Defynance - Blog , Debt

Do ISAs Have a Racial or Gender Bias? New Study Suggests the Answer is “No!”

Mon, 25 Apr 2022 23:39:22 +0000

Last week, an organization called Jobs for the Future (JFF) released the results of a statistical study they undertook to investigate whether or not Income Share Agreements (ISAs) reflect either a racial or gender bias in the distribution of their use. The report concluded that there is no bias in terms of race or gender.

For those of us working on creating more access to higher education and equal economic opportunities with ISAs, this conclusion does not come as a surprise!

Before commenting further, in the interest of transparency, let’s briefly review what the JFF did and how it conducted the study. First, the JFF used 7,639 ISAs that were active between 2018 and 2021. Some of the ISAs were new, others were in their repayment period. Now the caveat: Normally, in any financing endeavor, the financier is prohibited from collecting racial or gender data that can be tied directly to that application. That is, you can collect data during the process and save it in “bulk” to be reviewed later – but you cannot have it in a place where it could be seen by someone making the financing decision. The ISA data used did not have gender or race data, so that data was assigned to each ISA by using statistical methods. In fact, the JFF used several methods for assigning the same data, i.e., they used 3 different methods to assign race to have repeated confirmation of the assignments made.

In the end, as we’ve said, the study concluded that there was no statistically significant relationship between race and/or gender and the key contract terms they were offered!

Again, this is not surprising.

ISAs themselves are not living, breathing entities. They don’t think – therefore they do not form opinions and then biases or prejudices. Humans do that. Granted, this study could have found that bias does exist. But that is not a reason to cast doubt on ISAs as instruments – it only calls into question the equity of the financial system as a whole. The same bias that could exist in ISAs could also exist in mortgages and car loans. The instrument doesn’t decide, the lender does, whether through personal decisions made based on bias or through using algorithms that contain inherent bias.

The DefynanceISA product offers a fairer approach to financing higher education. By setting the monthly payment to a percentage of income, the Defynance ISA actually reduces bias by giving people – especially African Americans and Latinx and women, who are undoubtedly subject to bias in incomes – a more affordable way to repay the debt they incurred while attending college.

How To Tackle Debt Effectively

Mon, 21 Mar 2022 18:14:25 +0000

Debt is rising for Americans, and even though some debt such as mortgage debt is seen as financially viable, other consumer debt such as car loans and credit cards can be detrimental to an individual's financial wellbeing.

According to Northwestern Mutual's 2021 Planning & Progress Study, U.S. adults aged 18 carry an average of $23,325 additional debt on top of their mortgages. How can one go about tackling this amount of debt? There are 2 main strategies one can use, the snowball approach or the avalanche approach.

The starting point forboth approaches is that you make minimum payments on all your debts while singling out one of them and paying above the minimum on that one. The difference shows up in which debt you single out and choose to tackle first.

The Snowball Approach

The Snowball approach is seen as a more psychologically rewarding method. Here you tackle the smallest debt first and make the extra payments on them, moving up the ladder to the next smallest debt. This progression acts like a snowball effect where tackling the smaller or easier debt first gives you momentum to tackle the next one. Though it may be an easier method for those with less self-discipline and who want to see their number of debts decrease quicker, this is a more expensive method in the long term as you pay more in interest. It may also take more time despite the instant gratifications seen from a debt going off your books.

The Avalanche Method

The more mathematically logical method calls for tackling the debt with the highest interest rate. In doing The more mathematically logical method calls for tackling the debt with the highest interest rate. In doing so, you get rid of your most expensive debt first while paying the minimum on the others. This is a cost-effective way to tackle your debts since you will accrue less interest but may be tougher to do since it requires more self-discipline. For the math to work out, one needs to have a constant stream of extra income to apply to the debt repayments. If this does not happen, it may end up being more expensive than the snowball method.

