Friday, June 02, 2006

Financial fuss

Despite my starting school here with no educational loans at all, we're now pretty substantially in the red. The good news for us is that I consolidated the bulk of my loans when interest rates were at their historic low, fixing an interest rate less than 3%. Isn't that less than inflation? That seems to be a pretty good deal!

We went to a financial planning seminar especially for new graduates offered by a local business to attract new clients. There we were told that the "strategic" thing to do is enter the extended payment plan and continue payback over 30 years. Sure, your total interest paid goes up, but you have the advantage of capital on hand throughout those 30 years that you otherwise would have had to pay high interest on. Makes sense... but...

We had a special sacrament meeting the other day in which our bishop relayed a message from the stake presidency regarding assistance from public programs. It was not specifically directed at student loans, but is certainly applicable as the interest rates on those loans have been and will be subsidized directly by the federal government. In other words, the longer I draw out my payments for my educational debt, YOU, dear blog reader, get to pay my interest.

The talk reminded me that there is a big difference between what is ethical and what is legal. I've always known that, but occasionally I think I justify my feelings of entitlement for assistance programs thinking that although there exist other funding alternatives, I deserve to use the program funding for its ostensible purpose. For example, I could hit up family or fast offerings for help paying medical bills, but why not use Medicaid? I tell myself, that's what Medicaid is for. I'm going to be paying taxes my entire life, don't I have the right to use assistance programs now while I'm qualified? This sense of entitlement is repulsive to me when I recognize it, but insidious and compelling when not recognized.

The bishop was particularly emphatic that we must not judge one another in this regard because these decisions are personal and to be decided with regard to personal circumstances and the help of the spirit. I certainly don't mean to insult or criticize those who view the issue differently or come to different conclusions.

I'm interested to hear others' takes on this subject.


Anonymous said...

As always: learn correct principles, then govern yourself. The Spirit is absolutely essential for this. Live to have the Spirit in all decisions!
Love, Daddy-A

Anonymous said...

It's refreshing to hear your recognition of this problem in our society and even in the church. I am also glad that your bishop spoke on this because I believe alot of those involved don't feel they are doing anything wrong. There are difinitely people that need these programs, but those going to professional school especially when they have help from family are not they who need them. We saw people (many of our close friends) take advantadge of the system while we were in Dental School. These are people mind you that will make VERY good livings when they get done school. We had friends whose parents paid their rent, and they bought their kids clothes at Gymboree but were on wic and medicaid. Another friend's parents paid their rent while they lived on food stamps and used their $3000 earned income credit to go to the Bahamas on a cruise - Something seriously wrong with that!! We had friends who drove brand new cars, some who lived in really nice townhouses but yet were on wic and had all their babies on Medicaid. Not to pat ourselves on the back but Dan and I didn't have financial help from family during Dental school. I worked part time, he worked weekends and some summer hours with his old boss if he could fit it in. We took out loans to pay for school, living expenses, and health insurance. The schools offer health insurance and I feel it's the professional students duty to take out a few more loans to pay for themselves. They are going into a lucrative field. We lived in an old apartment without a lot of amentities, drove old cars and lived frugally with two children. It's not just professional students who take advantage. My sister was at Utah State and got married and pregnant fairly quickly (surprise!) She was a few months behind one of her closest friends who was also pregnant. My sister had health insurance thru the school but her friend called her and told her how easy it would be to get Medicaid to pay for everything as she had done. (incidentally, her friend lived in a nice condo, drove a nice car and had school all paid for by her husbands wealthy parents - all things that dont show up on Her taxes - so she could qualify for government programs.) My sister called my dad and I for advice - We told her it was her decision but gave our opinions. Who wouldn't want FREE? She stuck with it and had to pay out her 20 or 30% equaling $1600. It was hard for college students but they did it, saving tax payers money, being responsible for themselves and they are doing fine now. Dan and I are now in the process of paying back our monstrous school loans. It's alot to pay back and we will be paying for many years (maybe we could have more "stuff" now if we hadn't borrowed so much :) )But we are doing fine and feel a measure of satisfaction for taking care of ourselves. I am not condemning anyone that has used these programs because like I said some people really need them. I just think we should look at wether we use them because we CAN or because its a real need for our family and there is no other way.

PS - Sorry for the longest blog ever.


Anonymous said...

Just a little addition. Brittney mentioned things not showing up on taxes (financial help from family) but since I sit in on lots of those foodstamp and medicaid interviews, I know people also get asked if family members or others are regularly helping with rent, food, utilities, etc. Not everyone answers truthfully, but I feel that that part of "the system" then discourages femily from helping when they otherwise could and should. I'm not saying it's OK to lie about it. I certainly have seen those who need the help and I'm glad it is there for them, those who need it but don't "qualify", and those who "qualify" but are really just using the system. So very many years ago when Daddy-A and I moved to NY state, the first thing a new neighbor said as we were moving in was for me to make sure I didn't get a job paying more than (whatever) so I could be sure to get government help with everything. They are the same ones who thought we were weird when I made homemade bread, and later when we moved to our trailer and planted a huge garden. We saw things differently, obviously, coming from different backgrounds. sph-2

Coach said...

