Debt: A dream killer? Part 2

   I sat running the numbers.  Part-time tuition at Texas A&M School of Law was approximately $25,000 per year.  I would complete the degree in four years for an estimated $100,000.  The GI Bill would cover 40%, leaving me with around $60,000 in addition to books and living expenses. What did that break down to in a monthly budget? 

  Suppose I started school in August 2015, graduating in May 2019.  Since all money had to be paid by graduation, I had 58 months starting June 2014.  That broke down to around $1050 per month.  I had whittled my monthly budget to around $5,500.  That, however, was only making the minimum payments on my pesky credit cards.  I certainly didn't want to maintain my current debt for five years.
   I contacted my bank, USAA Federal Savings.  I had started using USAA during my time in the Air Force. Founded by and designed for military people, I have found them accommodating.
   I inquired about a personal loan to consolidate my credit card balances.  The three credit cards I still had were through USAA.  I explained what I needed, fully expecting to be turned down. Instead I was approved: $30,000, 7.5% interest, seven year term. For the lowest APR, I needed to purchase payment insurance (dropped my interest rate from 8.25 to 7.5%).  My biweekly payment was $243 ($526.50 monthly average).  I had been paying about $720/month in pure interest.
   I turned to my student loans. 

   The Wells Fargo Loan had ballooned with interest(post graduation) from $10,000 to $11,200.  With steady payments, I stood at 10,800 with 11% interest.  

   The Discover student loan stood at $8,486.88 with 10% interest.  I ran the debt calculator to find the necessary payment to eliminate both in 74 months.  Wells Fargo required a payment of $205, while Discover needed $155.00. Eliminating debt in seven years was longer than the five years (or less) I had originally hoped for. My monthly debt payments stood at $886.50.  That number burned me.  So close to what I needed, but it was going to pay for my foolishness. Perhaps I could get a scholarship.
   To be competitive for a law school merit scholarship, good grades and an excellent LSAT score are necessary. My grade point averages, undergraduate and graduate, stood at 3.94 and 3.48, respectively. Back in 2001, I had taken the LSAT on a whim, with little prep, scoring a 158 (77th percentile).  To qualify for at least a partial scholarship from a fourth tier law school (Texas A&M is currently ranked as fourth tier), I would need an LSAT score in the 160's.  

   I began to prepare and decided I needed a bit of extra help.  I looked at my options. Kaplan's LSAT test prep with a one-on-one tutor started at $2600.  PowerScore and Testmasters offered private LSAT telephone tutoring for around $100/hr. I wanted to know expressly who I would be working with, what their qualifications were.  Plus, I honestly couldn't afford $100/hr must less $2600.  

   I found one site, LSAT-Tutoring.com. Peg Tittle, the tutor, had once written LSAT questions. She had taught extensively and authored a book,"Critical Thinking: An Appeal To Reason", that was used in college level courses both in the United States and Canada.  Tutoring rates started at $75/hr, or $60/hr if the student committed to 10+ hours. I decided she was worth a try.
   With Peg, I made significant progress, understanding the test better, gaining speed and accuracy.  As test day neared, I took several timed practice tests, scoring an average of 165 (92nd percentile)  Aside from the general test angst, my LSAT went well.
   With score release in early July, I totaled up what I would needed per month during the school year.  Even with a scholarship it would be difficult to make bills. Expenses had to come down significantly. The largest among them was my mortgage. Should I sell my home? I hated losing the equity that I had in it. What about leasing?
   If I leased my home now, I could put back the extra money for school.  I would then have a bit of a cushion. In the event I was awarded a scholarship, I would need to maintain a certain GPA (usually 3.0+) to keep it.  During the term, if I could hold monthly expenses to $3,000, I would only have to work about 80hrs per month. This option showed promise.  So how does one lease out a home? 

Robbing Peter to pay Paul (and getting some breathing room)

As I wrote in "Tiny Steps," I had started making slow but steady progress. I watched my
budget carefully and worked hard, applying everything extra to my credit card with the
lowest balance (Visa, starting balance of $9,900). With credit counseling and loan
consolidation eliminated as options, I looked to my dwelling.
Recovery of home prices in north Texas after the 2008 housing bust had been fairly
rapid. My one-story brick ranch, purchased for $165,000 in 2005, was now worth
$182,000. Thanks to a 15-year mortgage at 5% APR, I only owed $129,000. Prime
mortgage rates had dropped to just under 4% in the summer of 2013.
I didn't have stellar credit anymore, but I managed to qualify for a loan for 4%
APR. Not bad. I was allowed to borrow 80% of my home's value ($145,600) in
September 2013. After fees and closing costs, I received $14,000. I used this to pay
down my car ($5,800) and to shrink my credit card debt to
just under $30,000.
Doing so gave me the biggest bang for my buck, freeing up over $350 dollars in my
monthly budget. Additionally, my mortgage payment dropped from $2,050 to $1606. In
under a year I had reduced my unsecured debt by 25.4%. I could now make ends meet
and slowly discharge the debt without working overtime.
While I was still willing to work hard, I was starting to buckle under the strain, falling
ill frequently. Early in 2014, I was diagnosed with a chronic illness.
Rolling debt into a mortgage is not "getting out of debt.” It is simply a reallocation
(Robbing Peter to pay Paul because Peter charges lower interest).
Huettner Capital president Todd Huettner manages a mortgage brokerage firm that
specializes in debt consolidation. Huettner suggests homeowners answer three questions
before combining debt with a home mortgage:
1. Why do you have this debt? As I mentioned in "Stopping the Bleeding,"
consolidation must accompany a change in spending habits (living on a sound
budget). Failure to do so only results in a bigger mess.
2. What are the costs of consolidating the debt? As I noted above, I needed to pay
nearly $2600 in fees and closing costs. I'm now paying that back (with interest of
course). Because I was able to finance to a lower interest rate, I will save money in the
long run (five years-plus).
3. Is there a more effective way to eliminate your debt? If you have less debt, or when
cash-out costs are high, stick with paying the old-fashioned way. While failing to pay on
credit cards may bring a lower credit score and some nasty phone calls, your house can't
be taken. Defaulting on a mortgage or home equity loan is a different matter.
All things considered, this was the best option for me. I needed some breathing room. I
needed to work fewer hours. I needed to take care of me.
Personal finance experts and their proscribed debt fixes are many: Jean Chatzy's “Debt
Diet,” Dave Ramsey's “Financial Peace University,” Suze Orman's “9 Steps to Financial
Freedom.” etc. Rolling debt into a mortgage is not high on the list of recommendations of
any of them. Overall, however, their principles are the same: Reduce your debt and
increase wealth through budget discipline and living within your means. I have taken tips
from each, with Dave Ramsey being one of my favorites. It is my life and my money.
Ultimately I have to do what works for me.