MONEY Debt

4 of the Weirdest Reasons People Have Gone Into Debt

Girl surrounded by stuffed animals
Maarten Wouters—Getty Images

These cautionary tales show how NOT to handle your finances.

For more than a decade, I’ve worked in the field of debt resolution, helping thousands of people overcome their debt issues. Most clients come to me in debt due to what I would call “typical” reasons for falling into debt. This includes loss of income or unexpected medical issues in the family, which become difficult to manage when there are bills to pay. However, sometimes we see some unusual situations that led to debt, which I call “doozies.” Here are some doozies that top the list.

1. The Child Spoiler Client

A few years ago, I had a client with a large amount of credit card debt. So as we usually do with clients, we discussed the reasons for the debt. He put his chin down, looked away and said, “Really, this is because of my child, she’s my only child and I just can’t say no.” These expenses included private school at 5 years old, and horseback riding lessons at almost $2,000 a month. The compulsiveness – or, really, obsession – with his only child had put him into debt. He was spending more money on her every month than his mortgage and car payments combined.

My Advice: Stop the horses! Overspending will put you in debt, whether for you or others. Learning to say no, instilling good spending habits and limits will keep you off that pony ride.

2. The Dream Wedding Client

A couple came to me shortly after their wedding. They said they had a lot of credit card debt, and had expected to be able to pay it off after the wedding. When they told me they had $75,000 of debt, I asked how the amount got to be so high. They said they felt that their wedding was important to them and they never budgeted the expenses and just assumed they would rely on gifts to pay off those expenses from the wedding. They told me that they didn’t expect some of their relatives to be so “cheap” with gifts and as a result they received less money than they expected. They then fell short on paying the bills.

Furthermore, falling behind on your payments will also hurt your credit score, which causes a number of issues, including making the cost of debt more expensive for you over time. (You can see how your debt is affecting your credit scores for free on Credit.com.)

My Advice: Take a tier off of the cake! Make a budget and stick to it. Never rely on future money to pay off bills.

3. The “Don’t Tell My Spouse I Have Debt” Client

I was a bit surprised when one client came to me and said, “My husband doesn’t know about this debt so you cannot call my house or send any paperwork there.” This scenario really isn’t that uncommon. One partner has debt and the other has no idea about the debt or if they do know, they don’t know how much is really owed. These clients have even given me lists of times we can call and alternate addresses to send paperwork to. For these clients, the trend to keep secret debt often starts early on in the relationship where one has a credit card outside the relationship and begins to spend and not tell the other. This infidelity continues until the one partner simply doesn’t have the funds anymore to pay the bills and they are forced to come to us to resolve it for them secretly.

My Advice: Avoid financial infidelity at all costs. Communication is a key element in any good relationship, and talking to your partner openly and honestly about finances is no exception and can actually keep you out of debt.

4. The House Flipper Client

A few years ago I had a steady stream of clients who came to me after they lost money in attempts to flip houses in places like Florida and Vegas. They told me that their friends made money doing this so they thought they’d try it, too. My flippers believed that they could purchase a cheap house in a short sale and invest in improvements and then sell the property for a profit. While this is a great idea if you’ve budgeted for time post-construction if the house doesn’t sell, it can jam you financially if you don’t have the money to pay the bills until the house is sold. Which is exactly what happened to them when the market fell out. They couldn’t sell the house in a short time and they were left with a house they couldn’t afford and mounting debt.

My Advice: There are lots of good ideas to make money, but before making any attempts, make sure you’ve done your homework and are prepared to handle the worst-case scenario.

Remember, maintaining good financial health can come down to good old-fashioned common sense. So many of these “doozies” could have been avoided had many of these people simply taken the time to stop, think about what they were doing, and focus on the reality of spending and budgeting.

More from Credit.com

This article originally appeared on Credit.com.

MONEY Kids and Money

What Smart Parents Teach Their Kids About Debt

hands holding IOU magnet letters
Getty Image—Getty Images

Steer your kids in the right direction by teaching them these debt "secrets" and backing them up with practical experience.

