Ask Orthonomics: Stay Out of Debt

I received this "Dear Orthonomics" comment from my previous post regarding K-12 loans to which I would like to apply: Do not do this under any circumstances.

I should add that I spotted this article in a frum publication and it was rewritten slightly, nearly hailing the arrival of the K-12 loan. Boo!

Dear Orthonomics,

Can k-12 student loans be discharged in a bankruptcy? I know that you usually can't do this with college loans. I send my kids to a Jewish community day school and was advised by a friend that I could take out one of these loans and have it taken care of via Chapter 11 or 13 if I run into trouble. I have also thought about taking out a loan against my house and my wife's 401K. We had a lot of expenses this year due to my son's bar mitzvah and my wife had her hours cut at work. We would welcome any suggestions.

Dear Reader,

My advice: don't. Secondly, stop listening to well meaning, but sorely mistaken friends. While I don't know if private K-12 loans can be discharged, bankruptcy is never a plan. Besides the complete lack of yashrut and the evil of borrowing with no viable plan to repay, a bad credit rating is a sure way to make sure that underemployment turns to a permanent scar on employ-ability. Credit rating is becoming increasingly important in the hiring process. If you need a security clearance, you will be in hot water. As I understand it, while bankrutcy isn't an automatic black mark and the circumstances can be evaluated, I can't imagine making a bar mitvah will be deemed as anything but irresponsible. While I have no idea what you or your wife do, I do know that a clean credit report is to your benefit. I also know that when you aren't chasing your tail out of desperation, that your mind is clear to dealing with financial blows.

Regarding borrowing from a 401k, once again, don't! Borrowing from a 401k is a particularily poor way of borrowing to provide what you don't have the cash t oprovide. There is a 10% penalty on early withdrawal. Then each dollar is subject to the highest marginal rate at the state and federal levels. And, if you phase out of available tax credits, which is quite likely, you will take another tax hit. Before you know it, the $30,000 became $20,000 and if you didn't pay up enough taxes, you can end up with a non-dischargeable debt to the IRS and your state's tax authorities. Not smart.

So what do you need to do. Draw up a budget that takes into consideration the new reality on the ground. The spending must be matched to income from current sources and anything that doesn't fit into the budget has to head to the chopping block. No 401k loans, no HELOC loans, no K-12 loans. Certainly not "creative", but sound advice nonetheless.

[Update: I apologize for not reading more carefully. I get asked all the time about early w/draw on a 401k. Regarding borrowing, my answer is the same even if there are advantages to this type of loan, as there are advantages to borrowing against a home for school instead of taking about a K-12 loan. This isn't about the fancy math, but about now living above your means and if you have to take from savings, that is a signal you are above your means. If you don't have liquid savings to take from, and must turn to retirement savings, kal v'chomer. I know it is painful to have to forgo on something expected, but we can't bankrupt ourselves in the name of a bar mitzvah, wedding, or even day school tuition].

Sincerely,

Orthonomics

Smart Money Mag: Student Loans for K-12

It isn't new news that Orthodox parents have been financing private K-12 education (usually via home equity lines of credit), but this Smart Money article, sent to me by another wonderful reader, outlines the newest loan industry, K-12 loans.

Personally, I'm just not that committed to private schooling to take out pre-college loans. I'm not convinced that college loans are an "investment" worth making in many cases. It goes without saying that I'm not going to favor student loans for the K-12 set.

The article states that most of the demand is coming from high-income parents (i.e. $150,000).

Much of this demand is coming from high-income families. Roughly 20% of families that applied for aid to pay for their children's kindergarten through 12th grade private school education had incomes of $150,000 or more, according to 2010-11 data, the latest from the National Association of Independent Schools. That's up from just 6% in 2002-03. Those who don't get approved for free aid, like grants, increasingly turn to loans, experts say.

This does not surprise me a bit. Being that it is tax season, I'm once again reminded that when you hit the $110,000 mark, some valuable credits like the child tax credit start being reduced and by $150,000 (!), these credits are other valuable losses that can reduce taxable income are long gone or limited in their entirety.

At $150,000 there is a large tax burden, a full tuition bill, and not a chance at aid, grants, scholarships. So, to loans such parents turn.

Besides the risk that loans entail, the entire idea of taking a K-12 loan in order to increase the chances of getting into a better college is upside down. What happens if the parents can't take on anymore debt? The kids will end up with less college opportunity.

Something interesting which I've pointed out on my blog before, paying private school tuition over 10 months, which is default in Orthodox Jewish schools, is NOT standard in private schools. Some schools, as you can see below, claim a 10 month plan is a "financing" plan and they charge a hefty sum of money to help you finance over 10 months. We'd run into ribbit issues, but it is still good to remember that paying over 10 months is a gift of sorts.

Schools are offering their own financing options as well. The Blake School in Hopkins, Minn. says 132 of its families signed up for its 10-month payment plan this year -- which charges an 8.5% fixed rate -- and that's up 19% from the previous academic year. The Hawken School says it provides a small number of loans with a 6% rate. "These loans aren't as taboo as they once were -- there are a lot more schools that are much more willing now to present a loan program as an affordability option," says Kristen Power, northeast regional director for the NAIS' School and Student Services, which processes families' financial aid applications to private schools.

Student Loans for K-12 in book equal a lot of risk and little benefit. . . . . .you can't even deduct the interest repayments to reduce your taxes, making the other financing "solution" of a HELOC look like a smart idea, although none of the above is smart in my book.

From Bad to Worse, Way Worse

(Sorry, not the final post on the hot topic at hand)

I'm going to make a prediction that ideas have consequences. The day will come (i.e. watch your mailboxes) where someone opens a "long overdue" tzedakah to provide "free" plastic surgery to 24 + year old, perfectly healthy girls who haven't yet married. Throw money at it is always the name of the game. Of course, the defenders will defend the solution "if it just helps one single. . . . . . "

One surgeon alone, based on the recommendations of shadchanim who feel their clients aren't marketable, will not be able to provide enough pro-bono surgery to "plain" girls who are in need of surgery, and it is unlikely that others will step up to this (potentially career ending) plate. So, a tzedakah will be commissioned. Those who "can afford" will drain funds affording. Those who can't quite afford will borrow. And some hachnasat kallah fund will be opened up for the rest.

