Updated on 11.09.11

Reader Mailbag: Focus On, Focus Off

Trent Hamm

What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Refinance timing question
2. Encouraging better financial choices
3. Old credit card debt
4. Nostalgia battles
5. Self control and financial drought
6. Risk and living off investments
7. Good customer rewards program
8. Banking on Obama’s loan plan
9. Preparing for a baby
10. Thanksgiving traditions

One topic I often write about on The Simple Dollar is focus. While I write sometimes about tactics I use for improving my focus on the task at hand (thus improving my work, thus increasing my income and improving my career), there are still factors I can’t control.

For example, it doesn’t matter how much I try, there are still some periods where focus just doesn’t come to me. I’ve been struggling with this mightily all day today.

There are also times where unexpected events destroy my focus. Last night, our 1 1/2 year old woke up several times in the night, apparently from bad dreams. A poor night of sleep completely destroys my focus.

My take on it? Spend your time worrying about the things you can control (like tactics for improving your focus) and not worrying about the things you can’t (biological and life quirks).

Q1: Refinance timing question
In May of 2008 I purchased a home for $210,000. After closing and 10% down I was left with a mortgage of $192,315 at 6.8%. I could not refinance until 4 years into the mortgage due to a 1st time home buyer program (which will be this upcoming May of 2012). I increased my monthly payments by $375 in April 2010 and that has been applied to the principal which is now down to $177,070. My original goal was to be close to having 20% of the home paid off by the time I was able to refinance. If the house still appraised for $210,000 I would need to owe $168,000. My only other debts are a college loan of $30,000 at 3.5% and approx $4,000 on my wife’s auto loan.

Should I refinance as soon as possible, in May of 2012, with hopes of lowering the interest rate to 4-4.5%. I only plan on staying in the house for another 3-4 years, how much would the closing costs have to be to offset the savings in the interest rate? What’s the difference (or benefit) between a 10, 15 or 30 year mortgage if I don’t plan on staying in the house that long?

My wife was never a big fan of paying extra into the mortgage to lower what we owe on the house. She would have rather opened a new savings account and used that $375 a month in savings for a down payment for the future house. I thought the payments on the mortgage were like saving the 6.8% interest as opposed to only receiving a 1% interest rate in a savings account. Am I right with this assumption or is she right? If the housing market were to continue to go down we would eventually owe that money one way or the other right, so why not pay it down and stay ahead of the market?
– Shane

You’re right in that putting extra money into the mortgage will effectively earn you that interest rate.

However, the big disadvantage that it holds is that money put into your mortgage is really not very liquid at all. You can only recoup it if you sell the house or if you pay off the entire mortgage and have a payment-free period, as a home equity loan essentially undoes the good work you’ve done by paying ahead.

The savings account, while not earning much of an interest rate, is highly liquid. You can easily take it and use it for whatever you need to in life.

My feeling is that once you have a cash emergency fund built up in savings to handle what life may throw at you, you’re better off paying ahead on the mortgage.

Q2: Encouraging better financial choices
I’ve been reading your blog for a while now, and I see a lot of similarities between your family money situation growing up and my own. We were a family of 6 (dad, mom, and 4 kids) with only my dad working. Money was always super tight, and I remember it being a constant struggle to make ends meet.

Now, I’m 27 years old and have “made it” in my family’s eyes. I went to college and earned my BS in accounting and my MBA. I work in the accounting department at a local bank. We have two early-mid 2000 vehicles that are paid off, have no credit card debt, contribute to my 401k and save regularly from each paycheck. Not that we’re rich by any means, however. I make $48k a year (decent money for the Midwest (Indiana), we eat almost all our meals at home, we don’t have cable tv or expensive hobbies. Basically, I like to think we’re making good long-term financial decisions.

The older I get, the more clearly I see the poor financial decisions that my parents have been making my entire life. They struggle and struggle to put food on the table and pay bills, but they’re making a two-day trip (gas, hotel, food) to visit my sister at college (6 hrs away) when she’s going to be home in two weeks for Thanksgiving anyway. Whenever we visit with my parents, most of the conversation topics they bring up are about their money troubles. I think it’s their subtle way of trying to get me to feel sorry for them and give them money (which I will not do). I’ve offered to sit down and go over their finances with them to see where they can do things differently, but they are not interested.

My question to you is how/if you’ve had any success in getting your family to make better financial decisions. Any advice is appreciated.
– Chris

To put it simply, you can lead a horse to water but you can’t make it drink.

A foundation of sensible financial choices can’t be built from the outside. It can only be built from the inside through a person’s desire to improve their situation and the willpower to make the hard calls to make it happen.

When you’re on the outside – as you are – pushing people to make changes they don’t want to make does nothing but cause relationship friction.

Your best approach is to simply be passive about it. Encourage the good behaviors that they mention by speaking positively about them. Drop an applicable tip for saving money every once in a while. Most importantly, prepare your own financial situation so that you can survive whatever they do.

Q3: Old credit card debt
I have had a few credit cards go into collections and 3rd party collection agencies. My question is what is the best way to pay these credit cards? I havent paid on these cards in 4 to 5 years.

– Daniel

The first thing I’d do is get a copy of my credit report from the federal government (using their annual credit report tool). Find out what debts are actually listed there, then track these debts down.

Before you do this, though, a caveat. It is awesome that you’re doing the right thing and paying off your debts. It’s the responsible human thing to do. However, strictly in terms of your credit, seeking out these debts at this point will do far more harm to your credit score than good. After seven years, unpaid debts vanish from your credit history.

I think this policy is completely broken and rewards dishonesty and avoidance of debt past a certain point, but it’s how the credit game works. As for me, I’d still do the right thing and pay it off.

