What you don’t know about your debt

A former roommate of mine turned me on to an article recently that I found pretty interesting.  Apparently, an offshoot of the Occupy Wall Street movement, Rolling Jubilee, has purchased just about $15 million of debt.  But they didn’t pay $15 million for it.  Not even close.  They paid just over $400 thousand to purchase $14.7 million of medical debt, which they immediately forgave, making some peoples lives much much better.  While the purchase price of the debt may sound crazy but is actually a fairly common practice in the finance and healthcare industries.  There are companies that exist solely to purchase charged off or way, way past due debt from banks and hospitals for pennies on the dollar.  They then go and collect.  When you’re in debt up to your eyeballs and the collectors are calling everyday, well, that’s these guys.

I wish I could come up with witty slogans that rhymed

I wish I could come up with witty slogans that rhymed

Ok, so, let me back up.  I may have rushed into the idea there.  Let’s start with the concept of medical bills and debt being sold from hospitals to parties otherwise unrelated to your medical procedures.  A hospital may do $100 million in business a year at their cost but, at the end of the day, is only able to take in $30 million in revenue.  The difference typically amounts to several areas: medicare and medicaid reimbursement rates, charity care, and bad debt provisions.  The $100 million is what the cost of the services for the hospital should be but, after they get reimbursed by everyone and deal with debts and self payers, they only ever see $30 million of the revenue.

This is where the collectors come in.  A typical hospital will see about 60% of its gross revenue being medicare or medicaid based.  The remaining 40% will be broken up between those with insurance and people the healthcare industry call “self payers.”  Basically, uninsured people or people who have hit their lifetime spending cap under their insurance.  A hospital wants to limit how many of these people it sees because, typically, they will immediately write off 95-97% of self payer revenue.  So if our example hospital has maybe 15% of its gross revenues tied up to self payers ($15 million), they can sell it to a collection agency for some immediate revenue.  Looking at the example given by Rolling Jubilee up top, the hospital can receive $400K when it believed it would never receive a thing.  It saves them the time and expense of trying to collect on it.  The collector, meanwhile, doesn’t have to get the $15 million to make a nice return. If they can turn their $400K investment into $3 million, they have made a good return after expenses.

And this is where the point of this whole thing comes in: everything is negotiable.  Right now, 60% of bankruptcies in the United States come from medical bills, meaning that somewhere in the process I mentioned above, ordinary people are losing control of their financial lives.  What no one ever told them is that debt, when it is traded on an open market, is negotiable.  If someone is accumulating debt related to medical procedures or anything done at a hospital, well, the price is far more negotiable than you think.  Just look at the above!  The hospital is going to sell your debt to someone for 3% of the full price that they want you to pay.  If you can’t pay the full amount but can pay 10%, offer it!

I know this may seem like a crazy person’s advice but I honestly mean this.  I see a lot of personal debt out there.  I review financials of companies and people.  I perform due diligence on hospitals and see them losing money as the self payer amounts rise and they continuously write the amounts off.  One of the big problems in the world of healthcare is the rising cost.  A part of the rising cost is the fact that many people have, for years, been unable to afford the healthcare.  Because they can’t afford it, the hospitals write off the amounts and pass the charges along by gradually, inexorably, raising the costs elsewhere.  As they do this, more people can’t afford the care, it gets written off, so on and so forth.  It’s a bit of a terrible spiral down.  The only people who win, in the end, are the collectors.  And let’s face it, we all hate collectors!

The next time you find yourself falling into debt, whether it is credit card or medical debt, and you’re getting to the point where you cannot pay anymore, take a deep breath and pick up the phone.  Your bank, your hospital and your credit card company will all work with you to make sure that you can pay.  In the end, they just want to be paid for services rendered and you just want to be out of debt.  Remember, in the world of finance, everything is negotiable.  Until next time everyone!

 

Photo courtesy of Aaron Bauer

Why do student loans suck so much?

We’ve been over this before.  My hatred of student loans and debt in general is well known.  But now I feel I have some new reasons to despise them.  I’ve been working with some people lately on building their credit and during this time I’ve found out that student loans like to screw with us in ways that, quite honestly, don’t even make sense under normal circumstances.  Of course, in the insane world of banking they make perfect sense but that’s a story for another day.

