared to a restaurant (especially when tipping is considered). Plus cooking with your loved one can actually be a lot of fun!

Host a potluck

Still thinking about food? Another smart way to enjoy some culinary treats along with some great company is to host a potluck dinner at your place. If you’re somehow not familiar with the concept, a potluck is where each of your guests brings some sort of dish with them for all to enjoy. Pro tip: it’s usually advisable to figure our who’s bringing what ahead of time so that you don’t even up with just desserts or five different kinds of mashed potatoes (not that there’s anything wrong with that). In conclusion, yes the potluck party is a classic but that’s for good reason.

Check out local festivals

In the “family” section above, I mentioned that a number of cities and communities host regular festivals of various kinds. As adults, there are even more festivals that might appeal to you and your partner. From craft beer and barbecue to wine tastings and art walks, there are likely plenty of fun and frugal times you’re missing out on.

Go mall walking

Some people might think that mall walking is just for older folks… and they may have a point. However, I can tell you from experience that my wife and I love to walk to the mall for a number of reasons. For one, it allows us to get some exercise regardless of what the weather is like outside. Additionally, it affords us the opportunity to monitor prices on items we want, determine our target price, and snatch it as soon as it hits that number. Of course mall walking isn’t a great idea for the weak-willed and easily tempted but, for everyone else, it’s a nice way to spend a few hours.

Take a nature walk

This one is clearly weather dependent but never underestimate the power of nature. Whether you take a day trip to a nearby national park or forest or keep it local at a park or garden, exploring the world’s natural beauty is hardly ever boring.

Set off on a photo trip

Speaking of nature, you might also enjoy bringing along a camera and snapping some shots on your walk. In fact, you may be surprised by all the fun details you miss in your city until you explore them with a photographer’s eye. If you enjoy taking pictures and being artsy, try setting off on a photo trip to either places you go every day or somewhere you’ve been meaning to visit and see what inspires you. Also don’t feel like you need to go buy a fancy camera to get great shots — your smartphone can do pretty amazing things.

Frugal Fun For Anyone

Frugal fun isn’t just limited to families and couples. In fact, spending time alone can be enriched by learning or trying new things in addition to taking in the typical entertainment. Whether you plan on heading out alone or bringing along some friends, here are some activities anyone can enjoy:

Attend library events

As I’ve discussed before, local libraries can be really awesome. Not only do they offer hours upon hours of free entertainment in the form of books and movies but also might host special events. For example, my local branch has held conversations with authors, movie screenings open to the public, and podcast discussion groups. Still not convinced? They even have a Zombie and Donuts gathering once a month where they read comics about the undead and dine on pastries. Basically, I’m saying that, if your library is half as cool as mine, you’ll be more than hooked up.

Learn new things on YouTube

If you’re like me, once every week or so you’ll wonder “how can I do (fill in the blank)?” As it turns out, the answer is usually on YouTube. In between cat videos and auto-tuned remix clips I’ve learned to do everything from reset my “maintenance required” light on my car to performing card tricks that frustrate the heck out of my wife. Whether you’re looking to learn something fun or want to save money by fixing something yourself, falling down a YouTube rabbit hole can actually be a productive use of your time — who knew?

Write a book

Yes, you too can write your own book if you just set your mind to it! In fact, with the numerous self-publishing options available to you these days, you could not only get your work out there but perhaps make a bit of profit off of it. Clearly, this might not be for everyone but, if you’ve ever wanted to write your own book, I’m here to tell you that you can.

Enjoy a Netflix binge

There’s really no denying how Netflix has grown into a powerhouse entertainment company. At around $10 a month, subscribing to the platform isn’t free. However, as an alternative to more expensive activities (including seeing first-run films in the theatre), it could be a great deal. Of course, if you’re truly frugal you can also sign up for the free trial, binge on all the TV you’ve heard so much about, and just cancel before your month is up.

Seek out some live music

It seems that no matter where you live you’re never that far from some live music. Plus much of it is free as many bars and clubs will invite artists of all kinds to play. Every so often you may encounter a small cover charge but, otherwise, this can be a great way to enjoy some music and maybe even discover your new favorite band.

