What is BeDebtFreeAmerica?

BeDebtFreeAmerica is a “debt elimination tool” that can help you optimize your debt repayment schedule.    It seems to work in the standard manner you would expect from such a site.  You enter all of your debts and their associated information (balance, interest rate, etc) and the software creates a customized, and customizable, plan for you to efficiently pay them all off.

Multiple Reports

BeDebtFreeAmerica provides the user with multiple reports so that can keep on top of your plan and how it is proceeding.  You can view the details for one debt at a time, or a detailed list of every debt, monthly payment, interest paid, balance remaining, or just the stripped down basics of what to pay each month.  For people who like to look at data a bunch of different ways (ok, for nerds like me) this is a handy feature.  Click here to check out a sample account.

The tool appears to use the interest rate method for determining to order of payoff (pay off the highest rate loan first) but the site states that sometimes it chooses to give a smaller debt higher priority in the payoff list a la Dave Ramsey’s debt snowball.  It does provide what I consider to be a nice feature in that you can manually adjust the order the debts are paid off if you decide that you really want to pay off a specific debt first (or last, I guess).

Free “Kick-the-Tires” and Premium Memberships

I like that BeDebtFreeAmerica provides free access as well as a premium membership.  Even the premium component currently only costs $30 for a lifetime membership though, so it’s not exactly big bucks we’re talking about.  The free component provides the basic functionality but you are limited to four debts and it limits some of the capabilities.  For instance, with a premium membership, you can modify interest rates and add extra payments at any time and can view all of the reports (you only get the basic report in the free account).  Check out this comparison for more details.

Overall this looks to be a pretty nice tool and I’d recommend you take a  look at it if you are in need of the assistance.  The ability to try it out via the free membership is a great way to delve into it and take it for a test spin.

Win a Premium Membership

But why settle for the free membership when you win a premium membership!  If you are interested in winning a premium membership to BeDebtFreeAmerica, all you have to do is leave a comment on this post.  Tell us how many debts you are going to pay off with its help….or if you don’t feel like doing that, then just say it’s none of our business!

To Review:

1. Leave a comment below
2. Updated: The giveaway will close Tuesday, February 9th, 2010 at 11:59 PM EDT.
3. I will randomly select a winner using random.org .  The winner will be announced February 10th and I will contact you via email – so please leave a valid email address in your comment.
4. Good luck!

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SeeBeyond2020.com is a subscription service that attempts to provide you with a plan to get out of debt in the shortest amount of time possible.  Now, this is not some debt consolidation deal or anything along those lines.  Instead, it simply provides you with a plan to apply your current payments to your various debts in the most efficient manner to reduce your overall time until you have paid off all your debts and save you some money (hopefully a lot of money). You can see their little “How it Works” section for a bit more detail.  Probably the most interesting thing to investigate if you are considering the service is an actual example plan.

As I mentioned, this service is a yearly subscription service.  And it appears to me that you don’t really get an overall, comprehensive plan.  Instead, I think that you get a monthly email telling you exactly what to do that month with each of your current debts.  For full disclosure purposes – I have not used this service so I can’t offer any personal recommendation one way or another.  In this case, I’m just pointing out a service that you might be interested in investigating. One other note if you are a big Dave Ramsey fan – I was not able to tell if this service followed Ramsey’s debt snowball technique for getting out of debt.  Frankly, I doubt that they do but I am not sure.  UPDATE - per the comment from Roger below, see that SeeBeyond2020 uses a hybrid snowball/avalanche method for determining your payment plan.

If you have used this tool, please leave a comment to let us know how well it worked for you and  your overall impression and recommendation.

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"Well, actually, I have pretty good news too – here, I found this thing you lost," I said to my son as I handed him the previously lost back to his faux-jibbit for his faux-crocs.

"Ok, here’s the good news – look at this."

I handed the two papers to my wife that showed the current balance on our last remaining student loan was $0 (well, actually it was -$511 since I overpaid it due to a administrative error on my part, but that’s not important now).

So, we’ve finally done it, we’ve paid off our student loans and it feels…..weird.

This is something I’ve thought about for years. At one point, I honestly couldn’t imagine paying them off since they had such long repayment periods. That was before I got fed up with all of the debt – my student loans, my wife’s student loans, car loans, mortgage. We started by accelerating my loans a little bit and then paid them off. Then we accelerated the car loans and got rid of them. Then we turned to my wife’s student loans.

That was the point in time when I first read Dave Ramsey’s The Total Money Makeover. His advice to use your available cash to pay off your debt was totally new to me. I had always heard of the importance of an emergency fund, but it was completely new to me to drop that fund down temporarily to get out of debt. This opened my eyes to the possibility of getting rid of the student loans within years, not decades.

