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Budget Reconciliation

Posted On: 2005-12-21Length: 28:44

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Three more shopping days till Christmas. Welcome to The Financial Aid Podcast episode #142. Today is December 21, 2005. We have a very few number of days left in the year here. 2005 is rapidly winding down. We have a lot to talk about today. We're going to cover a quick scholarship, possibly a scholarship scam. Some college gambling, some more information on the Higher Education Reauthorization Act. We have an Eye on the Economy segment to determine whether you're living in an overvalued market or not. And how to determine whether you rent or own. A scholarship update, 150 scholarships worth $2 million dollars and of course Podsafe Music. Let's get started right away with the news.

Topping the news today, gambling problems. According to InsideHigherEd.com, 14-22 year olds at least over 1/2 a million of them are gambling online in record numbers, spending anywhere from just a couple of dollars to holding up convenience stores for money to pay for online poker games. InsideHigherEd.com also revealed that 8.7% of those surveyed believe that they have a gambling addiction problem. Many students believe that colleges are not doing enough to inform students about the risks of gambling. I don't know about you, but I would think the risks of gambling are pretty clear. In it's healthiest incarnation, gambling is a recreational activity. That's to say that you spend money on it the same way you a movie ticket or a baseball game or something. You don't go in it expecting to win money. You don't go in expecting to earn money, because it's a game of chance. So gambling is, in it's healthiest mind set, a recreational activity. If you have a couple of extra dollars and you don't want to spend it on a movie or baseball game or whatever, then gambling is certainly an option for using your money in a recreational way. If you need the money, gambling with it, that would not be a healthy use of it, no more so than if you had a limited budget and you went out to dinner a few nights a week an spent all the money you had for a month. In terms of informing college students, there are a whole bunch of books out there, including Gambling and How to Manage Your Money Wisely. Well worth reading. The author I prefer the most is a guy by the name of Darwin Ortiz, who, besides being a card shark and a magician, is also a well versed mathematician when it comes to gambling. Two of his books, Casino Gambling for the Clueless and Gambling Scams are vital reads for anyone who wants to think about gambling. It also goes over how to calculate the odds to know which games give you the least chance of losing all of your money. But it's really important to realize, just like when you're talking about the lottery, gambling is not a form of financial management. At least not one that people who are responsible with their money might lose. Which is why you never see on Bloomberg or MSN Money, you never see an article saying, have some financial troubles this month? Try the poker tables. If you do, it's probably a sign of the Apocalypse.

In other news, scholarship scams. An interesting one I got in my email yesterday that is a little bit odd. You've seen these contests in email like, win a free iPod, refer friends or refer service and you could win a scholarship, or whatever. In this case it was a $500 scholarship for this referral thing. Now, I've always said that a dollar is a dollar regardless of where it comes from when it comes to scholarships. I should probably now start prefacing this by saying a dollar is a dollar unless it's from a scam. It's a scam if, 1) you're encouraging others to sign up for this thing or you have to purchase services in order to get it. And, in the long term, depending on how long the service contract is for, you may come out not having earned any money whatsoever. You may have spent more money than you have earned. Be aware that most scholarships, you know, they do require an application, they do require essays and things like that, some do require an application fee and generally you want to steer clear of those. But certainly anything that requires you to buy a product or service and then requires you to give up a list of five of your friends definitely falls in the list of things to avoid.

And finally in the news, more notes on the budget reconciliation bill. HR4241 or S1932 depending on which version you are reading, the House or the Senate. Some notes on this, student loan consolidation pretty much in the crosshairs. These are some extra things I learned from www.FinAid.org, Mark Kantrowitz's site which is an outstanding site. If you don't read it you should. Consolidation, like I said clearly in the crosshairs, no more Felp to direct consolidation. This is a big point. If you have student loans that are consolidated or even student loans that are not consolidated with a third party lender like Student Loan Network or Wells Fargo, right now what you can do is do a direct loan consolidation and the Department of Education can take over the loans. In fact, third party lenders are required to release those loans to the Department of Education. New legislation says, nope, no more Felp Loans can not transformed into direct loans. Which is unfortunately because that is one of the few ways you can get rid of a lender that you don't particularly like. No more in school consolidation no ore spousal consolidation, you can not consolidate if you're in school and you can not consolidate with your spouse's loans. And by the way all these changes that are being proposed, the Senate still has to vote on it's version of the bill and if both go through then the changes would be effective as of July 1, 2006. So if you are graduating in this coming spring time, you would have a narrow window to consolidate your loans and I would encourage you to pursue that option. You'll have a very, very small window in which to act. So, definitely get your paperwork ready.

