Loan Modifications: Good Idea or Bad?

The lender is going to come out on top. That's almost inevitable. It might be helpful, when you're thinking about a loan modification, to pretend that you're in Vegas. Think of your lender as a casino that wants your money. You want to win, but odds are, if you aren't careful, you're going to lose your shirt.

After all, a loan modification isn't a refinance. You refinance when you want a better interest rate, and you have the good credit to get it.

As a general rule, you tend to modify a loan when your credit is bad enough that you can't refinance the loan -- so your lender changes the terms of how you're borrowing for this current loan, so you can get back on your feet and continue paying off the loan. As Steven Hinrichs, a plumber in Willernie, Minnesota, found out, this almost always means that while your payments may become lower, the length of your loan stretches out much further.

Loan modifications are confusing. Partially because of the abundance of legalese in the paperwork, it's easy to agree to something you don't realize you're agreeing to.

That's what happened to Hinrichs.

"My husband did a loan modification on our home several years ago, before we knew each other. What was interesting is that they modified the terms of the loan, however, rather than forgive $40,000, which he was led to believe was happening. That $40,000 is tacked onto the end of the loan," says Hinrichs' wife, Kristin, who owns the company Best in Learning, which provides training products and services for businesses. "They made the payments affordable, but it was a surprise when trying to refinance that the equity that he thought he had was not there."

If you've been through a loan modification, or know something about the process, it isn't surprising that a bank would shift money owed to the back of a loan rather than forgive it entirely (see previous section; the lender is going to come out on top), but Hinrichs says he received a flurry of documents in the mail and had a short phone conversation with someone from his lender. He doesn't believe he was purposefully misled, but nobody spelled out how the modification would work, either.

"They knew what they were going to do before they did it," says Steven Hinrichs, who modified his loan during the recession and when a loved one was sick; he was buried in medical bills.

"They never explained if I had any options," says Hinrichs, who justifies his reluctance to ask a lot of questions by adding: "When you're losing your house, you have a tendency to look at things a little differently."

Hinrichs concedes that he may have well taken the deal anyway, but he would have appreciated more clarity from his bank.

One reason loan modifications are perplexing is that there isn't one approach to modifying a loan. For instance, just because you modified your student loans, for instance, doesn't mean it will work as easily for your home or car, which have their own quirks. Some federal student loans allow you to skip some payments for a few months or a year -- with no interest added. But other federal student loans don't.

5 Ways to Prioritize Your Student Loan Payments

1. Research the Best 401(k) Option for You

Upon landing your first job, there are a lot financial decisions to be made, including signing up for medical insurance through your employer and joining your company's 401(k) program. Depending on your situation -- your total loan balance, monthly payment, and overall income and expenses -- it may make sense to hold off contributing to your 401(k). This choice isn't for everyone as it depends on a variety of factors. For example, it depends on your tax bracket. If you invest in your 401(k), you can often lower your tax bracket. In addition, if your employer offers a matching contribution, it may make sense to invest in your 401(k), otherwise you're throwing away free money.

Alternatively, you may want to ask your employer if they are willing to contribute to your student loan payments in replacement of a 401(k) contribution. It's important to evaluate whether your investments earn more than your debt. However, if you're really strapped for cash, putting that money towards your monthly student loan payment can help provide a bit of financial wiggle room and help pay off that debt quicker.

Whatever your situation, it's important to consult your financial advisor before making this decision.

2. Don't Fear the 'B-Word'

A lot of recent college graduates flinch when they hear the word "budget," but creating a budget to help you manage your finances is the opposite of scary.

It's easy to push important financial obligations to the back of your head when you're first out of school. According to research from Student Loan Hero (where I am CEO), a quarter of Americans would prefer to pay for Netflix than student loans, and 23 percent would prioritize social activities.

Outlining a budget that not only accounts for your bills and loan payments, but social activities such as movies, concerts, and going out to eat with friends, can help make sure you're still paying down your debt each month. With great free services such as Moven, Mint and Digit out there that help you to do this automatically by tracking spending, creating a budget has never been easier.