It was an interesting thing to sit in the dinner pitch by the financial planning group. They went through all sorts of tips and tricks to maximize what you can get from the government--and all the residents (including us) nodded in agreement and seemed excited at the prospect of working the system. It wasn't until afterward we had our reality check. Boss was the one who made the connection between school loan payback duration and the bishop's comments. Boss is smart.

Harvey said...

There are 2 issues here. The government assistance issue and the other is the advice you were given about paying off your loans.

On the assistance: Is the interest rate lower for a shorter payoff term? (Like it is for a mortgage.) If it is, then you probably aren't using gov't money any more with the longer term than with the shorter term loans.

I don't think nursing a debt for 30 years to accumulate capital is good strategy. There are things you need capital for, but after a certain point it is better to work on getting out of debt.
(That point is usually after the home downpayment and before the yacht, unless the yacht is the home.)

I know that there are many investments that pay more than 3%. But getting rid of the debt provides at least two underappreciated blessings. First, it can give you a smile like Pres. Fausts (At least, that's what Pres. Hinckley implied.) Second, it increases free cash flow.

Businesses almost never fail because they run out of money. Instead they run out of free cash flow. Not that they can't afford to encumber their cash flow when they start, but something unexpected happens and either cash flow is reduced or the involuntarily take on additional obligations. Either way their cash flow becomes overcommitted.

This happens to people too. But overcommitted doesn't always mean you don't have enough free cash flow to pay the bills. It can also mean you don't have enough to give to those in need.

Coach said...

It's the same rate whether we pay it off in 10 or 30 years. It's about 2.8% interest rate.

I think your advice is generally good, and I'm no expert in finance, but I still think paying it off slower sounds better overall. If we put any extra cash into our mortgage instead of student loans, we're paying off a 7% interest rate vs. 2.8%. And I'm not sure exactly how the government subsidizes these sort of things, but I know they do.

Anyway, thanks for the comment.

toby said...

While I don't envy you for the debt that you have accumulated, you probably understand now why doctors, dentists, lawyers, and others are paid so much. It has been my experience with my clients in the medical field that they spend various years paying off their loans. What I can tell you is that the doctors that focus on paying off their loans the quickest, also are the ones who tend to build the most wealth over time. It is harder to accumulate wealth as long as you have debts working against you. an investment advisor, I LIKE PEOPLE TO INVEST, but it still makes more financial sense to get out of debt as soon as possible. True, you would want to pay off the debts with the highest interest rates first (such as a home with a 7% loan rate). However, the longer you delay paying off your loans, the more "capital" that you will have to use to pay them off. Also, I have never agreed that the tax savings associated on certain loans are so great anyway. If you get to write off 35% of your loans' interest, that is still 65% of that interest that you are paying. You also need to consider that once you start your profession as a physician, you will be in one of the higher tax brackets. So if you are earning say 7% on your savings, after taxes paid you would probably be earning only 4%. So I don't know if earning that extra 1% on your money is really worth staying in debt for an extra long time. Also, I did not factor in inflation. So it only makes sense to have more of your income down the road for your needs than sooner while things are cheaper today. Anyway, I just thought that I would share my opinion.

Tarimisu said...

When Loyd and I were in college, we had assistance, but we waited till the bitter end to get it. We had exhausted all resources and really felt that was the best way to go, and my mantra was, "I'm not going to be on this forever. I need it right now. I'll get off of it as soon as possible," which I hoped would be soon! I had neighbors, however, who were "milking" the system. One of my neighbors was on unemployment and was required to go on interviews. He would purposely try not to get the jobs. So I see what you're saying. It's there if you need it, and I'm thankful for that. The kids and I still qualify for WIC, and we participate, and it is so helpful. I'm thankful we have it. I have such a different way of thinking about how to live. Scott and I want more children, but we want to be sure we can financially support them. I'm not saying that God does not provide in every situation (like the two surprises that came our way in these past two years!), but I'm also saying that it is so important to be wise in making decisions. In conversation with the lady who cuts my hair, she mentioned a family that has several children, 10 or 12 but I forget the precise amount, that comes into her shop. I immediately said, "What does he (the dad) do? How does he pay for all those kids?" and I got a look from my hair-cutter and she said, "The government pays for 'em, honey." Why had it not occured to me that that would be so? I just don't think I could have child after child and think, "Oh, well, it doesn't matter if we can't pay for this child. The government will help us." And now I'm sounding judgmental when really I don't mean to, I am just realizing that people do operate their lives in that manner, and perhaps they simply don't know that there's another way. It's generational in part, isn't it? Maybe? But that's not the original issue that you brought up. Thanks for making me think with this post, and to examine every area of my life to live it with integrity and in a way that would be pleasing to God.