Talking Money: Find Optimal Options Online

Jean Chatzky
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Posted: Jul 15, 2009 5:59 PM
Talking Money: Find Optimal Options Online

The mail in my inbox has been piling up, so I thought I'd devote this week's column to tackling a few of your questions.

Q: I have $100,000 in federal student loan debt. The monthly payments are over $600, more than I can afford, but Sallie Mae will not grant me a hardship deferment because of my monthly income. However, I also have a car note, mortgage and credit card bills. What should I do? -- Jaclyn, Tampa, Fla.

A: I called Sallie Mae directly about this and they told me that the eligibility rules for hardship deferment come straight from Congress and the U.S. Department of Education. In other words, if you don't meet the criteria prescribed by the government, Sallie Mae can't bend the rules, unfortunately. But there is still hope. Have you checked into different repayment plans? July 1 just brought a new income-based repayment plan, called IBR, which will cap your monthly bill at 15 percent of your discretionary income. "IBR is designed to help federal student loan customers with high debt relative to their income," explains Erica Eriksdotter, a spokesperson for Sallie Mae. Because you're paying less each month, you'll pay more in interest overall, but any remaining balance is forgiven after 25 years of repayment.

If you don't qualify for IBR, go through your budget very carefully and see if there is any way to make cuts you hadn't considered before. If nothing turns up, you can consider extending your repayment term, an option that is available to borrowers with at least $30,000 in federal student loans. You can stretch your repayment period from ten to 25 years, which will lower the amount you pay each month, but increase the amount you pay overall in interest. One final note: If you haven't consolidated those loans, consider doing so now.

Because you're a teacher, consolidating through the government's Direct Loan program (www.loanconsolidation.ed.gov) may allow your loans to be forgiven after ten years of repayment, says Eriksdotter. This is part of a special federal loan forgiveness program for public service employees.

Q: My husband and I want to take advantage of the tax credit and purchase our first home this year. He makes about $28,000 in take-home pay a year and I am a stay-at-home mom. We have $15,000 saved for a down payment. We have no other debt aside from a small student loan. Can we afford to own a house on this income? -- Kate, Des Moines, Iowa

A: I think you probably can and here's why: The average home price in Des Moines, according to Zillow, is about $110,000. I used the mortgage calculator at CNNMoney.com to run some numbers. With $28,000 in annual take-home pay, you're living on $2,300 a month. Of that, no more than 35 percent -- or a little more than $800 -- should be spent on housing. That's not just the cost of your mortgage, but taxes, insurance and upkeep. If your credit score is decent, you should be able to land a mortgage with an interest rate of no more than 6.0 percent which would leave you -- depending on the exact price of the home you buy -- with a payment of around $600. That, according to my calculations, is something you should be able to manage.

But I want to leave you -- and everyone else who is thinking of buying a home before year's end -- with a few thoughts. Don't buy more house than you can afford. Remember, once you buy it, you still need to furnish it, heat and cool it, maintain it (count on spending $1,000 a year on that) and move into it (which can cost another $1,000, if not more). And second, you still need to save for emergencies and retirement. Spending no more than that $800 on housing should enable you to sock away at least $280 a month -- 10 percent of your take-home -- for short- and long-term savings. In this economy, this needs to be the priority.

Q: I have a large credit card balance, but I have been working to pay it off and I always pay on time. My interest rate has just jumped from 5 percent to 16 percent. When I called, the company said they are raising interest rates across the board. Is there a credit card with a low interest rate and no balance transfer fee? -- Daniel, Doylestown, PA

A: It's true that a lot of borrowers are seeing their interest rates jump or their credit limits cut by card issuers. It's a product of this economy. The problem is that good balance transfer offers are hard to come by. You're almost certainly going to pay a fee, and worse, while fees used to be capped at $75 or $100, many lenders are doing away with that, says Curtis Arnold, founder of CardRatings.com. Now, you're seeing fees of 4 percent on some Bank of America cards, and 5 percent on some Chase cards, with no cap. That means transferring a $10,000 balance can cost you $400 to $500. Add that to the fact that the 0 percent introductory periods these cards offer are getting shorter -- from 12 months to nine or six -- and transferring just isn't as lucrative as it used to be.

So what you really need to do is run the numbers. Look for card offers in your mailbox, online or by calling issuers directly (If you're carrying a card in your wallet without a balance, calling that issuer is a particularly good tactic. Tell them that you're looking to transfer a balance from another card, and see if they'll offer you a deal). On Arnold's CardRatings.com, I found the Citi Platinum Select MasterCard, with a 0 percent introductory APR for up to 12 months and a 3 percent balance transfer fee, and the Discover More Card, with a 0 percent APR for up to six months and a 3 percent transfer fee. Keep in mind that you're going to need a good credit score to be approved -- 730 or higher is the goal. Once you have an offer, use an online calculator (Bankrate.com

has a good one) to figure out if it's worth making the move.

With reporting by Arielle McGowen