Debt is a four-letter word, and your kids need to know it. The current public mood on debt ranges between loathing and fear. Nearly 20% of American adults expect to die with debts unpaid and a third of teens — perhaps because they’ve seen their elders saddled with lifelong debts — say taking on debt for college is “not worth it.”

Too much debt is a disaster, no doubt. But a carefully handled loan can help a young person get a degree, and a healthy credit score is crucial to finding a place to live and even getting a job. Steer your kids in the right direction by teaching them these debt “secrets” and backing them up with practical experience.

Credit costs money

You and I know that credit isn’t free, but kids need to understand that borrowing money is not like borrowing a classmate’s pen — unless that classmate charges a fee for lending out pens.

For younger kids and tweens, Northwestern Mutual’s financial literacy site, TheMint, has a simple debt calculator to make this point. Kids can purchase fictional concert tickets, a vacation, a car, or textbooks on credit and see how much they’ll really pay compared to the cash price.

Teenagers need a different spin on this lesson. They may know intellectually that credit costs money, but the allure of a shiny card is strong. I’ve found a quick way to cool off a credit-dazzled teen: Have him or her read a card application’s fine print out loud to you — especially the sections about interest rates, late fees, and rate hikes. Now it’s not just you saying that credit costs money. They’re getting it straight from the credit card issuer and hearing it in their own voice.

Debt can hang on after the thrill is gone

Brooklyn-based educational hip-hop video producer Flocabulary shares the sad tale of Melvin, who racks up credit card debt and wrecks his credit rating over Super Bowl tickets. Lana, meanwhile, does her credit card homework and spends carefully to avoid regret.

The clip shows kids they could be paying for a game, concert, or toy on credit long after they’re over it. For teens, the takeaway is that badly managed credit card debt can hinder their independence by keeping them from getting their own place or car.

Borrow what you need, not what you can get

Make sure your kids understand that if they have good credit, lenders may be willing to offer them a bigger loan than they need, because the more they borrow, the more the lender makes on interest. For young kids, a good analogy is birthday cake. One slice is great, but eating the whole thing will make them sick. As Warren Buffett tells the readers of the Secret Millionaires Club, “Credit cards can seem like an easy way to buy things, but it’s not a good idea to make a habit of using them. The chains of habit are too light to be felt until they’re too heavy to be broken.”

Teenagers can usually grasp the idea of keeping something back. For example, maybe you could get a loan to buy a high-end sports car. But if you take out a smaller loan for a compact car, you’ve got borrowing power in reserve for college loans or unforeseen emergencies down the road.

Real-life practice: Give your kid a loan

Whenever you hear, “Please! I swear I’ll pay you back!” you have an opening for a learning experience. It’s one thing to talk about debt. It’s another to experience the feelings that come with paying month after month on a purchase. If you feel your kids are ready and their request is worthwhile, offer to spot them a loan — with an interest rate, payment terms, and a penalty clause if they miss a payment.

Show them how much the loan will cost compared to the cash price. Put the payment schedule on your calendar so you don’t accidentally teach your kids that repayment is optional. And lend only as much as they need.

Lending your kids money is not without risks. They may decide to go on a chore strike or be stricken with borrower’s remorse. You may even have to temporarily repossess a computer, video game, or other item. But they’ll be smarter consumers and better money managers because of the experience, and they’ll see debt as a tool to be used carefully and not just as a four-letter word.

 

MONEY College

How College Costs Will Change in 2015

Although college costs are still increasing, they're increasing at a much lower rate than they have in recent years. Interest rates and repayment for federal loans have eased as well.

MONEY College

Here’s How the Government Thinks We Should Grade Colleges

Access, affordability, and outcomes are the three most important factors. But how will the government measure them?

The federal government Friday morning released what it’s calling a “framework” to rate America’s colleges on their performance in three areas: how many low-income and disadvantaged students they educate; how affordable they are; and how well their graduates do financially, in the job market, and in graduate school.

The U.S. Department of Education said it planned to issue the ratings “in time for the 2015 school year” — so, presumably, by August of 2015.