We then paid a lump sum on my wife’s first loan. We had made some money from selling our previous home. So, after buying inexpensive term life insurance policies, we cashed out our very expensive whole life insurance policies and used that money to get rid of the first loan. After that we really accelerated our last remaining loan by doubling our monthly payments while also saving extra into an account earmarked to pay it off. Recently, I contemplated finally paying the last one off , but was a bit nervous. My wife urged me to just do it and I got some comments urging me to do the same….so we did.

There were scoffers along the way

Along the way a number of people have made only slightly veiled comments about paying off our loans. "The interest rates are low…" "You can deduct the interest…" "Put your money in the market to earn more than you’re paying…" We persevered, however, and as of today, we only have to pay interest every month to our mortgage company. The money that we previously paid for our two car loans, my two consolidated student loans, and my wife’s two consolidated loans now goes straight into our savings account and investment account.

Now what?
The next step, actually, is to decide where to reallocate the money we’ve been putting to loans for so long. I think we’ll increase our 401k contributions, add to our college savings, start investing regularly again, and start savings accounts for vacations, gifts, house purchases, and grow our emergency fund.

After having accomplished it, here are two pieces of advice regarding student loans:

1. If you can afford it, do not consolidate them . Changing the term from 5 or so years to 25, while reducing the monthly payment, sure adds a lot of interest to the total. Check out the image below, at the prescribed schedule we would have been making monthly payments until 2032! (2032!!)
2. Whatever you do, do not defer them. For some reason, it seemed like a good idea at the time when we decided to defer one of my wife’s loans for a few years. Now, after paying on it for about four years and doubling the payment over the last year, the payoff amount was still more than the original amount of the loan!

How far we’ve come

The original balance when my wife finished medical school was $130,000. The loans peaked, after deferment, at a total of almost $160,000. I finished school with about $20,000 of student loans. We also had a car loan of almost $20,000 and a lease at one point. We replaced the leased car with a $25,000 loan (minivan!) and replaced the SUV with a Honda Civic (now an "ivic" since my 16-month old daughter ripped the "C" off of the back last night) with a loan of about $12,000. Now it is all gone…all gone…wow.

So, what about the "great" news?
Oh yeah – to finish the story….my wife then asked, "So, if this is the ‘good’ news, what is the ‘great’ news?" "THIS!" I exclaimed as I brought out the fancy-schmancy, stainless-steel, butterfly-opening, fingerprint-proof trash can my wife’s had her eye on for a while. I had previously dissuaded her from purchasing it since it cost $70 ($70 to put trash in it! what!?!) She seemed a little more excited about the trash can than the loan, which I expected (that’s why the trash can was the great news).

Her next question to me was, "Well, what are you going to obsess about now, honey?" To be fair, it was a valid question for which I currently have no answer….I’m sure I’ll think of something (blogging, maybe?)

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First, I have to apologize – we are not allowed to use the word "stupid" in my house. It just slipped out – honest. Anyway, what I really meant to ask is "am I silly to pay off our remaining student loan?"

We have one student loan left

When we moved from the southwest back to the east coast, we had just completed paying off all of my student loans. That left us with (from highest to lowest balance) my wife’s student loans, a mortgage, and two car loans. As seen on my story page and the first checkpoint post , that was the point in time where I started to get really obsessed with paying off all of our loans and getting rid of everything except the mortgage.

Fast forward a few years to today and we currently have a mortgage (unfortunately a much larger one than before) and one, single, solitary student loan. Well, we also have this other thing that we would have to pay back if my wife stopped working in the next 18 months – we count that as debt because it restricts our freedom even though it doesn’t currently have a monthly payment.

We are at the cusp of being able to pay it off

The amount left on the loan is quite large though we do actually have enough cash to pay it off. All it would take is a simple transfer from our emigrantdirect.com savings account to our checking account and a billpay to the loan servicer…then wait a few days…poof – no more student loans…

But wait – it is at a very low interest rate

The reason I ask the question is that, thanks to Ben and his band of merry policy makers, the interest rate on the loan has been dropping like a rock over the past 9 months. The last time I checked, it stood at 3.25%. That’s a pretty low interest rate. We are currently earning 3.30% on our ETrade savings account. Of course, the amount earned on the ETrade account is still lower after you factor in the taxes that would be paid on the interest earnings.

The interest rate is so low, however, that I’m sure a number of people would say that I should put the money into the stock market to earn some real money with it. Of course, if I had done that at the beginning of the year, I’d only have about 75% of the money I have now. I realize that the market will go up again. In fact, we are actively putting money into the market each month through our 401k plans and my employee stock purchase plan. I am sure that the market will rise again and that I will be better off for buying low-cost mutual funds when the market was "on sale."