3. Focus on Making the Right Decisions on 'The Big Stuff'

There are many large expenses that are often on the horizon as you move through your 20s and beyond. From marriage, to real estate, to starting a family, these are all big financial undertakings. In order to really make these big financial decisions a priority, try to cut out the small, frivolous purchases and focus on the big-ticket items. Saving for a down payment on a home is obviously more financially important than spending $6 a day at Starbucks.

Typical housing expenses (rent, utilities, etc.) should never account for more than 35 percent of your monthly income, according to financial expert Jean Chatzky. If you're paying more than this, you may want to consider making a change. If you live alone, consider getting a roommate to cut your rent in half or even Airbnb your room when you are out of town. Though it may be easier said than done, it may also be worth thinking about moving, whether it is to a smaller apartment, or even another city.

If you're living in an expensive area, like New York City, for example, think about how your expenses may decrease if you change locations. I personally did this and left New York for Austin so I could focus more on my student loan repayments. This, of course, is all dependent on work and your personal flexibility. It could, however, be a huge factor in helping to prioritize your student loan repayments.In addition, it makes sense not to get in over your head.

If you are saving for a down payment on a home it makes more sense to purchase one that is in your price range rather than purchasing a home that has a mortgage payment that will cause you to drown financially. This means, don't buy the most expensive home or product. If you're looking for a new car, it's best to purchase a used vehicle instead of that new BMW. Prioritizing the most important financial decisions is a key to staying on track with your budget and loan repayments.

4. Keep Saving

It's tempting to take extra money you may have each month and put it towards something else -- whether it's for something fun like a weekend away or something more responsible, like continuing to paying down your loan balance. However, it's important not to forget to contribute to your savings account or emergency fund.

Most Americans can't even afford a $400 emergency fund. According to Dave Ramsey -- the first step toward paying off consumer debt is building a $1000 safety net. Other experts recommend saving 5 to 10 percent of your net income.

Next, focus on paying off any consumer debt -- credit cards and student loans. Following that, save a few months of expenses up, just in case. There are even tools that can help you do this. For example, Acorns, an app that takes pennies off your purchases and rolls them into an investment account that's easily liquidated. Having these emergency pockets of money set up can ultimately ensure you don't miss a loan payment due to an unexpected emergency.

5. Pick a Student Loan Repayment Plan

In order to prioritize paying down your student debt, payments must remain a top priority. Utilizing strategies such as the "debt avalanche" strategy -- where borrowers pay off their most high interest loan first, allowing them to potentially save thousands of dollars on interest -- or the "debt snowball" strategy that is known as the most psychologically rewarding strategy by paying off the smallest principle loans first. Whichever plan is right for you, pick one and stick with it.

You'll feel a sense of gratification as you continue to see your total loan balance decrease. Beyond that, it may be worth considering refinancing or consolidating your student loans. Companies such as Common Bond, SoFi and Earnest all have options to help refinance, if it is the right decision for you.

2 Tools to Eliminate Student Loan Debt

Income-Based Repayment

According to the Department of Education, "if your outstanding federal student loan debt is higher than your annual income or if it represents a significant portion of your annual income, you may want to repay your federal student loans under an income-driven repayment plan." With the three available plans, your monthly payment would generally be capped to no more than 20 percent of your discretionary income. For people who are struggling to make student loan payments, the savings can be dramatic. You can estimate your monthly payment under the plan by using a payment tool created by the government.

Once you are enrolled in the program, your monthly payment reduces. However, your situation will be re-assessed every year and you will need to re-enroll. If your salary increases your monthly payment would likely increase. Depending upon the program, any remaining balance would be forgiven after 20 to 25 years. That debt forgiveness would be taxable. The people who benefit the most from this program are individuals with big federal student loan balances and low lifetime earnings.

It is possible to have your monthly payment reduced to nothing, if you don't earn enough income to make the payment on time. Enrolling in an income-driven plan doesn't harm your credit report or your credit score.

Unfortunately, income-driven plans are only available for people with federal student loans. Private loans aren't eligible for the program. You can apply for the program at StudentLoans.Gov.