Rabbinic leaders: now is the time to open up a blog about culture, pen a letter, and do so q-u-i-c-k-l-y. This is a halachic issue (the doc claims he will only work with those who come with refernces from shadchanim and Rabbis). This is an issue of culture. This is the yellow brick road to accepting eugenics, etc and changing the nation of the klal forever.

You think I'm exaggerating. . . . the doctor is drumming up quite a bit of support over at VIN.

On the subject of post-marriage (once the flowers have wilted and the enhancements have been eclipsed the effects of age and motherhood), check out this comment:

What about the ladies like myself who are having major marriage problems because of weight issues from having children. I had some c-sections and if I had a tummy tuck and lipo my husband might give me a chance. If only these guys would go into marriage loving their wives for who they are instead of their looks only and realize that things change, maybe I wouldn't be in this situation. I would take that surgery for free any day...

Blaming Bad Finances on the Girls

I found this comment on imamother which underscores my feeling that the attack against seminary for girls is not actually financial in nature, but is really an attack against Torah education for women.

That said, my DH is acquainted with someone in our community who offers free credit counseling and debt consolidation through a local gemach. He spends up to 20 hours per week helping families figure a way out of credit card debt. Now, I imagined all this credit card debt was a result of everyone running amok at the mall, but DH's friend related something surprising (to me, anyway!). He said that the majority of unmanageable consumer debt owed by families with whom he worked was based on two areas of expenditure: (1) Seminary in Israel for post-high school girls; and (2) Chassunah expenses.

I don't appreciate intellectual dishonesty and this is a prime example.

Never mind that the Orthodox parents have been financing 12 + year of private schooling for both boys and girls. Never mind that a good percentage of young people, especially men (!), don't enter the workplace until their mid-20s with a kid or two behind them. Never mind that long term savings, esp. retirement, is discouraged in favor of and it's-not-a-luxury-any-longer camp. Never mind that many enjoy plenty of luxuries on a regular basis from matching boutique children's clothing to new jewelry in honor of every occasion under the sun to designer strollers. Never mind that a cleaning lady is a regular feature in a a good half of frum households. Never mind over inflated household expenses from store bought prepared food products to flowers. Never mind school pizza lunches.

Nope, the reason for the credit card debt isn't years upon years of over-spending. The reason for the unmanageable debt is those pesky girls going to seminary!

When it is time to get serious about a communal debt problem that menfolk will be addressed and blamed together with the womenfolk.

Bad Financial Advice: Just Default

I believe I once started a feature on "Bad Financial Advice." I don't know if this is a revival, but a thread on imamother about getting out of credit card debt bring me back to the theme. A poster advises someone seeking advice on her credit card debt to default on the payments. She claims it isn't so bad and, in this economic environment, you can even get credit again. Yippee. In this case, the mother looking for advise has $4000 of credit card debt, perfectly surmountable.

Ruining your credit isn't just a matter of getting credit and the dollars and cents of interest rates. Bad credit hurt those seeking employment opportunities. It can cost you a security clearance. It can even cost you your current job. (link)

Bottom line: employers use credit history as an indicator regarding responsibility, character, and trust. Bad credit is a risk factor, especially if you are dealing with money. Best to deal with the $4000 than seek an "easy" way out. That easy way out may cost you much more in the unforeseen future.

Like Drugs to an Addict are Loans to a Debtor

As sent to me by a reader from a listserve in a major NY community. . . . .

An amazing opportunity, I think not. How about an opportunity that could leave someone else holding the bag? I don't think it is a chessed in the slightest to help people live beyond their means, even if it masquerades as hachnasat kallah. Here you have a family holding 3 jobs between them and they still need loans to make weddings. This, my friends, is a good sign that the last thing you need is another loan. Clearly debt has become a way of life.

Giving interest free loans is a hallmark of Jewish society, but (in my opinion) using gemach loans as such is a perversion of a mitzvah and only serves to denigrate the mitzvah. Interest-free loans are not supposed to promote dependency, but promote prosperity. If they are creating dependency and working against prosperity, then something is wrong.

But, you have to love the CAPS and the exclamation points!!!!!!!!!!

We are A"H making a wedding for our daughter on June 12th .

we have an opportunity to take out a gemach loan for $5000 for only $100 a month ! this is very rare- usually they want $300 a month or more!

we just finished paying off a $1000 loan for $100 a month and we are almost done with another loan for $50 a month.

we are already used to paying $150 a month and we have 3 jobs between my husband and myself. we are very very confident that we can cover this loan !

It would be such a HUGE CHESSED if someone would be willing to co sign this loan for us? we have one co signer right now but we still need ONE MORE .........

we need to get the application in by this sunday?

Thanks so very much for your consideration !

If you want to speak to me email me and i will give you my ph# or you can give me YOUR ph#?

Rav Aviner on a Segula to Reverse Debt

Hat Tip: Another fantastic reader

Rav Aviner answers a question on a potential segula with a much more Jewish approach!

Q: Our debt continues to grow. Is there a Segula to reverse this trend?

A: Certainly. You should spend less than you bring in and not rely on the miracle of overcoming the rules of mathematics. The Tur wrote that one should limit his expenses. And the Mishnah Berurah wrote that this is a harsh criticism against those who are enticed to spend money on luxuries without seeing the consequences, which will lead to theft and disgrace in the end. Biur Halachah chap. 529. One should plan well.

My type of Rabbi! Also see Rav Aviner on "Cake and Punch" Weddings.

Budgeting Primer: With the Savings, You Can Pay for the Next (Used) Car in Cash

There is a new blog on the blog, and one I'm watching with interested. Struggling Who is attempting to make the case for the so-called "strugglers" after another blogger made quite a splash making a case for the "Chumps."

Quite frankly, I have no interest in class warfare, even though it seems to be the hot topic of the week. What I do have an interest is seeing people prosper! Struggling Who comments, in regards to tuition discounts, states the schools tell us [those on discount] what to pay and what is left is for extra. Personally, I'd like to see the "extra" used to get ahead. Unfortunately, it seems that the "extra" is all too often used to fund increased consumption.

