Dealing with debt
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I’d now like to turn the call over to Dubis Correal. Thank you, and you may begin your
conference. Thank you, (Cordel).
Good afternoon. Welcome to our Financial Education Webinar series for library staff. I’m Dubis
Correal. And I’m Dan Rutherford.
We – as you know, we are with the Consumer Financial Protection Bureau, Office of Financial
Education, and today’s Webinar is part of an ongoing educational series to help library
staff build knowledge and become more comfortable helping their patrons.
Today’s Webinar will focus on credit and debt. We will have plenty of time for questions
and answers, but you can also use the Q&A on this screen if you have a question throughout
the Webinar. We will open the phone lines when we’re ready
to hold discussions and take questions. When speaking, I’d like to remind you to please
let us know the name – your name, affiliation, so we know who we’re talking to and where
you’re calling from. We are recording this Webinar so your questions
and comments will be recorded too. It generally takes a few weeks for us to review
and post these recordings, so we ask that you please be patient. We will post the video
on the library resources section of our Web site. The address is on the screen.
On that page, you’ll also see our list of upcoming webinar topics. We plan to hold these
Webinars on a monthly basis and our format should be fairly consistent with today’s presentation.
So if you haven’t already done so, please send your contact information to [email protected],
and ask to be added to our email list. If you add Library Webinars, or something
similar to the subject line, we’ll be sure to include you in future updates and announcements.
This is the fourth Webinar in our series, and last month we talked about how to discuss
setting money goals that are smart, specific, measurable, attainable, relevant, in timeframe.
And next month, we’re going to have a special guest from the CFPB Office of Financial Empowerment
to discuss how tax time could be a good time to start discussions about savings.
We would also like to plan something special. A panel discussion of marketing your programs.
We’re looking for librarians or community partners who have had a lot of success marketing
their programs or who want to share what it takes to spread the word about your financial
education events. So if you’d like to volunteer, suggest a panelist,
or suggest other topics for future Webinars, please send us an email to [email protected]
That is [email protected] As Dubis mentioned, you can ask a question
anytime during the Webinar by using the Q&A function on your screen. Just click the Q&A
button and type in your question and we’ll answer it during the session.
So as always, we like to provide some updates at each Webinar, and our update for today
is that we would like to start our conversation about working with schools. So if you have
had success in this area or would like to participate, please contact us at [email protected]
if you know any school librarian or if you know of any studies or surveys done to school
librarians, please let us know. Also, our free financial education marketing
materials are now available on the Publications page. So if you’re looking for any marketing
materials about this program, you can go and download them or order them for free.
Please remember that you can also co-brand these materials so you can display them at
your library. We’re also thinking about creating an Affinity
group of library staff or librarians that are interested in financial literacy, and
we would like to convene that Affinity group at one of the conferences. Maybe the ALA at
our conference. So, we’re in conversations with the American Library Association.
So if you have any ideas about that or if you’d like to propose any agenda items, if
we get to do that meeting, we would like you to email us again at [email protected]
Great. And let’s go ahead and press on with today’s
topic, dealing with debt. Here are our Webinar objectives for today.
And I just wanted to start off with a small statistic that about 80% of Americans carry
at least one type of debt, and that’s from the Center of Investor Education Financial
Capability Survey from last year. So with that in mind, what we’re going to
be covering today is how you can be better equipped to talk to patrons about how they
deal with debt, considering taking on more debt if someone comes up to you and asks about,
you know, should they you know – you know, if they’re worried about the debt load that
they have and are thinking about buying another car, this could be some issue that you offer
them in terms of research or additional help and resources.
Examining the costs and alternatives of high cost credit and ways to reduce debt, which
I know a lot of conversations have been had about that. Anecdotally, we’ve been approached
by a number of librarians who say this is a very common topic that they’re asked about
during programs, and especially you know around financial education programs that they’re
providing. So with that, let’s move on.
Let;s start with a definition of what we mean by debt and credit. Debt is very simply money
you have borrowed from a person or business. When you owe someone money, you have a liability.
When you owe money, you have to pay it back sometimes in the form of scheduled payments,
and often you use money from your future income to make those payments.
Debt is different from credit. Credit is the ability to borrow money. Debt results from
using credit. So you can have credit without having debt. For example, you may have a credit
card but no outstanding balance on it. So is there good debt or bad debt? Sometimes
people label debt as good or bad. Some debt can help you reach your goals or build assets
for the future. People will often say that borrowing for your education or a reliable
car to start a business or to buy a home can be a good use of debt.