Refinance

If you don't have problems making your monthly payment, but you are tired of the high interest rate on your student loan debt, you should consider refinancing with one of the new marketplace lenders. Today there are more than 20 providers (and growing) that offer student loan refinancing at very low interest rates. Fixed interest rates start as low as 3.25 percent, and variable rates start as low as 1.9 percent. You can comparison shop for the best rate at MagnifyMoney. One of the leading providers has disclosed that its average borrower saves $14,000 when refinancing.

In order to qualify, you need to have an excellent credit score, a good job and strong cash flow. Student loan refinancing companies are offering excellent interest rates to people with the best credit scores. If you have missed payments or have too much credit card debt, you might find getting approved difficult.

Refinancing student loan debt makes perfect sense for people with private student loans. However, people with federal student loan debt should be cautious. When you refinance a federal loan, you will be giving up income-driven repayment options described earlier. If you are highly confident that you can pay off your student loan debt in the next few years, it may be a risk worth taking. However, if you think it might take 20 years to pay off your debt, you should carefully weigh the risks before proceeding.

What if I Have Private Loans and Can't Afford My Payments?

People with federal loans facing difficulty making payments have great options. Unfortunately, people with private loans are at the whim of their servicing companies. If you are having difficulties making payments, your best bet is to call your servicing company and explain your situation. Private lenders are under increasing scrutiny from regulators to help people in hardship.

Getting loan against property more cost-effective

You can use your house as collateral to take a loan from a bank. The latter will exercise due diligence as far as the property is concerned, appraise its value, and offer you up to 70% of its value as loan. Since this is a secured loan (you are offering a collateral), you can get a higher amount than the one you will get for an unsecured loan like a personal loan. Of course, you will also have to pay the administrative and processing fee, which is usually 0.5-1.5% of the value of the loan. Typically, the tenure for such a loan is 1-9 years, but some banks may be willing to extend it to 15 years if the loan is large. The interest rate, which can be floating or fixed, varies from 12-16%, which makes them cheaper than personal loans (see table).

"Taking a loan against your property is certainly cheaper than a personal loan, where the interest rate is usually between 14% and 22%. The only loan that is less expensive than the one against a property is a home loan," says Rajiv Raj, director of CreditVidya.

It's also a better option since the tenure for these loans is longer than those for personal loans, which offer a maximum term of five years. Of course, you can prepay the loan, with the banks following the same guidelines as those for regular home loans. Though they cannot charge any fee for floating rate loans, there is a 2-4% penalty for fixed rate loans.

How to get a loan against your property

If the property you are taking a loan against has more than one owner, all of them will have to be joint applicants to avail of the loan. You can get a loan against any type of freehold property, from a house to a plot of land. It also doesn't matter whether you live in that house or have given it on rent. "The most important criterion is that the title of the property should be clear and there shouldn't be any encumbrances," says Pankaaj Maalde, head, financial planning at Apnapaisa.com.

The bank will check all the documents related to the title of the property, as well as ask you for proof of residence, such as ration card, electricity bill or telephone bill. You will also have to submit a copy of the proof of identity, such as a voter ID card, passport or PAN card. If you are employed, you will have to provide bank statements for the past six months, while a self-employed person will have to provide a certified financial statement for the past two years.

The loan offered by a bank will vary from person to person since it depends on various factors, including the work profile and age of the borrower. "Typically, the income proof for three years is required to have the loan against a property sanctioned. So, the minimum age is 24 years. Similarly, lenders prefer that the loan be fully repaid while the borrower is employed, which is why the maximum age till loan maturity in case of a salaried person is 60 years, while for self-employed individuals and consultants is 65 years," says Raj.The bank will also check your credit history through the Credit Information Bureau India Ltd (Cibil) and go through your repayment track record. Based on your credit score and the above documents, the bank will ascertain your repayment capacity. In case you have ever defaulted on any bill payment, it will reduce your chances of getting a loan. After the bank is satisfied with the paperwork, it will offer you the loan, which will typically range from 40-70% of the value of the property.

Is this the best option?