To make a case for the Strugglers, Struggling Who posts Yoni's budget. He doesn't want readers to pick it apart line by line, but it is really hard to ignore a budget of $6,900 that includes too much house ($2,761 mortgage payment, 40% of take home pay, granted that is after salary cuts), too much car ($625 in monthly payments bringing payments to 50% of take home pay) and too much food ($1,050 for food, including Shabbat).

I have consistently found that the difference between those who prosper and those who struggle has less to do with income, and more to do with spending habits. It breaks my heart to see families that could be comfortable or even prospering, struggling because they didn't get ahead when they could have. Let me demonstrate by using Yoni's own budget.

Yoni spends $1050 on food per month for a household of 5, including 2 school aged children and a pre-schooler (my assessment from the description). Anyway you cut it, $1050 is a lot of money to spend on food. Let's say that Yoni decides to really attack this line item of the budget and through a combination of different eating and shopping habits, lower the food line item to a still generous $650.

For the next 3 years, the $400 difference is locked into a savings account called "car." In three years, Yoni will have $14,400, a rather generous amount, which he can now turn around and spend on a quality (used) van, eliminating another massive line item, the $625 in lease and car payments (presumably the car payments will be complete, or almost complete in 3 years and the now owned car will be ready to drive into the ground).

Should Yoni continue to manage the grocery budget ($400) and eliminate the car payments ($625), there is now over $1000 extra to work with.

Now, Yoni and others like Yoni are fighting an uphill battle as school aged children are already in the picture and it still remains a mystery to me how scholarship committees come to a decision as to how tuition is charged. But, those who are starting out should take note. Controlling costs, even without high salaries, can and will result in real savings. Savings work for you. Debt works against you.

A Blog After My Own Heart: Kosher on a Budget

Hat Tip: A reader

A reader pointed me to a new blog, Kosher on a Budget: Live fruitfully without multiplying your budget. The blog has a beautiful and inviting layout, is well written, and has something for everyone.

I'm enjoying taking a look around. Particularly inspiring is Mara's Jewish Dave Ramsey Story. The writer's family managed to pay of $30,000 in debt in 6 months through a combination of expense cutting and selling stuff. Following that, the family built an emergency fund. Now the rest of the journey continues. She was initially shy to take advice from an evangelical Christian, but what works, works! (My own commentary: the biblical principals that Dave preaches are mostly found in my own handy-dandy Tanach, particularly Mishlei and Tehillim).

The blog is a great resource. If you like to coupon shop, she is doing the work for you by posting up the great drug and grocery store deals, amongst others. If you are interested in kosher, frugal cooking, there are recipes, all of which appear to be simple, quick, and family friendly.

Something I find exciting is the one month menu plan. While I tend to shy away from long term menu planning--my preference is to plan a one week menu around inexpensive produce, with recurring themes based on the night of the week so the kids know what to expect--I find the idea of a one month plan very intriguing. I also like the tips on doubling and freezing. While the frugal amongst us might argue if menu planning saves money, it is so important to find something that is practical. Perhaps I will give a one month plan a trial run during one of my busiest seasons, especially since Mara's blog provides a usable format. I don't believe in reinventing the wheel, so it is fun to discover a kosher, frugal blogger (with a frugal and practical Shabbat and Chagim section) who is happy to share.

One other thing: I have yet to publish some of my commentary on frugality blogs and books. In short, I find that many frugal resources, from books to blogs, are beyond intimidating, and not just to the newly thrifty. While I do read some frugality resources that lean towards the extremes, and sometimes even adopt ideas I was initially resistant too, I would define my brand of frugality as "middle income." Mara's money saving tips don't throw 7-11 convenience to the wind. Nor, is she a minimalist. In fact, we happen to share a love of plastic organizing boxes as mentioned in one post! While there are a lot of great resources out there, I think this resource will prove relevant to the greatest number of readers.

What a great resource! Highly recommended.

Look Before You Leap: Debt Settlement

(Any reader who is an imamother commentor, feel free to post my advice on any of the recent threads discussing debt settlement. . . . Disclaimer: This post is informational only and does not constitute personalized tax advice, just a summary of potential issues to be aware of).

There have, sadly, been numerous recent posts on imamother from families in untenable financial situations, often accompanied by plenty of debt, usually credit card debt. The "solution" offered by others is to settle the debt. You don't even need a company. . . you can do it yourself! is the advice. Some offer their success stories of negotiating debt down to pennies on the dollar. And, it it worked well for them, it should be something you should try too, right?

Well, maybe not. The decision whether to settle debt isn't just another solution for the amateur to test drive, like asking a credit card company to lower your rate or engaging in juggling debt from one credit card with a promotion to the next. . . . . nor is it particularly advisable to the leave it to the "professionals", i.e. those debt settlement/consolidation companies that have sprung up like weeds with all sorts of incredible claims that could work for you too. (I've noted many companies advertise heavily in the frum world).

Take my advice: before pursuing this route, consult a tax advisor/CPA who is familiar with the issues at hand. Just like in any other profession, the initials alone do not an expert make.

In short, debt settlement, unlike bankruptcy, can be a taxable event. In bankruptcy, unsecured debt is forgiven, although student loans and taxes owed still remain. In a debt settlement, there may well be a taxable event that one needs to prepare for. In such a case, the debt needs paid off as negotiated, and come tax time, an unfamiliar tax document called the 1099-C (Cancellation of Debt) will arrive in the mail and a new debt may be incurred, this one to good ol' Uncle Sam, as well as the State and Locality of residence. The taxable amount will, of course, be taxed at the marginal rate and could eliminate valuable tax credits. This could make the settlement not quite the bargain assumed.

The short of the long is that the amount shown on the 1099-C is taxable up to the net worth of the taxpayer. And, there is the rub. While some professionals in the debt settlement business will tell you ". . . relax about paying taxes on canceled debt balances. That should be the least of your concerns if you're upside down financially. Don't let the misguided criticisms of financial writers (who haven't done their homework) discourage you from looking into one of the most popular and flexible options for achieving debt-freedom," you might define insolvency from a different standard than the legal standard.

