Creative Strategies for Paying Off Student Loans and Debt

Cody Niedermeier: [00:00:00] Hello everyone. And welcome back to our webinar series. My name is Cody Niedermeier and I’m an associate at BFG Financial Advisors and a CFP candidate. And today we’re going to be talking about creative strategies to paying off student loans and other forms of debt. And we have a reoccurring guest who’s been on the, I believe the last few times we have Lena Nebel joining us. Who’s one of the principals at BFG and she has over 20 years of experience in the field. And we are more than delighted to have you return Lena.

Lena Nebel: Thanks for keep inviting me back. I appreciate it.

Cody Niedermeier: Keep doing a great job. You’re going to keep coming back, but once again, just thank you.

Cody Niedermeier: Uh, appreciate you making the time to, uh, to join us today. But without further ado, I think. Everyone wants to see the fun disclosure slide. And, uh, we’ll get this thing going. When people think of debt, is all debt bad?

Lena Nebel: No, not necessarily. I mean, I think it, it [00:01:00] really depends on the interest rate, the purpose of the debt.

Lena Nebel: Um, no, but there’s, there’s good debt and bad debt.

Cody Niedermeier: I feel like debt is a, it’s almost a bad word in our industry where a, it makes a lot of people turn in their seat when they think about debt or trying to get rid of debt, um, or anything kind of along those lines. So I guess building off of that, what are the different kinds of debt that people take on, on a daily basis?

Lena Nebel: Yeah, I think to your comment about in our industry, you know, people kind of, don’t like the term debt and everything because you, you owe something, right. You owe somebody something and it’s a payment that you’re going to have. Um, so it can make people very stressful. Uh, there are a few different types of debt.

Lena Nebel: So I thought I would, uh, we can kind of talk about some of the basic forms of debt, the more popular ones. Um, the first one is obviously house debt, so there can be a variety of debts that you can take off of real estate, whether it’s primary residence, vacation home, a second home, an investment property.[00:02:00]

Lena Nebel: Um, but typically you have that mortgage for the purchase of that property. You may have a mortgage because you refinance another debt as well. Um, one of our webinars that we recently had was about purchasing a home. So we spent a lot of time talking about the different types of mortgages for, so for our listeners out there, um, who didn’t get a chance to hear that webinar, uh, shameless plug go, please to the other webinar about the, uh, that the house purchase. Um, there’s also loans that you can take to get the equity out of your house. So they’re typically called a home equity loan or home equity line of credit. Okay. So the biggest differences between those two is a loan is a fixed interest rate for a fixed time period where a line of credit is a variable debt.

Lena Nebel: So on the variable debt as interest rates increase that, uh, payment is going to increase as well. Um, there’s also tax benefits related to both of those. I think we’ll probably cover that in a little bit later. Um, but those are again, the main types of [00:03:00] loans off of a house. Uh, you then have credit card debt, obviously credit card debt is one of the popular forms of debt.

Lena Nebel: It’s also the ones that people get in the most trouble for. A lot of people nowadays use credit cards to fund all their purchases and then they pay it off every month. Um, it’s an efficient way to budget and spend your money with the assumption that credit cards are going to get paid off each month. Um, a lot of people do it this way because they’re getting cash back or airline points or some type of meaningful rewards.

Lena Nebel: Uh, we have clients that will actually pay for college tuition on their credit card to get those points. And then they’ll use whether it’s the 529 or their savings to, to pay that off. Um, other individuals use credit cards to purchase items. Um, you know, one of the things we talked about at that last webinar was all of the ancillary expenses you have when purchasing a house.

Lena Nebel: So you think of furniture, um, you know, you can go to La-Z-Boy furniture and get 0% for 24 months. And so what that [00:04:00] means is that when you purchase that furniture, you don’t have any interest that you’re paying on during that time period, those 24 months. So if there is a balance leftover at that time period, all of the interest that has accumulated is now due so a lot of people forget that, um, that payment is then due on that 24th month, but that all of the interest that has been accumulating, not just what is going to start on that next month. Um, so that deferring of that interest could be pretty substantial, which is why you would want to have it all paid off by the time that interest expires.

Lena Nebel: Um, but again, uh, like I said, you know, this is the type of debt that, that can get people in trouble because it’s easily, you can apply for it. It’s super easy to get approved and everything. People will say, well, I’ll pay it off next month. Or when I get my tax refund, when I get my bonus, but there’s always something that changes.