The main reason people usually don't opt to mortgage their house is that they don't want to take the risk of the bank taking over the property if they are unable to pay the dues. Another disadvantage is that there are no tax incentives while paying the EMIs, unlike in the case of home loans. However, this is only in the case of a salaried person. A businessman can claim tax deduction on the entire interest amount paid on the loan if he can prove that the loan was genuinely used to improve his business.

However, this tax advantage is also available if the businessman takes a loan against gold or shares/securities that he owns. The interest rate for a loan against shares or securities, such as the PPF and NSC, varies from 12-15%, while that for gold ranges between 14% and 25%. In the case of the former, a lender will be willing to offer a loan that is 40-60% of the value of the securities, while for a gold loan, you will be able to get 50-70% of the value of the gold you pledge.

In either case, if you default, the bank will sell the pledged shares or gold to recover its dues, which is a smaller loss than losing your home. However, if you need a large amount of money that runs into lakhs, the only viable valuable asset that you may be able to pledge is your house.

Short-Term Health Insurance?

How It Works

Short-term health plans, also called gap plans or temporary plans, typically cover a period of one to 12 months. They’re designed to cover unforeseeable medical needs that arise, offering an alternative to going uninsured and paying the out-of-pocket for any procedure or treatment. In some cases, you can get approved for a policy almost immediately after applying.

Today’s short-term plans are similar to the individual plans that existed before Obamacare became effective. They don’t have to cover what the law deems "essential health benefits" (seeEssential Health Benefits Under the Affordable Care Act), including emergency room visits, hospitalization, lab services and maternity care. So read the policy carefully to see what it will pay for and what it won’t. (Services That Health Insurers Often Decline provides some general rules-of-thumb.)

These plans are subject to medical underwriting and aren't guaranteed issue, meaning you could be rejected if insurers think you’re too big a risk. For example, some policies say you shouldn’t even bother to apply if you’re pregnant, have diabetes or have cancer; you won’t get approved. Short-term health insurance doesn’t cover pre-existing conditions and policies can only be renewed a limited number of times – or in some cases can’t be renewed at all, especially if you end up filing an expensive claim.

Where to Get It

You can shop for a short-term health insurance plan through an online broker such as eHealth. You can also enlist the help of a living, breathing agent who sells health insurance. Reputable brokers and agents do not charge consumers application fees or other fees; they are paidcommissions by the insurance companies (learn more in How Does an Insurance Broker Make Money?). Another option is to head directly to your favorite health insurer’s website and buy a policy directly through the company. It’s a good idea to shop around so you can compare plans and choose the one with the best combination of premiums, deductibles, co-insurance and coverage for your situation. Some states have many options; others have few.

The Tax Bill

Here's another bit of bad news. Short-term health insurance plans don’t count as minimum essential coverage under the Affordable Care Act. That means you may have to pay the tax penalty for being uninsured, even though you technically aren't.

Penalties are calculated by income and per person, and you’ll pay the penalty based on which calculation results in the higher amount. In 2015, the penalty is 2% of your annual household income that's above the tax filing threshold (not to exceed the national average of a marketplace bronze plan annual premium) or $325 per adult and $162.50 per child under 18, whichever is greater. In 2016, the penalty is 2.5% of your annual household income above the tax return filing threshold or $695 per adult and $347.50 per child. (The aforementioned "bronze plan" is the most basic of the insurance plans offered by state health care exchanges. See Choose Among Bronze, Silver, Gold And Platinum Health Insurance Plans.)

However, if your "short term" is very short, you'll be glad to know that the ACA has an exemption for "a short gap in coverage" of "no more than two consecutive months." Click hereto read the details.

Should You Buy : Disability Rider on Life Insurance

How Does the Rider Work?

The waiver of premium rider is underwritten separately when applying for life insurance and is usually issued to individuals between the ages of 18 and 60. However, the rider is not automatically issued and for individuals in higher risk occupations, such as a fireman or police, an insurer may offer the life insurance coverage with a favorable rating, but exclude the rider. Or the cost of the rider could be more expensive based on the insured’s occupation or risky hobby, such as rock climbing.