I have been obsessing about this point in time for years

All of that is not the point. The point is that we now have in our grasp something that has been a huge goal of ours for a long time. In fact, I honestly never thought we would get to the point that we would pay off the student loans. (similarly, right now I feel that we will never pay off the mortgage) So, I’m really close now but I am nervous to actually pull the trigger and part with that much money.

We would still have about a four month emergency fund

I guess the reason I am nervous is that if we paid off the loan we would not have enough cash to satisfy my wife’s contractual obligations if we decided she needed to stop working. It is not like the decision is imminent, but it would further restrict our freedom of action . We would still have an emergency fund of about four months of expenses, but to pay off the obligation would completely wipe that out as well.

I can not see myself doing anything else with that money

To be honest, with the cash sitting in the savings account to pay off the loan, I simply can not see myself doing anything else with that money. I can’t imagine tying it up in the stock market or anything else. So, it will probably just sit in the savings account until the loan is paid off. (So, why don’t I just pay it off?)

Am I hoarding?

My wife occasionally suggests to me that I am worrying too much about money and that I am hoarding it. It may be true that I am not relying on God for our provisions as much as I should. Since I have been a somewhat less-than-stellar steward of our financial blessings in the past, I guess I am concerned that I might make another irresponsible financial decision. The loan balance is a significant amount of money, so this would be a big one! My lovely wife pointed out this verse from her bible study last night:

"I am the LORD your God, who brought you up out of Egypt. Open wide your mouth and I will fill it." Psalm 81:10

You can probably tell which way I am leaning

Well, what is your take? If I was asking you for advice, what would you tell me to do? And though it sounds similar, here is a very different question: what would you do in my situation?

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(Hey, I thought you said that debt wasn’t evil? Well, I did say that , and it isn’t, but that doesn’t mean it is a good thing. Besides, "the lesser of two bads" or "the lesser of two not-so-goods" does not make for nearly as catchy a title!)

The debt snowball and similar techniques assume that the person is paying off all of their loans in order. By rolling over the freed up cash after each loan is paid off into the payment for the next loan, it does not really matter what the balances or interest rates or remaining term of the loans are (depending on which technique you are using, of course) since it all basically works out in the end.

This is not the case when you are only paying off one loan and not continuing with the snowball.

In this situation, all of the loan factors do matter. As a result, you must, unfortunately, analyze the exact effect prepayment will have on both loans to determine which one should be paid off (unfortunately for you, maybe – but I like spreadsheets and stuff like that!)

The scenario

The person told me that she has two loans, a car loan and a home equity loan (HEL). (Note: that much is true, but I am making up all values in the example below because I don’t actually know them). She and her husband have extra money in their monthly income that they want to put towards one of the loans and wanted to be smart about which one to pay off to get the most benefit from the prepayment. Here are the steps I would recommend in this situation:

1. Determine how you define the "greatest benefit"

The point of this exercise is to be smart about loan prepayment to realize the greatest benefit, rather than just flipping a coin to decide which loan to attack. Unfortunately, there isn’t a simple way to define what would provide the greatest benefit for each person. Typically, I would think that a person would define the greatest benefit in this situation as saving the most money in interest payments . That is the criterion I will use in this example. There are other factors to consider, however.

For instance, you may want to pay off one loan as quickly as possible to free up cash flow. It might not save you the most interest by choosing that loan, but you want to get rid of one ASAP – so the shortest time to pay off a loan would constitute the greatest benefit for you.

Another thing to consider, especially in a case like our example, is risk . If something comes up and you can’t make your car payments, the bank comes and takes away your car. If you can’t make your HEL payments, they come and take away your house! (well, they don’t "take it away" I guess, but they take you away from it!) Therefore, having a HEL (and a mortgage) presents a greater risk than having a car loan. Even if you don’t save as much interest by paying off your HEL, if it helps you to sleep at night knowing that you have one less loan on your house, then it may be worth the extra interest you’d pay. In this case, you would accelerate the HEL loan and think of it as paying a little extra for stress reduction. (like a massage, I guess)

2. Collect all the numbers for your loans

To calculate which loan to pay off, you will need the following information for each:

• Current balance
• Interest rate
• Monthly payment
• Is it tax deductible? (if it is, you also need your marginal tax rate)
• The extra principal amount you are going to put towards the loan each month

3. Find a loan payoff calculator

The easiest way to find a loan payoff calculator is a good old-fashioned internet search. Go to Google or the search engine of your choice and type in "loan payoff calculator" or something similar. You can also use a spreadsheet or financial calculator, but I find the loan payoff calculators found online to be the easiest to use, so that’s what I’m going to use in this example. Click here to use the calculator I used. (it will open in a new window)

4. Run the accelerated payoff scenario for each loan

In the calculator, fill in the values requested for one of your loans (balance, interest rate, payment, additional principal) and it will show you how long it will take to pay off your loan at the minimum payment and how long with the extra principal you specified. Write down the values it spits our or put them in a spreadsheet or something. At the minimum, you want to write down the Payoff Time Savings and the Total Interest Savings . Then repeat the process for the second loan. Here is a screen capture of the values for our imaginary HEL loan.