But researchers familiar with the government’s plans say that ambitious and idealistic plan will be stymied by an ugly reality: much of the information needed to rate the colleges on these factors doesn’t exist yet.

While describing the government’s plan as “thoughtful,” Terry Hartle, a spokesman for the nation’s largest association of colleges, the American Council on Education, said “It is not clear how they will get it done.” The problem, he and other researchers said, is that there is currently no easy way to mine the government’s data on citizens to find out, for example, which graduates of which colleges go on to graduate schools, how much graduates of each college earn, or how much alumni of each college are paying on their student loans.

In August of 2013, President Obama pledged to create ratings based on which colleges are “offering the best value so students” and giving taxpayers “a bigger bang for their buck.” He said he hoped the government would provide more financial aid to students at colleges that do the best job providing opportunities, educating students, and helping launch good careers.

In its announcement Friday, the Education Department asked for public comments on its plans to judge colleges by the following factors:

Access: The Education Department said it was thinking of judging colleges’ provision of opportunities to all by examining, for example, factors such as the percentage of students receiving Pell Grants, which are grants awarded only to low-income students, and the percentage of students whose parents did not attend college. It was also considering looking at the family incomes of students at each college, and giving higher ratings to colleges with more students from the lowest income groups.

Affordability: The government is considering giving poor ratings to schools that provide so little financial aid that families end up having to pay much more than the “Expected Family Contribution” (EFC) after they fill out their Free Application for Federal Student Aid (FAFSA). Financial aid is generally in such short supply that 99% of colleges fail to provide enough grants or scholarships so that every student has to pay only their EFC. But currently, colleges are not required to reveal how many students they leave with financial aid “gaps” or how large those gaps are. Additionally, the ratings may ding colleges with high “net prices,” which is the price students (and their parents) pay after all grants are subtracted. The government said it may look at either the overall average net prices, or the average net prices paid by families divided into five income groups, such as those earning up to $30,000, or those earning more than $100,000.

Outcomes: While graduation rates are a commonly used metric for judging colleges, the Education Department proposes adding other gauges such as how many new graduates find jobs quickly, and how much money they earn over the long term. In theory, the Internal Revenue Services or the Social Security Administration might be able to provide the employment and earnings information for graduates of each school, but privacy concerns have stymied efforts to gather that data in the past. The Department says it may also consider what percentage of graduates are paying their loans off, and what percent go on to graduate school. For community colleges, the Department said it may consider what percentage of students transfer to four-year colleges.

To help families gauge the affordability and value of colleges, MONEY hired Mark Schneider, a former head of the federal National Center for Education Statistics, to develop college rankings based on quality, affordability, and outcomes, using the best data currently available, including, for example, a national survey of college graduates’ earnings by Payscale.com. Our rankings of the 665 top colleges in the country were released in the summer of 2014.

Read next: The Long, Sad Tradition of College Admissions Mistakes

MONEY Health Care

Why Getting Mental-Health Coverage Can Be So Tough

Despite rules mandating better insurance benefits, finding care remains a challenge, a new 50-state report concludes.

Even though more Americans have access to health insurance because of the health law, getting access to mental health services can still be challenging.

A new report concludes that despite the 2008 mental health parity law, some state exchange health plans may still have a way to go to even the playing field between mental and physical benefits. The report, released by the advocacy group Mental Health America, was paid for by Takeda Pharmaceuticals U.S.A. and Lundbeck U.S.A, a pharmaceutical company that specializes in neurology and psychiatric treatments.

The report listed the states with the lowest prevalence of mental illness and the highest rates of access to care as Massachusetts, Vermont, Maine, North Dakota, and Delaware. Those with the highest prevalence of mental illness and most limited access are Arizona, Mississippi, Nevada, Washington, and Louisiana.

Among its other findings:

•42.5 million of adults in America, 18.19%, suffer from a mental health issue.

•19.7 million, or 8.46%, have a substance abuse problem.

•8.8 million, or 3.77% of Americans have reported serious thoughts of suicide.

