Interest rates on student loans: when things get fishy

Interest rates can change when consolidating private and subsidized loans. Be sure to have the consolidation and the interest rates documented. See question No.3 of the Reader Mailbag.

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. Car buying question
2. Food business
3. Student loan question
4. Difficult car choice
5. Moving from Mint to spreadsheet
6. Savings or down payment?
7. Homeschooling
8. Overwhelmed by mortgage
9. Investing versus loan repayment
10. Hidden messages?

Yesterday’s review of The Total Money Makeover Workbook left several people asking me about other workbooks. While I may eventually review a few of them, I’ll say that most of the ones I’ve seen on the market are exactly like TMMW: they’re just rewrites of other personal finance books with some detail removed and some spaces for writing inserted in their place.

By default, I always would recommend grabbing a notebook and a pen and just working through a regular book instead of a workbook. You’ll get more out of the experience – and you’ll be able to work through the book again in the future or easily pass it along to friends.

Q1: Car buying question
My husband and I are moving from New York City to the Midwest and we need to buy a car fairly quickly. We both have jobs (he’s started his, mine starts in three weeks), and will gross about $75,000 a year combined. We have $33,000 in combined student loans (currently paying minimums) but no other debt, and $45,000 in savings earmarked for the move ($4,000 for the movers), emergency fund (no set amount really), and eventual house downpayment or student loan repayment. While we’d hoped to be able to rely on public transit, the job I found is not actually in the city center and we will need to purchase a car for me to get to work. We can borrow a car for a week or two, but that’s it.

I’ve lived in NYC and have been car-free for nearly a decade – and my college car I bought from a kid in my dorm for $1000 in cash on the hood, no negotiation, no mechanic’s visit, nothing (which worked out fine, but it’s not something I want to do this time). My husband bought his last car five years ago by walking into a dealership and walking out with a brand-new lease, which he ended up returning less than a year later when he was transferred to New York. We are both rusty and kind of intimidated by the used-car buying process.

Our biggest priorities are safety, reliability, and gas mileage; we plan to buy used and pay cash, but every time I look on Craigslist I am overwhelmed, mostly because I am not there in person yet and don’t feel like I will have the time to shop around. I will arrive in our new city five days before I start my new job, and as I will be the one driving the car 90% of the time, we feel that I should be the one to test-drive and pick it out. Ten years of ignoring what’s going on in the car market because it didn’t apply to my life has made me feel like I’m in over my head.

How much would you spend on a car in our situation, and how would you shop for it?
- Rachel

I would buy a low-end inexpensive car to start with, one that will allow me to commute easily for a while but won’t financially break me. I would not compress shopping for a $15K or a $20K vehicle into such a short timeframe. Focus on something very low end with the understanding that you’ll upgrade later on.

I would pay cash for this vehicle. I would also expect that within a year or two, you’d be shopping for a better replacement car, but at that point you’ll have the time and energy and focus to do it slowly and with adequate research.

Don’t overthink this purchase. You’re going to have a lot of other things to worry about when you move, so just go low end and don’t stress about it too much.

Q2: Food business
I made excellent deviled eggs. In fact I always make deviled eggs for every office birthday party or office pot lucks. I have been given so many wonderful compliments and people always request that I make and bring my creation at every office event.

I have often thought about starting my own business making deviled eggs. Here is where it gets sticky, eggs aren’t like cookies or other baked goods that can be left out for hours. Any suggestions or ideas how I could in fact get my business off the ground?
- Debbie

Getting into a food-oriented business is almost always difficult, since there are always a lot of laws and regulations dealing with food handling and food serving.

My best suggestion for you would be to find someone who is in a food-oriented business in your area that you wouldn’t be competing with and might be cooperating with. For example, are there any caterers in your area who might subcontract deviled egg preparation to you?

Meet with these people. Find out what kind of regulations they have in your area. Get an idea of what you’d need to do to start your own deviled egg business. You might find, though, that it would be easier to just work with an already-existing catering or food preparation business.

Q3: Student loan question
I graduated in November and they absorbed all of my loans which were prior to this they were about 25% subsidized and 75% private. This was done as a function of our health care bill. In the process of being switched to all federal loans my interest rate was increased. Upon completion of my degree I consolidated and this is where it gets ugly. First I was lied to about the due dates/terms of my loan – consolidated in March still do not have a loan packet with full disclosure of all terms. Now I have found out that on my loans consolidated and handled by the US department of education that I am not allowed to make additional loan payments towards my principal balance all payments scheduled or not will go towards interest which is at 6%. My loans of $57,000.00 approx are set to I believe (recalling from memory) be at total cost of $154,000.00 and the US department of education is not giving any option to cut that down. Interest is compounded daily.

What do I do to get out of this situation?
- Courtney

Something is very wrong here, and I would probably contact legal help. You should not have ever been involved in a loan consolidation that didn’t provide documentation of the consolidation. That, right there, is a giant red flag. Another giant red flag is a federal loan consolidation that doesn’t allow you to pre-pay.