Lena Nebel: Um, so it’s better to just, you know, [00:05:00] try and pay it off each month. Uh, car loans, car loans, another popular form of debt. A lot of people have, have car loans, um, depending on their finances, they may put money down on that car loan to be able to keep the interest rate down or keep, keep the payment down. They may extend the length of the loan to keep the payment down, which ends up costing them more in interest.

Lena Nebel: You know, you never want to go to a dealership and say, I can afford $300 a month of a car payment, because they may show you a seven year loan and doing that versus maybe taking a three or a five-year loan. So, um, again, car loans you want to make sure that you’re, you’re chopping the best interest rate. Dealerships aren’t the only places you can get a car loan. You could go to your credit union or to your bank. Um, there are used car loan rates and new car loan rates. Used car rates typically have higher interest rates. Um, so keep that in mind if you’re looking at used versus new. There’s also a 401k loan. [00:06:00] I would recommend against using the 401k as a means to, to, um, to purchase something.

Lena Nebel: You know, this would be a last resort because you basically are removing working capital and in the end it could possibly push you farther behind in retirement because you’re basically playing catch up. Um, but how a 401k loan works is you can take a loan out, uh, that you would not pay any taxes or penalties.

Lena Nebel: It doesn’t even show up on your credit report. You pay yourself the interest back. So you’re not paying a lender. Um, but if you leave your job, let’s say in the second year, after taking that loan, some employer plans, you have to pay it back within 90 days. And if that’s the case, you’re going to then have taxes and penalty on that distribution.

Lena Nebel: So just be careful if you decide to take out a 401k loan, it’s always advisable to speak with a financial advisor or a representative from the 401k provider if that’s something that you’re thinking of doing. Um, and then [00:07:00] lastly, we have student loans, um, and obviously student loans are, are used to, um, be able to pay for college costs.

Lena Nebel: Most individuals, these days have to take student loans just because of the skyrocketing costs of, um, of college education that you can get a private loan, which is typically through a bank, uh, could have a high interest rate. Um, there’s also subsidized versus unsubsidized loans, which are government loans. Subsidized loans don’t accrue interest, whereas unsubsidized loans do.

Lena Nebel: Um, so what that means is that when you’re in school, that interest is not accumulating on that subsidized loan. Um, so that can help to lower your payments once you graduate college and have to start repaying. You can defer both loan payments until graduation. You’re not required to start paying on it.

Lena Nebel: Um, but again, the un-subsidized loans may have a larger payment because that interest has been accumulating all through your college, uh, college career. Um, obviously student loans have been in the news a lot lately due to just the [00:08:00] various stimulus packages that have come out since COVID. Recently as in last week, um, the administration has actually extended the deferral of student loan payments until January 31st.

Lena Nebel: They were set to expire in September. So we’ve pushed them off again. Um, so again, therefore individuals who receive, um, they’ve been doing the suspension of the loan payments. Um, they may also be eligible for a 0% interest rate during that time period. And like most loans, it’s up to you to contact the provider to see what options you have.

Lena Nebel: They’re not going to automatically tell you some of the plans that you can have. But if you have good cashflow, it may make sense for you to continue those payments if you can get a lower rate, if you’re eligible for that. Just because you can turn off the payments just because the lender is allowing you to suspend the payments doesn’t necessarily mean that you should. If you have good cashflow, you have a steady job, you can make those payments, get rid of the debt and continue to make those payments even if it [00:09:00] was suspended. So those, again, those are what I would say are kind of the main forms of debt, the popular forms of debt. And then as we go through it, you know, I think we’ll be able to kind of go through more detail of which is good and which is bad.

Lena Nebel: What should we pay off?

Cody Niedermeier: Yeah, no, absolutely. To no surprise. We’re already actually receiving a few questions about loan forgiveness. And do we have any idea kind of what to expect or how much of my loans will be forgiven? And I think a lot of that is just still up in the air and we’re kind of waiting on decisions from the government about the plan with that, but they just kind of keep pushing off the interest accruing.

Cody Niedermeier: Is that right?

Lena Nebel: Absolutely. Yeah. So it, it is right now, we just keep extending the deadline of when people can begin repaying. Again, not all loans are eligible, so you want to make sure that you have that as well as the 0% and everything. So we’ll see what happens in January on what’s going to be extended and what options, you know, there’s been a lot different I want to say [00:10:00] packages that have been put out there regarding we want to forgive 10,000, 20,000, all. So again, everything’s kind of up in the air, right now.

