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

What will happen now? Will we really face a crisis just like the crisis in 1929? First of all, I want to say that nobody can predict the future but the similarities to the year 1929 are really frightening. The crash of 1929 for example had it’s roots in much too high stock values caused by the wide range of credit offers banks offered the people in order to achieve larger profits. Four years after the crash the U.S. government passed a sequence of central economic planning programmes called “New Deal” in order to stabilize the economy and above all regulate the completely runaway stock market. The deal worked and as banks weren’t allowed to spread credits to everyone in order to fund huge financial bubbles, governments did’t have to deal with the consequences of such enormous financial bubbles for more than 75 years - until now. But in the year 2000 bankers had a new exciting idea on how to offer credits to the masses. Instead of giving direct credits to the people like in 1929 they now gave mortgages to nearly everybody. This had the effect of raising housing prices and when the price of your home is very high you are also more creditworthy. But of course this bubble also had to burst and now we are facing a huge credit-funded pile of fragments again. The story of Bernard Madoff has also already existed, albeit in a slightly weakened form: Richard Whitney, who was the chairman of the N.Y. stock exchange in 1929 was sentenced to 5 years prison in 1938 for embezzling millions of dollars from his clients between 1929-1930.

So tonight was a pretty interesting and very easy day. Earlier in the day I registered for the ARCH homeless shelter sleep lottery. This means you show up in behind the facility in the alley at 6:00pm and stand in line for a lotto ticket. You pick a number out of a bucket, and they call a group of numbers at random (so people can't sell the tickets).
I was #4 and the first group the called was 1-25! Almost everyone there was familiar with the system, I was the only new one in my group. First they sent me through the X-rays again. I checked in my pocket knife, but they found a small bottle of alcohol in my bag. It was a 375ML bottle of Kentucky Whiskey or some cheap thing like that. The girl checking the x-ray immediately told the head guy, and all the people waiting in line let out a collecive "Uhhh ooohhh" expression.
The head guy told me there is an uber-strict ABSOLUTELY NO ALCOHOL policy on premises PERIOD. Anyone of the other guys would've been thrown out on the spot, no exceptions. He felt leniency towards me because it was my first time, so he allowed me to (first pour out) then discard the bottle. It was completely unopened and I noticed a couple of the guys cringe as I was forced to pour out a perfectly good bottle of alcohol! A bottle like that is a hot commodity in a place like that.
Anyhow, filled out some quick paper work with the guy, lied on all the questions about how long I've been homeless and proceeded to check in. First order of business was to take a shower. Everyone sleeping there has to take a mandatory shower (good thing or else it'd smell like sin in here). I went through the whole shower routine like I described earlier, still had no towel and dried off under the hand blower.They sent me to my bunk which from what I understand is in the best part. I am bunk E3, and the E section is an open hall which is the nicest. The whole third floor is dubbed "The Penthouse" because it's so nice (well...in relation to the other floors). There is a very large outdoor patio with a TV, fans bunch of benches. You could over hear guys saying, "Man, it's been almost a week since I've got The Penthouse!"
I was then given a meal ticket (one of the lucky ones who got a place to stay PLUS a meal). I was served a great meal, and once again all the volunteers were exceedingly nice to deal with. Get this: I got salmon, salad, lasagna and macaroni & cheese plus a Three Musketeers bars and ice tea to drink. I was for the third time today STUFFED! This is not really what I expected when I was planning the Homeless Experiment!
After dinner most people are just sitting around smoking cigarettes out on the third floor patio. It's very nice out there (sans the cigarette smoke which I stayed upwind from). I watched the sunset from a third floor primo location in Downtown Austin. There was a January 2009 issue of Texas Monthly on my bunk, so I proceeded to slowly read that for 2 hours since I had nothing else to do.
Funny note: There are two guys openly playing on their laptops here and one guy with a portable DVD player watching a movie. Many people have cell phones and MP3 players. I'm sitting in my top bunk typing this while most people are still outside. I now realize it's not dangerous to have a laptop here, but I'd still rather not raise my value as a target.
When outside you can start to catch glimpses of party goers starting to hit 6th Street. I'm usually one of those people who tries to avoid this area to stay away from people at the homeless shelter. Talk about flipping the script.
It's funny because this place reminds me of something....a COLLEGE DORM! It's a bunch of guys living together, sharing a bathroom, hanging out, chilling, eating together. Except everyone here is circa 45 years old. Everyone is very friendly, there are no "bullies" or anything like that here.
I’m not sure what time they’ll kick us out of here. Lights off is at 9:30pm….I have no idea how I’ll be able to sleep that early. I’m guessing they’ll wake everyone up sometime around 6 or 7am.
Well, I'm safe, clean, well fed, well stocked with food/water and have a comfortable bunk to sleep in. I see why so many chronically homeless people choose to live like this. IT AIN'T THAT BAD.
Written at 9:05pm on Friday June 5th, 2009. Bunk E3 of the ARCH Homeless Shelter while eating a Three Musketeers candy bar.

Labels: Homeless Experiment