City Girl's Financial Blog

With the recent student loans scandals, one realizes that one cannot trust university financial aid offices for sound financial advice. So, I've been scouring the internet for various sources of Federal Stafford and Federal Grad PLUS loans. While these loans carry fixed rates of 6.8% and 8.5%, respectively, each lender is allowed to offer additional benefits for the borrower. These can include rebates and interest rate reductions. A big problem in comparing the various offerings, however, is that there is no standard way to compare them. For example, how is one to compare the benefit "0.6% interest rate reduction at disbursement" with "3% principal rebate after 180 days"? Here, student loans can be a black box because a standardized APR is not required.
I've determined that an immediate reduction, a.k.a. front loading, is a better benefit than interest rate reductions further down the road. That's because a) while I know the present, I can't predict the future, b) future interest rate reductions, a.k.a. back loading, have contingencies that I may or may not honor in the future, and c) I have the option of consolidating.
Based on my own criteria, I've narrowed it down to three companies for the GradPLUS, and two for the Staffords.
GradPLUS, base rate is 8.5% fixed, w/ 3% origination fee:
1. AAMC Medloans: Offers 0.6% interest rate reduction (IRR) at disbursement, an additional 0.75% IRR with on-time repayment, and 0.5% IRR at repayment with auto-debit. Interest is capitalized once, after continuous deferment. Rate reductions contingent upon on-time payment, benefits can be re-instated once after 24 on-time payments.
APR in school: 8.57%
APR in school+residency: 7.02%
APR after residency: 6.65% (best case)
2. EdAmerica: Offers 1.25% IRR at disbursement, an additional 0.5% IRR at repayment with auto-debit. Interest (I think, will need to double check) is capitalized once, after continuous deferment. Rate reductions contingent upon on-time payment, benefits can be re-instated once after 24 on-time payments.
APR in school: 7.33%
APR in school+residency: 6.56%
APR after residency: 6.75% (best case)
3. Graduate Leverage: Offers 1.3% IRR at disbursement, 3% origination fee rebate 120 days after disbursement. Interest is capitalized annually.
APR in school: 7.28%
APR in school+residency: 7.23%
APR after residency: 7.2% (best case)
Stafford Loans, base rate is 6.8% fixed:
1. AAMC Medloans: Offers 0.3% IRR at disbursement, and an additional 1.0% IRR at repayment with on-time payment and 0.75% IRR with auto-debit. Interest capitalizes once, after continuous deferment.
APR in school: 6.11%
APR in school+residency: 5.54%
APR after residency: 4.75% (best case)
2. Graduate Leverage: Offers 1.0% IRR at disbursement. Interest capitalizes annually.
APR in school: 5.80%
APR in school+residency: 5.80%
APR after residency: 5.80% (best case)

The last consideration was that I felt that I had gotten a good deal on this car. MSRP, including destination charge, on this baby was $18,355. Edmunds' TMV price for my area is $17,529 while the invoice price is reported to be $16,944. The dealership I went to sold it to me for $16,632. I could have gotten another $200 off if I had settled for silver, gray, or beige. I did seriously consider it, but in the end I felt that the $200 is worth a color that I L-O-V-E, especially since I plan to keep this car for the next two decades. Total price, including taxes and fees, came to just a few dollars over eighteen grand, and the dealer did not try to push any of the extras on me.
It is interesting how human psychology works. If one of these three factors did not exist, I don't think I would be as happy as I am now.
I also applied for the 2.9% financing, since I can put the cash into a savings account paying 5% (In my finance class, I think this is called a risk-free arbitrage opportunity). The financing should be no problem, but I have heard horror stories of people driving the car off the lot and having their app rejected two weeks later, after they've spent hundreds of dollars on insurance, maintenance, third-party supplies, etc.

As I walked out the door with my scribbled figures, a manager made one last attempt. "I don't want to lose you as a customer due to price." So I told them that I would definitely give them first consideration when I had decided on a vehicle and was serious about buying. Coming home, I checked prices on cardirect.com. The website could not offer me a Fit -- none of the dealers that they worked with had any in stock. It did, however, offer me a Civic LX for $17,475 before taxes and fees. Edmunds.com showed that the invoice price for the Civic LX as $16,944, and $17,529 as what other people were paying in my neighborhood. These prices were roughly $900 less than the quote I got at the dealership.
Well, I ate lunch and dwelled upon the cars and the prices. At this point, I had pretty much decided on the Civic LX. There was no way that I was paying more for a Fit, and the thought of paying significantly above MSRP was disgusting to me. Having the afternoon free as well, I decided to visit an automall that was about an hour's drive from my house -- a friend had bought her car there and had had a decent experience. On the way, I saw another Honda dealership and abruptly decided to check the place out. They did have both Fits and Civics in their inventory. Fits were priced at MSRP, with no markup. Civics were available at MSRP, and if I wanted to make an offer, they would consider it. So I threw out $16,500 for a dark blue Civic, thinking that that would allow me to bargain up to $17,000, or around invoice. The sales manager thought about it, and said that he could only do that price for the silver and gray models.

