marcus Archives - The Debtist

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I don’t think I will ever forget this past Saturday when I learned that the student loan deferment was going to be extended until December 31st, 2020. As in, there is 0% interest on student loans for an extra three months this year due to COVID. This only applies to public student loans, not private student loans. Therefore, if you refinanced with a private lender, I would confirm whether deferment applies or not. But anyway, back to how this Saturday went.

It was sunny, and I was sitting at the park with Mike, my two siblings and my roommate. We were with my parents who had made us a nice barbeque. After spending the early afternoon poolside for hours with Mike, the BBQ was the icing on top of an already relaxing weekend. We had just finished looking up at the sky watching a jet plane spell “Marry Me” for a proposal to someone whose family happened to be setting up a picnic at the bench across the way. We knew it was related because of the champage, white roses, and blatant (and shall I say pre-emptive?) congratulatory sign.

We were discussing the ways in which to propose to someone. I’d like to think my siblings are of the non-romantic variety, probably to off-set my mother’s wildly lovey-dovey emotions. The conversation was about how unnecessary extravagant proposals were, and the frivolities on which we throw our money – when my brother glaned at his phone and announced that he just got a text with an update. Four new executive orders were released. He casually listed all four but I remember the giddiness (and shock) I felt when he announced that student loans were deferred at 0% interest for three more months.

My jaw literally dropped. I’m sure my eyes got all big like they do when I am swept with disbelief. I think my heart stopped for a moment, too. I asked a ton of questions, to which he replied, “That’s all I read,” with a shrug that told me he’s already moved on.

I could not believe my luck. I was smiling so big. This moment was very big for me.

I will remember this as the moment when I felt like everything I have done amounted to something really worthwhile.

My loans started at $575,000. It is taxed at 6.8% interest, but by switching from IBR to REPAYE after consulting Travis Hornsby from Student Loan Planner (affiliate link), we saved over $10,000 in interest. This is because REPAYE pays for half of the monthly interest for the first three years of the program whereas IBR does not.

When COVID hit, our principle was at $436,000. We stopped paying the loans aggressively since the interest rate went down to 0%, meaning the loan is not growing. We do still pay the minimum payment because we don’t want to be categorized as deferring our loan. Even though there is no penalty on your credit score for deferment, the “deferment” designation stays on your record. This could affect certain situations such as purchasing a house. If a mortgage lender sees that you had a deferment in the past year, they may decide not to lend you money. In that sense, deferment may still have an effect on your future financial endeavors. This is why I would recommend continuing to make the minimum payments, if able.

Meanwhile, we took the rest of our large, monthly payment and placed it in a high yield savings account at Marcus (by the way this is a referral link through which you can receive an additional 0.20% APY for 3 months) . This allows us to grow our money more while still keeping a liquid asset. A few hundred dollars of interest over the course of eight months may not seem like a lot, but it’s literally FREE money. I want my money to do the work for me, and this is one of the ways that we do that.

Of course, we can invest but our original plan was to pay off a huge sum on September 31, 2020 when the deferment was supposed to end. In fact, our plan was to reduce our loan from $436,000 to $380,000! We were simply setting the money aside and we did not want to tie it up in investments. I know that investments may give a better return, but we want to stay focused on our goal, which is to pay back the debt as soon as possible.

But now that we are going to wait until the new year to make our payments, my goal is to get our loans down to $350,000 on December 31st! Which means that on our anniversary (yes we got married on New Year’s Eve) we will be dropping the most we have ever dropped on our loan.

You may be wondering, how does the student loan deferment help us with our situation?

Well, let’s run some numbers.

$436,000 at 6.8% interest means that $29,648 of interest is added on to my loans each year.

Under REPAYE, half of that is paid off by the program for the first three years. Which means that $14,824 is per year is added to my loans in interest. This also translates to: $14,824 of what I pay towards my loans does not reduce the principal amount.

$14,824 of interest per year equates to roughly $1,235 per month of interest.

The student loan deferment due to COVID is now going to last 9 months.

Therefore, 9 months of $1,235 interest or $11,115 in interest is not being added to my debt. I am not wasting $11,115 of my hard-earned, post-tax dollars this year, which is the same as $15,878 of pre-tax dollars. It also means I can apply an extra $11,115 towards my principal amount!

I can see stars, I’m so happy.

Whose to say what will happen after this? All I know is that this is a big opportunity for us.