But it’s not always that simple. For example, borrowing to further your education may be
a good use of debt because earning a certification or a degree may lead to a better paying job
or more security. But if you take on the debt and you don’t
earn the certificate or degree, this student debt has set you back instead of helping you
reach your goals. Taking out a loan for a reliable car to get
you to and from a job can help you stay on track to meet your goals. However, if you
borrow 100% of the car’s value, you may end up owing more than the car’s actually worth.
Or if you buy a more expensive car than you need, you’ll have less money for other bills
each month. While it may get you to work, it might keep
you from getting to your financial goals. Borrowing money to start a business may help
a patron create income for herself or others, but if the business fails, she may end up
owing money and not having any income she can use to make those payments.
Finally, taking out a loan to buy a home may be a way for some patrons to reach their goal
of home ownership. But if they are unable to keep up with the payments or they end up
owing more than the home is worth, that debt may set them back for a long time.
This information is not meant to scare you. It’s simply meant to show you that even debt
that many people consider good should be approached with caution.
Some people consider loans such as credit card debt, short-term loans, and palm loans
as bad debt. This is because they carry fees and interest. And when they have been used
for things you consume, like meals out, gifts, or a vacation, they do not help you build
assets. But these sources of debt can help cover a
gap in your cash flow if you have a way to repay them.
So there is no one type of debt that is good or bad. That’s why it’s important to first
understand someone’s goals and needs, then you can help them research the credit they
need, especially for purchases like a car or home before they make their final decisions
on a purchase. Excuse us, we have to go back up one.
There we go. Okay, so when is debt secured or unsecured?
When debt is secured, it means that a lender has – can collect an asset if you don’t pay.
So some examples of secured debt would be a home loan that’s attached to the house or
a property that you’re buying. An auto loan that’s attached to the car. So if you don’t
make your payments, the home could be foreclosed upon or the car can be taken away.
Unsecured debt by comparison does not have an asset attached to it. And examples of unsecured
debt would be credit card debt, department store credit charge card, signature loans,
medical debt, student loan debt, et cetera. If these loans are not paid as agreed, they
will often go what’s call into collections, which means that it gets turned over to a
collections department or a third card – party collection agency. And, that can mean a drop
in your credit score. We’ve added several tools to the handouts
function of the Webinar, so please take a minute to download some of those now.
Using Tool 1, the debt management worksheet, patrons can list all of their debt and determine
whether they are secured or unsecured. For more information on student loan debt, see
Tool Number 4, Student Loan Debt Worksheet. So how much debt is too much? One way to know
if a person has too much debt is how much stress the debt causes them. If someone is
worried about how much debt he or she has, it’s likely too much. A more objective way
to measure debt is the debt to income ratio. The debt to income ratio compares the amount
of money paid out for debt payments each month to gross with monthly income. That’s income
before taxes and other deductions. The resulting number shows the percentage
of income that is dedicated to debt. The higher the percentage or debt load, the less financially
secure a person may be because they have less money to cover other living expenses and build
savings. So this is Tool 2, the Debt to Income Ratio
Worksheet, and you can use it to calculate this percentage. If you find out that it’s
higher than what you want, you can use Tool Number 3, the Debt Reduction Strategies Worksheet,
to make a plan to get out of debt. So let’s look at a couple of examples.
Karen has just graduated, completing her Associates Degree in Nursing. She’s already landed a
full-time job earning $2800 a month gross income. She works full-time at a hospital
21 miles from her home and public transportation is not available for her.
She found a good used car but she can’t afford to buy it without a loan. Her monthly payments
on that loan would be $158. Every month, she also pays debts that equal $975. With a monthly
debt with a car, her debts would equal $1133, so her debt to income ratio with a car loan
would be .41, or 41%. When using scenarios, have discussions about
debt to income ratios and remind people that the higher the percentage, the less financially
secure they may be because less is left over to cover everything else.
Explain how you can interpret the debt to income ratio. For example, if people are renting,
consider maintaining a debt to income ratio of between 15% and 20% or less. This means
that the monthly credit card payments, student loan payments, auto loan payments, and other
debt should take up to 20% or less of their gross income.
For homeowners, you should consider a little bit more. A debt to income ratio of about
28% or less with just the mortgage loan, taxes, and insurance. This means that if you have
a mortgage, the mortgage alone should take up no more than 28% of your income. This includes
the monthly principle, interest, and taxes, and insurance that go along with it.
