Beating Broke

Personal Finance from the Broke Perspective

Oregon Changing Student Loan Repayment?

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Could the landscape of student loan repayment be changing?  I have to admit, I don’t cover a whole lot of college topics here (because I’m a bit removed from that age group), so I almost missed this altogether.  But, it kept coming through on feeds, and it finally piqued my interest enough to get me to take a look.  I’m glad I did, because it’s actually gaining traction and could be something that becomes normal in the years to come.

What is the Oregon Pay it Forward loan repayment plan?

oregon changing student loan repaymentPay it Forward seems to have had an interesting life cycle. It was originally devised by a class of college students, working with the Economic Opportunity Institute, and then presented to the state legislature.  From there, it appears that the Working Families Party of Oregon, who happen to have been co-founded by the students’ teacher, took it under their wing and started pushing it.  According to this article in the New York Times, the resulting bill passed the Oregon House and Senate earlier this month.

From there, I would imagine that it’s got all kinds of structural work to be done in order to put the systems and processes in place to be fully functional.  But, once that’s done, it should become available to students in a few select universities and colleges sometime around 2015.

The plan, as it’s stated on the Working Families Party of Oregon website, will operate with a dedicated fund from which the tuition will be paid to the school.  After the student graduates, and gets a job, the student will then pay a fixed % of their salary back into the fund for 20 years.  The % that the graduate pays will depend on how much schooling they’ve received.

Under the proposed system, you would pay .75% of your adjusted gross income (AGI) for each year of school, or 45 credits. This means a student who goes for a 2-year degree would pay 1.5% of their AGI per year, while a student seeking a 4-year degree would pay 3%.

That should account, mostly, for the discrepancies of cost in tuition from a two-year degree vs. a full four-year degree.  The website also states that should a graduate be unemployed, there would be no repayment necessary until the graduate attains a job.

Is the Oregon Pay it Forward plan a good idea?

In my opinion, it’s both good and bad.  It all depends on how you look at it, really.  If you’re like me, and intend to work in a profession that basically requires a degree of some sort to even get your foot in the door, it could be a really good deal.  Heck, I’ve been out of college for 7 years.  Almost half way to their repayment period.  I’m not even close to half way to the end of my student loans, yet.

So, in that way, the plan might be a good thing.  It lowers the financial barrier to higher education, and makes less of a burden of the repayment of any tuition bills.  The lowering of barriers is also why I think it could end up being a bad thing.

Part of the reason that I think the higher education system is under so much fire is because it’s already too easy to get a student loan and go to college.  If anyone can do it, suddenly everyone must do it. If you want any sort of foothold in the professional community of your choice, you’ll need that degree.  That causes problems.  Demand for a college education never decreases.  The law of supply and demand says that the supplier (colleges in this case) can charge whatever the market will bear based on the fluctuations of demand.  If demand decreases, so too should supply.  If you want demand to increase, you reduce the cost of whatever you’re selling until demand begins rising again.  But, if demand never decreases, why should the cost of the education?  The supply of college attending students increases, increasing the demand for classrooms to teach them in and professors to teach them with.  School expenses increase due to the new buildings and additional staff.  If the fund for the plan doesn’t keep up, the money has to come from somewhere else.  Know where?  The state.  More specifically, the taxpayers of the state.

It’s too early to pass judgement on whether the plan will work or not.  Heck, the ink is barely dry on the bill itself.  It’s still got all kinds of tape to work it’s way through before it can begin being used.  I doubt that we’ll see any real results aside from an increased enrollment in the schools that pilot the program for at least 5-10 years.  Remembering that repayment likely won’t start for 4 years from the first enrollment.

I think it’s clear that the current state of student loans and their repayment needs to be reworked.  It’s unclear, however, whether this plan is the right answer.  It might be part of the answer though.  Combine something like it with a more rigorous acceptance process, and you might have a winner.

What do you think?  Is Oregon changing student loan payment forever? Is the program the right answer?  What would you change?  Would you have used it if you had the opportunity when you enrolled in college?  (I would have)

 

Paying Down Student Loans with Smarterbank

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There’s little question that student loans can be one of the more difficult debt burdens that a person can have.  The cost of tuition is rising each year, and the rates seem to be following suit.  Many college graduates are finding themselves with a degree that cost as much as their first house is likely to.  It goes to reason, then, that finding any means available to help pay that debt off is probably a good idea.

What is Smarterbank?

I was recently introduced to a product offering called Smarterbank.  It’s an online checking account that’s run by The Bancorp Bank.  It’s fully FDIC insured to $250,000 and, for most purposes, operates just like any other online checking account.  Much like some other online banks, Smarterbank has some perks attached to their accounts.

In the case of Smarterbank, they give a “cashback” that goes directly to your student loans.  For purchases under $100, they apply .5% of the purchase to your Smarterbucks account.  For purchases over $100, the first $100 gets you the same .5%, and everything over $100 gets you 1%.

Smarterbank Fees

One of the nice perks of Smarterbank is that it’s a relatively fee free account.  There’s a monthly “inactivity” fee if you don’t use the account at least once in a month of $4.50, otherwise, if you’re a smart user, you’ll never hit a fee.  And, by smart user, I mean you don’t overdraft, or do something else silly.  They’ve got fees that are associated with things like statement research, etc, but those are pretty standard and you’re pretty unlikely to ever use those services.  You also get access to over 40,000 ATMs in the STAR ATM network.