•The highest rates of emotional, behavioral or developmental issues among young people occur just west of the Appalachian Mountains, where poverty and social inequality are pervasive.

Part of MHA’s examination focused on the exchange market and its essential health benefit requirements that guided 2014 coverage. The group found that, while information provided through plans’ “explanation of benefits” might show that there aren’t limits on mental health coverage, limitations including treatment caps and other barriers still exist.

“Parity is in its infancy. Most plans know the numerical requirements around cost-sharing, but few have taken seriously the requirements around equity—around access through networks and barriers to care through prior authorization,” said Mike Thompson, health care practice leader at PricewaterhouseCoopers. “And, in practice, we have a history of imposing much more stringent medical necessity standards on mental health care than other health care.”

However, Susan Pisano, vice president of communications for America’s Health Insurance Plans, an insurance trade group, said the report doesn’t reflect the fact that many health plans have rolling renewals. That means the plans have until Jan. 1, 2015, to fully comply with the parity law.

“Our members are committed to mental health parity, and we’re supportive of legislation, and what isn’t apparent is that benchmark plans represented a snapshot in time … so that doesn’t give us the full picture,” Pisano said. “Our plans have really been working to get in compliance.”

Chuck Ingoglia, senior vice president of public policy at the National Council for Behavioral Health, a Washington-based trade group for community mental health and substance use treatment organizations, said the report’s findings aren’t surprising — though they are troubling. Implementation of the parity law remains a work in progress, he said.

“The law is based on a sound policy premise — that addiction and mental health treatment decisions and management should be comparable to physical health conditions,” he said. “But this also creates a tremendous barrier to proving violations as it requires a consumer to obtain access to plan documents for both types of care, which is frequently handled by different plans,” Ingoglia said.

In addition, the report found that some plans didn’t set out what and how many services were covered. That means consumers would only find out a treatment wouldn’t be paid for by their insurer after they’d already received care.

Americans with mental disorders have the lowest rates of health insurance coverage, so obtaining insurance is a good first step, according to Al Guida, a Washington, D.C.-based lobbyist who works on mental health issues with Guide Consulting Services. But the only way a denial can be reversed is through an appeal, which can be a long and arduous process.

“The vast majority of insurance plans offered on Affordable Care Act federal and state exchanges have close to no transparency, which could lead to abrupt changes in both mental health providers and psychotropic drug regimens with the potential for serious clinical consequences,” Guida said.

Meanwhile, there is a shortage of mental health care professionals—nationally there is only one provider for every 790 people, according to the report.

All of these factors can cause minor mental illnesses to grow more severe, according to Mental Health America CEO Paul Gionfriddo.

He suggested that mental illness should be screened for and covered in the same way cancer, kidney disease, and other illnesses are.

“Right now we’re trapped in a stage where we wait for a crisis, when they’re in advanced stages and then we treat it, and we wonder why it’s so hard to treat it more cheaply,” Giofriddo said.

Kaiser Health News is an editorially independent program of the Henry J. Kaiser Family Foundation, a nonprofit, nonpartisan health policy research and communication organization not affiliated with Kaiser Permanente.

MONEY Taxes

Congress Delivers a Few Last-Minute Tax Breaks

A last-minute bill restores a break for charitable giving, the sales tax and tuition write-offs, and more.

The U.S. Congress, in its wisdom, waited until the waning weeks of the year to approve some tax breaks that will only be good for 2014.

That means that in some cases, you lost out: it is too late to take advantage of them and you are going to lose them at the end of the year.

But there are a handful of provisions that may benefit some taxpayers who have special situations and can act quickly to lock in their breaks, once President Barack Obama signs the tax extenders bill as he is expected to do soon.

In addition to the usual year-end moves—make your charitable contributions, feed your individual retirement account, take your investment losses—consider this short list of limited-time strategies:

Give away part of your IRA. There is a special situation for people who face mandatory minimum distributions from their retirement accounts, but do not itemize their tax deductions, and as a result, can’t write off charitable contributions. They can avoid taxes on their IRA distribution by transferring it directly to a charity, suggests Greg Rosica, a partner with Ernst & Young.

