June 24, 2008


As I've mentioned a couple times in the past few months, federal student loan rates would be dropping come July 1. The only question was how much (*recall that this only impacts federal student loans that were taken out before June 30, 2006 and have not been consolidated; this does not impact loans borrowed since then or previously consolidated loans. All federal loans borrowed after that are fixed rate, not variable rate loans). That 'hunch' will become a reality next week ...

July 1 is an important date not only because rates are set each year at that time. This year, July 1st also marks the date many professionals in public service careers can take a step toward loan forgiveness. Lets address these issues one at a time:

All unconsolidated loans origintated prior to 7/1/06 will have their rates reset to 4.21% (3.61% if you are in school or in your grace period); that is a full 3% less than this years levels (7.22% and 6.62%)! Federal loan consolidation is the only process available to lock in this rate.

- 'New' subsidized loan rates for undergrads will drop from 6.8 to 6%.
- Stafford loan fees will drop 1/2% point to 2% of amount borrowed.
- Undergrads can borrow $2,000 more per year in unsubsidized loans.
- Total undergrad loan borrowing limits will increase to $31,000 for dependent students; $57,500 for independent students.

If you're new to my financial tip or don't recall me mentioning the new loan forgiveness provisions available to some public service professionals, you will want to review the site -- http://ibrinfo.org -- which will provide detailed info as well as updates as new info becomes available ... this program is only available for people repaying through the Direct Loan program. Beginning on July 1, individuals that had previously consolidated with a private company in the FFEL program (i.e., Sallie Mae, Wells Fargo, etc.) will be able to reconsolidate into the Direct Loan program to be eligible for the public service loan forgiveness (http://loanconsolidation.ed.gov).

* Remember that to be eligible for the loan forgiveness, you need to be in one of three repayment plans: standard, income contingent, or income based (not available until July 2009). If you're in a different repayment option, you can switch to one of these plans at any time. Your ten years of "clocked" payment time (to meet the forgiveness criteria) could begin as early as last October (10/07) if you had been using one of these repayment plans [per prior tip instruction].

* If you are unsure of the types of loans you have or whether they have been consolidated, you can find out at NSLDS (http://www.nslds.ed.gov/nslds_SA/).

* The Project on Student Debt provides a nice overview of federal loan terms and rates for 2008-09 (http://projectonstudentdebt.org/files/pub/2008-09_loan_terms.pdf).

June 16, 2008


The pros and cons of credit cards are well documented and seem to be understood [although many people continue to fall into the CC trap]. In a stark contrast to credit cards, debit cards enable consumers to make purchases with existing money (checking account), avoiding the prominent problem that credit cards promote (get today, pay for it later).

Although debit cards typically look like a credit card (Visa or Mastercard logo on it), that is where the similarities really end. The Privacy Rights Clearinghouse (a consumer rights organization) does a great job outlining the drawbacks of debit cards ...

- Do not have the same legal protections as credit cards. Legal liability with a lost or stolen credit card is a maximum of $50. With a debit card, federal law limits your liability to $50 only if you notify your financial institution within two business days of the theft ($500 if you don't meet the two day deadline). Experience has found that in many instances, although stolen funds are eventually replenished, the compromised funds are usually not available during the interim (a deficiency most people aren't prepared financially to deal with effectively).

- Consumer protections for debit cards are not as strong as those for credit cards. Because funds are withdrawn from your account quickly, you aren't able to 'stop payment' during a dispute.

- Payment acceptance. Many large rental car firms [namely Hertz and Avis] have stopped people from renting cars using debit cards (you can pay for the rental after, you simply can't reserve the car with a debit card).

- Merchant 'blocking'. A common practice where merchants withhold an amount on a debit card until the transaction is fully processed. Hotels, gas stations and rental car agencies are the most common culprits of this practice. Because the "held" amount is 'unavailable' in your account, it can cause the account to be overdrafted.

- Can be charged for 'potential' overdrafts. With signature (non-pin) transactions, the debit is processed through a credit card payment system [meaning the money will take a couple days to clear your account]. Even though the money is 'physically' in your account, some banks will charge an overdraft fee if the pending activity exceeds the available balance, even if the balance is sufficient to cover the debit when it finally posts.

- Debit cards aren't necessarily a way to avoid debt. One common reason debit cards are favored by some over credit cards is "fiscal responsibility" - not allowing one to spend money they don't have. The reality? Some banks will process debit card charges despite insufficient account balances, creating overdraft fees and undermining your management system.

- Debit card usage. Many card issuers limit the number of uses each month; after that, fees are charged. Some will enforce maximum daily spending limits.

- Credit. Using a debit card to the exclusion of a credit card can affect your creditworthiness ... a debit card won't build your credit. That may or may not matter to you, but is worth consideration. Obviously good credit is important when searching for credit (car loan, mortgage, insurance, etc.).

To learn more, visit: http://www.privacyrights.org/

June 04, 2008


I have written regularly about the importance of information (to be able to make informed decisions); and some of the more common barriers to making sound choices. Notable among these roadblocks are misinformation, fear, greed, pride, and desperation. Today, I want to write about a commonly overlooked pitfall - overconfidence ...

One of the most common biases researchers have documented is our natural tendency to be overconfident about beliefs and abilities as well as overoptimistic about our assessments of the future. One illustration I always find humorous is where large groups of participants are questioned about their competence as auto drivers [in relation to the average driver in the group as well as to everyone who drives a car]. Obviously driving a car is a risky activity and skill plays an important role. In the case of college students, 80 to 90% believed they were more skillful, safer drivers than others in the class. In another experiment involving students, people were asked about likely future outcomes for themselves and their roommates. They typically had very idealistic views about their own futures (i.e., successful careers, good health, happy marriages, etc.). When asked to speculate about their roommates' futures, their responses were far different ... they were far more likely to become alcoholics, suffer illnesses, get divorced, and a plethora of other unfavorable outcomes. Different studies reveal similar phenomena (when asked to rank how well people get along with others, 100% of respondents ranked themselves in the top half of the population; 25% believed that they were in the top 1% of the population). I think you get my point.

Many researchers have argued that this tendency to be overconfident is particularly strong among investors. More than most other groups, investors tend to exaggerate their own skill and deny the role of chance. They overestimate their own knowledge, underestimate the risks involved, and exaggerate their ability to control events. Research conducted (by Odean & Barber) found that the more individual investors traded, the worse the return/performance [and male investors traded much more than women, with correspondingly poorer results]. Many potential explanations exist for this "illusion" of financial skill; having a selective memory of success is a likely culprit in many instances. In hindsight, it is easy to convince yourself that you knew Google was going to be a great investment. People are prone to attribute any good outcome to their own abilities and rationalize away bad outcomes as resulting from unusual external events (outside of our control).

Just some food for thought as you make your daily financial decisions ...