The Consolidation Approach

A lot of debt may not lead to a poor credit score but, as you start paying it off, offers will come into A lot of debt may lead to a poor credit score but, as you start paying it off, offers will come in to consolidate all debt into one payment. Do the math to make sure these offers make sense because they present a good option to just have one payment that you can pay extra on to get rid of the overall debt load. As credit further improves, there may also be an opportunity to roll over debt into 0% interest rate offers to further bring down the interest and apply the maximum amount of money to the principal in the quest to become debt-free.

Sometimes a mixture of all or some of these methods could be a smart move. Targeting the most expensive debt along with paying off some of the smaller ones or consolidating into lower interest rates may strike a good balance between mathematical logic and psychological benefit.

Everyone needs to assess their own debt situation and how it is impacting them and their family. This will help in selecting the right approach. Lastly, for true long-term debt relief, it is important to change one’s lifestyle and spending habits to avoid debt, as much as possible, in the first place.

Why is student debt a social issue?

Mon, 27 Dec 2021 23:54:48 +0000

We can agree that not all loans are bad from a financial point of view. In fact, getting a loan can improve your credit score as long as you repay it in a timely manner.

On the other hand, the pros and cons of a loan vary depending upon the type of loan. For example, a home loan is beneficial as it lets you purchase an asset whose value appreciates as time passes. On the contrary, an auto loan suffers from a not-so-favorable opinion; as any vehicle depreciates over time, and the interest paid on the loan ultimately adds to the cost.

Are student loans favorable?

When it comes to student loans, people have various opinions on this subject. Some are in favor of a student loan and look at it as a cost for a brighter future. Whereas, some opine it to be not so worthy of the cost and stress. In recent years, the rise in student debt has shocked several policy-makers and forced many to reconsider its benefits to cost ratio. Often, the cost has surpassed the benefits by miles.

There are cases where not just the loan holder but the whole household is under the burden of this debt. The college education fund is constantly on the mind of parents, often even before the child is born. The loan repayment amount sometimes equals or is more than the family revenue; which then leads to defaults, and ultimately increases in total debt amount. Why should higher education become such a burden for general people? Why is accessing higher education such a tough choice for so many individuals in society?

Who does student debt impact most?

Student debt impacts borrowers over time by raising debt burdens, lowering credit scores, and ultimately, limiting the purchasing power of those with student debt. It often results in making the borrower financially weak when actually student loans should be a building block for a brighter future. According to experts, all this debt could slow economic growth, with borrowers prevented from fully participating in American capitalism.

The middle class and lower class populations are hit the most because of student debt; as education is the only way for them to have a better future. Even though there are numerous need-based scholarship programs, the number of students who actually land a scholarship is negligible. After committing to student debt, if they fail to land a well-paying job, the debt piles up and they are stuck in the same vicious circle.

While it is a known fact that student debt does more harm than benefit, there is no escape from it if you want to pursue higher education. Hence, it will be wiser to follow a well-thought strategy to make sure that an education loan does not get the best out of you and reap maximum benefits out of this loan.

4 ways you're stuck in a debt trap

Mon, 15 Nov 2021 23:17:12 +0000

Debt can be a useful tool, but other times you can get stuck in the debt trap. Sometimes debt keeps you in a continuous cycle where interest compounds and it seems like you'll never escape. So what are some of the ways that debt traps you?

1. Interest isn't your friend

Interest is a parasite that you can't get rid of. When you take out a loan or have an open credit card, you can keep paying the interest off, but it'll keep coming back until you pay off the entire debt. The buildup of interest over time and the difficulty of paying it back leave you in the debt trap.

2. If you can't pay, you're punished

Whenever a person can't make payments on a loan, nothing good happens. Their credit can take a huge hit due to a missed payment and their interest will compound. If you lose your job, the loan company doesn't care and just wants their money back. They don't help you get out of your slump and just make it worse by piling on interest. This practice keeps you stuck in the debt trap.