This provision expires on Dec. 31, however, and it is unclear whether it will be renewed next year. Taxpayers in high tax brackets who do not itemize may want to transfer more than the minimum to get money out of their IRA and cover gifts they would otherwise make in subsequent years: under this rule, you can transfer as much as $100,000. So contact your favorite charity and make sure they can effect the rollover before year-end.

Buy your boat. Congress also extended, just through the end of 2014, the provision that allows taxpayers to deduct their state sales taxes from their taxable income instead of deducting their state income taxes. In places like Florida where there is no state income tax, that is a benefit that can be worth a lot. If you’ve had your finger on the “buy” button for a new boat, car, or other expensive item, you might save significantly by buying it this year, says Rosica, one of the authors of the voluminous EY Tax Guide 2015.

Make a tuition payment. Even people who do not itemize deductions are allowed to write off up to $4,000 in tuition and education expenses if their income falls under certain levels. You may have already spent that much on qualified education costs this year. But if you have not—and you expect to be ponying up for spring semester—make that payment before 2014 ends.

Talk to your human resources department about that commuting benefit. For almost all of 2014, employers operated under the clearly inequitable (and environmentally unfriendly) rule that people who used mass transit could set aside pre-tax income of up to $130 a month for commuting costs, but those who drove to work could set aside $250 a month for parking. Now Congress has equalized those two benefits at $250 per month for all of 2014—but this year alone.

For many workers at large companies, it is too late to get an additional $1,440 taken out of their pay for commuting costs this year. That’s too bad, because it could save some people more than $600 in state, federal and Social Security taxes. If you have a more flexible HR department, go ask for a make-up withdrawal. You could always load your farecard for next year when Congress may go through this exercise again.

MONEY Student Loans

The Most Terrifying Stat About Student Loan Debt Isn’t What You Think

About half of student loan borrowers underestimate the amount of education debt they have.

It seems some college students need to work on their reading comprehension. Or their vocabulary. Whatever the problem is, some students aren’t grasping the concept of loans: 17% of first-year students who have federal student loans responded to a survey saying they had no student debt, according to a Brookings Institution report.

There are scores of stories and reports about the difficulty borrowers have repaying education debt, and that’s a serious issue, but the statistics about borrowers’ understanding of their loans and the cost of college are much more troubling.

The report from Brookings “Are College Students Borrowing Blindly?” cites some shocking figures, based on two data sets. The first, a survey conducted in spring 2014, included responses from first-time, full-time freshmen who applied for financial aid at their college, a “selective four-year public university in the northeastern U.S.” The second is the most recent result of the National Postsecondary Student Aid Study, a nationally representative analysis of first-year, full-time undergraduates with federal loan information available in the National Student Loan Data System.

The data reveals that students are generally clueless about the costs of higher education and how they’re paying for it. Nearly half of students underestimated their debt loads by at least $1,000, with 25% of students underestimating their debt by $5,000 or more.

I’m in Debt? Really?

There are a lot of reasons students may not fully understand their student loan debt: Students may be confused about the different kinds of loans (like federal or private), their parents may have taken charge of figuring out their education expenses, they’re simply not keeping track of their finances, or they really don’t understand the fact that borrowed money must be repaid. There’s not really a good excuse, considering the students had to sign paperwork saying they’ll repay the loan as agreed.

The gap between perceived and actual student debt is potentially more troubling than the growing student debt load itself. Failing to understand the costs of college and how you’re paying for it sets students up for an unpleasant reality check and regret if they can’t afford the debt they incurred along their chosen career path.

Student loans are rarely discharged in bankruptcy, and failing to repay them has serious consequences on the rest of your financial life. Missing loan payments is one of the worst things you can do to your credit, and if you default on student loans, you may face wage garnishment and calls from debt collectors.

Consequently, a low credit score can leave you unable to secure other forms of credit at affordable interest rates, not to mention rent an apartment or get a job. To see how student loans and your other financial behaviors affect your credit score, you can review two of your credit scores for free every 30 days on Credit.com.