Look at this accident I got into while contemplating my student loans.  Truly horrific stuff.

Look at this accident I got into while contemplating my student loans. Truly horrific stuff.

You see, when you’re going through your few years at school, whether it is undergrad or graduate, and you have student loans paying for everything, you’re hurting your credit score.  Most people will tell you that by taking on term debt, which is what a student loan is, that you’re going to help add credibility to your name in the eyes of the banks.  While this may be true traditionally, it fails to take into account the years you spent in school, not paying that term debt down.  Even though you’re in school and either no payments or just some interest payments are required, you’re dinging your credit score.

What?  No one has mentioned this to you?  Yeah, I didn’t know either.  What happens is that because your term debt goes years without declining, the algorithms at Experian and TransUnion (and that other one whose name I can’t remember) look at it as though you are a bad payer.  It doesn’t matter that no payment is required, just that the balance is either not changing or going up (if the interest accrues while you’re in school).  While I completely get it…wait  no I don’t.  Nothing is due!  Gah.

Ok ok, this is fine though.  Sure your credit score went down but you saved up a lot of money in your first job post school and you have decided to be super responsible and pay off your student loans early.  Sure you lose the tax deduction but who cares!  No debt!

The banks care, that’s who.  And because you paid the student loans off early and they didn’t receive their interest, you’re going to get your credit score dinged.  Insanity.  Despite the fact that you just paid off your debts and have proven yourself to be a good risk for the banks in terms of them receiving their principal, you have made yourself a risk to them.  A risk that they will not receive their profits off of the interest.  Once again, insanity.

Normally, I don’t rant like this.  I get the system has quirks and I accept that.  However, coming across these to items while trying to help people improve their credit makes me furious.  There’s just no reason for this to hurt you at all, especially when a student loan is considered “good debt.”  What this does whole experience has told me is that people need to keep track of their credit!  There are two websites that can help you do this.  The first is www.creditkarma.com.  This site is run by TransUnion and gives you your score and a quick rundown of your report.  It’s a good free way to make sure you don’t have any derogatory marks on your credit.  The other site is the government’s annual credit report website.  Government regulations require the three credit bureau’s to give you free credit reports once a year.  These reports will be thorough and will tell you everything about your credit, including the names and numbers of the firms that gave your derogatory marks.  These two websites can help you sort everything out.  Often, you will only need to make a few calls to remove derogatory marks from your record.  Not the student loans, just people saying you didn’t pay on time.

Hopefully this post makes people think twice before adding another $5K or $10K in student loans when they may not need them.  Looking back, I wish I had done more to prevent getting my student loans.  Until next time folks!

 

Photo courtesy of Rool Paap

Refinancing my car

I’ve been tinkering with the idea of refinancing my car.  This ties into what I was talking about on Monday and really comes down to my desire to maximize cashflow.  Despite my hatred of debt, cashflow is king to me right now.  And looking at this as if I were a business, the best thing I could do would be to refinance the debt to a longer term at a lower debt rate, reducing my interest expense and my principal repayments each month.

The Stocks and Cents mobile

The Stocks and Cents mobile

So I’ve been working with a firm, Blue Harbor Auto (Not an affiliate link, I swear), to get this done.  So far, they’ve offered me very competitive rates on 48, 60, 72 and 84 month terms.  Considering I only have 51 months left, all of this seems a little ridiculous.  However, if we’re talking about investment return vs debt payment, there is something to be said.  The 84 month term would only carry a debt rate of 2.85% for me, a pretty big drop from what my current loan has (6%) and would free up $200 of monthly cash flow.  Even more ridiculous, I’d actually still pay less interest (only about $200, but still) than I would pay in the remainder of my current loan.  Even adding three and a half years to the loan term doesn’t reduce the financial benefits of refinancing.

The additional $200 a month would be a huge step forward for me.  It would increase my current savings dramatically each month and would hopefully grow at a much larger rate than 2.85%.  If my investments only grow at an annualized rate of 7% for the next 51 months, that extra $200 a month will add up to just under $12K.  Even if I keep my current loan and then invest the full value for the three years after, I still will not save that much money.  From a pure numbers stand point, this is a no brainer!