If you want to look at the whole debt picture for homeowners, consider a debt to income
ratio of about 36% or less. This means that if you have a mortgage and other debts, such
as credit card payments or student loans, your debt to income ratio should be around
36%. If you have court ordered fixed payments such as child support, count these as debt
for that purpose. Some lenders will go up to 43% or higher for
all debt. Dan, people are asking how they can get the
handouts. Can you please repeat? Yes. There should be a button at the top of
the Webinar window that says Handouts. It looks – why don’t you go ahead and tell them
because I can’t (unintelligible)… ((Crosstalk))
Yes. It looks like three sheets of paper on the upper right hand corner.
Yes. So if you just click on that, a dropdown window
will show up and then you should be able to just pull those up individually.
Okay, so avoiding debt traps. If you are considering loan products or patrons
are considering loan products that meet an immediate need, it’s important to avoid these
debt traps and – to keep you on path for your goals. A debt trap is a situation where people
take a loan and have to take out new loans to make the payment on the first loan.
It’s called a trap because for many people it becomes difficult to escape the cycle of
borrowing and taking on more debt to cover the loan payment and still be able to pay
for other expenses like food, rent, and transportation. A debt trap can happen when people use short-term
loans that have to be paid back in just a couple of payments, such as payday loans.
Signature loans and deposit advance loans are other examples of short-term loans. These
loans have many things in common. They are small dollar loans generally under $500. They
must be repaid quickly, 14 days is the median term of payday loans. They require the borrower
to give creditors access to a repayment through an authorization to present a check or debit
a borrower’s deposit account. If patrons ask about these products, it’s
important to make them aware of some common misunderstandings and the facts about payday
loans. One, the money is borrowed for emergencies.
The fact is most borrowers do not use their first loans for emergency expenses. The Pew
Charitable Trust Payday Lending in America study from 2013 found that 69% of first time
borrowers used the loan to pay for regular bills, while only 16% used them for emergencies
such as a car repair. Myth 2. Borrowers can pay back the loan. The
fact is while they may pay it back on time, many borrowers have to either immediately
take out a new loan or take another one in the same period.
A CFPB study found that payday borrowers are in debt for a median of 199 days, nearly seven
months of the year, and pay a median of $458 in fees, not including the principal.
The Pew Charitable Trust found similar results that on average, borrowers are in debt for
five months out of the year and pay an average of $520 in fees on top of the money they have
borrowed. This shows some of the different amounts and
how they sort of break down in different payment scenarios.
Next slide. So what are some alternatives? If you are
short on cash, consider other alternatives, including using your own emergency savings,
using lower cost short-term loan alternatives from a credit union or bank, borrowing from
a friend or family member, using a credit card. While it will increase your monthly
card payment, it may prove cheaper in the long run.
Negotiating for more time to pay if the loan is for a bill that is due. Bartering for part
or all of what you are borrowing the money to cover. Determining whether the item or
circumstance you are borrowing the money for is a need, an obligation, or a want. If it’s
a want, consider whether it’s possible to spend less money for it or not purchasing
it at all. Often, people find out they have a debt in
collection when they receive a letter or a phone call from a debt collection agency.
Sometimes they don’t remember owing the debt so they are surprised when they are told the
debt has gone into collections. For some people, this can feel overwhelming. Debt collectors
use persuasive techniques to get you to send money.
Do not send money or even acknowledge the debt the first time you are contacted. This
is because you want to make sure you actually owe the debt. You want to make sure that the
individual contacting you really has the authority to collect that debt.
If you know the debt is not your debt, you can ask the debt collector to stop contacting
you. Before sending money or acknowledging the
debt, ask the debt collection agency to verify the debt. Do this by sending a letter within
30 days of the debt collector’s first contact asking them to verify the debt is yours and
that they have the authority to collect it. Use the sample letters in Tool 5 when debt
collectors call to get started. Even if a debt may be yours, you may have
the right under the Fair Debt Collection Practices Act to ask the debt collector to stop contacting
you. Once you make this request, they can contact you to tell you that they won’t contact
you again, or they may notify you that they or the creditor could take other action. For
example, filing a lawsuit against you. Stopping them from contacting you does not
cancel the debt. You still might be sued or have debt reported to the credit reporting
agencies Equifax, Experian, and Trans Union. You can ask a debt collector to stop contacting
you at any time, so keep in mind that you could ask them for more information before
deciding whether to tell them to stop contacting you.