Q4: Nostalgia battles
One thing I can’t help but notice is that everything old is constantly new again. Companies seem to constantly bring out revisions of things that I loved from my childhood and I find that I have a weakness toward them simply because of the fond memories they bring about. How do you fight this?

– Amy

I usually combat this type of sentiment by asking myself, “Why am I buying this?”

Almost always, items that I’m buying because they hit a nostalgic nerve completely fail this test. I usually don’t have a good reason for buying the item. I usually only picked it up because it hit some emotional response to something good that happened in my childhood.

I try to ask that question of everything that I buy.

Q5: Self control and financial drought
A lot of your advice is going to necessarily be for people who have some sort of income, but I don’t, and I haven’t for two years. I’m disabled, and if all goes well I’ll have SSI sometime in the next six months.

My question is this: how do you spend enough after the drought that you don’t spend too much? How can I restrict my spending when I’ve had so little? I have a list of bills to clear and things that absolutely must be bought, but I also want to set aside a little bit so that I’m not tempted to spend a lot. For the last two years I’ve had NO income, no spending money, nothing except food, shelter, and the occasional necessary item gifted. Christmas and gift money went into purchasing things I needed. (Mostly toothpaste, meds, and toiletries. The only treats I’ve had have been comfort foods with my food stamps.) I’m really scared that I won’t be able to control myself when I do have money after this drought! Do you have any advice?
– Veronica

The technique to use here is what is commonly called “paying yourself first.”

Simply put, the second you get a paycheck from SSI, you take it to the bank and put most of it in checking, but some of it straight into a savings account, not to be touched until you absolutely need it. Do this right off the bat, before it even touches your checking account.

Then, forget about that savings account. Only pay attention to it if there’s a very good reason for using it, such as a deep emergency or something like that. Don’t use it to buy anything that isn’t incredibly vital.

In other words, live on less than you make and bank the difference until that rainy day comes along when you’ll need that difference.

Q6: Risk and living off investments
I have 2 questions. I have no debt of any kind. I am also unemployed for 4 months now. Since I had my savings, a decent apartment and received a handsome severance money, I am not only been able to survive but also am earning income around 70% of my last take home salary every month by investing my funds in different asset classes.

This earning is sufficient for my monthly expenses but I won’t be able to save unless I take some business risks to increase my income. I want personal freedom like you but my wife is very upset and is pressing me to find a job. We both are from middle class families and have been taught to take control of our spending habits and finances by our parents. She is of the view that I am walking on a thin string and if there is a drop in income for few months, we have to eat our savings which will deplete our net worth. I like my job and will consider working again if there is an offer, however the jobs are not available even at a lower grade or a lower salary. Being realistic, the best option for me seems to be doing my own thing.

Now my first question: How should I convince my wife that I have to take some risks with our wealth under present situation.

Second question: What’s your view on decrease in net worth due to decline in income.
– Roger

It depends on how much risk you’re already taking on to earn that 70% of your take home.

Quite often, when we’re doing well with our investments, it’s really easy to minimize the risks in our head. We see how the returns keep flowing in and, by simple human nature, we project the same results down the road. This is more or less how the banks got into trouble with the housing market during the last decade.

You need to look carefully at the long term history of what you’re investing in and ask yourself what would happen if 2012 were equal to the worst year in the history of those investments. How bad would your financial situation be then? How much of your life savings would you lose? Are you comfortable with that? Is your wife comfortable with that?

If you can’t make that case, then you’re already into too much risk.

Q7: Good customer rewards program
There’s a new grocery store in our area that operates on a “customer rewards” basis. Basically, you get a card and use it each time you shop. When you rack up a certain dollar amount in receipts over the last twelve months, you get a discount level on your entire purchase. If you get to higher levels, you get a higher discount. Now, without the discount levels, the prices there are just a bit higher than the store I shop at, with prices like $3.09 for the juice my kids like versus $2.99 at my store. However, at higher levels the prices are lower. Is it worth it to shop there?

– Karen

It depends on the specifics of the program. How long does it take to hit these reward levels?

If you can get to a level that causes your prices to be lower in just a month or two of normal shopping, then the long term savings you’ll get from being a customer there will save you money over the long run.

However, if it looks like it will take many months or years for you to reach those levels, it’s probably not worth the switch.

Customer rewards programs tend to help out the high-volume customers much more than the low-volume customers.

Q8: Banking on Obama’s loan plan
After 10 years of college I now have $90k in federal student loans (already consolidated, less than 5% interest rate). I make less than half of that for my annual salary, I have been making payments for almost 5 years now and have no other debt other than my mortgage. My question is should I try to lower my payment and only pay the minimum for the next 15 years and let the rest be forgiven per Obama’s plan? Is there something I’m missing?

– Amber

I would never change my financial planning based on the promises of a politician. I probably wouldn’t even alter my plans if there were a law on the books offering loan forgiveness.

Simply put, I don’t trust such programs. They change constantly depending on the priorities of the leaders in charge at the moment. In six years, we will have a different president and a significantly altered Congress. Will they be in favor of forgiveness?

Assume you’re going to be paying your debt according to the agreement already in place. If something better happens and you can quickly take advantage of it, great. However, don’t alter your plans because of what might be there in fifteen years.

Q9: Preparing for a baby
My wife and I recently learned the terrific news that we’ll be having a baby! It will be our first, so we are learning all that we can. Could you recommend some personal finance resources geared toward this big change? Or could you directly suggest any steps that we should take to prepare?