(See Pub. 4681) When a taxpayer is deemed insolvent, there is no tax incurred. Where a taxpayer is solvent, tax is incurred on the amount of the debt settlement up to the amount of solvency. The insolvency worksheet (p. 6) assists the taxpayer in determining their Net Worth. Assets include just about everything, from the home to jewelry. Liabilities include all debts owed, from the house to the babysitter.

I can easily envision situations where a debtor may see no way out from their mountain of debt, see settlement as a great option, and end up in a pickle come tax time. This especially could be true where equity exists in a home or business. So, tread carefully. And feel free to point to this very, very incomplete synopsis when others recommend debt settlement. For some, it might smell like roses; For others, like rotten eggs.

"We Come to this Gift in a Position of Financial Strength"

Note: I just edited the posts as I didn't convey the content of the article correctly. Note to self, don't blog under the influence of lack of sleep.

Thank you to my reader (feel free to self-identify) who pointed out an article to me on a $15 million gift and added some point to ponder. The Solomon Schechter School of Essex and Union, New Jersey has received this gift from a alumni (a portion of the gift is dependent on bringing in matching funds, as is common with large gifts), the son of a founder of the school. The endowment funds are intended to ease tuition costs for middle-income families, enhance academic excellence, and improve the “bricks and mortar” facilities, school officials said. The fund (grant + matching funds) is eventually expected to spin off 1.25 million yearly for tuition assistance for 230 students.

Some interesting notes: The school has no debt! Their buildings are paid for. Hence the comment, "so we come to this gift in a position of financial strength." There has been a lot of talk of Endowment Funds in the Orthodox community, but (sorry for the gloom and doom), when we have mortgaged schools, Endowment Funds simply can't make a sizable dent in operating costs and tuition fees because the debt load is eating us alive. On a more micro level, imagine a scenario of two children each receiving a very large gift or inheritance from a parent, say in the $100K range. At the end of the year, the financial situation of the two siblings looks quite different. Why? Because one sibling used the funds to keep their family afloat, while the other didn't "need" the funds, but has now created additional income to enhance investments, education, and more.

Another interesting note is the tuition assistance method:

The school currently offers two kinds of tuition assistance — flat dollar amounts for middle-class grants (i.e., $5,000 for all middle-school students), which do not require full financial disclosure, and tuition assistance for those families requiring more significant aid. That process is more detailed and requires more disclosure.

Like the commentor who wrote me, I too have never heard a two-tiered method of dealing with tuition assistance. Certainly a method like this requires a great deal of trust in the parent body, but it is certainly a "kinder and gentler" way of providing more minimal levels of assistance. Interesting.

[Just a note to readers: I pulled yesterday's post off my blog, not because I had second thoughts about the discussion of Jewish philosophy as prompted by comments on VIN and a contrasting news story and an article on Cross-Currents, but because I received a comment for which I realized that the post and some of the underlying details would not being fully comprehended. As such, because of the emotional subject, I decided to pull the post down. I have so many interesting posts I'd like to make on financial issues, as well as a back log of guest posts, that I figured I'd just poll the post].

How Debt Can Destroy a Budding Relationship

Hat Tip: A reader who is free to self-identify. That you to all the great readers who continue to send relevant articles and links to me on an almost daily basis. My apologies for being unable to blog at such a speed.

See this article in the NYT that begins with a story of an engaged young lady whose fiancee broke off their engagement three days after he discovered exactly what her debt (in this case student loan debt) actually was. Neither he or she was aware of the bottom line and the grand total was simply something he could not handle.

Bringing in large amounts of debt is "tricky" as the article states and I've heard stories within the Orthodox community regarding handling student loan debt that make me believe this issue is just as relevant to us as to the rest of American society. Who is responsible for that debt within a relationship? Who is legally responsible (in the case of divorce)? How will the debt affect the marriage, and what happens when things like kids come along?

Perhaps the most tricky question is the following: at what point during the courtship, should debts be disclosed? The first indebted young lady in the article has concluded that she should have disclosed her debt between the 8th and 10th date. I'm not quite sure what that translates to in shidduch-land. But I'd like to hear from my readers. Of course, the best course of action for singles is to avoid/minimize debt.

School Shuts its Doors with One Days Notice

I can't even imagine what the parents of 400 students in Lakewood must be going through when currently after receiving the news (one day before the first day of school!) that their boy's Yeshiva was shutting its doors (see TLS, YWN, and Matzav). This isn't the first closing of the 2010 year in Lakewood. A Bais Yaakov day school announced its closing prior to the end of the previous school year. The school had a student body of 65 and over $1mil in liabilities including half a million owed in back taxes to the IRS. The numbers are as incomprehensible to me now as they were then when I heard the story.

I doubt there is much more behind this latest school closing beyond a lack of funds, or more specifically the lack of available parental funds. As we've learned from past articles, the majority of families in Yeshiva schools receive tuition discounts.

I think it disingenuous for Jewish news sites (YWN) to continue and propagate wishful thinking that school closings are a result of being "hit hard by the recent financial crisis." Such wishful thinking allows all involved to continue to naively believe that when the market turns around, that everything will return to normal. While we can't be completely dismissive of the current economic downturn, I find the thinking a distraction from the house of cards that has been constructed. Let's imagine an individual runs up numerous sources of debt from debts to friendly local retailers, to auto loans, to a mortgage giving them income to debt ratio of 1:1. This individual may well muddle along, making all required payments, by designating work bonuses and windfalls and taking advantage of transferring balances from card to card. Should that individual take a 20% pay cut in an economic downturn, is it really fair to blame insolvency of the economic downturn? Of course not! At least Matzav's report is a little more balanced writing that the situation is "indicative of a disturbing reality that is hitting home with great force: the dire financial state of our communities’ mosdos hachinuch." Of course, the financial state of Yeshivas and Day Schools is directly related to the financial state of the parents, and there are few schools out there (including modern Orthodox schools) that do not have significant numbers of families receiving significant discounts.