Cody Niedermeier: Yeah, a lot more questions than we have answers at the moment, but it’s definitely something we’re keeping an eye on. But I think you, you hit the nail on the head with, you know, those main types of debt and that discussion, but, and you kind of briefly talked about each one of these with this as well, but you know, what’s the big idea of, you know, why do people take on debt?

Lena Nebel: I think a better question is, you know, why don’t we just take it out of savings? Why can’t I just take all my money out of the bank and put it to a car. So, you know, as we kind of went through house, car, student loans, those all have specific purposes, right? You’re buying a house, you’re buying a car, you’re going to college.

Lena Nebel: But why don’t we just pay for it out of cashflow? Why have to take on debt? And the easy answer is most people can’t afford it. Most people can’t afford to take that amount of money or they may not have that amount of money so they’re [00:11:00] borrowing that ,they’re using somebody else’s money and they’re going to be subjected to a certain time period on paying it back and certain amount of interest.

Lena Nebel: So keeping that money in the bank or starting to accumulate savings is usually the better option. Um, then, you know, just paying for it all outright. You know, one of our jobs as a certified financial planner is to do a comparison of taking money out or taking a loan. So quite often we’ll run those scenarios, you know, should I pay for this out of pocket?

Lena Nebel: You know, especially for a new house, if we’re selling one house, should I take a mortgage on a new house or should I put all of those proceeds on that new property. It’s very, very common. So again, a lot another big question that people have is should I carry this debt as I’m going into retirement?

Lena Nebel: And I would love to see all retirees, not have any of those, those loan payments, not have those expenses, but quite honestly, if you have a car loan that’s at 0%, I’d rather you use that than [00:12:00] take money out of your investments that hopefully are doing better than 0%. So rather use somebody else’s money that’s that’s free.

Lena Nebel: So that’s really the main reason people take money and people take loans is because they’re trying to rebuild savings or they’re trying to build savings. So, it’s very common and, and that’s not a bad thing to take out debt. You just want to make sure that you’re keeping your interest manageable.

Lena Nebel: And most importantly, that that you’re able to afford that debt as well.

Cody Niedermeier: Okay. Yeah, no, that makes, that makes a lot of sense. And I think builds into, you know, when and why is it important to paying off debt? And I might be jumping ahead, but, you know, to my knowledge, and please correct me if I’m wrong you know, there’s two kind of big forms of the idea of, you know, a debt reduction plan or, you know, planning on reducing your debt.

Cody Niedermeier: And there’s one idea it’s called the snowball effect and that’s when you’re starting off with paying off that lowest balance owed debt first, and it kind of, it builds up confidence and, you know, you attack that [00:13:00] one, then you direct those payments to the next one and you kind of build up that way. And there’s also the avalanche method, which is you attack the one with the highest interest rate first.

Cody Niedermeier: And by doing that, the idea is, you know, you’re going to be paying off the ones with the highest interest, therefore, you know, saving money in the long-term on those interest payments.

Lena Nebel: Yeah. I, I agree with both of those. I, I love both of those strategies and how I would present one option versus the other really comes down to the client’s behavior towards debt payoff.

Lena Nebel: Right. So if it’s something that’s stressing them out and they just want to start cleaning it up, doing the snowball approach, maybe the best one, just lowest balance. I’m able to knock that one out. You feel better. And then, like you said, you have confidence and you just kind of keep that momentum going.

Lena Nebel: We, you know, had a client, you and I had been working on who put together a debt reduction plan and [00:14:00] we did the avalanche one. We looked at the highest interest rate first and started working that way because. They’re way on how they could pay things down. That was the best option for them. Um, one of the things we talked about at the last webinar too, was about the debt to income ratio.

Lena Nebel: So sometimes an individual must pay off certain types of debt before they can accumulate other debt. So regardless of the strategy that you want, a lender may be saying I need you to pay this loan off over here. So that may be a reason to pay off one debt versus another debt. If somebody received an inheritance or a bonus that would be motivation to start paying off some different debts and everything. And then of course there’s always the situation where interest rates are variable and in the environment that we’re in right now, interest rates are expected to increase. So we may want to pay down that higher interest rate or the variable interest rate. So again, could be, it could be a time period or it could be a time period based upon the [00:15:00] interest rates.