My wife and I are nearing 30 and make modest salaries. Importantly, we have chosen to live within our means; we recently bought our first house with a large downpayment and have built up an emergency fund that could cover our (current) expenses for six months. We are saving for retirement and so far have been fortunate enough to be able to plan for and fully save for several significant home repairs. Our immediate goal is to have some flexibility regarding my wife’s work schedule; we’d love for her to work her job part-time or even quit so that she can be there full time when our baby is born. A longer term goal is to get our child off to a good start financially by being able to support and develop his/her various interests (sports, hobbies, etc.). I think we have a solid foundation in place but I want to go the extra mile to get our expanded family off to the right start.
– Matt

I think you’ve got everything you need already in place. There’s really no special trick with regards to being financially ready for a baby to come. You’re going to have some extra expenses, particularly right off the bat, but it sounds like you’re completely ready for them.

Instead, I’d mostly focus on what it takes to be a good parent.

I’m going to give you the one piece of advice that I think is the most important thing expectant parents need to hear. This is the big one, right here. When being a parent gets hard, talk to your spouse about it, and when your spouse is talking about the challenges of it, listen. Communicate with each other. There are going to be times when this is hard. There are going to be times when your spouse is frustrated and you’re exhausted. Be willing to tell each other what’s hard and listen when the other one is talking. You’re a team, and a team doesn’t function well if one person is really struggling.

Q10: Thanksgiving traditions
For the first time, my family is going to be speding Thanksgiving at home without visiting other family. My wife and I want to make this very special and start establishing some traditions for our family (we have two kids, 7 and 6). Do you have any thoughts/suggestions?

– Reggie

It really depends on your specific family and what’s important to you guys. I think the best answer I can give is to share our own Thanksgiving traditions.

We usually have a meal on Thanksgiving Day both with my parents and with my wife’s parents. We usually try to fill the day after Thanksgiving with purely family-oriented activities, usually including a movie (this year, I think we’re going to see the Muppet movie). We usually also go to a holiday parade that’s in our area. The Sunday after Thanksgiving, we all participate in decorating the house together for Christmas.

Mostly, though, it’s just spending a lot of time together and enjoying being together. Time together is far more important than formal traditions.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

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  1. Johanna says:

    Q3: “However, strictly in terms of your credit, seeking out these debts at this point will do far more harm to your credit score than good. After seven years, unpaid debts vanish from your credit history.”

    Wrong, wrong, wrong. By law, unpaid debts vanish from your credit history after seven years *whether you pay them off or not*. But if you don’t pay them off, and they fall off your credit report, you can (in some cases) still be sued for the debt, which would again harm your credit.

    To answer Daniel’s actual question: The best thing to do is to get an agreement in writing with the collection agencies before you send them any money. Get them to agree to how much you owe (or how much you will pay them for them to consider the debt settled), the date of first delinquency (it should be six months after you last made a payment on the account – this is the date that determines when the debt falls off your credit report, so it’s important for it to be reported accurately), and whether they will report the debt as “paid in full,” “paid as agreed,” “settled,” or something else (these all have different meanings).

  2. Baley says:

    Matt (Q9): I wish I had such a great start as you do when beginning with a baby! The one best tip I have for saving money: investigate cloth diapers. They’re amazing and save thousands of dollars! They’re good for more reasons than just saving money, but that’s why we started cloth diapering.

  3. Johanna says:

    Q8: As far as I can tell, “Obama’s loan plan” is a modification to the Income Based Repayment system. IBRs aren’t a “promise of a politician,” they’re a thing that already exists, and there are calculators you can use to figure out if an IBR would save you any money. In your case, it sounds like it might.

  4. valleycat1 says:

    Q3 – Actually, Daniel, the first thing you need to do is check to see what your state’s statute of limitations is on old debts. It can vary from 4-7 (or more) years. THEN check your credit reports to see if any of them are being reported there (not all are). THEN contact the agencies, and I agree with Johanna that you need to get everything in writing.

  5. valleycat1 says:

    Q3 – and, although I firmly believe in paying off loans and credit cards if you can afford to, not everyone who has bad debts is a slacker. Loans and credit card agreements are legal agreements subject to laws that protect the lender and the borrower, for that very reason. There may be some people who recklessly run up debts knowing they’ll eventually go away, but who really wants to spend their life dealing with collection agencies?

    I saw a really great discussion of the line between morality and legal responsibilities yesterday in the New York Times – an article about how a financial expert lost his house. I recommend you read it. Basically, there comes a point where it’s more moral to take care of yourself and your family today rather than throwing money at a bad debt that’s going to be written off anyway.

  6. Johanna says:

    Good point on the statute of limitations, valleycat. But the statute of limitations “clock” can be reset, and the types of actions that reset it vary from state to state, so it’s complicated. If, once you’ve looked into this, you think that the time limit allowed by the statute of limitations may have run out (or may run out soon), your next step should probably be to meet with a lawyer, to make sure you don’t mess anything up going forward.

  7. Tom says:

    How do you title Q1 Refinance Timing Question, and then not try and tackle the question of when/if he should refinance? I guess you do need more sleep!

    Generally speaking, a refinance takes between 1-2 years to break even, depending on how much your rate is dropping and how much closing will cost. I think refinance closings are also generally cheaper than purchasing closings. So if you’re really going to be there 4 years, you should come out ahead by refinancing.