The good thing about this is that there are no prepayment penalties if I pay extra or pay the loan off early, so I can still tackle the debt while investing if I choose, just utilizing a much smaller debt rate.  After doing some number crunching here, this means that if I choose to pay the exact SAME amount that I pay now, I’ll actually have my loan paid off in 45 months, as opposed to 51.  So if I were to refinance at the 84 month rate and still pay my current amount, I’d actually save myself half a year of payments.

Chances are I will probably go through with refinancing my car through these guys.  They did, however, try to sell me on an extended warranty which I declined, so I think I figured out where they actually make their money.  I’ll keep you updated as I go through the general negotiations involved with this.  I’ve never done it before but I’m hopeful this is significantly easier than trying to close a bank account with Bank of America (for the record, it’s near impossible).

 

Image courtesy of Stradablog

Invest or Pay down my debt

I’m not sure if you’ve noticed this about me through my writing but I tend to think a lot, sometimes too much.  This blog is limited to personal finance mostly but still, you’ve probably noticed that I go back and forth on concepts and ideas, wavering on the execution and which strategy is best for which time.  Which brings me to my current dilemma: should I be investing my money or putting every extra penny into paying down my debt?

I go back and forth on this all the time.  I’m already paying extra into my debt to knock it back but still, I feel like I could do more.  I look at the $750 a month I spend there and literally drool at the investments and returns I could be making.  I already put away $400 a month outside of my 401k, so if I was able to put aside $1150 a month?  Now we’re talking.  At the same time though, I enjoy putting money into my investments.  Watching my $400 a month grow into something is exciting and gives me hope that I just might be doing something right with my money!

When I look at how my net worth has changed over the past year, what I see is that my debt has just slowly, moderately decreased, while my investments in my 401K and Vanguard account have led a massive charge forward.  Since I started tracking my net worth like a crazy person, in January of 2012, my debt has decreased by only a total of $7,900 while my investments have risen by $12,500.  There is a huge disparity here and while I’m not going to say I dislike it (I do like having more money as opposed to less), I tend to think about the road not traveled.

The thing is, my investments massively outperformed the interest I paid on my stocks.  Since January 2012, my investments have paid a return of over 22%, outpacing the weighted average of 5.25% of my debts (not taking into account the tax deduction for student interest).  I can look at those two numbers alone and know that my money is being put to better use by investing it.  The bigger question now is, now that I have enough savings to feel safe in case something truly awful happens, should I just do it?  Should I just go for it, cut my 401k and my investing and just knock away my debt?

I’m honestly not sure about this.  On the one hand, I hate debt.  I truly loathe it!  It’s one of the only things that can keep me up at night and I don’t even have that much of it!!  I hope I never have a mortgage, otherwise I’ll never sleep.

If I choose to jump on the debt, this is how I'll do it.  A ridiculous avalanche off of half dome.  That's right Sallie Mae, I'm going to dump your body off half dome in the middle of winter!

If I choose to jump on the debt, this is how I’ll do it. A ridiculous avalanche off of half dome. That’s right Sallie Mae, I’m going to dump your body off half dome in the middle of winter!

On the other hand, I love watching my investment account grow.  I love having money as opposed to giving it away.  In the end, I’m almost positive that I will take stashing money into a Vanguard account over paying off my debts any day.  The more quickly that account grows, the quicker my net worth heads towards positive and the less I will worry about my debt just hiding off to the side, slightly out of view.

Opinions here are appreciated.  What do people think?  I know a great deal of people choose murdering debt while others would rather build up their cash stash.  Let’s hear it, what road should I take?

 

Photo courtesy of somewheregladlybeyond

Fighting back against Student Loans

By this point, you probably realize that I hate debt.  And while student loans helped me fund my education, which got my job, they’re still debt.  But here’s the thing about them: you might not know where they are.  When I graduated college, I was lucky.  My loans were only in three places and my mother is an amazing records keeper.  I was able to quickly find them and start paying them down when I got my first post-college job.  But a lot of people aren’t that lucky.  Some have loans in four or five places, plus private loans.