Plan your next vacation

Everyone needs a vacation from time to time and, incidentally, planning one can be half the fun. Whether you already have your trip booked and want to start filling out your travel days or are just starting to dream up your next destination, you’d be surprised how the hours can fly by when you’re researching all the fun you’ll soon be having. Plus after the trip you can spend many more fond hours looking back at your trip and sharing the highlights with others.

Host a gaming tournament for friends

As a frugal individual, chances are you don’t own the latest gaming system and games… but at least one of your friends probably does. Try talking them into bring over their system to your place for a gaming tournament everyone can enjoy. Alternatively, you could break out your retro gaming systems or older sports games, which are still just as much fun.

Have a poker night

In a similar vein, why not have a good old-fashioned poker night? The obvious objection would be that poker usually involves gambling, but it doesn’t have to! You can always have a hold em tournament where the only prize is bragging rights or, if you must gamble, keep the stakes really low — like a $1 buy in and $1 rebuy — just to make things a little more interesting.

Start learning a new language

While we’re on the topic of travel, another smart way to spend you time is to learn a new language. At this point you’re probably thinking about the expensive language learning software you’re seen or heard commercials but there are a wealth of free tools available as well. One of the most popular options is an app called Duolingo, which offers a number of languages you can learn through various lessons, chats, and more. Beyond that, a quick Google search is sure to turn up dozens of sites and tools that will help you get a basic grip on a language before your trip and, perhaps, even lead you on your way toward fluency.

Watch Out! These Activities Can Get Pricey

Sometimes something can start out as a thrifty activity and quickly snowball into much more. If you’re not careful, these things could actually end up costing you a fortune in the long run. With that said here are some things to avoid:

Picking up crafting

Crafting activities like creating scrapbooks or decorating pottery can admittedly be a lot of fun but they can also get quite expensive. In fact, while the idea of making someone a gift for a holiday or other occasion sounds smart, the truth is that it’s extremely easy to get carried away when buying supplies. For that reason you may want to reconsider picking up a crafting hobby unless you do a careful job of pricing it out first.

Throwing a party

Grab some food, put on some music, and invite some people over — that’s all there is to throwing a party right? It’s possible but all too often the “good host” gene kicks in, causing people to over plan and over spend on entertaining their guests. If you’re going to throw a party, consider making it a potluck or ask guests to chip in some other way because taking on the full burden can often prove to be financially demanding.

Getting into gardening

In another case of a hobby gone amuck, gardening sounds perfectly thrifty. Heck, you could even grow your own veggies and spices to save money on groceries! Unfortunately getting to that point takes a lot more time, effort, and, yes, money than you may be prepared for. Again, this doesn’t mean you have to rule it out entirely but you should definitely do your research.

Over Groupon-ing

Earlier I mentioned how Groupon and Living Social can offer some great deals on activities for the family or for individuals. Of course, this only works if you actually get around to cashing them in. Before buying one of these deals be sure to look into anything and everything that could pose a problem to you redeeming it. This includes the location, the hours of operation (and whether the deal is valid on weekends or holidays), and the expiration date. Don’t fall into the trap of buying something you’re not going to use!

Hosting a (fill-in-the-blank multi-level marketing company) party

Seriously, just stay away from that stuff.

Just because you’re trying to be thrifty doesn’t mean you can’t enjoy life — it’s all about getting the most out of your entertainment dollar. From free events to small splurges that lead to big fun, there are plenty of ways activities that fit into the thrifty lifestyle. So what are some of your favorites?

 

This article by Kyle Burbank first appeared on Money at 30 and was distributed by the Personal Finance Syndication Network.

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Financial Advice

Bankruptcy Groups Jump In to Support Student Loan Discharge to Avoid Cement Life Preservers

The National Consumer Bankruptcy Rights Center (NCBRC) and National Association of Consumer Bankruptcy Attorneys (NACBA) have decided to support the bankruptcy discharge in ECMC v. Murray with an outside briefing supporting the effort.

The Murray case is very interesting in that the bankruptcy court agreed a substantial part of their student loan debt should be discharged in their bankruptcy filing. The bankruptcy court ruled that all the accrued interest on their student loans should be eliminated. ECMC appealed.

Here is a quick background of the case.