  8. Tom says:

    So to follow-up, I plugged your numbers into my mortgage amortization sheet, and it shows that after your May 2012 payment (with the extra 375 principal ongoing from Apr2010), You should be sitting at a loan balance of about $170,300. Maybe you’ll have an extra $2k on hand to bring the equity to the 20% mark. Two big assumptions come next: assuming the house is worth $210k at time of refinance, and assuming you can refinance to 4.5%, your new payment would be about $851 for principal and interest, saving you about $380 a month. Divide your closing costs by $380 to find the specific break even point in months, eg, if it would be $2500 to close, $2500/$380 = about 7 months.
    Or, another way, you’ll save $380×48 months = $18,240 in payments over the next 4 years you live there.

  9. Becca says:

    Q8. I have had two good-paying careers, and neither required a four-year degree. I chose degree-less professions in great part to avoid college debt. In doing this I accepted the tradeoff that I might earn less or have a less exciting career. So my question to Amber is, as a taxpayer, why should I help to pay for your college debt?

  10. Jayme says:

    Q1 – I agree. Definitely pay down the mortgage, assuming you have an adequate emergency fund. Especially if the savings was targeted for the next house. Every penny you pay down on THIS house just comes right back to you when you go to buy the NEXT house.

    But I thought you could refinance before the 4 years were up – you just couldn’t move.

    Q3 – just don’t contact them until you are able to pay. Don’t wake a sleeping giant just to tell them “go take a nap”.

  11. Johanna says:

    @Becca: Because the law requires you to pay your taxes. You could try not paying your taxes, and see what happens, but I don’t recommend it.

  12. Katie says:

    Becca, because you will probably, at points in your life, seek medical specialists or accounting advice or maybe need a lawyer to help you, or you might have children who you want taught, and it behooves you to have a society with a supply of people who now how to do those things.

    Also, because you might want future yous to have chances you never got.

  13. Johanna says:

    Also, @Becca: “neither required a four-year degree” – Does that mean that one or both of them required a two-year degree? From a community college, perhaps? You know why community colleges are so cheap, don’t you?

  14. valleycat1 says:

    Q10 – [Reposting to try to circumvent my earlier response that’s in moderation, so this may end up an -almost- duplicate]

    Here’s some of what has worked for us (a combo of my family’s and my spouse’s traditions): We have always have a specific dip & chip snack available(for at least the last 50 years!) as the aromas from the meal start setting off hunger pangs . A special tablecloth. A traditional blessing or sharing what we’re each thankful for, to start the meal. Toast the cook(s)! Make an informal ceremony/big deal of carving the turkey. A certain combination of foods (each person in the family gets to select one side dish they want served, which is surprisingly consistent one year to the next) – or always having one new recipe tried out. Let the kids make decorations or place cards for the table. Eat by candlelight. Perhaps always having turkey sandwiches at dinner (if you do the big meal at lunch), or a final dessert together later at night. Everyone takes a walk around the neighborhood after the meal.

  15. Tom says:

    Not to pile on Becca, but 20 years of student loan paying (what this person is looking to do) is a net profit on interest collected for the government, not a burden on taxpayers. The government collects less money if the person chose the standard 10 year repayment plan (with unaffordable payments in their case).

  16. jim says:

    Q1 Shane : First I wouldn’t assume the property is still worth what you paid for it unless you have good reason to think so. Many/most places have lost value since 2008. Check Zillow and Eppraisal first to see what they say. You may be underwater. If you house is definitely retained all its value then you might look into a no cost or streamline refinance. Some lenders will let you refinance the mortgage with them for low cost or no cost. They keep you as a customer that way. Or you can find a mortgage broker to do a no cost refinance. If you pay negative points it could cover the closing costs and still get you 4.5-5% essentially for free. Closing will be ballpark $1500-$2500 plus pay up for taxes into escrow maybe. Dropping from 6.8% to 4.5% would save you 1.3% annually in interest and on a $168k loan thats $2184 /yr.

    Q4 Amy : Its not entirely clear what the problem is. I guess the implication is that you can’t afford the stuff you’re buying? If so, then budget an amount for such things that you enjoy and/or find other cheaper ways to enjoy them. e.g. if you love the Smurfs and see new Smurf merchandise for sale you don’t need to buy it. Instead shop ebay or thrift stores for bargains on original Smurf collectibles. Or just shop for bargains in general. Budget yourself X amount to spend and then don’t buy the things you see till you find it for 20% cheaper.

    Q6 Roger : Your wife is right that if you have a drop in income it will eat your savings and cut your ability to support yourself. Whats YOUR answer to having a bad month or two or eight? Taking yet more risks just snowballs the problem for the next time you have a bad stretch. It doesn’t sound like your investments are safe at all. Sounds more like you’re daytrading or something. If you’re investing in stocks or whatever then its risky and its only a matter of time till you lose a considerable chunk of money. If your investments are stable and safe then thats another thing, but it really doesn’t sound like it. I think maybe you’re not quite ready for what you’re doing. You need a plan to ensure adequate income to support your family long term. A certain amount of your investments should be in SAFE vehicles that give you a good solid return to pay your basic bills. Then the rest of your money can be used in your riskier investments. If you could swing that now then try suggesting it to your wife. If you can’t even manage that now with your assets then you need to build more assets before you try living off them full time.

    Q8 Amber : Yes if you qualify for lower payments then do it. However be aware that if your income goes up then your payments may go up. And if you do IBR then it may extend your repayment period and accrue interest. Its not just free money, its meant to help people who struggle with payments. So if things turn around and you can afford more then you may have to pay up. Just be aware of that. If it works for you then do it, I don’t really see a downside.