Here are a couple of examples of the letters that we posted online for you.
There are several under (unintelligible) resources. So it comes down to knowing your rights. The
Fair Debt Collection Practices Act says that debt collectors can’t – what debt collectors
can and cannot do. This law covers businesses or individuals that collect a debt of other
businesses. These are often called third party debt collectors. This law does not apply to
businesses trying to collect their own debt. The law states that debt collectors may not
harass, or press, or abuse you or any other people they contact. Some examples of harassment
are repeated phone calls that are intended to annoy, abuse, or harass you or any person
answering the phone. Obscene or profane language. Threats of violence or harm. Publishing lists
of people who refuse to pay their debts. This does not include reporting information
to a credit reporting company however. Calling you without telling you who they are.
The law also says debt collectors cannot use false, deceptive, or misleading practices.
This includes misrepresentations about the debt, including the amount owed, that the
person is an attorney, threats to have you arrested, threats to do things that cannot
legally be done, or threats to do things that the debt collector has no intention of doing.
It’s important to keep a file of all letters or documents a debt collector sends you and
copies of anything you send a debt collector. Also, write down dates and times of conversations
along with notes about what you discussed. These records can help you if you have a dispute
with a debt collector, meet with a lawyer, or go to court.
List debts, their interest rates, and the amount owed, then consider which debt reduction
strategy you’d like to use. So there are a couple of methods when we talk about debt
reduction. And again, what you want to do is write it all down on paper and take a look
at the big picture. So the first method would be to attack the
highest interest debt first. In this method, you’re going to focus on unsecured debt with
the highest rate of interest and eliminate it as quickly as possible because it’s costing
you the most money. Once it’s paid off, you can focus on the next most expensive debt,
and so on, until they’re all paid off. So the pro of this strategy is that you eliminate
the most costly debt first. The con however is you may not feel like you’re making any
progress very quickly, especially if this debt is costly or has the biggest balance.
The second method you could try is what’s known as the snowball method. Here, you would
focus on the smallest balance debt. You would get rid of it as quickly as possible, and
once you have paid it in full, you would continue on to the next debt payment, but you would
– or the next debt, but you would roll up the payment from the original small debt into
the payment for the second debt, and so on. This snowball method – this way you create
what’s called the snowball method. You create a snowball of debt payments that keeps getting
bigger and bigger as you eliminate each debt. You keep making the payments, but you are
redirecting them to the next debt as the previous debt is paid off.
The pro here is that you can see progress quickly, and especially if you have many small
debts. And in theory, this creates a momentum and motivation for people who are trying to
become debt free. The downside or the con, you may be paying
more in total because you’re not necessarily eliminating the most costly debt first.
So in terms of debt reduction, there are other things you can do too. You can call creditors
to see if they will lower your interest rates. If you have paid all of your bills on time,
they may lower it to maintain your loyalty. If you are in a difficult position, you can
explain your hardship and ask them to lower the rate.
You can get another source of income or another job in the short-term. Use all of your additional
earnings to eliminate the debt. Another option is to sell something and use
the income to pay off the debt or debts. If you’re eligible, you could file for tax
credits and use your refund to pay down or eliminate what you owe.
Student debt. There are two general kinds of student loans. Federal student loans and
private student loans. Federal student loans are loans that are funded by the Federal government.
Private student loans are non-federal loans made by a lender such as a bank, credit union,
state agency, or school. In both Federal and private student loans, delinquent payment
will impact your credit history and scores and may result in collection.
Private student loans do not offer the flexible repayment terms or borrower protections featured
by the Federal student loans. There are many options for paying back Federal
loans. Do not ignore student loan paperwork. Non-payment and delinquency reduces options
for payment plans, as many require loans in good standing to qualify.
Some of the repayment options include standard repayment (unintelligible). Standard repayment,
in which most borrowers start with this repayment plan, this repayment plan has a fix payment
of at least $50.00 a month for up to 10 years. Graduated repayment is lower the first year
and then gradually it increases every two years for up to ten years.
Extended repayment. This payment is fixed or graduated for up to 25 years. The monthly
payments are lower than the standard or graduated payment plans, but you will pay more interest
over the life of the loans. Income-based repayment is payment that is
limited to 15% of discretionary income, which is the difference between your adjusted gross
income and 150% of the Federal Poverty Guidelines. Payments change as income changes, and the
terms can last up to 25 years. After 25 years of consistent payment, if you
have missed no payments of caught up with things, the loan will be forgiven. You will
have to pay income tax on the portion of the loan that is forgiven.