3. You always pay more than you bought the item for

The use of interest forces you to pay more on an item than you initially paid for it. Sure, that's the point of interest, but that doesn't mean that it's not a trap. It means the item will never be worth what you paid for it. In some cases, you can even pay up to three times what you paid for an item or more. In the long run, you pay more for an item than a person who pays for the item outright, leaving you with a lot less money for the future.

4. ...Unless you declare bankruptcy

The only way to avoid paying back everything when you're in debt, is to declare bankruptcy, which can cause more problems than they fix. Declaring bankruptcy will hurt your credit and stay on your record for 7 years. During that time, it would be hard to get financing from almost anyone without a subprime loan, the ultimate debt trap.

What alternatives are there to the debt trap?

There are currently few options out there for people trying to avoid debt when financing. One current option for students or recent graduates is the use of Income Share Agreements. This financing method is debt free and offers many protections for the income sharer. Defynance currently offers an Income Share Agreement for recent college graduates trying to rid themselves of their student debt.

Is it better to pay off debt or save money?

Mon, 20 Sep 2021 21:29:51 +0000

As a general rule you if the money you save has a higher return rate than debt, you should save money; and if the interest of your debt is higher, you should start paying off debt.

Usually one does not have only one type of debt but different such as credit card debt, mortgages, student debt, car loans. Credit card debt is normally the most expensive one with interest rates averaging almost 20% for the United States. On the other side, auto loans or mortgage rates are lower, currently, the ARP for a 30 year fixed mortgage is 3%.

Save up or pay off?

Knowing this, the first step is going to be to make a review of everything you owe, how much you owe in total, and the interest rate for each. Then, you can start to prioritize.

As for savings, according to value penguin, the average bank interest rate for interest checking accounts in the United States is 0.03%. Meanwhile, the average savings account rate is currently 0.06%, and the average money market account interest rate is 0.09%. For Certificates of Deposit, the rate can go up to 1%.

What about investing?

As you can see it is better to pay off debt than just to save money. Investing can be a different story.

The SPDR S&P 500 ETF (SPY) has generated an average three-year return of 13.25% and based on 10-year data, the fund generated average annual returns of 13.55% the Dow Jones Industrial Average has returned an average of 15.03% annually for the past 10 years.

The thing about investments is that they can be volatile an index fund might be up 10% this year but down 10% next year. While there are investments that pay a guaranteed interest rate, such as bank certificates of deposit (CDs) and U.S. Treasury bills or other corporate bonds, they tend to have low rates of return that rarely exceed the interest rates charged by credit cards and other lenders.

Ultimately we could say that it is generally better to pay credit card debt because as you can see, the interest in this is a lot higher than average annual returns for stock market indexes after this carefully analyze options and the best thing is to do both, allocate a portion of extra cash to pay debt and also start investing at the same time that you are paying your low-interest debt.

Every situation is different

Each person should carefully understand their financial position to decide what to do with any extra cash. You must go through options to analyze your types of debt and your possible investments.

Income Share Agreements and Income-Based Repayment Plans: What’s the Difference?

Mon, 28 Jun 2021 19:09:57 +0000

As the realization that student loan debt has become a serious issue in the United States spreads, the number of different solutions proposed to resolve or at least alleviate the burden on the debtholders has increased as well. Two of the newest and probably most misunderstood are the Income Share Agreement and the Income-Based Repayment Plan.

In this post, we will attempt to highlight some of the more important features that make the two concepts different.

Income Share Agreements

Income Share Agreements (ISAs) are rather straightforward. For our example, we will assume that the two parties entering the agreement are a financial institution and a student. The student has applied to the financial institution for funds to pay for their tuition. In an ISA, the financial institution will provide the funds in exchange for the student’s promise to share some percentage of her future income for a specific period.

ISAs typically include some additional beneficial features. For example, if the student post-graduation experiences a period of unemployment, no repayment is usually due. This is because the student is only in active repayment while employed and earning a salary to share. That salary sharing may also only kick in after reaching a certain level as well. Of course, this provision does not “forgive” those payments and the amount must be returned eventually. In this case, the final payment month is just pushed out to a later date without adding to the total balance owed.