  17. valleycat1 says:

    Since so many people have invoked why their tax dollars should go to someone else, here’s a break down of $1.00 paid to IRS (US) from cleveland dot com published april 8 2011:
    Military: 27.4 cents
    (Includes 7.6 cents for weapons development and acquisition. Also 5.6 cents for the wars in Iraq and Afghanistan.)
    Health: 21.5 cents
    (Includes 1/10 of 1 cent for Planned Parenthood. Also, 2/7 of one cent for the Children’s Health Insurance Program.)
    Interest on the National Debt: 13.8 cents
    Income Security and Labor: 10.9 cents
    (Includes 2/3 of 1 cent for Temporary Assistance to Needy Families, commonly referred to as welfare.)
    Housing and Community: 4.9 cents
    (Includes 1/5 of 1 cent for Community Development Block Grants. Also, 1/3 of 1 cent for Section 8 low-income housing)
    Food: 4.2 cents
    (Includes 1/4 of 1 cent for the Women, Infants and Children supplemental food program)
    Veterans Benefits: 3.9 cents
    (Includes 1/3 of 1 cent for veterans medical services)
    Education: 3.5 cents
    (Includes 6/10 of a cent for Pell grants. Also 1/4 of 1 cent for Head Start)
    Government and Commerce: 3.3 cents
    (Includes nearly 2/10th of 1 cent for Corporation for Public Broadcasting. A tiny portion of that includes federal grants to National Public Radio).
    Energy, Environment and Science: 3.0 cents
    (Includes 2/3 of 1 cent for weatherization assistance; 1/6 of 1 cent low-income home energy assistance)
    Transportation: 2.2 cents
    International affairs: 1.2 cents

  18. Wes says:

    Q8 – I thought that only applied to federal guarenteed loans? If you consolidated, wouldn’t you have done that through a private institution and thus not qualify?

  19. Wes says:

    Valleycat, thank you for the information. But readers take note: tax expenditures (that is, deductions for things such as mortgage interest, certain medical expenses, charitable contributions, other (not fed) taxes, personal and dependency exemptions, etc.) are functionally the same as government expenditures. If these deductions are not factored into Cleveland’s analysis, then the actual proportions may be off. I don’t know whether or not Cleveland has factored these in, but the way the analysis is framed suggests it did not.

  20. Wes says:

    That’s kind of funny, two separate Wes’s commented back to back (I am the latter).

  21. MattJ says:

    #19 Wes:

    Huh? Could you clarify? For instance, how are my charitable contributions functionally equivalent to government expenditures?

  22. MattJ says:

    #19 Wes:

    Never mind, I misread your sentence. Still not sure what your point is, exactly.

    Are you claiming that any taxes not collected are somehow equivalent to spending?

  23. getagrip says:

    Q1 Go to some online calculators and run the numbers (bankrate.com comes to mind). I think you’ll learn more and understand your options better if you run the numbers yourself rather than asking Trent to do it. With those plug and chug style calculators you should get answers to most of your questions fairly quickly. With respect to closing costs and making that up, the difference shouldn’t be much greater than how much you paid the first time, that’s a good indicator for what they’ll be next time. Verify what your house is worth, as others have already suggested. I’d recommend doing this by checking online but more so by checking what similar houses are going for in the nearby area (better indicator IMHO than zillow which can be a year or more behind the curve). A local paper typically includes these numbers in their real estate section.

    Q2 Trent’s advice is spot on. In essense your attempts to tell them what they are doing isn’t helping their finances is telling them they’re doing it wrong, which triggers a whole host of emotional baggage. On the other hand sometimes people may have a different thought process on what they feel is important or in addressing what concerns them. For example, your parents may have alternative or additional motives for visiting your sister that they’re not sharing with you (maybe they’re worried about something). Regardless, it’s hard for a parent to have their child tell them how they’re potentially messing up. I spent many years suggesting things to my mother only to watch her do what she wanted to do in the first place no matter the consequences. For more solid tips there are some family and money books you could look into that may have some more solid suggestions (I think there was one by Charles Schwab’s daughter).

  24. Wes says:


    I am not saying that any taxes not collected are somehow equivalent to spending, though I can see how you might infer that.

    It is deductions, credits, etc. that are equivalent to spending. For instance, the first time homebuyer credit. If you bought a home when the credit was available, you got an $8k credit (or something like that, I don’t recall the specifics). The credit had very specific paramaters: first time, buying a home, and probably several others, with a few exceptions and special circumstances to boot. Functionally, this is exactly the same as if the government sent people $8k checks from the treasurey for buying a home under the same circumstances.

    Your charitable deductions (just the deduction you take on your taxes, not the whole gift) are functionally equivalent to expenditures for the same reason. Instead of allowing you to pay $20 less on your taxes because you gave a $100 gift to a charity, the government could have just as easily sent you a check in the mail for $20 (assuming a 20% marginal rate).

    That these expenditures are not included in analyses such as Cleveland’s (offered by vallycat) mean that those analyses are not showing an accurate picture of government spending. That is, the analysis may not include the $20 you deducted from your taxes for making the contribution or the $8k you deducted for buying a house.

    But, this $8,020 is effectively government spending whenever the government is spending more than it collects in taxes. That’s because whatever it doesn’t collect it must finance with debt. So the $8,020 becomes the present value of the amount we must collect in the future to pay off today’s deficit.

    Thus, the point is that the analysis offered by valleycat may distort actual spending. Such information is often given for the shock value (i.e., “we spend that much on defense but so little on welfare?”), but when you consider the fact that a lot of welfare programs are done through tax expenditures, you realize that you aren’t getting the whole picture by simply looking at actual government expenditures.

  25. Wes says:

    That last word should probably be “spending,” not “expenditures.”

  26. Jonathan says:

    I am a big proponent of government sponsored social programs. Probably more so than more of the commenters here, at least based on some of the previous discusses I’ve read on the topics. I am, however, against the plan to forgive student loans after a set amount of time.

