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Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions. In this episode: Keep your money safe by spotting student loan scams, and how to cover child care costs without going into debt.
This Week in Your Money: Sean Pyles and Liz Weston dissect an actual voicemail from a student loan scammer line by line to give you a better understanding of the manipulative strategies and pressure tactics used. Sean and Liz also share practical advice about how to safeguard against these scams and tips on how to plan your budget for when student loan payments resume later in 2023.
Today’s Money Question: Personal finance Nerd Kim Palmer helps Sean and Liz answer a listener question about the financial challenges of sending two children to day care full time, even when both parents have six-figure salaries. They suggest different budgeting approaches parents may want to consider when planning for child care costs, and Kim shares the trade-offs she has made in her own life to afford child care. The Nerds also discuss the risks of using a home equity line of credit to fund day care, the potential hazards of lifestyle creep and the implications of becoming a stay-at-home parent to offset child care costs.
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Sean Pyles: Liz, I'm sorry to report that they are back.
Liz Weston: They? Who's they?
Sean Pyles: The student loan scammers. They're back, and I've really had enough. So this episode, we are going to do something about it.
Welcome to NerdWallet's Smart Money podcast, where you send us your money questions and we answer them with the help of our genius Nerds. I'm Sean Pyles.
Liz Weston: And I'm Liz Weston. Quick reminder, listener, to send us your money questions. Maybe you need help paying off some credit card debt or you're not sure how to start the money conversation with your partner. Whatever money question you want some help with, the Nerds are here to help you.
Sean Pyles: You can leave us a voicemail or text us on the Nerd hotline at 901-730-6373. That's 901-730-N-E-R-D. You can also email us at [email protected].
Liz Weston: In this episode, we answer a listener's question about how to cover child care costs without going into debt. But first, Sean has an ax to grind.
Sean Pyles: That is right. A few weeks back, I received a voicemail from my old nemesis, the student loan scammer. And much like the spotted lantern fly or an ex that won't leave you alone, these pests are back, and I'm really over it. So we're going to give that voicemail a listen and dissect it piece by piece so our listeners can know what these scammers sound like and how they work to deceive you.
Liz Weston: Oh, this is going to be good. And for some historical context for newer listeners, last year, Sean got a number of these calls and he decided to mess with them to see how far he could get until they hung up on him.
Sean Pyles: Yeah, that was a lot of fun. OK, here's the voicemail.
"Andrew" the Scammer: Hello. This is Andrew with the Student Services Department. The payment pause for federal student loans will end on June 30th. In order to prevent your payment from increasing and see if you qualify for a federal student loan forgiveness of up to 90% of your total balance, give us a call as these programs may not be available much longer. You can reach me at (beep). We look forward to assisting you.
Liz Weston: All right, Sean, do your thing.
Sean Pyles: I'm going to take this line by line starting with the first sentence. Andrew, if that is their real name, says they're from the alleged student services department. And my first question is, student services department of where? That name sounds official, but is also vague enough that if you're not really paying attention or you don't know who these organizations are, you might assume that they're calling from your student loan servicer or maybe even the Department of Education.
Liz Weston: OK, so what else stood out to you in the voicemail?
Sean Pyles: I'll say the very next line, Andrew, again, if that is their real name, says that the payment pause on federal student loans will end on June 30th. When I first got this call, that was within the week. First, that is just incorrect information. Payments are set to resume in October. But given all of the back-and-forth on when payments are going to resume, a lot of people might not know exactly when their bill might come due. So that June 30th date might have seemed legit to a few people.
And also for the purposes of Andrew the scammer, this date was being used to create a sense of urgency. The thinking is that, "I better act now before payments resume in a matter of days."
Liz Weston: Yes, and that's always the case with the scammers. They're trying to put pressure on you to make you override your rational mind and act quickly. And then in the next sentence, Andrew says that your student loan payments might increase but that they might be able to help you get up to 90% of your loan balance forgiven if you call them.
Sean Pyles: Yeah, this is classic. Andrew is upping the stakes. Not only are my payments resuming, but inexplicably, they might be higher than they were before. But thankfully, we have good folks like Andrew around who are going to show me how I can get most of my loans forgiven if only I call them back. But I’d better hurry since these programs might not be available for long.
Liz Weston: And people should know, the federal programs that do offer loan forgiveness like the Public Service Loan Forgiveness program are not going anywhere, and they typically require years of payments for people to qualify.
Sean Pyles: Exactly. So to recap, in a matter of a few sentences, this scammer has, one, worked to establish some sense of authority, two, instilled fear about my student loan payments, and three, said that they have the solution.
It's an old formula, but they use it for a reason. People are desperate for student loan help right now and scared about what the resumption of payments will mean for their finances, so scammers are seizing on that.
Liz Weston: So, Sean, what do you think they were hoping to get from you?
Sean Pyles: I think there are a few possibilities. The first one is my federal student aid ID and/or password. Scammers can use this to get into your account. Your FSA ID is used to sign legally binding documents, and a scammer could use this to make decisions and act on your behalf.
When I decided to mess with those scammers last year, I was hung up on when I said that I didn't know my FSA ID. So that was a pretty strong indication that they’re after that information.
I think it's important for folks to treat their FSA ID like you would your bank account login information. Something to know is that your servicer and the Department of Education will never ask you for your FSA ID. If you are being asked for this by a stranger calling you, just hang up.