Additionally, the percentage of the student’s future monthly income is set. With traditional lending, the payment amount is set and will vary as a percentage of monthly income as that income varies. However, this creates another interesting feature of ISAs: ISAs will normally contain a provision “capping” the total amount repaid, unlike traditional loans where the longer one takes to repay, the more interest that accrues and the greater the total repaid.

Income-Based Repayment Plans

On the other hand, Income-Based Repayment Plans (IBRs) could be considered “mean-tested” plans. This means that someone who holds student debt would have to qualify based on certain conditions. IBRs will normally limit the monthly payment to a certain percentage of monthly income based on the debtholder’s discretionary monthly income. On the surface, this sounds like a good deal. On the surface, it sounds like the same deal offered by ISAs.

The Difference

ISAs fix the term of repayment based on the percentage of monthly income required – this in turn sets the total amount repaid in subject to a repayment cap. IBRs offer no such protection. Lowering the monthly payment to a set percentage of income will indeed lower the monthly payment. However, this does nothing to the amount owed and does not stop the “clock” causing interest to accrue. If the new, lower payments cannot cover interest payments and reduce the principal, the balance can actually increase!

Knowing the differences between ISAs and IBRs can help borrowers trying to choose the two avoid additional financial duress.

Ways to Pay Down Your Debt Ahead of Time

Mon, 05 Apr 2021 18:05:16 +0000

It can be difficult and take a lot of time to pay down your debt, unless you come across a huge windfall. However, if you’re like most people, you probably don’t have a lot of extra cash laying around to deal with your problems. Even without a huge windfall, it’s still possible to become debt free! It just takes some discipline and creativity but it is possible and incredibly rewarding. You can even automate your payments to remove some of the discipline.

Let’s talk about the few main methods to pay down your debt ahead of time. Just remember that every strategy requires a payment more than the minimum required. If you have trouble finding extra money, there are plenty of useful tools that can track your spending and help create a budget to pay off debt such as Mint and You Need A Budget. A budget will help you know where your money is going and prevent overspending. You can still have fun with a budget but in a smarter and more responsible way.

The Snowball Method

The first popular method for paying back debt is the snowball method. It is called so because you slowly pay off debt based on the size of the loans. Using the snowball method you make all your minimum monthly payments. After that, you put extra money towards paying off the loans with the smallest balance first. Once the smallest is paid off, you can start paying off the next smallest balance. The snowball method is motivating because it starts getting rid of loans quickly and it is easier to monitor progress.

The Avalanche Method

The avalanche method is my personal favorite, because it helps you save the most in the end. This method is similar to the snowball method, but instead of putting extra payments towards the smallest balance first, you pay off the loans with the highest interest rates first. This method saves you the most money because it starts paying off the highest interest loans faster. Those loans will accumulate the most interest over time, so it's great to get rid of them first. The difference between a 3% loan and a 4% loan over many years can be huge.

Other ways to pay off your debt

Other useful methods of dealing with debt is transfer balances to lower APR credit cards or loans. There are many 0% APR options depending on your credit score and history. Using this method enhances the avalanche method because you can focus more resources on higher interest rates. This strategy can also work with the snowball method if you transfer the higher balance debt to lower interest rates and focus on paying off the smaller balances.

Another option for those with student loan debt is to refinance to an income share agreement (ISA). This instrument is debt-free to begin with, so refinancing will remove your debt immediately. With an ISA, you share a percent of your income for a set period of time and then you are free. The payments are always affordable because they are tied to your income. Interest never accumulates and you don’t have to make payments if you don’t have income. The ISA is the best solution for those struggling with student loan debt. Currently, only Defynance offers a student loan refinance solution that utilizes ISAs instead of debt.

Three new companies helping you destroy your debt

Mon, 15 Jun 2020 19:16:44 +0000

Debt can be beneficial and some of it is good debt. Some debt can help you to improve your credit score and help make big purchases like cars or houses. Student debt is not that. Other debt is not like that. Bad debt comes in many shapes in sizes, but it always leaves you in a worse position than before. However, we found some companies to help you destroy your debt.