Other changes: elimination of the grace period rate and elimination of the in-school rate. When the interest rats become fixed rates there will be no in-school rate which currently is 6/10 of a percent lower than the payment rate. So, students who are in school will accrue interest at the same rate at those who are in repayment. That's pretty much of a negative. It just means that you will owe more when you come out of school then you would under the current program. Also the Department of Education will have access to your IRS income data so when you submit a FAFSA or things like that they will be able to verify at least your IRS 1040 information with the Department of Education. Extensively to cut down fraud also does raise a few privacy questions, but that doesn't seem to be a concern of anyone these days, at least in the government these days.

That's the news, let's move onto our first piece of Podsafe Music, Charlie Crowe and Tuckassee Train.

(music)

Tuckassee Train by Charlie Crow from the Podsafe Music Network at www.music.podshow.com. I tell you if you have a country music podcast, that would be some great intro music.

Alright, let's talk scholarship update. Today's scholarship is actually 150 of them worth $2 million. The Mercedes-Benz Drive Your Future USA Scholarship Program. It's really nice to see corporations starting to step up and fill a gap in financial aid that the government has absolutely no intention of helping with. Now your elected congress critics are doing everything in their power to make college less accessible and it's nice to see that corporations are starting to recognize that college education is important and are starting to add some funding to it. The Drive Your Future USA Scholarship Program, now in its third year will grant $10,000 scholarships to 100 high school seniors across the country who demonstrate financial need and exceptional achievement in the areas of academic performance, leadership, and school and community activities.

As an extension of this program, an additional $500,000 will be made available to the new The Mercedes-Benz Drive Your Future performance awards designed to recognize students who want to pursue their degree in the performing arts. 50 of these $10,000 scholarships will be awarded. Students can visit the website when it opens on January 4, 2006. The application will also be posted there. The deadline for the scholarship is February 10, 2006. Recipients will be announced in May of next year. The Drive Your Future Program is designed to respond to a critical need of scholarships to help students offset the cost of post-secondary education. It's administered by Scholarships of America. It's terrific to see all these different companies start to step up. The awards basically are they are going to try and find three students in every one of the 50 states in the country and get some people sent to college or at least helped out financially. So $10,000 scholarships, 150 of them from Mercedes-Benz.

That is today's scholarship update for today. You can find information about this scholarship along with the website, when it opens at www.studentscholarshipsearch.com our free student scholarship site. Two other things on that note, we're up to $43,863,850 in scholarships and if you want to be in the loop about new scholarship awards via RSS feed, we are publishing in the show notes today the new scholarships feed, it's from the Student Scholarship Search website. If you know how to use the RSS feeder, this is clearly one of the best ways to always be on top of new things in the database. You'll see them appear as they're added. You'll never miss one. So check that out. It's in the show notes today at www.financialaidpodcast.com. If you need to know how to use a RSS feeder, check out Google Feeder. Go to www.google.com/reader and you can just use that to read your feeds until you find a level of comfort using RSS. Alright, now let's move onto our next piece of Podsafe Music. The Lindsey Rakers Band with Save Us.

(music)

The Lindsey Rakers Band, Save Us from the Podsafe Music Network. Alright let's talk about our segment, Eye on the Economy. There's been a lot of talk lately about all of the different types of mortgage options, interest only mortgages, negative amortization mortgages....including an article on Bloomberg yesterday on federal reserve board governors that these mortgages place an undue risk on the economy because it is very, very likely that borrowers will default on them when the time comes to repay them and that shock alone will have negative effects; wide ranging effects on the economy. Everything ranging from people just being able to spend less on basic consumables because they are so strapped for cash and their budgets, al the way up to foreclosures, defaults, peoples' credit ratings being trashed. The U.S. Comptroller, Ron Dugan said, all these exotic loans can trigger payment shocks. For example, people choosing to make just the minimum payments on a typical option ARM on a $360,000 home with an interest rate of 6% would see their monthly payment rise to $1600 from $1200 a month in the first 5 years. That amount would then soar to $2500 at the start of the 6th year. An interest rate bump of 2% in points would nearly double it to $3200 on the reset date. And since the fed has been pushing rates up across the board and all these different yields and bongs, the short version is that interest rates for everything is going up and the end result is that people with Adjustable Rate Mortgages are going to be in lot of trouble if they don't refinance to a fixed rate mortgage. Definitely something to look at. Talk to your financial planner if you have one. If you're a member of a credit union by the way, a lot of credit unions have in-house financial planners for free to members. So if you can, join a credit union and get access to those services.

