As strains of "Pomp and Circumstance" waft across the perfumed spring air, it seems just the time for Pennywise to take up cudgels against the staggering debt levels plaguing university graduates.
Both undergraduates and those seeking a Ph.D. all too often find themselves in the cold embrace of debt these days. One reason is the pernicious ubiquity of credit cards, with punishing rates of interest. Another is the decline of federal student aid, replaced by loans. Tuition inflation is a third. We could go on.
To those mired in debt—both students and faculty members—this column is for you. Moralists may blame your debt on character defect, but given a lousy job market (academic and otherwise), usurious interest rates on credit cards and private loans, and stagnant real wages for most Americans, your debt most likely has some origins beyond your control. Perhaps you were just getting by as a junior academic and then down came the furloughs.
Pennywise believes that much of the household debt explosion of the past 30 years is a consequence of consumers borrowing simply to tread water, combined with ruthless, predatory lending practices—including by mainstream banks. (Turn over your MasterCard or Visa and you'll likely see Citigroup, Capital One, Bank of America, or JPMorgan Chase, the four banks that account for 80 percent of the credit-card industry, according to The New York Times.)
Anyone can fall into the debt trap when hit by unexpected adversity: chronic health trouble, a death in the family, a downsizing. In times like that, overspending happens.
But to be ruthlessly honest, a permanent state of credit-card debt—year in, year out—is a sign of living beyond your means. If you grabbed up an iPod, iPhone, and iPad on credit, the iProblem is all on you, dawg.
We aren't doing remorse here, though; this is about the future. Whatever profligacy lies in your past, you do not deserve to spend eternity with a monstrous chain of debt clanking around your neck like the ghost of Jacob Marley in Dickens's A Christmas Carol. It's time to stick it to the modern-day Scrooges in their skyscrapers counting houses. Let's get you free of debt. It won't be easy, but it is doable, given resolve, perseverance, and a plan of strategic action. Here's how:
Take responsibility. No matter how you got in this predicament, only one person can free you from it. Look around. Is anyone else offering to pay off your debt?
Buy only the life you can afford. To erase debt, you must spend less than you bring in. That means you must control your spending. If you notice a pattern of credit-card expenditure followed by regret, then cut up all your cards and throw them away—or at least put them on ice or in a drawer. Keep only a debit card in your wallet. Instruct the bank to turn off the overdraft protection so you can spend only if there is actually money in your account. Either get personal-finance software like Quicken or just collect your bank and credit-card statements for a month. Look over your expenses. What can you cut? Could you rent more cheaply? Do you really need 137 channels? Should you eat in more? Nothing is off limits. If you free up $150, $375, or $600 a month to put toward debt reduction, your debt will begin its descent. Sacrifice. Get out of the red and into the black.
Tally your debt. Before you can conquer debt, you have to know its extent. Download a free credit report at AnnualCreditReport.com (this site, unlike its competitors, will not fleece you). The report will detail your credit history and status, enabling you to know your total debt, since it will identify every loan in your name. Alternately, you can save all your credit-card bills and other financial statements for a month and determine your total in credit-card, student, auto, and mortgage debt. Track this monthly, whether in an Excel spreadsheet, personal-finance software, or a simple piece of paper tacked above your desk. Your objective: zero balance.
Pay the minimum religiously. Late payments result in fees, high interest rates, and a disastrous credit rating. Pay your minimums on time, every month, without fail.
Go beyond the minimum. If you make only the minimum payment, it will take you decades, literally, to repay a loan. The minimum goes mostly to interest, not principal. Pay more—much more—than the minimum.
Pay off your lowest-balance card first. That will give you an immediate morale boost, eliminate one mandatory payment (freeing up money you can use to pay down another debt), and improve your credit rating (which affects what rates you are charged).
Next focus on your highest-interest card. Determine your rates (the APR's) by looking at statements or calling each card issuer. Any interest rate north of 20 percent is killer, but even run-of-the-mill rates of 14 to 18 percent are ugly. Rank your credit cards, with the highest-interest one on top and the lowest at the bottom. Pay off each card in sequence, eliminating the most expensive first. Do that, and you'll achieve success faster and pay far less interest in total.