Once eligible, the rider pays a benefit to age 65 or for the planned premium period. The planned premium period is how the policy was issued based on the hypothetical illustration. For example, the benefit could stop on a whole life policy that was scheduled to be paid up at age 55 or after 20 years on a level term policy. The limited waiver period can be a problem with a permanent policy that was illustrated with premium payments that extend beyond age 65 because the policy may be underfunded and eventually lapse. (For more, see:Understanding Insurance Premiums.)

To qualify for benefits most riders have an elimination period of four to six months during which the insured must be totally disabled. The premium may also have to be paid during the elimination period, depending on the company later reimbursed. If the insured has a recurring disability, due to the same problem, once the initial elimination period has been met subsequent claims will not require a new elimination period. However, if the claim is for a new ailment a new elimination period will be imposed.

What Qualifies as Disabled?

The definition of disability is included in the policy. For example, many insurers define total disability as the inability to perform the substantial and material duties of one’s regular occupation. In addition, the disability must be due to an accidental injury or a sickness and pre-existing conditions may be excluded. The loss of sight as well as the loss of use of a hand or foot may also qualify the insured for benefits.

Definitions are very important and do vary by insurer. For instance, a liberal definition may allow the insured who was not working, but instead a full time student, when the disability occurred to collect benefits. Also, many riders allow the insurer to review the insured’s status periodically as well as change the definition of disability after a stated period of time, three to five years, for example. The change is usually to a broader definition of disability, such as the inability to perform the substantial and material duties of any occupation for which the insured is reasonably suited based on education, training or experience. Thus upon review the insurer could argue that benefits should end well before age 65, depending on the insured’s ailment. (For more, see: The 7 Reasons to Own Life Insurance in an Irrevocable Trust.)

Should You Buy a Rider?

Purchasing a rider to waive the premium can be an expensive way to get a limited amount of disability income coverage. If you have group long-term disability coverage and/or are eligible to purchase an individual policy you should weigh the cost and benefit of the rider. If you have limited disability coverage or coverage is unavailable due to a health issue or could be very costly based on your occupation, then purchasing a rider that waives the premium could make sense.

Employer Health Insurance, Still Intact

The Case for Employer Health Insurance

• Tradition – For starters, healthcare coverage is an essential part of the traditional employee benefits package. “[It] remains an important recruitment and retention tool as the labor market has tightened in recent years. Desirable employees still expect health benefits, and companies are responding,” notes the Times.
• Financial Impact – You must also consider the financial impact on employees if employers cut the cord on healthcare coverage. “[Employers] would almost certainly be pressured – especially in a strong labor market – to add enough money to workers’ paychecks to cover the cost of buying insurance on the marketplace,” the article adds. There’s a valid reason for that: For middle- and lower-class families, the financial burden could easily be too much to bear.
• Tax Benefits – While employers dole out large sums of cash to provide healthcare benefits, they also enjoy tax breaks that come with the territory. According to IRS Publication 535, “If an S Corporation pays accident and health insurance premiums for its more-than-2% shareholder-employees, it generally can deduct them, but must also include them in the shareholder’s wages subject to federal income tax withholding.”
• Costly Penalties for Employers – Should an employer decide to drop coverage and stick it to the employees, the initial costs could seemingly outweigh the benefits. That’s because employers with 50 or more workers incur a tax penalty of about $2,000 per employee when they opt out of providing health insurance, according to The New York Times. In addition, the company would lose its tax break.

The Future of Employer Health Insurance

Approximately 155 million Americans, or 57% of the population under 65, are projected to be covered by an employer-based healthcare plan in 2016, according to a recent analysis from the Congressional Budget Office. This number is slated to decrease to 152 million by 2026.

In 2015, 98% of large firms – those with 200 or more workers – offered some form of coverage. However, only 56% of small firms – those with three to 199 workers – provided healthcare benefits, due to the rising costs of premiums. And “since most firms in the country are small, variation in the overall offer rate is driven primarily by changes in the percentages of the smallest firms (three to nine workers) offering health benefits,” according to a reportfrom the Henry J. Kaiser Family Foundation.

What does this mean for those entering the job market in the near future? If you are currently seeking employment at a large firm, expect to see some form of health coverage offered in your benefits package. However, if you are considering a smaller firm, you may have to explore other options.