Of course, wishful thinking seems to be modus operandi. Commentors can't seem to help themselves as they suggest that all parents enroll their children in the public schools so as to "overwhelm" the public schools and receive those long awaited vouchers. Let's be frank, I doubt that even a small percentage of the most desperate parents of these 400 students will enroll in the public schools and even if all 400 did, it wouldn't be overwhelming. That probably about the size of an average elementary school. A few new trailers on a few campuses would solve the problem asap. If parents want to "overwhelm" something, they are better off dropping their 400 children off at homes of the board and administration on their way to work tomorrow. But, wishful thinking is always a cozy distraction. In other wishful thinking news, the cynical bunch wants to believe the school will open and this is just a brilliant fundraising move. Doubtful since there seems to be no fundraising campaign attached.

I think it would be interesting and very valuable for those involved in school closings to help educate other schools on the signs that the numbers just aren't going to crunch and that a closing is inevitable. That would be productive and hopefully helpful in the future. It certainly isn't pleasant to enroll 400 kids in school only to announce, one day before school, that the curtain has closed. One can only imagine the panic that has currently ensued.

Guest Post: Debt is Harmful to All Those Around Them

With thank to my Guest Poster who would like to remain anonymous.

When my wife and I first started dating, we marveled over how similar our families are. Every time we spoke about our families and compared notes, it seemed they were more and more alike.

Looking back, it's amazing that it took several years before we discussed one key issue in which our families are as different as can be: finances. I come from a family where discussions about money, how much things cost, why certain purchases were or weren't being made, and budgeting and saving were the norm. We knew that money was tight, that yeshiva cost a whole lot of money, and therefore we had to sacrifice and spend money intelligently. We weren't poor and we weren't deprived, but we knew there were monetary limits and we had to live within them.

My wife's family is the polar opposite. Money is never, ever spoken about. And if it is mentioned, it is likely to cause a major scene leading one to learn very quickly not to bring it up again. It's not important how much something costs as long as it makes the purchaser happy. If you want something, don't wait, just go and buy it. Planning and forethought are unnecessary. If you're not sure which dress you want, buy all 3 and sort it out later. Suddenly want to visit family in another state? Buy a ticket and go.

This difference in attitudes has had dramatic effects on our respective families. My parents both work in good, but not great, paying jobs. But, because of their financial approach, they have managed to save a lot of money for retirement, have almost finished paying off their house, and are finally enjoying the financial freedom to travel. While my MIL does not work, my FIL works in the type of career where people immediately think they must be well off. Nothing could be further from the truth. They are drowning in tens of thousands of dollars in debt, have no equity and no savings (not even retirement), and spend their days and nights stressed out over whether the bank balance is high enough to cover the $100 payment just made to the credit card company over the phone after they threatened to close off credit or impose another fee.

It's been hard to get a complete sense of what my in-laws finances look like. As I mentioned above, they refuse to discuss it. But, you pick up bits and pieces despite their attempts to keep things secret. What's amazing is that while there were large financial mistakes that were made, the biggest contributor to their debt has been the many small, seemingly insignificant decisions they made along the way: spending too much for holidays, staying in nicer hotels, giving larger than necessary gifts for simchas, refusing to accept second best when purchases are made, and the like. When paid for on credit, those little purchases add up.

The problem with my in-law's situation is that their fierce desire to protect their family from their financial woes, is actually causing financial misery that they don't even see and that extends far beyond their personal issues. My wife is an apple that fell far from the tree. She is naturally frugal and saw the mistakes her parents made and didn't want to repeat them. Her siblings, though, are another story. Without having learned even basic financial responsibility they have fallen into the same patterns as their parents: no budgets, no planning, spend on what makes you feel good, don't seek out advice, and don't talk about money at all. Even when my wife asks them simple questions like, "Did you lock in the rate of your federal loans?" she is brushed off. They say she is stressing them out talking like that.

But, in the end, it's me and my wife who are really stressed out. Like when we hear something that leads us to think her brother is overspending and isn't paying off his credit cards in full every month. Or when her father jokes that it's good we have extra bedrooms in our house so they can move in when they're older. We worry how her parents will possibly retire, whether they really will have to move in with us, or what will happen if her father gets sick and they have no income. We worry that her siblings are following in the same path.

I'm not writing this looking for solutions. I just want to share our experiences and show how harmful debt is not just for those in debt but for everyone around them as well. Here, it doesn't just affect my in-laws, and it doesn't just affect my wife and I who may have to pick up the pieces down the line and possibly upend our lives to do so, but it affects their other children who never learned the skills necessary to make intelligent financial decisions.

Mesila Counselor on Correcting Erroneous Thought Patterns

The following was just published in Mishpacha in response to another letter. It is written by a Mesilsa counselor, an organization that I admire. I'm always thrilled to see well written pieces that help disseminate ideas that are key in helping build financially stable families. This is an excellent response. Rarely is solid financial advice groundbreaking as it is rooted in sechel and a mesorah.


CREDITS CARDS ARE NOT THE ANSWER
[Inbox / Issue 309]
In response to your article entitled “The Newlywed Spending Bubble,” Y.B. from Lakewood writes the following: “For some of us, credit cards are a lifesaver. Shabbos comes every week, no matter what your financial status is, as do the Yamim Tovim, bar mitzvahs, weddings, and the like. Even if you don’t buy the fanciest roast, you still need the basics, which can be burdensome for large families. And when your son’s toe is at the end of his shoe or already popping through, you can’t always wait until the funds are there.”

As a Mesila counselor, I have to respectfully disagree with that statement. For a family that is struggling to pay for its basic needs, creditcards are not a lifesaver, but a dangerous trap. Putting purchases on a credit card is an easy way to pay for immediate needs, but it creates a much worse problem in its wake.

If a family is already having a hard time making ends meet, paying an extra 15–30 percent in interest above and beyond the purchase price of everything on their credit card will surely make things harder.

Even if credit cards are a lifesaver in certain situations, a lifesaver is by definition something that should be necessary only in an emergency. Shabbos is not an emergency; nor are Yamim Tovim or simchahs. And kids don’t outgrow their shoes in a day or two. If a family is feeling the pinch from any of these normal, predictable expenses, credit cards are not the answer.