I do not know the specifics of your situation, but I see several very confusing and borderline suspicious elements in what you describe. It sounds like you may have consolidated through a shady business.

If you have a family lawyer, I would gather up your documentation and get an appointment to see if there’s anything awry here.

Q4: Difficult car choice
After losing a high paying job and readjusting to a salary that is lower, I am still looking for ways to reduce my expenses so that I will stop living in a way that does not allow me to save because I don’t have enough income to cover all of my expenses. One of these expenses is the vehicle I drive, a truck. It was a good deal when I bought it 2+ years ago, but now the gas mileage creates a big expense. It is paid low enough to have a positive difference between what I owe and what Kelly Blue Book says it is worth. Should I try to sell it (can you sell a car you owe money on?) and buy a car that gets better gas mileage? Maybe a used car, but I will have to finance because I don’t have money saved to buy another vehicle. My fear is that even if I sold it, used the difference to put down on a car that gets better mileage, I might not be in a much different position with another car payment. What do you think?
- Ann

You can sell a car that you owe money on, but you have to handle the transaction with your bank involved in the process. The easiest way to do this is to execute the transaction at a branch of that bank when you’ve informed them ahead of time of what the situation is so that they can have the title on hand when you actually make the sale and pay off your loan with the proceeds from that sale, all in one meeting. This is how we purchased our most recent vehicle.

If you’re just moving from one car payment to another, I’m not sure you’re going to be much money ahead on this after all of the taxes, transfer fees, and so on. It’s going to depend on what exactly you get as a replacement, how good of a deal you make on both the sale of this car and the buying of the next car, how much in debt you actually have to go on your next car, and so on.

Are you sure there aren’t merely lifestyle options that could reduce your usage, such as carpooling? Bicycling? Walking? Civic transport? These would all reduce the miles you put on your vehicle, likely saving you significant money.

Q5: Moving from Mint to spreadsheet
I have been using Mint.com primarily as an aggregate. I like it because it pulls all my financial accounts into one easy reference to see how everything is doing. I don’t really use it for budgeting or expense tracking (I have my own custom spreadsheets for these purposes).

I keep having problems with Mint.com not interfacing with various accounts, so I’m ready to dump it. Also, like you have stated about Mint in the past, I am beginning to mistrust a 3rd party app with access to so much of my financial data. I have a vague recollection of you discussing this in a blog post, and that you mentioned you have your own method of pulling an aggregate of financial data. Do you use a spreadsheet and do a monthly (or other regular) update manually?
- Hillary

I pull information into my own primary spreadsheet manually. It’s pretty straightforward. I just have a column for each month and a row for each different account, with debts separated from assets. This allows me to easily add up my assets, subtract my debts, and get a good estimation of my net worth.

Here’s how to build such a net worth calculator in your own spreadsheet tool.

I prefer such tools for privacy purposes and flexibility purposes. They might not be as “slick” as something like Mint, but I don’t have to worry about syncing errors and I don’t have to worry about identity theft, either.

Q6: Savings or down payment?
My wife and I are currently saving up for a house. We already own two rental homes we have owned for approximately 5-6 years. I bought both of these prior to meeting her and getting married, so both loans are in my name only. I owe a total of about $180,000 between the two of them. We have limited equity in both due to the decline in real estate prices. I am in no hurry to sell either. One is rented out so we break even every month and we are living in the other home for now although it’s not a house I would like to live in 3-5 years from now.

We also have $18,000 we owe on a new car we bought last year and right around $20,000 in savings. We share one credit card for most expenses that is paid full at the end of each month. My car is owned free and clear, the only debts we have our the two mortgages (both in my name) and the car payment. We would like to move into a new home in the next year or two. Mortgage rates should still be low and home prices should be about bottomed out (in my opinion). My fear is that my wife will have to carry most of the loan since the other two mortgages are in my name. Should I keep the $20,000 in savings (we plan to have $30,000) for a down payment next year or should I pay off the car in full now and still have time to save up for a smaller down payment?
- Matt

In my eyes, it depends on the interest rate on the car loan. Is it substantially higher than what you’d expect to get on your mortgage if you didn’t have your 20% down payment?

What number would that be? If your car loan is 6% or over, I’d pay off the car loan. Otherwise, I’d hold onto the car loan, make minimum payments, and then make a full down payment on the house loan.

What you’re trying to do is minimize your interest over the course of both loans.

Q7: Homeschooling
What are your feelings on homeschooling? I’m considering homeschooling our children and I’d love another levelheaded opinion on it.
- Dana

It depends on why you’re homeschooling. In short, your educational goal should always be to expand the horizons of your children.

If you’re homeschooling because you believe the education provided in your public school is too limiting and you believe you can provide more well-rounded education to your child, it’s a good idea. If you’re homeschooling because the school district isn’t teaching exactly what you believe and you want to shield your child from those ideas, then it’s not a good idea.