Ideally, you’re well prepared to handle your student loans when you enter repayment, but if you think your loan payments will be unaffordable, you have a few options. If you have federal student loans, you may qualify for a variety of student loan repayment and forgiveness options. If you have private loans, you may be able to refinance. At the very least, you should reach out to your student loan servicer to see if there’s any way to avoid defaulting on your education debt.

More from Credit.com:

MONEY Health Care

4 Smart Year-End Strategies for Maximizing Your Health Benefits  

Tray of dental instruments
Dental plans often have annual coverage caps. Have you used up yours yet? Peter Dazeley—Getty Images

In these winter months, don't overlook these valuable health perks—and the crucial deadlines for getting your money's worth.

The first and last months of the year can be the best time to use your health insurance benefits. Here’s how to make the most of four common scenarios:

You’ve Met Your Deductible

This is the amount you must pay for your own health care before your insurance starts covering a larger portion of the costs. If you’re close to that cut-off, consider a last-minute appointment, says Carrie McLean, director of customer care at online insurance exchange eHealth.com.

“If you’ve already met your deductible for 2014, or are close to it, medical care rendered before the end of the year may be covered at a lower out-of-pocket cost,” McLean says. “Conversely, if you expect to have a lot of health care expenses in 2015, you may want to schedule non-emergency medical care for early next year so you can fulfill your deductible as soon as possible.”

You Have Unused Dental Benefits

In most cases, dental coverage works differently from regular health insurance. This benefit is often capped at $1,000 to $3,000 annually, according to the American Dental Association. If you have unused benefits remaining, now may be the time to schedule a last-minute appointment, especially if you might need serious dental work soon. That way, you can spread the cost over both years and pay less out of pocket for dental care.

You Have an Leftover FSA Money

If you set up a flexible spending account, or FSA, through your employer as a supplemental benefit to your health insurance, you were able to contribute pre-tax money to it each year and use that money for qualifying health expenses. Now’s the time to check your balance.

Some FSAs allow you to roll over up to $500 of unused funds into the following year, or give you a 2 1/2-month grace period to spend the money, but many don’t. In that case, you’ll forfeit your remaining balance.

If you have funds left in your FSA, or you are over your rollover limit, it’s time to spend the money. The good news is that a lot of expenses qualify, starting with purchases you’ve already made. If you can prove it, you can reimburse yourself for health costs you paid earlier in the year, says Craig Rosenberg, benefits specialist at human resource firm Aon Hewitt.

“Check to see if there are any out-of-pocket health care expenses you haven’t submitted for reimbursement. It’s easy to forget co-pays, prescription drug expenses, or certain medical supplies,” says Rosenberg.

“December can be a good time to stock up on health supplies,” he adds, and that goes for a lot of expenses, from bandages to braces and more.

If your FSA has a grace period, you have until March 15, 2015 to use your 2014 funds. In that case, it might be a good idea to schedule checkups for January so the costs count toward next year’s deductible. Check your FSA summary of benefits first, because in some cases that grace period is only for vision and dental expenses.

You Have an HSA

Whatever you do, don’t confuse your health savings account, or HSA, with an FSA and hurry to spend it, Rosenberg says. “FSAs have ‘use-it-or-lose-it’ rules that apply each year, but HSAs do not,” he says. “Any funds in your HSA are yours to keep indefinitely, even if you change jobs.”

Some even look at HSAs as a retirement savings vehicle since the funds can be used to pay for Medicare premiums and medical costs in retirement. That’s a big deal: Fidelity Investments estimates that the average couple retiring this year will face $220,000 in medical costs in retirement.

You may even want to add funds to your HSA now, McLean says. “Maximize on your tax saving by funding [the HSA] fully before year’s end,” she says, but know the limit. The contribution cap for HSAs in 2014 is $3,300 for individuals, or $6,550 for families.

Lacie Glover writes for NerdWallet Health, a website that helps consumers lower their medical bills.

MONEY Taxes

How to Keep Stock Gains From Hiking Your Tax Bill

By following a few simple steps, you can make sure gains in your portfolio don't result in a big gain in your tax bill.

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