    The difference between student loan forgiveness and other government programs is that student loans are optional (like mortgages). This is yet another situation where the government is rewarding bad behavior. If you took out more student loans that you can afford to repay, you get them forgiven. In other words, you received the benefits of the education without paying the full cost.

  27. Johanna says:

    @Jonathan: If somebody isn’t earning enough to repay their student loans, I’d argue that they haven’t really “received the benefits of the education.”

    People go to college for all sorts of reasons, and for most people it’s probably a combination of reasons, but the big one – and the really big reason why people are willing to borrow tens of thousands of dollars in the process – is the promise that a college degree will help you get a good job with a good salary.

  28. Josh says:

    The government should only offer loans/forgiveness to degrees that are needed such as engineering/medical, etc…

    No loans or subsidies should be available for most liberal arts degrees and similar degrees that will never pay off. If someone wants these, it should be considered a luxury that they need to pay for themselves.

  29. Becca says:

    Q8. I first went to a technical school that was extremely cheap. It was a private school, so not subsidized by tax dollars. Some of the money came from a grandfather, and I also worked while going to school. After about a decade in that field, I started a business in an unrelated field, and it has done quite well.

    However, I happily pay taxes to support community college. Community college puts higher education in reach of just about anyone, and is cheap enough that one can go without taking on loans. I have siblings that did this. They worked in grocery stores while going to school. Community college is also a reasonable first step to a four-year degree. Community college gives a lot of bang for the buck and is an example of smart government spending.

    I am not questioning there should be student loans. I just don’t understand loan forgiveness. I think that this could be “moral hazard.” What’s to stop people from piling up massive debts for say, for degrees in basket weaving? I don’t mean to sound ignorant, I have relatives with degrees in things which never yielded decent-paying careers, like cultural anthropology.

    My understanding is that you have to pay only 10% of your annual income over 150% of the poverty level, and that loans are forgiven after 20 years. It seems to me possible that this is a net loss for taxpayers. Maybe I don’t understand something here.

    There are economists now beginning to question if college loans are the next big bubble to burst. This year, for the first time we have more college-loan debt than credit card debt, over a trillion dollars. At the same time we have an excess of people with degrees in many fields. In my region of the country, we have had a glut of teachers for a couple decades.

    There are fields, such as law enforcement, that you now need a four-year degree just to compete for jobs with other people who have four-year degrees. I know this because I have family in law enforcement. After you get hired, you then spend another six months in police academy. It used to be you didn’t need four years of college to be a police officer.

    It seems to me that we are spiraling this college thing upwards. Since tuition rises way faster than inflation (fueled by easy student loans) then the answer seems to be everyone just needs more education to compete with everyone else who has more education. So more student debt for ever increasing loans that will be increasingly difficult to repay, so more tax-payer funded debt forgiveness.

    Debt forgiveness doesn’t address why college has gotten so expensive, and may also contribute to the increase in costs.

    Go ahead and pile on more. I have been better trying to understand this.

  30. jackowick says:

    Q1 (and addressing a lot of bits and pieces in the thread)

    You home value, Zillowed or otherwise is a completely localized market for comparison and value. I live in a town where the price range and features have stayed put since 2008 (yes, I have not lost gained value since 2008) but I did a refi 1 year in (yes, I did, because I missed the rebate and special programs)

    Doing it through my credit union, costs for closing were *cheap but given a low interest rate and knocking off about a point still made the math work that I’d have to do about 4 years to “break even” on the refi. Again, this is a case to case calculation.

    So my questions to the reader mail are:

    1) Do you NEED that new house in 3-4 years? This is often a lose-lose conversation if a spouse has their mind set on it, but I have to ask.

    2) Putting that $375 to work in any form is better than nothing. I’d offer a compromise to my wife of splitting it $125 each towards paying down existing mortgage, increasing savings towards a new home, and paying off her car loan (depending on car loan terms of course. I could write a side article on how Toyota misled i.e. lied to my mom about the financing terms with their “finance” manager at the dealership… but my point is, all things being normal, assuming you can pay the car loan off ahead of time)

    3) If your wife feels strongly about her plan of saving cash down for the new house, and not knowing her financial abilities, just tell her to make the case with numbers and say “if you can show me why, then we’ll do it your way”.

    I’m a big fan though of the King Solomon “split all the money across the plans” method though…

    We get spoiled by, yes, making our money work towards the biggest payoff or flashiest result, but as long as the reader is doing SOMETHING with their money, I will always start with a thumbs up before being critical.

    And Johana, Q1 he’s not “Wrong Wrong Wrong”. He was strictly talking about the existing blemish on the credit report. I think you should either plug your financial blog outright or start one of your own. You can turn a 3 sentence question into a 3 paragraph answer.

  31. Jonathan says:

    @Johanna #27 – Forgiving these loans, however, allows people to not face the full consequences of their decisions. People need to realize that a college degree doesn’t always result in a high paying job and that thousands of dollars of student loans are not always a good investment. It seems unlikely that these lessons will be learned if we bail out those for who the student loans were a bad investment. What is next, forgiveness of debts for day traders who made bad investments in stocks purchased on margin?

  32. Johanna says:

    @Becca: “What’s to stop people from piling up massive debts for say, for degrees in basket weaving?”

    The limit on the amount you can borrow in federal student loans, for one. That limit is currently $31K total for an undergraduate degree, as I understand it. The people you see with federal student loan balances much higher than this are the ones that went for graduate and professional degrees – like in medicine, the sort of thing Josh says is “needed.”

  33. Johanna says:

    @Jonathan: “What is next, forgiveness of debts for day traders who made bad investments in stocks purchased on margin?”