Well! That was was unexpected. I asked him about the blue cars, and at first he blustered and said that he could only do MSRP on those. I told him that I'd have to look at the cars on the lot and think about it. As I was looking at the colors, trying to decide if I cared about color, the manager came up and said that he could do blue for about $500 more, or at invoice. Since I was actually on my way to another dealership, I thanked the salesperson, took his card, and promised to call him by Monday if I wanted to buy a car from him.
I drove elatedly to the dealership that I had actually wanted to go to. There, I was impressed. The salesperson that I talked to subscribed more along the lines of high-pressure tactics. He kept wanting to know all about me and tried to push one car over another. I stood firm on the Fit and the Civic LX. They didn't have any Fits; the Civic they had and offered at MSRP. I told him I was looking for a good deal and he said to make an offer. Remembering my previous experience, I offered at $16,000, to which he balked and said no way. I waited for him to counteroffer, but all he did was ask me to raise my price. So I raised it to $16,100, which he also declined. At which point, I asked if he was willing to go below invoice, of which he replied in the negative. This, while all the time trying to sell me the vehicle. He was definitely a very poor salesman.
Having returned home, I've decided to record today's experiences for future reference. The price at the second dealership was the best, and I am thinking of calling them up and giving them the down payment now. But I did promise the first dealership that I would give them first consideration, and so I will honor my word and ask them to beat the price tomorrow. If they match or beat it, then I will buy from them -- despite their general sales tactics, they did let me test drive both vehicles without any fuss or complications, and the sales person that accompanied me on the drive was both friendly and knowledgeable.

The recession after the recession

But is this really the beginning of the end of the worst economic crisis after 1929? I don’t think so, because a second recession seems to appear in the year 2010.
But let me explain. The cause of the current crash was the collapse of the global growth model, which was handled by the industrialized countries for years. The model was based on consumption which was financed by credit. Huge current account deficits, a dept bubble and finally the world financial crisis were the results of this model. But the model also had positive affects, for years the Anglo-Saxon consumers had been the locomotive of the world economy. Everybody had a benefit from this model. Developing countries could produce huge amounts of goods and established new jobs for their people and the people of the industrialized countries lived a life in decadence and wastage. Suddenly artists like 50 Cent earned more than 400 Million USD at the stock markets and a company of a 23 year old guy was valued by 15 Billion USD.

But in my opinion this is over now and it won’t come back for a long time. Now the world has to pay the price for the excesses of the past. The governments of the industrialized countries can’t afford to pump more money into the system, solely the USA have accumulated a gross debt of 12.000.000.000.000 USD. However exactly here is the problem: the world needs a draft horse which gives strong impulses when the economy starts to recover in the year 2010, but the governments of the industrialized countries have to darn their budgetary holes by stopping their expenditures and higher taxes. Also the Federal Reserve can’t pump money into the system endlessly and BRIC counties like China or India are just not strong enough to play the role of the draft horse for the world.
Well, to assume the facts I agree with economists like Nouriell Roubini, Robert Shiller or Barry Eichengreen who also don’t believe that this crisis will be over that fast. Even if it seems like the current crisis has reached the bottom, which perhaps might be true. To achieve the growth we are used to, we will probably have to wait many, many years.

The Black Swan

The Black Swan by Nassim Nicholas Taleb is a book about randomness in life and economy, concentrating and explaining the Black Swan phenomenon. Basically the Black Swan is a highly improbable event with huge influence on it’s surroundings. Although not foreseeable, the book teaches the reader how to deal with randomness and gives valuable tips on how to live a life which is open to opportunity.
Throughout the first chapters of The Black Swan: The Impact of the Highly Improbable you get an introduction to randomness and Black Swans. The author describes various situations where randomness is a huge factor and unleashes some common mistakes in human thinking regarding this topic. Nassim Taleb explains why so called experts are wrong and why the future can not be predicted by looking at the past. Instead, the really important events are rare and unpredictable, he calls them Black Swans.
The book goes on until you can’t take it any longer and start to have the nagging question in your head: “Dear author, what the heck should I do then?” The answer is provided in the practical chapter with some simple rules to handle life better with the knowledge of random events and their effects.
The book ends with some chapters about formulas and theory. Although there is a technical part, this book is not at all technical. If you are not interested in formulas, just skip these chapters, the author himself recommends that.
All in all, the Black Swan highly influenced my thinking about randomness and I think you should read it, too.
Go get it at Amazon.com