“This truth is starkly illustrated in the case of Murray v. Educational Credit Management Corporation, which was decided in December 2016 by a Kansas bankruptcy judge. At the time they filed for bankruptcy, Alan and Catherine Murray owed $311,000 in student-loan debt, even though they had only borrowed about $77,000. Thus 75 percent of their total debt represented interest on their loans, which had accrued over almost 20 years at an annual rate of 9 percent.” – Source

I’m going to sum up the ECMC appeal by saying they disagreed with the court. Most likely, not because the facts didn’t support that decision but it’s not a president they’d want to have on the books. ECMC wanted to offer the Murray’s a repayment plan they couldn’t afford that wouldn’t even cover their daily interest building on the loan. In fact, ECMC wanted the Murray’s to enroll in a federal student loan income driven repayment plan that would leave them a huge balance owed at the end of 20 or 25 years.

“Educational Credit Management Corporation (ECMC) argues that the bankruptcy court erred in its application of the Brunner test and that the Murrays should have enrolled in a 20- or 25-year income-driven repayment plan (IDR). ECMC’s position, that the Murrays should be burdened by their student loans until they are in their late sixties or early seventies would guarantee “the certainty of hopelessness” in their declining years, the very outcome the Polleys decision explicitly rejected as unnecessary.”

Robert Fossey helped to write the brief submitted by NCBRC and NACBA with input from Tara Twomey of National Consumer Law Center.

At the heart of this case is the hope some clarity and order can be brought regarding when it is hopeless for people to slave under continued student loans when there is no hope to repay the debt. While bankruptcy allows for all student loans to be discharged if the create an undue hardship, there is no crystal clarity on what constitutes that hardship.

The brief supports a position I’ve previously stated that income-driven repayment (IDR) plans just postpone the debt and never give the consumer a fresh start that bankruptcy is designed to allow.

“In this brief, amici argue that long-term, income-driven repayment plans are an inappropriate remedy for debtors seeking to discharge their student loans in bankruptcy. IDRs have three fundamental flaws. First, most debtors in IDRs will never pay back their student loans. Second, although debtors who fail to pay back their loans at the conclusion of an IDR will have their loans forgiven, the amount of cancelled debt is taxable to them unless they are insolvent at the time the debt is cancelled. Third, IDRs impose heavy psychological stress on debtors who are burdened with long-term debt they will never repay. Additionally, the legislative history of the undue hardship provision further suggests that IDRs should not be considered when considering whether the debtor may discharge student loan debt under section 523(a)(8).”

Fossey makes some very cogent arguments through the brief:

“It might make sense for student borrowers to enter IDRs when there is a realistic chance that IDRs will enable borrowers to repay their loans. But it makes no sense at all to force a struggling student-loan debtor into an IDR as an alternative to bankruptcy relief when it is evident the debtor will never be able to repay his or her student loans.”

“But in fact, DOE, ECMC and other student-loan debt collectors have insisted that nearly all bankrupt student debtors enter IDRs, even under absurd circumstances. For example, in Myhre v. U.S. Dep’t of Educ., 503 B.R. 698 (Bankr. W.D. Wis. 2013), Bradley Myhre, a quadriplegic, sought to discharge $14,000 in student loans in bankruptcy over the opposition of the U.S. Department of Education. At the time of trial, Myhre was “paralyzed from the chest down.” He required an electric wheelchair to get around and relied on a full-time caregiver to assist him with all his daily needs, “including eating, dressing and bathing.” Myhre’s salary did not allow him to meet his monthly expenses, and both Myhre and his caregiver filed for bankruptcy in 2012.

DOE argued that Myhre had not met the “good faith” prong of the Brunner test because he had not enrolled in an income-based repayment plan. Nevertheless, the bankruptcy court discharged Myhre’s student loans. “Mr. Myhre has done his best to earn an income that would allow him to financially support himself,” the court wrote, “and it is not his fault that even working full-time, he is unable to make ends meet.”