    We have that already, I think. It’s called bankruptcy.

  34. Jonathan says:

    @Johanna – Even though I’m not a proponent of bankruptcy, at least it comes at some cost (a hit to one’s credit rating, etc).

  35. jim says:

    Becca: “It was a private school, so not subsidized by tax dollars.” Most private universities do receive federal subsidies via grants and federal financial aid.

  36. Johanna says:

    @Jonathan: To have your federal student loans forgiven, you have to make payments on them for 20 years (currently 25). That is “some cost.” Do you really think that people go to college planning to still be paying for it when they’re well into their 40s?

  37. jim says:

    If Amber’s income is $45k and she has $90k in eligible loans then her IBR payment woudl be around $360/month. If she made those payments for the current 25 year max to have the debt forgiven then she’d have paid $100,800 towards that $90,000 debt. Her payment would undoubtedly go up over the years as her income gradually rose so she’ll pay much more than that. So… IBR isn’t necessarily a ‘loss’ of money for the government.

  38. Jonathan says:

    @Johanna – No, I do not think that people plan to be paying for student loans for that long. I do think, however, that some people just make bad decisions. If someone believes that a college education is a worthwhile investment, then they should be willing to pay off their loans in full, even if it turns out it was a bad investment. When most people rack up credit card debt they don’t plan to be paying on the balance for years and years. I’m sure that most people think that they’ll pay it off in some reasonable amount of time. That doesn’t mean that after paying on it for 20 years they should just have the debt forgiven.

  39. Johanna says:

    @Jonathan: In this country, we believe that when you’re in too far over your head – whether you got there through bad decisions or through no fault of your own – you deserve a chance to wipe the slate clean. That’s why we have bankruptcy court and not debtors’ prisons.

    As you pointed out, with bankruptcy you get a black mark on your credit report, whereas with the IBR you don’t. But consider this: Bankruptcy falls off your credit report after 10 years. With the IBR, you don’t get anything until after 25 years.

  40. Jonathan says:

    @Johanna – Not everyone in this country feels the same way :-). Also, there are options other than bankruptcy or debtors’ prison. I’ve derailed the conversation, enough, however, so I’ll drop out and let the conversation get back to student loan forgiveness rather than bankruptcy.

  41. kristine says:

    Ditto all on the check your local statute on debt vanishment. And yes, if you get sued (which you will) it is a fresh item that takes another 7 years. And if you do pay it off, it s removed 7 years after the last transaction of payment, NOT 7 years after the debt was incurred. If you choose not to pay it, even acknowledging the debt over the phone can start the clock from zero again. Check your state laws.

    Sadly this, blog consistently gives incomplete and erroneous answers to this questions, that if the questioner does read the comments, could really effect them adversely.

  42. kristine says:

    “I think this policy is completely broken and rewards dishonesty and avoidance of debt past a certain point, but it’s how the credit game works. ” This is in regards to the 7 year statue of limitations. Well… I am not a believer, but the blogger self-proclaims to be one. Deuteronomy mandates the forgiving of loans at the 7 year point. I have often wondered if the normal statute was founded in that biblical directive. I used to know the exact verse, but maybe someone else does off the top of their head? I guess the bible condones that “game”. I think it is in the name of – oh, just get on with your life!

  43. David says:

    “At the end of every seven years thou shalt make a release. And this is the manner of the release: every creditor that lendeth ought unto his neighbour shall release it; he shall not exact it of his neighbour, or of his brother; because it is called the Lord’s release. Of a foreigner thou mayest exact it again: but that which is thine with thy brother thine hand shall release” (Deuteronomy 15, 1-3).

    These words are from the King James version of the book of Deuteronomy. I quote the archaic phrases in order not to put things simply – there is far too much of that around here.

  44. kristine says:

    Thanks David! Interesting that it does not apply to foreigners.

  45. Becca says:

    I definitely went to a private technical school, that not get any government money. It was a very small school unattached to any larger school system. It has since gone out of business. Whatever.

    Johanna, the website for Stafford loans says the max is $31,000 for dependent students but $57,500 for independent students for undergraduate degrees. The max if getting a graduate degree is $138,500.

    Does anyone understand what happened with the student loan program under Obamacare? I’ve been reading, but still don’t get it. Some how this was a federal takeover, but I am unsure if it means there would be no more private loans? If it’s all federal, aren’t the tax payers on the hook for a greater amount?

  46. Brandon says:

    @45 Becca

    Pres. Bush transferred administration of student loans to private companies – ie they managed federal loan dollars. In return, they had management fees that they tacked on, plus they handled customer “service”. Pres. Obama transferring administration of these loans back to the federal government.

    There was no takeover, they just stopped letting private companies lend federal dollars, it’s back to being direct. I’m not sure personally how adding a middle-man and a profit motive helped anyone, but it certainly let those companies make quite a bit of money.

    You can still get private loans, just as you could before the transfer to those private companies and back from those private companies.

    Taxpayers being on the hook hasn’t changed.

  47. Wes says:

    It’s not wise cherry-pick Bible verses that support your proposition. Aside from several theological and scriptural reasons why the OT law, out of its context, should not be adopted as civil law today (or even necessarily dictate the personal opinions of a follower), there are several blatantly obvious practical resons.

    1) The OT law was ex ante, not ex post. So people lending money did so knowing that if they didn’t get it back in 7 years, they weren’t getting it back. Loan foregiveness changes the rules after the money has changed hands.

    2) People did not buy unnecessary things with loans in the OT. They bought land to grow food or raise livestock. They did not buy consumer products or 4-year life experiences of dubious value.