Lena Nebel: And then you have time period based upon if there’s a balloon payment on that loan. So what a balloon payment is you could have a loan that is amatorized over 10 years, which means that your payment is calculated off of a 10 year loan, but there’s a balloon in the seventh year, which means that the loan has to be paid off in that seventh year.

Lena Nebel: Benefit of doing that, of having a loan for, let’s say amortized over 10 with the balloon of seven is because the payment is lower. So for individuals that may have tight cashflow your first few years, but later on you think it’ll ease up to where you can take on that balloon payment again, that may be a good way to structure a loan.

Lena Nebel: All depends on your personal situation, but that balloon payment would tell you, okay, I need to attack that debt as well. And that’s kind of the mentality of having, taking out a longer term loan, but maybe treating it like a shorter term loan. So when clients say, should I get a 15 year mortgage or a [00:16:00] 30 year mortgage benefit of a 30 year mortgage is it can keep your benefit, your payment low and you can pay it like a 15 year, but if something happens to your job or your cashflow, you have that flexibility to go back to that 30 year loan payment. So how you initially structure the debt could also help with cashflow too. And again, while we’re talking about mortgages, the other types of mortgages are the adjustable rate mortgage.

Lena Nebel: So an adjustable rate mortgage. These are loans where the interest rates adjust at some point in the future and they can go pretty high. For individuals who took out an arm (adjustable rate mortgage) a few years ago. And if it’s coming due this year or next year, it’s going to jump up. So you have to be careful to understand the rules of how high that arm can go, especially in an environment where there’s a interest rate increase.

Lena Nebel: So that may dictate wanting to wanting to pay some debts off sooner rather than later. Quite honestly, it’s just [00:17:00] looking at the total debt picture and going through all of the analysis of their individual situation, looking into the crystal ball to see where interest rates are going, projecting cashflow, and then really start having a game plan on what to attack first.

Lena Nebel: And sometimes, like I said, it’s out of our control, whether they’re applying for a different type of loan and the lender wants them to pay off something first or they’re contractually obligated to pay it off at a certain time periods. So it’s important to understand all those variables associated.

Cody Niedermeier: Yeah.

Cody Niedermeier: And I mean, briefly in the last few minutes, we talked about several different variables that I’m sure some people are scratching their heads while they’re watching this webinar right now, trying to get everything organized. And it just shows, you know, another benefit of having a financial planner who kind of break everything down with you.

Cody Niedermeier: Kind of explain the rationale behind the debt reduction plan and kind of working together in order to to reduce that outstanding debt. And then it leads once again into the next slide of, you [00:18:00] know, does it matter which debt I pay first and the ideas that you’ve mentioned above, you know, just building on those with even more variables.

Lena Nebel: Absolutely. And I, I can’t stress it enough. You know, if you’re working with a financial planner, they should be examining all the debt and, and coming up with a payment plan, you know, I would say the rule of thumb is to pay the higher interest rate first. You know, that’s kind of the rule of thumb, but as I mentioned, You want to take that into context of, of everything else.

Lena Nebel: There’s also tax benefits that are part of the overall debt structure that, that we’ll talk about. And there could be options to refinance and consolidate, you know, in kind of talking about, you know, one of those clients that we helped come up with a debt payment strategy, by paying off one debt, we can then use the payments they were making on that one debt to then to another loan and start paying that off. And I think of that as almost like a snowball, right? If I’m paying off something where I was used to [00:19:00] paying $200 a month on that debt, and I take that 200 and I apply it to another one, I’m kind of doubling down on my payments and then you really can start paying things off much quicker.

Lena Nebel: In that situation, you know, we were projecting to take about three years for him to be debt-free on kind of the bad debt, right. It was okay to keep the 0% car loan, it was okay to keep the mortgage but all the other debt we want to clean up. And that’s the biggest thing is it takes time. That debt didn’t occur overnight.

Lena Nebel: And if you’re disciplined and you have patience, the debt will be eliminated, but I think some people just get so bogged down and stressed and they think that they’re never going to get out from it. Come up with a plan, stick to it and you’ll feel much better, but it does take time. Doing it, doing a balance transfer on different credit cards is always an option to a low, to a low interest rate.

Lena Nebel: If there’s not a balance transfer fee, always pay attention to the fine details. Most people aren’t aware of this, but you, if you have, let’s say a high [00:20:00] interest credit card that you’re not paying off every month you can actually call the credit card company and ask if they have a lower interest rate available not to apply for a new card, but it’s like calling Verizon and negotiating your Fios bill. Are there any specials that you’re running right now? They’re not going to call you to tell you how you can save money. You have to be your own advocate and reach out to them. So let’s say you have a credit card balance and it’s at 16%. Maybe they’re able to able to lower that rate to 10% or 6% for a certain time period.