Y.B. goes on to write: “Some of us must have bitachon that, although we don’t know how we will pay off our credit cards, if we are doing ratzon Hashem, we are confident that He will provide for us in some way or form.”

This is a gross misapplication of the concept of bitachon, for bitachon does not justify acting in a way that is financially irresponsible. Charging things to your credit card and then waiting for money to miraculously appear is a highly dangerous habit, and one that the Ultimate Provider
will not necessarily underwrite.

So what is a struggling family to do when there are bills that need to be paid, but no money to pay them with?

For one thing, they can seek creative, low-cost alternatives to ensure that the family is adequately fed and attired. They can also build a spending budget that maximizes every dollar and allows them to meet their basic needs while avoiding unnecessary expenditures. And a prime example of an unnecessary expenditure is money paid to the bank in the form of
interest on credit card debt!

It is also critical for every family — even a family that is having a hard time making ends meet — to put aside cash on a regular basis. Even if all you can manage to put aside is $10 a week, the money will build up steadily, giving you your own little fund to turn to in a pinch — instead of having to look to greedy credit card companies for illusory salvation.

[Meslia Counselor]
Baltimore

Just More School News

This time out of Lakewood. An older, small Bais Yaakov closes with debt that I really am having a hard time grasping. I simply don't know how you get to the point of owing half a million to the IRS (read: tax with holdings as this is a 501(c)3, likely the majority of which is social security and medicare) and over $1,000,000 in liabilities in such a small school:

"By the winter of 2008, Bais Yaakov Elementary had all but crumbled. In debt to the Internal Revenue Service for nearly half a million dollars and delinquent on its mortgage, the girls' school of about 65 students stood almost solely on the crutches of last-minute donations. " [Orignial article here].

I'm really not at all interested in all the "politics, lawsuits and backbiting." When you have an IRS debt load per student of $7700 (rounded) in a town where tuition is rumored to be only $4000 or $5000 per year, the numbers are simply too hard to comprehend. The article states there are over $1,000,000 in liabilities. That exceeds $15,000 per student (which must translate into some truly astronomical figure per family)! I simply can't comprehend these numbers.

So that is the school news since my last post. The principal apparently pleaded with the judge to keep the school open as the kids supposedly will not be accepted elsewhere, are from poverty-stricken and "underprivileged" homes and will be "in the streets." Good thing the school is in bankruptcy court. Advertising potential truancy doesn't seem very wise in my opinion, but I digress.

Some hope the school will be purchased by someone with "deep pockets" so it can reopen. I hope that if this mythical figure with deep pockets swoops in to save the yeshiva system, or a part of it, he will not throw good money after loads of incomprehensible debt load. One of the first lessons I have learned in high school economics and was repeated through intermediate level econ, finance, and accounting courses: do not throw good money after bad.

I'll Tell You What Isn't Fair

A poster on the imamother chatboard is debating between paying of $10,000 of credit card debt (read interest charges alone likely vary between $800 to $3300 per year!) or sending her children to camp. Regarding camp, the pluses she list are sending her children to camp over paying down, and ultimately off, the debt she lists: giving them a wonderful, fun summer and saving her sanity. She wonders if "denying them a camp experience isn't fair to them."

Please don't take this in the wrong way, because it might sound a bit harsh, but the message needs to get out there. . . . . I'll tell you what isn't fair to the kids: jeopardizing your financial future and, for that matter their financial future, so you can having something you want NOW. I'll tell you what isn't fair:

• Putting your shalom bayit in jeopardy. Money problems do exactly that. Money problems have hurt many a marriage. We pray daily to Hashem to not place us in challenging situations. The best way to shield yourself from financial challenges is to live on a budget and stay out of debt. Want real sanity? Pay off that credit card debt. I guarantee you that an exhausting summer will allow you to sleep at night. Fielding calls from creditors will cause plenty of sleepless nights.
• Reaching retirement age with a mortgage in the hundreds of thousands or reaching the retirement years with debt, debt, debt, placing plenty of pressure on your adult children who fear what will be. One of my readers has commented on the heartache that he and his wife have over their parents' debt. While I have no particular issue with grandparents and parents living under a single roof and working cooperatively together, such is best done out of free choice, not out of lack of choice.
• Not being mechanech children regarding healthy financial management including delayed gratification and living within our means (happily). I've noted that debt is often generational.
• Spending money on the fleeting, while underfunding other opportunities, perhaps opportunities that will have a far more positive effect on a child's future than a summer in camp.

This is a no-brainer. Get out of consumer debt asap. Save for emergencies. And at that point you can consider a camp experience. There are many more summers and many more camp experiences to be had. Ultimately, you will "deny" your children far more if you continue to dig yourself into a hole. And while plenty of people will scream that camp is a necessity and that it is a vital chinuch experience, I will let you in on a secret: plenty of kids don't really enjoy camp. So use the opportunity to have a fun, wonderful experience in your own backyard.

Student Loans: A Tremendous Burden

Hat Tip: A long reader and commentor, feel free to self identify

The Wall Street Journal online edition has an article posted with the title "The $555,000 Student-Loan Burden." The case presented is most certainly extreme, but demonstrative of the tremendous burden that student loans can be, especially when you don't read the fine print. But even where you read the fine print, payments come due, income isn't always earned as planned, and life gets in the way. It was nice to see an article call these loans "one of the most toxic debts" because student loans are often labelled as "good debt" and many people don't consider other options in the face of student loans.

But the structure of the debt is anything but "good." It is near impossible to discharge the debt, or even renegotiate it, something that can be done regarding other debts that do not get discharged in bankruptcy, such as debts to the IRS. The article quotes a figure that absolutely floors me: only 40% of student loan debt is being actively repaid. The remaining debt is in default, deferment, or forbearance.