A big opportunity for a lot of graduates out there.

If you have student debt, you can definitely make the most use out of this time to pay it back quicker. That is, if you are on the path of standard repayment.

Then again, did you know that two-thirds of the borrowers were only paying the interest on their debt each month? This means that for two-thirds of graduates, their balances are not actually going down. For those under the loan forgiveness program, their balances are actually going up!

To make matters worse, it is unclear yet if the missed months will count as payments for those enrolled in income-driven repayment plans or the public service loan forgiveness plan. I have yet to find something regarding that written in stone. It’s all heresay. Meaning, this 8-month period may prolong the amount of time a person has to wait until their loans are forgiven. YIKES.

Lastly, prior to COVID, 1 in 7 borrowers were already defaulting on their student debt. What can we expect after COVID is all over? Many people are going to be left un-employed. How many more borrowers will default?

What if the economy takes such a down-turn that they pull the forgiveness programs altogether, leaving millions of young Americans swimming in trillions of dollars in student debt? Leaving two-thirds of borrowers with debt that has actually accrued interest. I would love to offer consoling words about how previous borrowers would be grandfathered in but I have never read that anywhere in the fine print. It just isn’t there.

My sister herself went through such a situation where the government program was pulled 6 months prior to her “forgiveness”, leaving her with $70k of student debt at a teacher’s salary after working at a low-income school for five years which should have qualified her for loan forgiveness.

I am not trying to scare anyone here, but we cannot turn a blind eye and hope for the best.

I have never felt more confident in my decision to be aggressive about my student debt. It has been a very lonely road, but I couldn’t be happier. I want others to know that this may be possible, too.

If you are paying back your student debt aggressively or want to pay it back as soon as possible without relying on the government to waive the debt, here are a few suggestions on what to do:

Pay the minimum payment to your lender if you can, to prevent from being classified as having a deferment.
Use the extra cash from your would-be extra payments to build an emergency fund. During COVID, you never know what can happen. Jobs are unstable, the economy is unstable, and the virus is still with us. You can always flip the emergency fund to a large sum payment later when this all ends. I would recommend storing such liquid assets in a high-yield savings account.
Pay off other high-interest debt. Did you know that the average US household has $5,700 in credit card debt? And credit cards have high interest rates, averaging at 18.61%. Get rid of that stuff!
Cut out as much spending as possible using frugal life hacks, my favorites of which can be found here.
Budget out the rest of the year. We personally love using YNAB.
Keep earning income. If you’ve lost your job, get back out there and earn where you can. Start a blog. Open a bakery. Walk some dogs. Ask to sit kids so that parents can go back to work. Offer online tutoring for those struggling with the distance-learning. Give yourself the skills worth sharing. Every little dollar counts right now. This is your gift. Consider the 0% interest rate the student loan version of FREE money.
Bookmark December 31, 2020 as the day you make your move.

If you need help, reach out to me anytime. I am rooting for you!

What is a High Yield Savings Account?

A high-yield savings account (HYSA) is something worth looking into. It is the same as a savings account that you would normally have at your financial institution (aka bank) but it yields higher rates (as the name suggests). A savings account at Chase bank will likely lead 0.01% interest per year, whereas a high-yield savings account can yield 1 or 2%. That’s 200x more than a traditional Chase account! This may not seem like a lot, but let’s take an example to demonstrate what a difference this can make.

Let’s say you have a financial goal of saving for a home. You currently have $20,000 in the bank, sitting idle waiting for a few more pennies to roll in before house searching.

If it was sitting in a Chase account, you would make $2 over the course of the year. But, let’s say you put it in a high yield savings account such as Marcus which is currently earning 1.3% per year (which is actually a low rate due to COVID . About a year ago they were returning over 2% APR). Then you would get an additional $260 by the end of the year for doing nothing other than choosing a different place to store liquid cash.

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About HYSAs

There are many options for HYSAs. Some offer you a sign-up bonus, and I know of a friend who treats HYSAs like credit card travel hacking. He signs up to get the sign-up bonus, then transfers the money to the next HYSA. This wasn’t on our checklist of requirements, however, below I detail what I would consider to be a good HYSA.

There is no fee associated with putting in or pulling out money from high-yield investment accounts. You can transfer directly from your bank or financial institution. There is no amount of time that you are required to leave it in the HYSA, although the funds may not be available for the first few days that you transfer it. Regardless, it starts earning interest on the day you transfer. And there is no minimum deposit. If possible, you want to choose an FDIC insured institution.