Lena Nebel: What that means is that more of your payments are going to principle. More of your payments are able to start paying down that credit card. So that’s important to, to be able to, to look at that. Additionally, if you lost your job or you had a reduction in income, even before the different COVID rules regarding debt payments, call your credit card company, you could actually negotiate to try to get a hardship.

Lena Nebel: So you could negotiate either your balance, your interests, your payment plan, and [00:21:00] depending on the situation they can work with. You just keep in mind. If they forgive a portion of the debt, you may have to claim that as income on your taxes, but don’t feel like there’s no hope out there. Work with your credit card company, work with your lender on those options.

Lena Nebel: And then of course the last option is bankruptcy. Yeah, bankruptcy is never one that, you know, we want to be able to use. So last resort where all other options have been exhausted. The reason being is, you know, you’re limited. The reason why I wouldn’t always recommend bankruptcy is you’re limited to how much you can keep in your name and assets.

Lena Nebel: It creates a credit report, you know, for years that it’s just not advantageous for you. So before you go down the path of filing for bankruptcy, see what other options you have, see what other agencies you can work with, like a debt consolidation agency and things like that to be able to help.

Lena Nebel: And if bankruptcy is the last resort to clean everything up, it’s best to work with the bankruptcy [00:22:00] attorney who knows all the laws and knows everything that you need to do going. Through that paperwork or keeping and, and everything else. But again, it, you know, it does matter which debts you pay off first, but it really comes back to just sticking to a plan and being patient.

Cody Niedermeier: Yeah. Commitment to the plan is the one thing that we see finds our clients most successful, especially when they’re working through it. And then, I mean, you bring up the case in point of touching on bankruptcy. That is a subject that we could have several webinars, bring on, of course, an attorney that’s specific in the field.

Cody Niedermeier: But is a last resort. You know, let’s say you’re in one of these situations where you do have that debt. And, you know, you’re looking for every resource you can possibly find to help you pay it off, you know, can employers actually help with student loans?

Lena Nebel: Actually they can, there was a, it was a few years ago.

Lena Nebel: The IRS has actually allowed employers to offer matching of student loan payments in lieu of a [00:23:00] 401k match. But it’s up to the employer to offer that. So for some individuals, some young individuals who are just starting in their career, they come out of college with some student loan debt. Instead of having the employer do a 401k match, they may request, can you help me pay off my student loan?

Lena Nebel: And that will get that loan paid off quicker and still giving that young employee time to build a 401k. So talking to the benefits coordinator at your employer, understanding all those benefits. And again, while I’m talking about it, shameless plug for next month, I think we’re going to be talking about benefits as we get into open enrollment season.

Lena Nebel: And these are one of those benefits a lot of people overlook on what their employer can offer. So, yes, to answer your question and it’s not just employers actually. States actually have assistance on being able to pay off student loans. So Maryland where our office is located. Um, there’s actually, what’s called a student loan debt relief program.

Lena Nebel: [00:24:00] It allows individuals who went to a Maryland college and have student loans to be able to receive a credit, to be able to help pay, pay down your student loan and paperwork you go through and you could receive you know, a couple thousand dollars on helping to put towards your student loan. We have a lot of clients in Texas, Texas has a public service loan forgiveness program for their state employees that after a required term of 10 years, whatever balance is left on that loan it’s forgiven.

Lena Nebel: So there’s an option in Texas. The federal government actually it has a program that allows the agencies to make up about $10,000 of student loan payments per year. So we have a lot of clients whose children are going to college and they apply through the office of personnel management and they get $10,000 a year to apply towards their student loan.

Lena Nebel: Of course, with everything you have to be eligible, you have to file paperwork. I know our [00:25:00] contact information will be provided at the end of the webinar. So for any individuals who are interested in, in getting additional information, send us an email and I’ll, I can send you the links to these different programs.

Lena Nebel: You have to look for it. Right. So if you’re in the state of California, you know, maybe there’s something in California that’s available for you. That’s one of the reasons I love having all of, you know, our team built of certified financial planners because it allows all of us to have experience and knowledge and do research and kind of spread our area so we can kind of cover in different states and understand the rules that apply to them. So both employers and states can help to contribute towards that student loan pay off.