When it comes to properties, the question that a lot of people, especially students who are in college or students who have just graduated from college is, rent or own? Here in Boston, for example, when it comes to buying a condo vs. renting an apartment, the condos themselves are really apartments that you buy instead of rent, the question is how do you determine whether it's better to rent or own? Well there's a ratio between the monthly rent payment and the monthly mortgage payment. For identical properties on the same stretch of road with the same number of features (2 bedrooms, 1 bath, etc.) the payments should be relatively close in a properly valued market. In an over valued market you'll see mortgage monthly payments much, much, much higher than rentals. So, it behooves you to run the numbers and take a look at where things are going especially with interest rate changes. Here's an example, in Quincy here where the Student Loan Network is based, just south of Boston, a two bedroom condo on Quincy Shore Dr., which admittedly is a nice place to live, is, at a 6% mortgage plus taxes, there running about $400,000. That is for a 6% interest rate, about $2600 a month in Quincy. Now here's something to keep in mind, if that interest rate goes up to 7%, now you're talking about $2900 a month, that's a pretty big jump for a 1% interest rate jump. Now, the same property on the next building over, same type of apartment, rents for about $1100 a month. So clearly $2600 or $2900 vs. $1100 a month, the condo is definitely overvalued. Probably it would be more reasonable mortgage payment, discounting taxes and PMI, should be around the same $1100 a month and then you have to add in PMI and taxes and things like that then you're talking $14/$1500 a month, that's a sign that the market is over valued. What would be a fair price on that property? Probably around $199 or so instead of $399 especially for a 2 bedroom 1 bath, we're talking about 600 sq ft or so, not a lot of room. Certainly you're paying a bit of a premium for ocean front access to the beach but $399 for a house is crazy. Still, how do you determine, that's a good close for this, pretty simply. There's a couple of different resources, the first is, get a good mortgage calculator. There's some online on the web, if you use a Macintosh, there is one called Home Calc that is for Dashboard and tiger. There's probably a similar widget for Confabulator which I guess is called Yahoo Widgets now, that will let you type in property prices, interest rates, and run different scenarios for determining a mortgage payment. Then, to look at the rental market, check out websites in your area. Sites like www.apartments.com or www.craigslist.org which is an excellent resource. This will give you a kind of baseline of that to look for and what rents are going go. By the way, if your in Massachusetts, this is an unpaid plug for a friend of mine, if your looking for a realtor in Massachusetts, go to www.maresource.com my fiend Arthur runs a Massachusetts real estate source website. Good guy, definitely trustworthy so check him out if you can. That will conclude the Eye on the Economy segment. Let's do one final piece of Podsafe Music. Heather Sullivan, Twisted.

(music)

Heather Sullivan, Twisted from the Podsafe Music Network and that's going to do it for today's show. This is the last of the regular Financial Aid Podcasts until next Wednesday. So, tomorrow and Tuesday will be all Podsafe Music, new music holiday. I probably will put out a show on Christmas as well. So you can definitely catch that. Show notes are at www.financialaidpodcast.com you can stop by there you can also learn how to subscribe there if your not already subscribed. If you are, get a friend subscribed. You can also be notified by email when scholarships become available. There's a Frapper Map on the website, stick your pen up there and let me know where you're listening from. Feedback, financialaidpodcast@gmail.com is the best place to get in touch with me. If you're going to send feedback, I'm going to be out of the office until next Wednesday, so maybe take some extra time to do that so when I come back on Wednesday, I have lot's of stuff to go over, lots of stuff to cover. So, until next Wednesday, we'll see you then. Have a great holiday. Have a great Christmas if you celebrate Christmas. If you don't celebrate Christmas, have great, really long weekend 'cause I'm sure everyone else around you in terms of businesses and things will be closed up. Try and stay out of holiday shopping traffic. Definitely leave the credit card home so that you have a financially responsible holiday season. We'll see you next time. Take care, everyone.

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