I think that many people would make different decisions regarding paying for college if they didn't view student loans as a first option. It is no secret that I don't like student loans. I see too many people being crushed by student debt. In the frum community, the burden of K-12 tuition is putting a tremendous strain upon parents, leaving little money to work with come college. This is quite problematic as young families often are dealing with a tremendous debt burden for college tuition (often compounded by other debt run up in addition to the student loans) and the burden of their own children's tuition and/or childcare.

I'd like to hear from my readers who student loan debt is affecting you? Was the debt you took out an active choice or a more passive one? What, if anything would you do differently? And what are your plans in terms of funding an education for your own children?

Some Personal Thoughts on Tuition, Family, and More

I have been blown away by the number of comments that my post "Private School or Bust" engendered. The subject of the post was about the decision to grow the family to a bit beyond replacement level vs. tuition. Most comments that came in were from Bergen County residents who are definitely feeling stretched to their limits and I think the subject veered a bit off topic. I'm going to attempt to share some personal thoughts on the subject of growing a small family just a tab bit, although I realize that I am going to open myself up to plenty of criticism.

Honestly Frum has picked up where the discussion on my blog left off and I've just been sitting back and watching the show. The anger is present and I have no idea how that anger will be translated (or not), but I do hope that it is translated into productive solutions because the feelings are quite destructive in my opinion. For some ideas that have already been declared "impossible", please check out the post on the Flordia co-op school which will be expanding to serve lower elementary school students, the Los Angeles alternative Yeshiva program, Hybrid Schools, and homeschooling. These ideas might not be at all possible for everyone. But individual decisions are where those who want to relieve themselves of a massive burden need to start. I see no signs of major change coming this way for the year 2010/11. I have heard through the grapevine that the schools where I am are planning to raise tuition. If this is true, and I imagine it is because the funding structure ingrained and is what it is, then parents can either write a check or explore other options. If most parents re-register their children in the coming months, the schools will lack the incentive to be the innovators.

Back to my subject. . . .

Reading the comments has been revealing and has helped me clarify some of my own thoughts vis a vis my relationship to private schooling. While having the option of sending our already small family to day school is an option that I wish were sustainable over the long haul, I don't believe it is sustainable in the long term. In the short term, I have every intention of making it happen because we are quite pleased with our school, but I have been tracking tuitions in the main games in town and tuition has consistently increased been increased between 5 and 7% every year. Every year I say that there is no way that tuition will increase at the established average, and every year I am sadly proven wrong. Tuition is increased, and my estimate is within a hundred dollars give of take. I have no doubt that in the next 5 years, elementary tuition will be hovering around $20K and that high school tuition will near the $30K mark. Unless the current funding structure is completely overturned and other major changes implemented, I don't see a way to turn back the clock.

So long as it is a nearly foregone conclusion in my mind that I am going to have to seek alternatives to day school education, I don't see it wise to worship at that altar, basing nearly all of our decisions around something that is likely unobtainable in the long term. While some families might be willing to forgo bringing child #2, 3, or 4 into this world because of Yeshiva tuition, I am not going to choose that path. I will never have a super-sized family for a myriad of reasons, but I believe that halacha does not leave family planning decisions completely at our discretion. And, quite frankly, I love being a mother, it is the most fulfilling job I have ever had, it makes us better people, it gives us great purpose, and it enhances our marriage and our spiritual life. If I were to perform a risk analysis, I think I'd rather have that next child and figure out how to best give our kids a Jewish education outside of the system, then to curtail growing our family only to find out that, in the end, day school/yeshiva is still out of reach and we sacrificed our family for something we couldn't have anyway.

Some will say that young families should do everything possible to achieve a day school education. Some will say that they should exhaust their savings and then go into debt. Let's face it, most young people already are maxxed out, so schools are simply going to have to deal with this factor as it hits them harder than ever. This generation is carrying a lot of debt (much in the form of student loan debt) and are paying twice for tuition. I have no intention of draining savings or taking on debt. If that makes me a bad person, so be it. I refuse to live beyond our means. It sets a terrible precedent (if this precedent wasn't set, perhaps we wouldn't even be having tuition discussions today). Compounding interest either works for or against you. Exhausting savings is the quick way to disaster. Going into debt is a bad idea for anyone in the management or financial fields. Living on the edge, quite frankly, endangers integrity.

Others will say that young people should turn to their parents for money. Asking our parents for money isn't an option, even if they surprise us by forking over their checkbooks. It isn't just a matter of being "too proud." Quite frankly, I'm not sure that they have enough for their needs. We need to be prepared for this possibility, not spend all of our money and then some of theirs. If, after 120, we find there is something left over, that is great.

Others will say to ask for a scholarship. While I do believe the scholarship committees do take great precaution with sensitive information, I think it a bad practice to put financial data out there. I am not the bargaining type. I'm not the threatening type. If the price on the free market is reasonable for our family, we will pay up. We have done our hishtadlut to get ahead and if the price is still out of reach, I don't see myself throwing a "tea party" in the school parking lot.

We happily forgo the cell phone, eat rice and beans, shop in a very cost effective way, shop in thrift stores, drive paid for used cars, and don't take vacations for which we can't bunk up at a relative's home. We had a reasonably priced wedding (could have been lower), haven't taken on student debt, and don't send our kids to camp. I work at strange hours and don't pay for daycare or camp. I've organized co-operatives for babysitting, etc. If these "sacrifices" don't pay for day school, then so be it. If day school was priced like the many Christian and Catholic schools available, we would figure it out. But it isn't.

There is always plenty of room to criticize. Some might say that if I hadn't left my job to freelance from home so I could raise my children, I could be a manager and with tens of thousands left over to pay for tuition. Some might say that if my husband would take an even higher paying job (more hours, more risk) that paying for day school for a small family wouldn't be a problem. Some might say that if we stayed in a 2-bedroom apartment that we would be able to meet these massive tuition hikes. Some might say that if we picked up and moved to a less expensive area that we would be perfectly fine. But the job is here and I tend to deal with what is, rather than what if.

And perhaps they are right! But I'm not going to make apologies for the decisions we have made, nor am I going to apologize if Hashem blesses us with one more child. We made our decisions based on what we believe is best for our family and for our children. We have lived frugally. We are paying full tuition for the time being. And we have given tzedakah (in the past) to the schools in our area. If steady, well paying jobs, living below our means, and a frugal lifestyle doesn't leave many tens of thousands of dollars left over for day school tuition, then I believe we will simply seek alternatives.