Cody Niedermeier: And like you said, the resources are out there. It’s just, you got to go find them, but let’s say we utilized all of those resources, you know, we’ve, we have our debt reduction plan.

Cody Niedermeier: We, we figured out our employer has helped with a little bit of the debt, but there’s still some outstanding. And, you know, we can’t afford to make those payments. [00:26:00] What are some steps that we can take in order to tackle this debt that you know, we feel like we’re drowning in.

Lena Nebel: Yeah. I mean that that’s when tough decisions have to be made.

Lena Nebel: You know, you have to look at cutting your expenses. As I mentioned, bankruptcy as a last resort, should you go through credit counseling? Do you need to borrow money from a friend or a family member, which can be tricky, and doing that and emotional. But again, that’s, that’s when tough decisions have to be made.

Lena Nebel: Ideally those decisions are made before that debt is even taken. That’s the tough part about our job. Quite honestly, it’s telling people if they can’t afford something that they’ve been wanting to do, but you have to do the due diligence. You have to make sure that you can make this purchase. So for some individuals, they want to purchase a, a $750,000 house, but they can only afford a $500,000 house.

Lena Nebel: So you may have to look into a different county, or you may have to give up certain things on that wishlist for a house. Or you just have to save longer [00:27:00] to be able to do that. But if you’re already in that situation and maybe through no fault of your own, you you’ve lost a job or other things have happened you gotta have to, you have to make tough decisions. You have to cut expenses in different areas or as a last resort, that’s where, you’re where you’re looking at with bankruptcy. But I’m very confident in saying if you develop a plan, if you utilize all of these other resources that we talked about, That should help you, even though you still may feel very overwhelmed hopefully there’s light at the end of the tunnel. When you map out how long it may take you to pay off certain debts or what other adjustments can be made, even if it’s just a couple of dollars, you know, you, you look at your cell phone bill or your utility. There’s all these little ad-ons that happen, right?

Lena Nebel: There can be a monthly insurance protection plan, or maybe you’re, you’re buying additional services for your TV, that everybody does streaming now, do I even need cable saving 30 or $50 a month. It adds up over time and that [00:28:00] money can be applied to other things, but you have to go through the exercise and the energy to try to find some of those savings.

Cody Niedermeier: Yeah. And you brought up the point of, you know, maybe borrowing money from a friend or a family member. I think that’s just an important one to touch on of, should I, Hey, you know, I’ll pay you back whenever or, you know, when you’re in those situations should you get something prepared legally, like a document or something just to kind of cover all the bases and not, not try to let something like that come in between, you

Lena Nebel: Always have a legal document.

Lena Nebel: Yep. I’ll always have a legal document for the reason you just said, don’t let it come between you. Don’t let it be a thing. If you don’t have the legal document, and if you say I’ll get back to you when I get my tax refund or my bonus, and that those things don’t happen, it’s tough. More people may feel more inclined to be able to loan you money if there is some type of legal agreement too.

Lena Nebel: So it’s not enjoyable to have to go through that process, but legal documents are the best way.

Cody Niedermeier: Yeah, that water’s a little murky, but I just wanted to make [00:29:00] sure we, we definitely buckled down on that one because it’s a resource that people reach out to, especially as the last resort. So that was a little bit on the downer side.

Cody Niedermeier: Let’s, uh, you know, there are some tax benefits when you do have a loan. So getting to the last few slides, I definitely want to want to get this information out to everybody of, you know, what are some of those tax benefits to having a loan?

Lena Nebel: Right. So I’ll absolutely put that disclaimer out. I am not a CPA as we’re going to be talking about the tax benefits.

Lena Nebel: So with tax advice, we always recommend you consult with an accountant. So what I’m going to do, I’ll go over the basic and more popular debts with the tax impact. But as it applies to your situation, work with the CPA or, and they can run scenarios and everything. Finishing up with student loans, you used to be able to deduct the interest off of your tax return.

Lena Nebel: It was up to a certain amount. You were phased out based upon your income, but with recent tax law changes you no longer can deduct student loan interest. So that may be a motivation [00:30:00] on wanting to pay that off quicker, because you’re not receiving any benefit tax-wise like you used to. Mortgages interest on your house debt, that’s gone through a lot of changes over these past couple years.

