I have spent the past week wrestling with how to tell this story — and whether or not I should tell this story. It’s certainly related to personal finance, especially my own personal finances. But if I tell it wrong, it comes across as overly political and a plea for money. Awesome! Two things that I’ve attempted to avoid for the entirety of this blog! (Two birds with one stone?)

But I do want to tell this story, because I think it brings up some interesting questions about loans, campaign financing, and even gambling. And because I’m not sure what the best way is to tell it, I’ll do it the only way I know how: starting from the beginning.

My Loans

As of the last time I checked (at the end of August), I owe $42,526 in student loans to the US government. I’m on the 25 year repayment plan. Due to underemployment and my high loan balance, I’m currently on the graduated repayment plan (my payments get bigger every two years) and I’m paying my loans… but just about nothing else. I can’t afford much else, and I’m draining my savings. None of this is news — it’s just the way it is right now.

Krystal Ball for Congress, 2010

Since moving to Virginia, I’ve made a point to begin investigating local politics. I had done a lot of research on local candidates in New York during the last election, and it felt really good to be that involved. But I didn’t actually find out about Krystal Ball (yes, that’s really her name) through research, I actually first started seeing her in ads on Facebook. That’s a common thing to do, since you can target Facebook ads to certain regions.

Krystal Ball is running for the House of Representatives in Virginia’s First District, which isn’t actually my district, but it certainly is my state. To be honest, I didn’t notice the strangeness of her name until weeks later — at the time, I got very much wrapped up in reading about her and learning about her ideas on the issues. In a lot of ways, Krystal reminds me of myself and we share many of the same views. Personal finance nerds will get a kick of the fact that Krystal is a Certified Public Accountant!

I wrote Krystal an email, telling her that I supported her campaign, despite not being a resident of her district. I made myself a “fan” of her page on Facebook and continued to keep an eye on her over the next couple of weeks. I even sent her a few emails to get her views on campaign finance reform (only to find out, again, that we are very much on the same page about that issue, as well).

The Student Loan Challenge

On Krystal Ball’s website and Facebook page, there were references to something called the “Student Loan Challenge.” Just like I failed to notice that her name was strange, I didn’t pay much attention to this either. (I have a one-track mind when it comes to the issues.) But eventually I did look into it, and became fascinated with the idea. Basically, her campaign is offering to pay off the student loans (up to $50,000) of the person who raises the most money for her by the end of the day on September 30th.

Gambling With an Emergency Fund

As of the last update, the leader in the Student Loan Challenge has raised $1,450 for the campaign. If I dumped all of the money I have in all of my savings accounts into her campaign, I would be the new leader. And if I won, that would pay off between $10,000 and $42,526 of my student loans* (depending on the overall amount raised by the Student Loan Challenge). But that’s a big gamble — I don’t know how many other people are sitting around, waiting until the last day to pump a bunch of money in and get their student loans paid off. (*I’d owe taxes on the prize.)

It’s a gamble that I’m ultimately not willing to take. I adore Krystal Ball as a candidate, but I’m not in a position to give up my emergency fund, my car fund, my charity fund (well, maybe that), my travel fund, etc. etc.. Especially when I’ve barely got my head above water as it is. Yes, if it worked, it would take care of a big problem in my life. But if it didn’t, if someone beat me… I’d have trouble even making next month’s student loan payments. It would ruin me.

So I made a decision, and agreement with myself. If I reach my fundraising goal of $3,000 in donations from other people, by Wednesday afternoon, I’ll kick in $500 myself – if it looks like that will make me win. Because I support Krystal Ball’s campaign a lot — at least $500 worth. So even if that didn’t make me the winner, I wouldn’t feel bad. I’d be responsible for $3,500 in donations to a candidate I truly believe in. And that would be enough for me.

Peanut Gallery

So what do you guys think? Am I making the right choices regarding this whole Student Loan Challenge? Would you give $25 to a political candidate if it might mean the end of student loans for the poorest personal finance blogger? Is this all nuts, or awesome? And who names their kid Krystal Ball, anyway?

Update: the winner of the Student Loan Challenge (who was most certainly not me!) ended up raising $3,500. I ultimately did not contribute any money during the challenge, because I didn’t reach my $3,000 fundraising goal. I plan to donate later on in her campaign. Hindsight is 20-20, of course, but what do you guys think of the whole thing in light of that?

It’s not the billions received by AIG and the car companies, but at least it’s something!

The following is a guest post by Emily, a 20-something single gal who writes about navigating her way through her finances and the world, at Musings and Ruminations of a Single Gal.

Like so many other graduate students, I’m facing the probability of an enormous amount of student loan debt (upwards of $100,000 in my case, since I’m a law student) and not such a large starting salary. While it is possible for some law grads to start out with a six-figure salary, those grads are usually the exception and not the rule. In this economy, where big law firms are laying off lawyers by the hundreds and deferring new hires, the prospect of a six-figure starting salary is even less likely.