The Smarterbucks Program

As I mentioned above, the “cashback” goes into your Smarterbucks account.  So, you’re probably wondering what the heck that is.  Smarterbucks is a rewards program.  Not unlike programs like Swagbucks, it rewards you for certain actions.  Things like shopping through their portal (“Smarterbucks Marketplace”) earn you cash back that is credited to your account.  You can also ask others to contribute to your account.  That option could be pretty cool to use as an alternative for people to give to you for birthdays, Christmas, or special events.

Once your Smarterbucks account reaches $15, they send a payment for that amount to your student loan.  At first, that might not seem like much, and, really, it isn’t.  But, every little bit helps.  And every $1 you pay off early is $1 that you aren’t accruing interest on for the life of the loan.  And that can add up in a hurry.

Would you switch to an account like Smarterbank for an offer like this?  Is the offer strong enough to make it worth the time?  What other offers have you seen that help with student loan payback?

See all the details on Smarterbank.

Lending Club Return Update 1Q13

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If this is the first of my Lending Club return updates that you’ve read, let me catch you up a bit.  It all started with a little Lending Club / Sharebuilder experiment.  It’s moved on past that, to an ongoing series here at Beating Broke where I share, on a quarterly basis, how the account is doing, the things I’ve done with the account recently, and the things that I might be thinking about trying over the next quarter.

How I invest in Lending Club

Because of where I live (North Dakota), I’m not able to directly invest in fresh loans.  I’m forced to use the FolioFN trading platform to buy (and occasionally sell) the notes that I’m investing in.  But, based on my returns, I don’t think I’ll be complaining anytime soon.  If you’d like to read more about how I select my Lending Club notes, you can read my post on that subject here.

Beating Broke Lending Club UpdateLazy Lending Club Investing

While I consider investing in peer-to-peer investing to be a nearly passive income source, it isn’t a pure passive income source.  What I mean by that is that it does require some active management in order to keep the money invested in loans, and not just sitting fallow in your account.  Without meaning to, I put that to the test this last quarter.  In February, I don’t even know if I logged into the account.  I certainly didn’t buy any new notes.  What that means is that for the better part of February, the money that I had coming in just sat in the cash account not doing a darn thing.  By the end of February, the cash account was nearly 10% of my Lending Club portfolio.  I invested all of that back into notes in March, but it was a lesson in needing to log in and check the account once in a while.

Lending Club Loan Analysis

Analysis might be a bit too strong of a word.  At the end of the quarter, I had invested in a total of 62 notes.  Of those 62 notes, 19 had been paid off, and there have been no written off loans.  There is one that has slipped into the delinquent status column, however, and is showing signs of ending up in the written off column. The balance on principle of the loan is less than 1% of my total portfolio.  I might be able to sell it, but it’s far enough delinquent that I’d have to sell it at a significant discount.  Honestly, I haven’t decided if I’ll do that or not.  I’d rather it just came back around and was paid off, but I’m more of a realist than that.  Maybe we’ll be talking about the written off loan effect at the end of next quarter.

Lending Club Return

So this is the part that everyone’s been reading for, right?  If you look back at the 4Q12 update, you’ll see that my rate of return (displayed as NAR in the account dashboard) was 14.48%.  I screwed up a bit and didn’t record the NAR displayed at the end of March.  As of 4/24/2013, it’s being displayed as 14.63.  That still includes the one delinquent loan, so it’s likely to go down some if that loan is sold at a significant discount, or if it is written off.  The spreadsheet I use to keep track of the numbers shows a a return of 15.86% and 13.26% (adjusted with inflation, which may or may not be necessary).

The cash flow in the account remains pretty good.  I had several loans paid off in the last quarter that was reinvested.  All told, the portfolio of active (principle remaining) loans grew by 2 over the first quarter.  The average amount of money churning back into the account each month is averaging well over $30 a month now allowing me to invest in one new note (at $25/each) each month and then another when the balance grows beyond $25 again.  Monthly interest received is teetering around the $10 a month line.  I think my next goal might be to get the interest income up to $25 a month.  That would be pretty sweet.  I’d be investing in a new note each month on just the interest along.  If I want to do that anytime soon, however, it means I’ll have to start putting money into the account again.  I haven’t put anything into it since November of last year, and I haven’t yet decided when I’ll start putting money into it again, but it will likely be soon.

Embracing Risk, and Increasing Returns

I suppose that somewhere along the way, here, I should mention risk.  The notes that I’m investing in all carry a risk of potential default.  If they all were to default, I’d lose every penny in my account.  The odds of that happening are pretty small.  But, the odds of having one or two loans default out of a couple hundred is significantly higher.  If you’re going to invest in Lending Club notes, or any investment, you need to know and understand the risks.  That’s your warning, and my disclaimer.

Now, take a minute and go look to see what your bank or credit union of choice pays on their savings account.  How about their best rate on a CD?  Now, even if I were to invest my portfolio into loans with a better credit rating (and, supposedly lesser risk), I could easily be making 6-9% if there weren’t any defaults.  It beats the heck out of the rates at my credit union.

One last disclaimer.  Please don’t put your liquid (or, emergency) savings into risky investments.  You need those readily available, and relatively risk free.  Even at a paltry 0.25% in a savings account, it’s in the best place.  Every other drop of savings is fair game though.  Your money needs to be working for you, not the bank.

If you think Lending Club (or Prosper) is something you want to give a look (maybe you’ll want to try an experiment like I have?) you can sign up at the following links: (Lending Club | Prosper)