The good news is, there are ways to figure this out.  The government set up the National Student Loan Data System just for this purpose.  They knew exactly how difficult it was to deal with them so they tried to make it a bit easier.  You log into this site and are able to find all your loans, who is servicing them, and how to reach them.  You’ll need a PIN (found here, it’s not hard to get one and you might already have one) so it could be a little easier but hey, at least they put all the loans in one place.

The great thing about this is that you can find ALL your federal loans.  If you’re on a PLUS loan, you can find the information.  The downside here is that there is no information about private loans.  Obviously, the government doesn’t have anything to do with those.  Which means if you have them, you’re probably not too happy with the interest rate.

Don’t worry, you can find those too.  It’ll require another step though.  You see, once a year you’re entitled to your credit report, courtesy of TransUnion, Experian or Equifax.  The government made it law that they have to give it to you, free of charge, once every 365 days.  If you have private loans, they’ll be on your credit with all the information you need to find your servicer and argue with them for a few hours about how criminal their interest rates are.

Between these two sites, you should be able to get a good count of your loans, payment dates and payment amounts.  Tracking these loans and making your payments on time will be key to getting rid of them before you turn 40.  So take a look and figure out how much you own!  It’s going to be a big deal.

Additionally, if you’re still a student, you should take a look at this.  Student Loan interest rates are set to double in the next year on all new debt issued.  Write your congressmen, your senators, your representatives, whomever you think can help.  Going from 3.40% to 6.80% is going to cost you and the rest of the students thousands of dollars each.  The purpose of federal student loans isn’t to make money for the government but to make education more affordable to every citizen.  So if you can, write and make sure that they know to do their job.

 

Please note, no links in this post are affiliate links.  Also, only click on adsense if you are actually interested in the product!

Image courtesy of Occupy* Posters

Destroy your debt

Destroy Debt - Courtesy of By all hands volunteer photobank

Destroy Debt – Courtesy of By all hands volunteer photobank

Screw debt.  Seriously, screw it!  Who needs it?  I mean, yes, most people need it to buy homes and cars, etc, but still, screw it!  You all know I hate debt.  I mean seriously, I loathe it.  You also know that I’m doing everything I can to pay mine off early.  Because seriously, who needs or wants debt?  But just hating debt doesn’t get me or you where we need to be.  We’ve gotta figure out the best way to actually fight it off for good.  Recently, I got turned on to the website unbury.me, which has a wholly unsafe sounding site link but I assure you is 100% real.  Seriously, I swear it.

Anyway, this site allows for you to input all of your loans, the interest rates and the payments, and then specify how much a month more than the minimum you’d like to pay.  It then tells you exactly how much to pay on each loan, each month, until they’re paid off using two different methods: the debt avalanche and the dent snowball.   Let me explain.

Debt Avalanche: This is the more mathematically sound of the two methods.  Under this method, unbury.me calculates what you need to do in order to pay off your highest interest rate loan first, followed by the next highest, and so on and so on.  This method will ultimately lead you to save the most on your interest payments, cutting down the principal of the highest interest loans before they can take too much money from you.  The problem here is that it’s not terribly satisfying.  Your biggest loan might also have the highest interest rate, which means you might not see any real momentum in your debt destruction question.  This makes this a bit more difficult but in the long run, much simpler.

Debt Snowball: Similar to above, this method pays the smallest loan off first, rather than the highest interest rate.  Basically, if you have four loans, each with a value of $1,000, $2,000, $3,000 and $4,000 respectively, you’d try to knock off the $1,000 loan first.  By doing this, you’ll start to see tangible results in your debt destruction process and feel like you’re actually accomplishing something.  You’ll go smallest to largest and by the time you get to your last loan, it shouldn’t take you too long to beat it into submission.

Both of these methods have their own merits.  The debt avalanche obviously saves you the most money in the long run.  The problem is, you can feel like you’re banging your head against a brick wall for most of it!  It just takes too damn long.  The debt snowball actually feels like you’re accomplishing something.  With every small loan you knock off, you know you’re getting closer to your goal.

Personally, I’m using the debt avalanche.  The numbers just don’t lie.  If you have time, check out the unbury.me site and see how soon you could pay off your debt.  It’s at least worth a look!