“It might be argued that the Murrays are in totally different circumstances from Myhre Roth, Krieger and Fern; and indeed the Murrays’ combined income puts them solidly in the middle class. But the underlying rationale of all these decisions—four by appellate courts (Roth, Krieger, Barrett and Fern)—applies to student-loan debtors regardless of income bracket. There is simply no point in putting debtors in 20- or 25-year repayment plans when it is virtually certain they will never pay off their student loans. Indeed, placing the Murrays in such a plan, as suggested by ECMC, will cause their student loan debt to grow by tens of thousands of dollars over the life of the repayment plan. For many people, like the Murrays, income driven repayment plans are cement life preservers pitched by student loan creditors that, in the end, will only cause borrowers to sink further into debt.”

A big drawback to the IDRs is the taxable loan forgiveness if the debtor is not insolvent. In their arguments to not allow the bankruptcy discharge of this federal student loan debt, ECMC said there would be no tax due at the end of a 25-year repayment plan because the Murray’s would be broke.

You’ve got to love the response to this position by NCBRC and NACBA in the brief. They said, through Fossey’s hand, “As ECMC correctly noted in its brief, forgiven loans are not considered taxable income to the extent the debtor is insolvent at the time the debt is cancelled. “Thus, those who elect repayment under an alternate repayment plan will only experience a taxable event if his assets are greater than his liabilities before the loan is forgiven at the end of the 25-year period.” Essentially, ECMC is asking this court not to consider the tax consequences of an IDR for the Murrays because they will be so broke 25 years from now that they will suffer no tax consequences when more than half a million dollars in student loan debt is forgiven. “[I]t is almost absolute,” ECMC argues in its brief, “that the Murrays will not have assets exceeding liabilities (including unpaid Loans) at the end of the 25-year repayment period and therefore no tax consequences.” That is, ECMC is acknowledging that 20 or 25 years from now, when the Murrays will be in their late sixties or early seventies, they will be insolvent.”

Income Driven Repayment Plans Are Emotionally Cruel

Being a student of the mental consequences debt that consumers face, I loved the enlightened part of this brief that specifically talked about the severe psychological stress an IDR puts a consumer under.

“Studies have consistently found that socioeconomic status and debt-to- income ratio are strongly associated with poor mental health. Debt from student loans is often viewed as necessary by most Americans, but can be a chronic strain on an individual’s financial and emotional well-being. The mere thought of having thousands upon thousands of dollars’ worth of debt can severely impact those with already fragile mental health, especially if they will carry that debt for the rest of their lives. There is also the relentless nature of debt collection, the incessant calls from creditors, and the hassle of continuing to put student loans in forbearance. Financial difficulties “can also contribute to a sense of continuing entrapment and hopelessness that can in turn serve to extend an episode.”

There is so much more in this brief that could serve as a guide to defending for a student loan discharge when the lender objects. It’s worth a read if you are interested in this stuff.

Steve Rhode
Get Out of Debt GuyTwitter, G+, Facebook

If you have a credit or debt question you’d like to ask, just click here and ask away.

This article by Steve Rhode first appeared on Get Out of Debt Guy and was distributed by the Personal Finance Syndication Network.

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Financial Advice

Who’s Really Calling?

The millions of people who reported scams last year told us that imposters were the top fraud of the year. Imposters have called many of us – maybe even most of us, pretending to be anyone from the IRS to a family member in trouble, from fake tech “help” for your computer to a business selling things that turned out to be bogus. Their goal? To get your money as quickly as possible.

Thanks to the Legal Aid Society of Hawaii, we recently heard about scammers calling to ask for contributions to the “Legal Aid Society” and pretending to be from the “national legal aid/defenders office.” A quick search of the phone number the callers used showed complaints for different kinds of imposter scams. (Of course, scammers can make caller ID show any number – even the name that shows up on the display. So don’t rely on caller ID to help you decide if a call is legit.) Imposters can pretend to be anyone, but the twist on this imposter scam is that the scammers are pretending to be from well-respected community service organizations and appealing to your civic spirit.

To make sure your donation dollars are doing the good you want them to, learn more about giving wisely. If you get a dubious call, or one that pressures you to donate right away, tell the FTC so we can investigate. We rely on you – and our partners in your community – to tell us what you’re seeing. In fact, our most recent imposter scam case – against a company that pretended to be from a community help center, the government, radio stations, and companies like Walmart – came about because of a tip from a legal services group in Washington, DC. So every report, from everyone, makes a difference.

This article by the FTC was distributed by the Personal Finance Syndication Network.

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