So how should you go about getting rid of bad debt while taking advantage of any "good" debt? There are plenty of companies out there designed to do just that, many of which are POC-owned businesses. Below we have compiled some of these change-making companies. And before you ask, no they didn't ask us to do this. They're just really cool.

SpenDebt can help you destroy your debt

To steal a quote from SpenDebt's website: "How do you eat an elephant? One bite at a time." This pithy explanation perfectly encapsulates what SpenDebt is all about: paying off your debt gradually by taking bite-sized chunks out of the elephant that is your debt. They take care of your debt by taking micropayments from each purchase you make. This allows you to slowly take out a bite-size chunk of your elephant-sized debt.

By using SpenDebt, you'll find that your student loan payments can be much lower at month's end than you would think possible. Not only that, but this method of payment is like candy to the credit bureaus. Showing responsible payment habits like the ones established through SpenDebt can be crucial in building your credit score.

To find out how it works, visit them at SpenDebt.com or check out their explantation video!

EduRain is perfect for student loans

Your inclusive higher education financial support platform! EduRain is literally an all inclusive platform which allows students to find funding for higher education in one place. With EduRain you're able to complete the tedious government FAFSA form within 5 minutes as well as find scholarships and scholarship writing assistance with their AI writing tool.

If housing and living accommodations are a barrier for prospective students, EduRain offers a bridge-credit advance program to help students move off campus and start building credit. Currently the platform is open for viewing but will be launching soon. Their credibility is backed by companies such as The Balsa Foundation, The StartUp School, The Center for Experiential learning and many more. Another bonus, is EduRain's diversity of clients, as this company supports the use of any student regardless of race, ethnicity, and sexual orientation on their platform!

FreeCap Financial

So what do you do when you've either completely paid off, or stabilized yourself with your student debt? If you're smart, it's time to invest. The problem is, how do you know which companies to support when you constantly see these big corporations being caught as contributors to the country's biggest issues? You may not know it, but a huge portion of companies are directly or indirectly complicit in the expansion of the immoral private prison system. This system is a huge part of why the United States has roughly 5% of the world's population, but almost a quarter of the world's prisoners.

FreeCap Financial tackles this by providing financial data on "socially responsible investing criteria, helping investors move their money out of prisons and into solutions to mass incarceration." So not only do they make your money work for you by providing a financially stable future for yourself, but your money will go towards abolishing private prisons and helping the nation heal from the evil, discriminatory nature of mass incarceration.

Take a look at their website to learn more, or watch their founder's video on YouTube!

And of course, Defynance is fighting the good fight to destroy student loan debt.

Even if you don't use them yourself, it would be wise to keep these resources on your radar as they are the future of finance. We want to thank SoCap for connecting us to these amazing companies. We look forward to seeing them progress and grow in the future!

Compound Interest: How does it work?

Mon, 16 Mar 2020 19:50:09 +0000

Compound interest is considered by some to be the eighth wonder of a world, and for good reason. It can be a hard concept to understand at first, but it's actually fairly simple. Unlike simple interest, this interest grows on top of the interest already earned until that point. This means that calculations using compound interest will grow faster than simple interest.

How does compound interest work?

It's magic. Not really, but it can seem that way. Essentially, compound interest is money that accumulates interest on any already accumulated interest. The interest can compound at different periods, ranging from daily to yearly (or later). The rate at which it compounds is when the interest that accumulated will become part of the balance and start earning interest as well.

You have $1,000 growing every year at 10% and it compounds yearly, for example. After one year, you would earn $100 and have a total of $1,100. Now you would start earning interest at $1,100, instead of just $1,000. This means that at the end of year two, you will earn $110 and have a total of $1,210. And this compound effect will continue, until after 10 years, you accumulated $2,593.74, more than 2.5 times what you started with.