Lena Nebel: So a mortgage is only deductible up to $750,000 of that balance. So if let’s say you purchased a house and you took a mortgage for 800,000. Only the interest up to $750,000 of that balance is deductible. So you can imagine when that tax law changed the form 1098, which is what you use to put on your tax return to show how much interest you’re claiming, it had to be expanded to record the outstanding balance, the date that your loan was taken and other items that the lender is now required to report. So, of course, when the lender is required to report more, it means that you have higher fees. And of course that’s part of all those fees that you pay at settlement.

Lena Nebel: So mortgage is still deductible, but up to a certain extent. [00:31:00] The home equity lines that we talked about in the past, you could take out your home equity line for anything that you want, and you could deduct that interest for anything. So if you were using it to pay for college loans, for a car purchase or for home improvements, you could deduct all that interest that now you can only deduct the home equity loan interest if it’s used to improve the value of your home.

Lena Nebel: So if you’re you’re doing painting, carpet, and you add a deck, you add a pool, a kitchen upgrades. That can all be deductible, but it’s up to the taxpayer to be honest and record how those funds were used. The lender is not required to report that to the IRS as of now. You can, as it relates to the house, you can actually deduct points on your tax return.

Lena Nebel: So points are fees paid to the lender at closing and exchange for reducing the rate. So this is usually called buying down the rate, which can lower your monthly mortgage payments, but it requires [00:32:00] more upfront money from you and you can deduct those those points. And that’s typically done in either a refinance or on your initial mortgage.

Lena Nebel: But keep in mind, all the interests that we’re talking about that you can deduct can only happen when you itemize your tax return. So if you just take a standard deduction, all that interest that we talked about, it doesn’t matter because you’re not even able to, to itemize your return. So for some people they’re not motivated to pay off their mortgages, their home equity lines, because they’re not claiming any of that interest.

Lena Nebel: Now with the new administration they’re talking about changing the rules as it relates to mortgages again and what you can and can’t do. So that may kind of change our recommendations and rules overall. Credit cards and car loans, no tax impact. You don’t have any availability on receiving a deduction for anything.

Lena Nebel: Now, with that [00:33:00] said, If you are a small business owner and you have a car there’s certain car expenses that you can deduct off of your tax return, I’ll leave those conversations to the accountant to kind of go into details. But as far as the interest on your standard tax return, credit cards and car loans, there’s, there’s no tax benefits.

Lena Nebel: So maybe it would be smart to pay those off first, depending on the interest rates and, and your individual situation.

Cody Niedermeier: Yeah, that’s our favorite answer of it depends

Lena Nebel: That should just be the name of your webinars show. It depends.

Cody Niedermeier: It might need to get changed, but, you know, if, if we really had to take one thing from talking about debt and student loans and you know, everything that we’ve talked about today, what should our listeners or viewers take away from this.

Lena Nebel: Debt and money is it’s always emotional, right?

Lena Nebel: So anytime you’re talking about finances, we’re always talking about [00:34:00] emotion. So I would say, remember to stay calm, focus on creating some type of debt reduction plan, try and get assistance in doing that and stick to it. It’s like diet and exercise. If you’re consistent, you stick to it. And when you see the results, it gets you motivated to continue to do it.

Lena Nebel: So going back to your snowball versus avalanche strategies, that may be one to where, you know, I’m just going to pay one off. It feels good to be done with it. So have a plan in place. It’ll be far easier to get out of debt than not having a plan at all.

Cody Niedermeier: And, you know, for those listeners that, you know, I make a plan and I can’t stick to it, or, you know, where do I even begin to make the plan?

Cody Niedermeier: You know, where’s the resources to find people to help.

Lena Nebel: I think they’re all over. So there’s a few different ways. You know, one of the things that I think about when working out is accountability. So possibly having an accountability partner, whether it’s, you know, your [00:35:00] significant other. And as you pay things off, you can kind of reward each other.

Lena Nebel: If you’re using a financial advisor, they can be checking in with you to see how you’re progressing along. If you’re using different apps that are out there where you can actually see it taking effect in everything as well. There’s also credit counseling agencies that can work with you. Also looking at your employer benefits.

Lena Nebel: They have different types of financial wellness programs. That’s one of the things that our company is very successful with is going into different corporations and developing their financial wellness program to where we can sit with the employees and talk about a plan for them. So if your company has some type of financial wellness program, that would be a resource as well.