To qualify for income-based repayment, you must be able to show partial hardship.
Earn – Pay as You Earn. Payment is limited up to 10% of the discretionary income as defined
above. Payment changes as income changes, and the loan term is 20 years. After 20 years
of payments, the loan is forgiven as described above, and taxes will be owed on the amount
forgiven. To qualify for pay as you go, or Pay as You
Earn, you must be able to show partial hardship. And finally consolidated loans – or consolidation
loan. You pay off of your existing student loans with a new loan. This simplifies the
paperwork and the payment you owe. You go from monthly payments on multiple loans to
one payment per month on a new loan. Your loans must be in good standing to qualify.
This results in lower monthly payments as the term is 30 years; however, you will pay
more interest over the life of a loan. You may also qualify for a deferment or forbearance
in certain circumstances. In deferment, payment of both principal and interest is delayed.
If you have a subsidized Federal loan, the government pays your interest during the deferment,
otherwise you must pay interest or it accrues, which means it builds up.
When interest builds on student loans, it becomes part of what you owe. This means you
ultimately end up paying interest on the interest. Deferments are only granted for specific circumstances,
including enrollment in college or a trade school, a graduate fellowship or rehabilitation
program for individuals with disabilities, during unemployment, during military service,
and during times of economic hardship, including Peace Corps service.
Forbearance means that you stop paying or pay a lesser amount on your loan for a 12
month period. Interest accrues during forbearance. When applying for a repayment option, be sure
to continue making your loan payments until you receive written notification that you
have been approved for income-based repayment or forbearance, for example.
This ensures your loan continues in good standing. Finally, you may also apply for loan forgiveness,
cancellation, or discharge in the following situations. Total and permanent disability,
death — someone would apply on your behalf — and a closed school.
There’s also teacher loan forgiveness if you are a teacher working in certain educational
setting, and public services loan forgiveness if you work in a public service sector and
have made 120 loan payments. Except for the above circumstances, it’s nearly
impossible to eliminate Federal student loan debt even in bankruptcy, and your wages and
bank accounts can be garnished for non-payment. The CFPB has a section on its Web site dedicated
entirely to helping you plan for ways to pay for postsecondary education. In fact, the
tool will help you think through the entire process of planning for and paying for school,
including researching schools, filling out the free application for federal student aid,
FASFA, a first step in figuring out how to pay for college, choosing a loan, comparing
financial aid packages and college costs across more than one school, managing your money
in college, and repaying your student loans. If you have student loan debt, start with
the repaying your student loan section of the tool, which can be accessed at www.consumerfinance.gov/payingforcollege.
Finally, we’d like to leave you with some resources. Here are some other places that
you can go besides our Web site to get additional information on dealing with credit and debt.
And with that, we’re ready to take your answers – questions.
We’ll now begin the question-and-answer session. If you’d like to ask a question, please press
Star 1. You will be prompted to unmute your phone and record your name.
Your name is required to introduce your question. And again, that’s Star 1.
Great. Well I guess we answered everyone’s question.
Are there any online questions? And at this time I’m showing no questions
in queue. Do you have – we do have a question online,
and the question is, Do you have information available about student loan forgiveness for
things like civil service? Yes. We did cover that a little bit earlier,
so let me flip back to that and go back over that.
So yes, public service loan forgiveness. If you work in a public service sector and you’ve
made 120 payments, then you might be eligible for that. And more information is available
on debt repayment and student loan debt repayment on our Web site. So if you’re looking for
more specifics, you might want to turn there. Do we have any more questions?
And at this time I’m showing now questions in queue.
Okay, so we would like to remind participants that the next – our next month’s Webinar is
going to be about how tax time could help start the discussion about savings, and also
to remind participants that the Webinar in Decembers is going to be about marketing.
So if you have ideas of a good marketing program that you have used to market your financial
education programs, please let us know at [email protected]
And just to remind you our next Webinar is going to be on November 19th at 2:30 pm Eastern
time. Again, our next Webinar will be on November
19th at 2:30 Eastern time, and our Webinars are about 30 to 40 minutes long, so we hope
you can join us again. Thank you everyone.
Thank you for your interest, and for participation. Have a great day.
And that concludes our conference. You all may disconnect.