Transfer balances. Use Bankrate.com or similar sites to find a low-interest-rate card. Consider transferring high-interest balances to it. But be attentive: A transfer fee will likely be charged, and after a teaser time the interest rates may go sky-high. Do the math, because consolidation may not be worth it.
Find new income. Do you have books, CD's, or clothes to sell on eBay or Half.com? Could you tutor high-school students? Moonlight in an SAT-preparation center? Read AP exams? Proofread for a publisher? If you add an income stream or two to your current ones, put any resulting cash to debt reduction.
Call your creditors. Tell them you are organizing a financial turnaround and ask for a reduced rate or minimum-payment level. More is negotiable than you might imagine. If you are severely delinquent, ask for balances to be slashed. Be polite, but assertive. Ask to speak to a manager if the frontline employee is unhelpful.
Tap your wealth. Retain an emergency fund of three months' expenses, but if you have other savings devote them to debt reduction, which boasts a guaranteed return. Other wealth can be deployed. If you have a Roth IRA, you can retrieve past contributions. A home can be tapped for equity, or an employer-based retirement plan borrowed against. But think hard before depleting such assets.
Restructure. If you are in real trouble, a nonprofit credit-counseling service may be the way to go, but beware high fees and scams. Bankruptcy, the last resort, wipes the slate clean—in the fashion of a neutron bomb.
Once you start paying down your debt, you'll start to feel better. Unless you are a saint, you may backslide once or twice, but pick yourself up, chip away steadily, and you will get there. This you owe—to yourself.
Comments
1. 11159786 - May 13, 2010 at 08:30 am
There are numerous assumptions and generalizations here, but so many exceptions that I know which are ignored. Here, at Penn State, the highest tuition in the country for a public university means that the cost for an in-state student is more than $25,000 per year. Many students I know have negligible parental support, meaning that when they earn minimum wage for 20 hours per week during the academic year they are still $20,000 short of paying their bills. Pell grants leave them owing more than $15,000 per year. "Financial aid" for such students mean a loan.....You do the math about their debt at graduation!
Milton Cole, Department of Physics
2. mheffleychron - May 13, 2010 at 09:08 am
Silly Pennywise; more common-sense bromides that the pirates of our Penzance love to keep us in tow and under lash with. Such helpful hints only add insults to the injuries inflicted by the obscene system we live under, not much different than tips on how the determined and diligent might buy their way out of slavery, or make sharecropping work for them, in times past.
Another option: incur crushing debt if needed to live a normal life of survival and hope, pay none of it back if survival and hope preclude doing so, die before the dogs collect a penny. Wise? Kind of happening, in manyways...
3. professorpennywise - May 13, 2010 at 09:25 am
Last month I was a Marxist, this month I am a tool of piratical capitalism. It gets so very confusing, even to little moi.
If only you could just take their money and run -- I agree, my fabulous friend mheffleychron, it would be a dream. But alas they, not you, win if you live your life in debt, paying them interest upon the interest, wracking up new debt to keep the pyramid scheme going. It might do in a pinch for survival, but I really can't see the hope in it, and doubt you do either.
4. shiksha - May 13, 2010 at 11:14 am
Number 4 hits the problem on the head -- tuitions have gone up because of the availability of relatively cheap loan money. Schools know this when setting tuition.
5. malvais - May 13, 2010 at 11:24 am
Another practical suggestion: bank at the credit union, rather than a bank. The two that I patronize both offer "FinanceWorks," a program by Quicken that is provided by the credit union as a free service. If you don't mind the privacy issue, you can enter the account numbers for ALL accounts, from the credit union to other banks to credit cards to utilities, and FinanceWorks will automatically update them, provide you with a list of cleared and pending transactions, plus pie charts to analyze your spending. It's a lot easier than doing it manually, and you don't have to buy Quicken or pay extra. You can see your current and future financial status at one glance.