How compound interest can be good for you

This kind of interest can be good for you when you're investing your money. In investing, compound interest means that you're not just making money on your initial investment, but also the accumulation of any returns. This is like the example that is shown above. Basically, you will continue to earn more as your investment grows, compounding over time.

Make sure you start investing today to maximize your return. The earlier you start, the earlier you will start earning and experiencing compound growth. It's important to take steps and start today if you can. You can also earn compound interest from savings accounts. A high-yield savings account could earn you more interest than a traditional account.

How it can hurt you

This type of interest can also be harmful to you depending on the situation. When you have debt, the interest can pile up quickly and leave you drowning. In fact, most loans will compound the interest daily, making your balance grow even quicker.

While taking out loans may be necessary to make some big purchases, it can come back to haunt you. Compound interest can make you spend well over 1.5 times what you purchased an item before. Also be weary of high-interest debt, such as credit cards or payday loans. The interest on these types of credit can accumulate quickly and leave you buried in debt.

If you're currently struggling with compounding interest from student debt, check out Defynance. Our interest-free solution is based on income share agreements, which allows you more freedom to live your life.

The State of American Debt

Tue, 21 Jan 2020 22:46:37 +0000

Debt is a fact of life. It follows us everywhere and is readily available for many big purchases, like cars and homes. In fact, the average American debt sits at nearly $38,000 a person. This is mostly spread across the four main types of debt: Mortgages, Student Loans, Auto Loans, and Credit Card Debt. Together they total over $13 trillion.

The availability of debt has led to 1 in 5 Americans getting in trouble and having a negative net worth. A negative net worth also factors in assets, such as cars and homes that the debt purchased. Even then, these people still have more debt than money. The rise of student loan debt has also added to this negative net worth problem. Getting a degree is expensive, but once it's earned it can't be "sold", only used for labor.

How much American debt is out there?

According to debt.org, the total amount of debt is closing in on $14 trillion. That's a lot of debt. However, the amount of debt in each of the categories differs greatly. Most of the debt, $9.4 trillion, is tied up in mortgages. This isn't the worst type of debt, as the underlying asset, the home, gains value over time.

The rest of the debt is either unsecured, not tied to an asset, or secured by a depreciating asset. Assets like cars, which make up $1.3 trillion of debt, lose value quickly. This makes it easy to "go under" in the loan, as your debt may be worth more than the car itself.

Credit card debt also comes with it's own set of issues if used incorrectly. This type of debt makes up just over $1 trillion and can be one of the hardest to get out of due to high interest rates. The APR on a credit card can be well over 25%, meaning that it grows fast if you forget about it. This has caused many to get into tough financial trouble as they hold onto a high credit balance.

The Rise of Student Loan Debt

Some say that student debt is in a crisis. So much so that presidential candidates have made it a top issue in the upcoming elections. Student loans are the second largest debt category, behind only mortgages. Student loan debt recently surpassed $1.5 trillion and causes problems for many in repayment.

It's no surprise that tuition has grown over the last few decades, and student debt has grown with it. Since 1990, tuition has tripled, even when adjusting for inflation. So college has gotten more expensive, while families incomes haven't kept up. College has been seen as the traditional way to earn a higher income, so people are willing to pay, but when things don't go right, they get into trouble.

When is debt a bad thing?

Debt is a great tool to help you afford things that you normally can't, such as a home. However, it can become a problem if you aren't able to fulfill your obligations. Debt makes you pay more than you would straight up and takes from your future income. When deciding to take out debt, you need to decide if you can afford the payments, even if something were to happen in your life.

This is where budgeting can be important. Having a proper budget lets you know where your money is going and how it can be spent. It's also important to have an emergency fund, typically 6 months of your income, in case anything were to ever happen.

Has debt been causing issues for you? If you have student loan debt, Defynance can refinance student loans using an income share agreement. An income share agreement is debt free and bases payments off a percentage of your income. This means that payments adjust to your situation in life. If you lose your job or pursue more education, payments will pause, leaving you to focus on the important things. You can apply for the program here.