This debt load is enough to make anyone anxious, stressed, and overwhelmed. Most of the time I try not to think about it and focus on the present, but that’s not always easy. Luckily, as of July 1, 2009 people like me will have reason to celebrate (at least somewhat). On that date, the Federal Government is implementing a new repayment option, Income-Based Repayment (IBR), and a low interest rate for loan consolidation.

Income-Based Repayment — What is It?

IBR works differently than the previous option of Income-Contingent Repayment (ICR). While both IBR and ICR base monthly payments on a percentage of discretionary income, IBR defines discretionary income differently and requires a smaller percentage. IBR caps monthly payments at 15% of the amount by which adjusted gross income exceeds 150% of the poverty line. Here is an example of the calculation for a single person:

.15% *[(AGI — 150% Poverty Line)/12] = Maximum amount of monthly loan repayment under IBR

Adjusted Gross Income: $40,000
2009 Poverty Line in US: $10,830
150% of Poverty Line: $16,245

.15%*[($40,000.00 – $16,245)/12] = $296.94

Under the IBR plan a person making $40,000/year would only be required to make a monthly loan payment of $296.94. The payment would be adjusted each year based on federal income tax returns filed by the individual.

IBR is available to both direct loan program participants and the federally backed loan programs.

Other Great News About IBR

• During the first 3 years of IBR, the federal government will pay the unpaid interest on subsidized loans. This is because the monthly payment could be less than the amount of interest accumulating.
• Remaining debt is forgiven after 25 years (regardless of where you are employed).
• If you work full-time in a public service career, the remaining debt is forgiven after 10 years.

 

 

 

Interest Rates Also Set to Drop — Time to Consolidate

 

The other exciting change scheduled for July 1, 2009 is the annual interest rate adjustment.Now is excellent time to consolidate student loans — especially those that were borrowed with variable interest rates before 2006. Loans having a fixed interest rate, including all borrowed after 2006, are not affected by this change. The interest rate for variable rate loans will be reduced to 2.00-3.38%, depending on the type of loan. You can check out the Loan Consolidation website run by the Federal Government for more information:

When you consolidate your loans you lock in a new lower rate. Even those loans borrowed after 2006 can be consolidated with the earlier loans. Although those loans won’t yield the 2.00-3.38% interest rates, they will lead to an overall reduction in interest rates because the Federal Government will use a weighted average in calculating the interest rate. The rate cannot exceed 8.25% and is fixed for the life of the loan. The federal Loan Consolidation website has information on calculating the weighted average.

You can determine how much loan consolidation will save you by using the loan payment calculator, and comparing it to the loan calculator.

Here is a simplistic example of the savings. I have left the current interest rate the same on all loans (which is unrealistic given that those before 2006 would be variable) and have chosen a standard 15 year repayment.

John Doe currently has the following loans:

2003-2004: Undergrad year 1, Stafford loan: $2,625 @ 6.8%
2004-2005: Undergrad year 2, Stafford loan: $3,500 @ 6.8%
2005-2006: Undergrad year 3, Stafford loan: $5,500 @ 6.8%
2006-2007: Undergrad year 4, Stafford loan: $5,500 @ 6.8%
Total: $17,125 @ 6.8%

Without consolidating he will be required to make 4 separate payments per month (if the loans are held by different servicing companies) totaling $152.02 per month for 15 years. His total interest costs will be $10,237.31.

Until 2006, the interest rates were variable rates and they are eligible to be locked in at anywhere from 2.00-3.38%. This example will assume John Doe’s loans from 2003 to 2006 would be eligible for the 2.00% interest rate (for the sake of simpler calculations). The actual determination of the interest rate for consolidation depends on numerous factors such as the types of loans you have and whether you have entered repayment. John Doe’s loan for 2006-2007 would remain at 6.8% because the loans were no longer variable interest rate loans. Consolidating these loans will produce an overall interest rate of 3.625%.

2003-2004: Undergrad year 1, Stafford loan: $2,625 @ 2.0%
2004-2005: Undergrad year 2, Stafford loan: $3,500 @ 2.0%
2005-2006: Undergrad year 3, Stafford loan: $5,500 @ 2.0%
2006-2007: Undergrad year 4, Stafford loan: $5,500 @ 6.8%
Total after consolidation: $17,125 @ 3.625%

If John consolidates his loans, his monthly payment would total $123.48 for 15 years. That is a monthly savings of $28.54. John will only have to pay one loan servicing company (rather than 4 separate payments) and he will only pay $5,100.81 in total interest — a $5,136.50 savings!

You can submit your application for consolidation at anytime. Loan consolidation applications that are submitted now are placed on hold until July 1, 2009, when processing will resume with the new lower interest rates. The processing of your consolidation application will generally take 60 — 90 days. This is what you need to know to begin the consolidation application process:

You need information regarding all of your student loans, even if they are not federally backed. Although the consolidation application will not allow you to consolidate non-federal loans it still requires information concerning total debt load.