    Others may include differences in legal duties the debtee owed the debtor, differences in how interest rates worked, etc.

    I firmly believe in the Bible, but to take parts of it out of context when you admitedly don’t follow its doctrine (and presumably haven’t studied it systematically in its entirety) is an outstanding example of using your ignorance recklessly, and to do so to further your own policy opinions makes it truly absurd.

  48. Tom says:

    #45, 46 – Obama shut down the FFELP program, where basically private companies originated federally guaranteed loans with their own money, using the same provisions as Federal Direct Loans. Anyone who puts “service” in sarcasti-quotes clearly has not dealt with Federal Direct Loan Services :) (ESPECIALLY since the new website has opened!). Say what you will about Sallie Mae and other private loan lenders, but this move was really about bringing student loan profits back to the government.

    Again, taxpayers are not on a hook for IBR loan forgiveness. See jim’s comment #37. That’s how the math is going to work out for most borrowers. I think an extremely limited number of people can truly “take advantage” of the government through this program, as it is currently designed. Everyone else who signs up for it is trading todays dollars for longer and more costly (read: more revenue for the government) loan repayment.

    And I’d love to know the economist that can explain how the student loan bubble will burst, given the lack of consumer protections relative to other loan products that have bubbled over. I have seen people predict the fall of for-profit institutions – I get how that can happen. But I don’t understand how student loans will be a bubble affecting the economy a la home mortgages.

  49. kristine says:


    I have studied the bible systematically, but it was many,many years ago; I am a former fundamentalist. Your presumption about me is wrong. I plainly pointed out my lack of up-to-date status. That said, I think it unwise to assign your own qualifiers to the bible. Historically your premise is sound, but the way I was taught was that the bible was not written for one point in time, but for all times, regardless of how we humans decide to change our legal system, or social expectations (part of the reason I left the reservation.) But heck- you believe, I don’t, and I think that is the feather I ruffled. In any case, the one question I asked, which you might have answered, was if anyone knows if the statue in our country had biblical roots.

  50. kristine says:

    The student loan bubble issue- I’m no economist, but here’s how I see it making sense. If a person can no longer pay their loans, and they are non-discharged in bankruptcy, they have 2 choices- buy nothing but essentials, and lower consumption of goods (we are consumption driven), or, go under the radar, and never be able to buy anything via loans- cars, homes, etc. And if under the radar, get paid and buy with cash, affecting the tax base as well. Or I guess, if unable to curb consumption, they can rack up other debt, or move home with parents (not setting up a household or buying new construction). It sounds anecdotal, but given the number of borrowers is huge, it could have a negative impact, the same as any widespread credit-damaging event. My daughter is going to have 24K in debt, and it gives me pause. But her major pays well, with growing demand, so I am optimistic, assuming no deflationary scenario. But yes, I can see her having to move home for bit first.

  51. valleycat1 says:

    Becca – There’s no such thing as Obamacare, and even if you want to use the term, it applies to medical insurance, not student financial aid.

    Folks, Bush and Obama didn’t make the rules. Congress does, and the current one is very obviously blocking the administration’s every action except for those things he’s having to resort to issuing executive orders for. Don’t blame the president these days, blame your congress members. In earlier years, the president was able to steer legislation, but now that we’re into the ‘elect an outsider to fix things’ mode, presidents don’t have the political capital or chits to call in to move things their way.

  52. Courtney20 says:

    @ Wes #18 – you can consolidate federal student loans and still have them with the government instead of a private lender (I did this in 2009).

    @ Tom #48 – my student loan will be paid off next month BECAUSE of the new website. I hate it. It’s not the right decision “mathematically” because the loan is only at 1.75% and the payment is only $52/month, but it’s not worth the frustration of dealing with that horrible website.


    @ valleycat1,
    I think Obamacare refers to the 2700 page bill and all that it contains. This was much more than medical insurance.

    Doesn’t it concern you that the President is able to create the effect of law by issuing executive orders rather than having the deliberation of the representatives of the people?

    In terms of Congress blocking measures; When was the last time the Democratic controlled Senate passed a budget? (Hint – it wasn’t this year or last year)

  54. Johanna says:

    “In terms of Congress blocking measures; When was the last time the Democratic controlled Senate passed a budget? (Hint – it wasn’t this year or last year)”

    That’s a trick question. We didn’t have a Democratic controlled Senate this year or last year. The Democrats were in the majority, but because of the filibuster and the abuse thereof, they were not in control.

  55. Tom says:

    valleycat – I don’t like the negative connotations the word carries, but when “Obamacare” refers to the Health Care and Education Reconciliation Act, that is where the rider was attached to end federally-backed, privately-funded student loans.

    Courtney – I wish I was in the same boat as you! What a nightmare the transition was, and I’m still not confident my Kwikpay is going to work.


    Are you actually arguing that one party doesn’t control the Senate unless they have more than 60 members?
    I assume you would also not refer to the House as Republican controlled as the Republicans don’t have enough votes to override a presidential veto.

  57. Johanna says:

    “Are you actually arguing that one party doesn’t control the Senate unless they have more than 60 members?”

    Only when the minority party abuses the filibuster. That hasn’t always been the case.

  58. AnnJo says:

    Johanna, The whole point of a filibuster is to allow a determined Senate minority to obstruct the passage of legislation. If it is used to obstruct, it’s being used correctly, not abusively. Of course the slim majority which is obstructed will regard any use of it as abusive, but they always use it exactly the same way when they are in the minority, so those protests are just bogus.

    The passage of important transformational legislation by slim majorities is invariably politically destabilizing. The increasing use of cloture votes is just a symptom, not the cause.

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