Click to enlarge

By the way, here are the values I used for the two loans:

The extra principal payments will be $200 per month.

I put in the values for both of the loans and got the following information – formatted in a nice spreadsheet (wait- ignore the last line in the spreadsheet for a minute):

5. Calculate the tax ramifications, if necessary

At first glance, we see that paying off the HEL saves $841 in interest (that’s money we keep and do not give to the bank!) while paying off the car loan would only save us $615. But hold on, there is one more thing to consider….TAXES! Well, not taxes paid, but taxes saved. Since the HEL is tax deductible for the person asking me this question, that must be taken into account to get a valid result. If there are no tax implications to either of your loans, skip this step.

Since the HEL is tax deductible in this case (they are not always, so check into it for your situation), by paying less interest over the course of the loan we will be getting a smaller tax deduction and a smaller tax savings compared to paying the full amount of interest. To properly compare the two loans "apples to apples," we must therefore take into account this reduced tax savings .

A simple way to do this comparison is to reduce the interest savings from the HEL loan by the percentage of your marginal tax rate. Calculating this might be a lot more complicated depending on your tax situation. If you are in the middle of your marginal tax bracket and will not be pushed into a different bracket as a result of having a smaller deduction, it is actually a fairly simple calculation.

To determine the total after-tax interest savings , take the interest savings for the HEL loan ($840.67) and multiply it by (1 – marginal tax rate). In this example, I will use a 28% tax rate, so 0.28 in this calculation. Thus, the actual interest savings after we consider the tax savings we will no longer receive is $605.28. [840.67 x (1-0.28)] Again, since the car loan is not tax deductible, we do not need to do this calculation for that loan.

6. Compare the interest savings

Now you can look at the last line of the spreadsheet (I trust you didn’t peek!). Comparing the $605 saved by prepaying the HEL with the $614 saved by prepaying the car loan is easy. When the taxes are taken into consideration, you see that accelerating the Auto will save you slightly more interest. Again, if there were no tax implications, we would have picked the HEL in this scenario.

Of course, the results are highly dependent on the specific loan parameters . If the car loan would have been larger or had a higher interest rate, we would have saved even more money by prepaying it. If it would have been smaller, maybe even at a higher interest rate, we might have saved less by prepaying it. Since all three factors come into play independently, it is important to analyze the numbers for your specific situation and not just follow blanket statements like "prepay the higher balance" or "prepay the higher interest rate" or "never prepay a tax deductible loan."

7. Get rid of the loan!

Now the fun part begins! You’ve seen the process I would use when determining which loan to pay off first. The most important step, however, is to actually start paying the extra principal and eliminate the loan (when it comes to debt, let’s talk tough and use words like "eliminate" or "eradicate" or "terminate"). Even if you choose the wrong loan, the most important step is still to do something and pay it off . And after you pay off the first loan, I would gently suggest that you consider paying off the next one (and the rest of them). The more debt that you get rid of, the freer you become (is "freer" a word…spell check didn’t flag it…hmm, it did flag "didn’t" though…and "hmm." Sorry, I’m back on task). Remember,

The rich rule over the poor, and the borrower is servant to the lender. Proverbs 22:7

Final thoughts…

I hope the explanation of this process is helpful (I’m hopeful that it will be useful to at least one person!). Again, this type of analysis isn’t really necessary if you are doing a debt snowball with the intention of paying off all your loans in succession. In that case, just decide whether you agree with Dave Ramsey and like to see momentum growing by making progress or whether you are strictly a "by the numbers" kind of a person who wants to pay the least amount of interest and can stay motivated if you don’t get to experience any short-term successes.

Another note:if you have a variable interest rate on your loan, it gets harder. As long as you can predict the future and know how the interest rates will change, you can still do a similar calculation. If you can’t do that (if you could, you would have already bought stock in the next Wal-Mart and used that money to pay off your loans…so I’m guessing you can’t), I would suggest you skip to Step 7 and just do something .

One final note: my assumption is that most people reading this post are already familiar with the debt snowball technique (or you don’t care about it). If this is a bad assumption (and you do care) please let me know and I will put together another post on Dave Ramsey’s technique and the similar interest rate based technique.

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