One should always remember, however, that the interest you gain is a taxable amount. Anyone who gains more than $10 in interest from a savings account will file Form 1099-INT which your bank will send you to include into your tax filings. So if you are gaining interest and pulling out your money, do make sure to set aside a little bit of that interest to cover the taxes. You are only taxed on the interest earned, not the contribution (aka the money you put in).

Shall I Always Put my Extra Money Into My HYSA?

The short answer is no.

Typically, you would want to invest in long-term investment accounts to get a higher rate of return. However, if you have short-term goals that you are saving up for, using a high-yield savings account is a great strategy. You don’t want to do active investments that are high-risk if you want to buy a home. It would be a shame to save up all that you need for a down-payment and then lose it all in an active investment. Plus, active investment isn’t our choice of investment strategy anyways. I wouldn’t recommend it, not because I have a low risk tolerance but because I honestly believe that no one can consistently beat the market. On the flip side, everyone can consistently make smart financial decisions that would earn them more money. More on this a different day.

Using Marcus HYSA In Our Student Loan Repayment Strategy During COVID-19

We just recently opened up our own high yield savings account with Marcus by Goldman Sachs. Prior to COVID-19, we did not have such an account because we were funneling all of our money towards my student loan, which had an interest rate of 6.5%. The more we paid it down, the less interest we would pay over time.

However, since COVID has reverted the interest rate of public student loans to 0%, we reduced our monthly contribution to my loans from $6.5k to $1k. We then funneled all the extra cash we had into a high-yield savings account to earn 1.3% interest. Before the student loan forbearance period ends on September 30, 2020, we will funnel all that money plus the interest earned into the debt.

It was a smart decision because when the COVID stay-at-home mandate started, everything was up in the air. We wanted to keep liquid cash in case of an emergency or a drastic change in income. We did not know if we would both be without jobs, or the extent to which the economy would be affected. Although we already had an emergency fund, the world-wide response to this pandemic was new to us and we did not want to take any chances. We approached it from a defensive stand-point. Surprisingly, it has worked well for us.

If you are paying down student loans, I would say there is still time (three and a half months!) to open a high yield savings account and earn a little interest passively. Then, without missing the deadline, make sure to funnel what you would normally (and then some) towards your student debt by September 30, 2020.

Also, some may ask, “Why do you still pay $1k?”. My minimum monthly payment is just under $1k normally, and although forbearance was granted to everyone without having an effect on your credit score, what most people don’t know is that forbearance still shows up on your record. It won’t mess up your record, technically speaking, but it can affect you financially. If you buy a home in the near future, for example, the mortgage lenders will see that you entered forbearance in 2020 and even though your credit score is 800, it may still affect their decision to lend to you. I didn’t want that on my record so I continued to pay it as if nothing happened. I simply stopped being aggressively paying my debt for the time-being.

Why Did We Choose Marcus by Goldman Sachs?

There are a couple things that we liked about Marcus.

They are an award-winning savings account that provides a rate that is 4x the National Average. They have no fees and minimum deposit. They allow same day transfers of $100k or less to and from other banks. They link other bank accounts for incoming and ongoing transfers which makes it very easy for me to simply log in and send money. You can open a personal account and/or joint account. And the savings are FDIC insured up to $250k (per person when considering joint accounts). This means that Mike and I can have up to a million dollars in their high yield savings account that is FDIC insured. How?

Mike opens a personal Marcus HYSA – $250k is FDIC insured.

I open a personal Marcus HYSA – $250k is FDIC insured.

We open a joint Marcus HYSA – $250k is insured for Mike, $250k is insured for me.

Lastly, we chose them simply because our roommate, Kirsten, used to work for a Goldman Sachs company. It is a reliable company and we trust our money with them. Simple as that. I know it’s a bias, so if you wish to shop the market, you can always shop the options here. I know of many people who have been happy at CIT Bank, if that helps. If you happen to choose to open a Marcus High Yield Savings Account using my referral link, you can receive an additional 0.20% Annual Percentage Yield (APY) on your Online Savings Accounts for 3 months.

Bottom line. I think it would behoove everyone to open a high yield savings account because many of us do save for short-term goals. We are all about earning passive income. I like to call it, free money. If you are looking to learn more, these resources are a great starting point.

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