The requisite information includes:

§ The contact information for all loan servicing companies
§ The interest rates for all your loans
§ The principle amount of all your loans
§ Your Federal Student Aid PIN (the same one that is used in completing the Free Application for Federal Student Aid “FAFSA”)

Student loan consolidation is a good thing to look into. While it may not be for everyone, it could end up saving you a lot of money in the long run. All information (and the application for consolidation) can be found at the Federal Government’s website.

Disclaimer: The content of this article is for general information and does not constitute advice. While the author has written from both personal experience and research that was both true and accurate at the time of writing, she gives no assurance or warranty regarding the accuracy or applicability of any of the contents. The author of this post and the website accept no responsibility for and excludes all liability in connection with utilizing the above information. Complete and current information on student loan consolidation can be found by visiting http://www.loanconsolidation.ed.gov/.

The time has come: May is the first month that my first student loan bill is due. I have three student loan bills, actually, and indentifying them now will make this little tale easier to tell:

• The first is a Direct Stafford Loan, from the government, consisting of both subsidized and unsubsidized loans. It is the culmination of the Stafford loans that I took out from the beginning of college until the time I dropped out. I call it the “Old Stafford” loan.
• The second is also a Direct Stafford Loan, serviced by the same online account and login. It’s the culmination of the subsidized and unsubsidized Stafford loans that I took out from the time I returned to school until graduation. I called it the “New Stafford” loan.
• The third is a Federal Perkins loan, issued with my college as the lender. I have to use a different website and login to access information and pay this loan. This is the “Perkins” loan.

This month, the Old Stafford loan comes due. The New Stafford loan and the Perkins loan are both in their grace periods, so I won’t have to make any payments on them until at least September.*

The Stafford loans have put forth an intriguing proposal for me: set up an Electronic Debit Account (EDA) to automatically take the loan payments from my bank account each month, and they’ll shave 0.25% off of my interest rates. Many people take this option because 0.25% can have a big effect, if you have a lot of loans. I did the math for my combined Stafford loans (using my ultra geeky financial calculator):

If I pay the loans off in 10 years….
Interest paid: $10,207.89
Interest —0.25%:  $9,695.48
Money saved: $512.41

If I pay the loans off in 25 years…
Interest paid: $28,375.39
Interest —0.25%: $26,840.27
Money Saved: $1,535.13

So we’re not exactly dealing with chump change here. Depending on how long it takes me to pay off these student loans, I will save $50-$60 per year if I sign up for this program.

However, there’s a catch. For me, anyway. I hate automatic debits out of my checking account. In fact, I have a few set up to try and parse my savings out to online savings accounts right now… and I’m in danger of over-drafting over the next few days because of them. Automatic debits work well for some people, but I handle them badly. Which means I have to choose: is $50/year worth a headache for me?

Luckily, the Direct Loan program has the solution for me. They give you the option of having your EDA set up with a savings account instead of a checking account. This is great for me — I could much better handle money coming out of one of my ING sub-accounts each month than straight from my checking account. As soon as I figured this out, I logged onto ING and set up a new sub-account specifically for student loan payments. If you’re not sure how to do this, it’s extremely easy.

To create a sub-account if you already have an ING Direct bank account:

1. While logged in, click “Open an Account” on the left side of the screen.
2. Choose the type of account you want your sub-account to be. For this particular purpose (student loan payments), I chose to get another Orange Savings Account.
3. Click “Open Now”
4. Select the type of account. For most people, this will be either an individual account, or a joint account (if you’re sharing it with a spouse, etc.).
5. Give the new account a nickname, so you’ll know what it’s for. For me, this was “Student Loan Payments.”
6. Chose one of your linked accounts to pull your first deposit from. I pulled in the amount of my first student loan payment from my already-existing Electric Orange Checking account.
7. Read and agree to the terms of service, click Open Account, and you’re done!

(If you don’t already have an ING Direct bank account, I highly recommend both their Electric Orange Checking and Orange Savings accounts. Especially because of this sub-account feature.)

Bing bang boom! The account exists instantly, and I can enter the account information into the EDA instantly. The only thing that isn’t instant is on my student loan issuer’s end – it says it will take 30-45 days for electronic debiting to take effect, so I’ll still have to make my first payment my hand, on my own.

So all’s well in the State of Stephanie’s Student Loans. I’ll save about $50 each year, and I’ll earn a little interest from the cushion I keep in the savings account. The only problem I’ve encountered is with the Perkins loan. Although they allow you to set up electronic debiting, they don’t allow you to do it from anything but a checking account. Boo! And I can’t find any mention of them giving me a discount on my rate for setting it up. So you know what? For now, I’ll just pay the Perkins loan by hand. (Well, by hand online. You didn’t think I was crazy enough to write checks and use stamps, did you?)

*I may pay extra toward the interest on the New Stafford loan during the grace period… but that is actually quite difficult. Because the Old and New Stafford loans are serviced by the same website, login, and account, I can’t tell the system which loan extra payments should go toward. It just splits up any extra payments evenly between the two loans.