The best gift any parent can give their child is the ability to process information sensibly on their own and deal with a variety of life situations and issues using those skills. If this is absolutely your goal for homeschooling and you have real reason to believe you can provide it while other school situations cannot, then it’s a good idea. If your goal for homeschooling is to reinforce in your children the values you hold dear and to undermine other values that you do not hold dear, homeschooling will have some awkward results.

Q8: Overwhelmed by mortgage
My husband and I bought our current home in 2003 at the height of the housing market in our area with the intent of renting it out as an investment. Through a series of events we are now living in this small home and are upside down in our mortgage by about $80,000. We have learned some hard lessons along this path, and our family continues to grow. To put it simply we need more space and I see no way out of our current home. Are there any options for homeowners like us other than renting out our current home and moving to another home? Is there anything I could be missing here?

My husband is a teacher and I am a stay-at-home mom so we don’t really have extra money to apply to our already huge (to us) mortgage of $1360/month.
- Megan

Your options with just your current home are to continue paying your mortgage bill, to negotiate with your lender for some kind of short sale (where you sell the home and wipe out your whole mortgage at once), to refinance, or to walk away from the home while taking the huge credit hit in the process.

I would be amazed if you were able to get the credit to buy a second, larger home if you’re finding the payments on your current home to be a challenge. The lending isn’t quick and easy like it was five years ago.

None of these are great solutions, I know, but that’s the reality of the housing market right now. Millions of families are facing the same situation you are. It’s not easy. It’s not fun, either.

Q9: Investing versus loan repayment
My wife and I make about $100,000/yr. We have a substantial amount of debt which were are in the process of working off. The following is a rough summary of our debt:

Credit Cards $8,000 at 0% until 3/2012
Car Loan $16,000 at 2.95%
Mortgage 148,000 at 5.5%
Wife’s Student Loans $86,000 in multiple loans all with rates < 4%
My Student Loans ~ $250,000 in multiple loans; approximately $140,000 of which have rates about 8%; the remainder of which are about 3% (Medical School is very expensive)

Most of my loans – including all of the loans with the 8% interest rate – are in deferment and can stay that way for another two years.

My financial goals are as follows:
1. Pay off our credit card debt.
2. Raise our emergency fund to 3 months worth of expenses.

I anticipate that this will take about a year to accomplish. My question for you is what the best plan of attack afterwards? Because of some frugal maneuvering (including some moves inspired by your column) we have a substantial amount of wiggle room in our monthly budget after we’ve paid all our minimums. Is it worth investing our gap in retirement savings while making the minimum payments on our loans? I have seen you recommend investing when you don’t have consumer debt with interest rates greater than 10%. Where did you get that number from?

Alternatively, we could tackle more of our debt. We have minimal retirement savings (about $10,000) and we’re not spring chickens; I am 32 and my wife is 29. I will experience a significant jump in salary in the next 3-6 years. We would appreciate any advice you can provide.
- Adam

The 10% number is a good rule of thumb to use, simply because you’re not going to find any sort of reliable investment out there that returns at a rate of 10% or greater over a long period of time. Your best use of your money if you have debts with an interest rate of 10% or greater is to pay them off first.

Honestly, I’d probably put that percentage even lower, somewhere around the 8% mark. You’re just not going to find reliable investments that return more than 8% per year consistently. Extra debt payments offer that kind of return (in the form of lower interest payments) as compared to just making minimum payments on that debt.

In your situation, I’d tackle those high-interest student loans first. The longer you let them sit around accumulating more than 8% interest per year, the longer it’ll take to ever pay them off. 8% interest on $150,000 is $12,000 per year that’s just gone in the form of interest payments to the bank. That’s just not good over the long term.

Q10: Hidden messages
All of your posts reek of your particular values. Can’t you just write without trying to indoctrinate people to be just like you?
- John

I could certainly write to promote a value set that’s different than my own, but what would be the point of that? The only purpose I could see would be solely to earn money.

Now, if I were to write solely to earn money, I certainly wouldn’t be writing about frugality and ways for people to keep their money in their pocket. I’d be telling people to spend spend spend. Why? Advertiser dollars. Companies that make consumer goods are much more likely to put their ads on sites where the writers are whipping readers into a consumerist frenzy than on a site that encourages people to save their money for the important things.

I suppose I could also do things like try to run seminars and the like, but that would (in my eyes) run completely contrary to what I talk about on here. “You should spend less money… except for the $400 I want you to give me for my seminar!” That seems hypocritical to me.

The only possible reason I’d choose to write a site like this one – and eschew things like seminars and such – is because I believe what I’m writing. If I believe in what I’m writing, it’s naturally going to reflect my values.

If you don’t like those values, that’s great. I don’t think you’ll get a lot of use out of The Simple Dollar, though.

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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