6. marcomeneses - May 13, 2010 at 12:17 pm
Moralists may blame your debt on character defect, but given a lousy job market (academic and otherwise), usurious interest rates on credit cards and private loans, and stagnant real wages for most Americans, your debt most likely has some origins beyond your control.
7. mheffleychron - May 13, 2010 at 12:49 pm
Prof. pennywise wrote: "But alas they, not you, win if you live your life in debt, paying them interest upon the interest, wracking up new debt to keep the pyramid scheme going..." in response to my "incur crushing debt if needed to live a normal life of survival and hope, pay none of it back if survival and hope preclude doing so...". There's a disjunct there; you didn't take me at my word! ;>}
Actually, what I had in mind were the common situations of filing for personal bankruptcies on credit card debt, walking away from underwater mortgages, and simply never touching any part of a student loan repayment, interest or principal. Again, not out of an adolescent rebelliousness, but simply because that's really all you can do without stealing your own rent and food costs. I know I'm not the only one for whom that fabulous approach to this fabulous American Dream life is not only the wisest but really the only option...
8. professorpennywise - May 13, 2010 at 01:35 pm
It's an alternative strategy, that I'll give you. The problem is that you'll blow out your credit rating, which may not sound like so big a deal, but the truth is that a rotten credit rating can affect a lot of life prospects, including the price one pays for insurance, employment and promotion prospects (employers now check credit histories because employees with bad credit are seen as having a motivation for theft and embezzlement), rental ability (because landlords check too, wanting to be sure they are paid), and--most obviously--the ability to obtain more credit in the future. Try your route for a while and eventually they just aren't inclined to shovel out any more money your way.
Another thing to think about is whether you have a spouse or dependants, because all your assets, if you have any, might be seizable by creditors. Even if you don't, if you came into an inheritance someday, that could be snatched away.
I really do think a debt-free life can be obtained and makes most sense. In time you can restore your good credit by adopting a different mode of life. Then you win and they stop hounding you.
I'm not just advising what I advise in the column to be a goody two shoes. I've grappled with debt myself at various points. I think willful debt is self-defeating, though.
9. trendisnotdestiny - May 13, 2010 at 04:05 pm
mheffleychron
you just made my day.... the power to walk away and not participate in markets reliant upon participation is the single greatest collective power we have.... if we do this individually we risk everything and if we do this collectively we can create change...
Almost like the origins of the battle for civil rights...
10. mheffleychron - May 13, 2010 at 04:11 pm
I take your points, Prof. PW; clearly getting the upper hand is preferable. If it were always as possible as preferable...well, it is sometimes, for some, and then it's both--but for others, no matter how well and sincerely they try to play the games and do everything right, it just isn't.
My points are not ones I've come to make or take lightly, but they have proven truer to the world and reality I keep running into and inhabiting--both in my youth and in the onset of my encroaching old age--than have your points as ways that will always work for all who choose wisdom over folly...
11. professorpennywise - May 13, 2010 at 09:35 pm
Here's hoping it all works out for you, mheffleychron.
12. mheffleychron - May 13, 2010 at 11:49 pm
Thanks, Penny, and you as well--and 4 trendisnotdestiny. So far, so good...
13. kymac - May 18, 2010 at 10:44 am
mheffleychron
If you spend money on a credit card but don't pay it back it is, essentially, stealing.
I am up to my eyeballs in debt and I will pay every penny back because I make good on my word.
I am not saying that I won't kick up a fuss if my credit card companies go back on their word (by changing rates) - but if they keep their word, I will too. I also understand that MY rates will go up if they have to make up for lost income, say, from other individuals not paying their bills.
So thanks a lot, mheffleychron.
14. nofinance - May 18, 2010 at 03:53 pm
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15. tcli5026 - May 21, 2010 at 06:30 pm
Most of the advice in this article is the same stuff you find pretty much on every financial website and in thousands of finance columns over the years. The problem is not what people should know (they already know it, especially the highly educated), the problem is what they do, which is mostly this: living beyond their means. Yes, I know, another trite expression and one that "Professor Pennywise" mentions. But, this is exactly my point: people know they should live within their means, but they don't do it. Perhaps we all need psychological, instead of financial counseling.