I don't see any good purpose is making day school the be all and end all of our existence. I don't want to become a bitter person, mad at those who have made less than "optimal" decisions. I don't want to harbor anger at the very people I charge to educate my children. I'm willing to continue to seek more opportunities to increase the cash available for tuition, but I'm not willing to take a risk to family life for the sake of tuition that we might never be able to pay anyways in 5-10 years, another child or not.

Yes, I prefer to go quietly in the night. There are plenty of things that could be explored and I believe I will play a roll in exploring some of those possibilities. But, what I see from "establishment" is a 10 foot list of reasons why everything is impossible and I know that any alternatives will have to come from the grassroots (who will likely eat the blame in the end anyways).

Fire away! (Wow, the post sounds a bit more bitter than I would like it too. That wasn't intentional because as I make peace with the situation we will face, I am releasing a lot of animosity I might have had pent up inside).

Tzedakah Marketing Gone Terribly Wrong

For once I am nearly speechless. I've written about tzedakah marketing campaigns centered around promises of miracles. I've written of tzedakah marketing that is simply obscene given the target audience. But this method of marketing will now top my list as the most tasteless and irresponsible of them all.

To promote tzedakah by guilting people about saving for retirement and creating mass panic about investments? Wow! I'm not quite sure what to say except that this is really low.

How can anyone possibly say with a straight face that the amount that Klal Yisrael (read: the frum community) places into retirement is "staggering" unless we are referring to staggeringly low? [Quote: "Let’s consider the net sum placed by Klal Yisroel in IRAs annually. It’s staggering.] You could say that a staggering amount is spent on tuition as well as debt servicing interest, cleaning help, camps, dating, weddings, sheitels, manicures, clothing, and even food. But retirement savings? No way, no how. I know highly paid professional couples that don't pay cash for their cars/minivans. Let's just say staggering[ly high] isn't the way I would describe the savings rate of the frum community!

A GUARANTEED INVESTMENT
Dear Editor,
I would like to suggest an excellent and fully guaranteed investment vehicle for this year’s IRA contribution. It’s called Klal Yisroel. It’s the oni who knocks at your door, it’s the local yeshiva that can’t pay their rabbeim, it’s the neighbors who can’t afford to make a wedding for their daughter, it’s the people in your community who have had their electricity shut off, it’s the many people facing eviction from their homes.

Let’s consider the net sum placed by Klal Yisroel in IRAs annually. It’s staggering. Can we collectively really afford to place that money in an investment that either will make or lose money, in an investment house that may or not be in existence when we retire? Is this prudent at a time like this? Can we find a better investment for our IRA? Permit me to present my suggestion:

Safety & Return: Hakadosh Boruch Hu Himself guarantees both the security of the
principal of our tzedakah investments, and a substantial return as well. To cite just one of numerous sources for this, the Torah tells us, “Aser te’aser es kol tevuas zarecha” (Devorim 14:22). Rashi tells us, “Aser bishvil shetisasher - Give tzedakah so that you become wealthy.” Rashi, with his ruach hakodesh, reveals for us the path to financial wealth. There are far more sources that can be cited to bring home the same point, but permit this one source to speak for them all.

Limits: We are free to invest as much as a chomesh, one fifth of our income, toward this guaranteed investment. “Beshuv Hashem” (Tehillim 126), once we have returned to seeing things with clarity, only then will we realize that “hoyinu kecholmim,” we were like dreamers. We were so wrapped up in our faith in the US banking system, which is weak, and the investment houses, many of whom failed and the rest of whom are weak, and had so much faith in the strength of America (uninvited guests dropping in on the President of the United States in the White House), that we completely lost sight of reality. Our faith was misplaced.

My friends, we’ve all been fooled. There is no stronger guarantee than the Torah, and no stronger Guarantor than Hakadosh Boruch Hu. Let’s begin by taking any
money we were going to place in IRAs this year and invest those dollars in alleviating the tzaar of Klal Yisroel. May I suggest we call the local yeshiva rather than waiting for them to call us? Let’s inquire whether the rabbeim and other staff members are up to date in their pay. Let’s take a deeper interest in the plight of the aniyim of our
community. Is there a local tzedakah fund that we can contact? Our rov probably knows which situations require the most immediate assistance. Let’s take a
deeper interest in aniyei Eretz Yisroel. The next time an oni knocks at our door, let’s try a little harder to focus on his plight.

Now, I’m not advocating a reckless abandonment of the US banking system. Rather, I’m suggesting that we place our IRA investments in a far better and more secure long-term investment, shoring up our more pressing needs right here in ouro wn Torah community.

These concepts are not new. Rather, they are the oldest and most proven concepts
in existence. Let’s be mechazeikeach other to reevaluate our priorities.
[Director of] Tomche Shabbos of Rockland County

Perhaps in response to the verses quoted I will quote birchat hamazon, "Please, Hashem, our G-d, make us not needful of the gifts of human hands nor of their loans -- but only of Your Hand that is full, open, holy, and generous, that we not feel inner shame or be humiliated for ever and ever." Yes, we have a lot of very pressing needs in our communities. And one of those pressing needs is financial stability.

Where will these families turn when they are no longer able to work? That's right! Us. And a note on the 20% rate we are allowed to give. There are many different opinions as to what ma'aser can be used for. Those that count tzedakah and tuition or partial tuition as ma'aser likely need not worry about hitting that 20%.

Trying to guilt people out of putting a little something away for their own future needs: Tasteless and irresponsible.

And with that note, a friendly reminder that you have until tax day 2010 to fund your IRA or ROTH IRA. In a recent post, the letter writer looking for solutions stated: "At this point, we need a lot of money just to get by, no matter how simply we live. We have children to feed and our expenses are only growing." If she only knew just how expensive older age can be she'd plotz. Having some hands-on knowledge about such things I will state unequivocally that we NEED community members to be saving for their future. Aging isn't inexpensive.