Cody Niedermeier: Yeah. We can be a resource here too. And that’s what the barcode is on this screen. If you actually take a picture of this, you get to schedule a free consultation with one of our lead advisors that actually could be you, Lena, correct?

Lena Nebel: [00:36:00] Yes.

Cody Niedermeier: And you know, we can be a resource for you to, to try to help you take the right steps towards coming after that debt that that’s accumulated over time.

Cody Niedermeier: There’s been a couple of questions throughout this and I’ve actually written a few down myself throughout the presentation, but yeah. You briefly touched on credit cards, are there better credit cards than other credit cards out there? We talked about maybe, you know, consolidating and moving the balance, or you said maybe we use a credit cards for the points.

Cody Niedermeier: You know, maybe I want to be a traveler. Maybe you want to get on a plane, maybe not now with COVID, but do you have any recommendations on certain credit cards out there?

Lena Nebel: So it depends first on what’s the purpose of the credit card. Is the purpose of the credit card because you have a balance on another card that you’re trying to reduce the interest rate on.

Lena Nebel: So you’re going to look at credit cards that have a zero or a very low balance transfer option. And then you can go to the credit card companies and find out which options they have with no annual fee. Either zero or minimal balance transfer options or [00:37:00] balance transfer fees. And then again, a 0%. So one credit card you may want to look at because I have a large balance and I need to attack this and I need to have a low interest rate so that my debt isn’t accumulating.

Lena Nebel: That would be one goal. Another goal is, Cody, you say, well, I pay my credit card off every month. What do I want more? Do I want the cash back or do I want the mileage? For frequent travelers, again, not as much, but for frequent travelers, they’re going to use, let’s say their Southwest card. I’m always on Southwest or I always travel and stay at a Marriott.

Lena Nebel: And I want my Marriott points. So think about the places that you frequent a lot and then also look to see, okay, well, what’s the cashback that they’re getting. For our household we use one credit card for all of our expenses because we get cash back. I like the flexibility of having that cash back. I like getting that check and then I can use that check for anything I’m not required to use it on an airplane or use it in a hotel or [00:38:00] go to the reward mall that’s online that a lot of these credit card companies have. Pick different gift cards and everything. So you have to use what’s, you know, what works in your personal situation. And there are a lot of different options out there and that’s what you have to determine. Do I want low interest rate, cash back, miles, rewards.

Lena Nebel: What’s the best one for you.

Cody Niedermeier: Awesome. And then I think I got one more question that was actually from a few people and. Oh one person tuned in late, but, just the question about spending down the emergency fund again, or what we call the emergency fund and using that savings to pay off the high interest debts.

Cody Niedermeier: Could you just reiterate exactly, you know, the idea behind, you know, you don’t want to do that because you know, you don’t know what else could come up in your world where you, you need that emergency fund.

Lena Nebel: You said it perfectly, I mean, that’s the whole benefit of having the emergency reserve is in case there’s an emergency.

Lena Nebel: So if you spend that down and then an emergency happens, guess what? You’re using your credit card again, and you’re back to [00:39:00] square one and that’s not helpful. So we have to think of other options besides using that emergency fund.

Cody Niedermeier: And it’s, it’s easy when you’re already in the debt hole to dig it deeper rather than dig yourself out.

Cody Niedermeier: So it just reiterates, you know, having that plan and sticking to it. But once again, listeners, viewers, everybody that’s tuned in today, first off, thank you. But if you take a picture of this barcode, you get that free consultation, or if you actually, Lena I believe we have your information on here.

Cody Niedermeier: If you guys have any specific questions you want to reach out to Lena specifically, you can give her an email, her emails, right there. Or give the office a call and we can set up a quick phone call, but, no, we really, really appreciate everybody tuning in, our next webinars actually going to be on September 8th and Lena, you are gracing us with your presence one more time, and I believe you you did the shameless plug, I believe is how you referred to it earlier of we’re going to be discussing understanding your employee benefit package, which I think lines up perfectly in the year where there’s a lot of [00:40:00] companies out there who your employee benefit elections and everything kind of goes on around this time. So once again, that’s going to be September 8th and Lena, thank you so much for joining us again. We can’t wait to have you back in a few weeks and then maybe we’ll give you a break, but you just keep doing such a good job that I keep bringing you back.

Lena Nebel: Thanks, Cody. I appreciate it.

Cody Niedermeier: Yeah, no problem. And, last thing, thank you everybody for tuning in. We’ll catch you during our next webinar. Thanks.

Lena Nebel: Take care.