Liz Weston: OK. And if they're not after that specifically, a lot of times they're trying to charge you for something you could do yourself for free, right?
Sean Pyles: Yeah. This is another classic playbook that goes beyond student loan scams. They will work to get you to sign up for some services that you can really do yourself for free.
So in this case, it might be applying for a loan forgiveness program like they said. If you go this route, realize that you'll have to give any sort of scammer your payment information as well as more personal information, which can be really risky, and brings me to the third thing they might be after, which is your personal information in general. They might want your email address, your Social Security number, your banking information. And as you can imagine, a scammer can do a lot of damage with that type of information about you.
Liz Weston: Yes. OK. So what is your advice for other people who are getting these calls or are worried about student loan payments resuming?
Sean Pyles: I would say arm yourself with knowledge and be proactive. On the knowledge side of things, know how scammers operate; we just walked through that. They'll often set up high-pressure situations to get you to divulge your personal information or send money without time to think about it. Also, the Department of Education and your student loan servicer are not going to just call you out of nowhere, so be very suspicious of any call that you get.
Then when it comes to being proactive, I would say first and foremost, make a plan for your payments resuming. I recently started a new high-yield savings account for my student loan payments. I'm putting money into that now. And then once payments do resume, I will have my monthly payments taken out of this account. That's one possible approach.
Next, I would say contact your servicers sooner than later if you do need help. As we get closer to student loan payments resuming, these servicers are likely going to be really swamped with calls from borrowers. Use the time that we have right now to sort out any new payment plan arrangements that you might want to make with them.
Liz Weston: That is really good advice. And we also want people to spread the word.
Sean Pyles: Yes. If you are listening to this podcast, you're probably pretty financially savvy and you probably also have some friends and family members who might not be so financially savvy, so let them know about these scams so hopefully they will not fall victim to them.
And also one final piece of advice is maybe just don't answer the phone unless it's your mom. That's some solid phone advice in 2023.
Liz Weston: Very good. Yes.
Sean Pyles: OK. Well, before we move on, we have an exciting announcement. We are running another book giveaway sweepstakes ahead of our next Nerdy Book Club episode.
Liz Weston: Next month, we're speaking with Cameron Huddleston, author of “Mom and Dad, We Need to Talk,” which guides us through the challenging but essential financial conversations with our parents.
To enter for a chance to win our book giveaway, send an email to [email protected] with the subject “Book Sweepstakes” during the sweepstakes period. Entries must be received by 11:59 p.m. Pacific Time on Aug. 9. Include the following information: your first and last name, email address, ZIP code and phone number. For more information, please visit our official sweepstakes rules page.
Sean Pyles: And that wraps up our This Week in Your Money segment. Today's Money Question is up next; stay with us.
This episode's Money Question comes from a listener's email. Here it is, as read by our audio wizard, Kaely Monahan.
Kaely Monahan: "Hi, NerdWallet's Smart podcast. I'm a big fan and have listened to just about every single podcast of yours. I will be making a financial decision pretty soon on how to stay financially ready for our two kids in daycare. I have a 2½-year-old and a 6-month baby, and both are in daycare full-time. My wife and I have two full-time jobs, six-figure salaries, and we still cannot afford our expenses, daycare, mortgage, credit cards payoff each month. We are slowly losing our savings and we will have no savings this upcoming winter. I was wondering if we should take a loan, HELOC, home equity, to help us pay for the next three years of daycare. Daycare costs here outside of Boston is $2,500 per child. Our mortgage is about $3,000 per month. We have no debt elsewhere besides small car loans. Let me know what you think. Would love to hear this on your podcast. Thanks. Mike."
Liz Weston: To help us answer Mike's question, on this episode of the podcast, we are joined by personal finance Nerd and host of the Smart Money Book Club Series, Kim Palmer. Welcome back to Smart Money, Kim.
Kim Palmer: Thank you for having me.
Sean Pyles: Kim, I am really excited to talk with you about this topic because I feel like you've been through maybe a similar experience in the past with trying to afford child care. But what's really interesting to me about Mike's question is that he and his wife are facing a budgeting issue, how to afford expensive child care in a high-cost-of-living area. But the thing is that Mike and his wife both have six-figure incomes, so they're bringing in a good amount of money monthly. I see that, and I think the math isn't mathing, as the kids say. Where is all the money going? I'm thinking maybe they need to spend some time evaluating their finances. What do you think would be a good place to start, Kim?
Kim Palmer: Well, I do think this is such an intriguing mystery for us to solve because I mean, on the surface, it seems like they have a very healthy income. And yes, day care is expensive, but it seems like their income should cover it. So I really think we need to start by doing a deeper dive into their budget.
I did do just some general calculations to try to get to the bottom of this. So let's start with their income. They say they both have six-figure incomes. Let's just guess it's on the lower end of that spectrum. So say they each earn $150,000 for a total of $300,000 as their household income. So after taxes, that should be about $17,000 a month. I just did sort of a general calculation to get these numbers.
So we have $5,000 for day care, $3,000 for a mortgage, and that leaves $9,000 for other expenses like food, transportation, household costs, everything else. So I think in this situation, what they might want to do is to really take some time tracking their spending to see where that money is going. Personally, I really like using the 50/30/20 budgeting approach, which basically means you have 50% of your take-home pay going towards needs, like your housing, you have 30% going towards wants like, say, restaurant meals, and then 20% for debt payments, if you have any, and savings. I think that's a good general ballpark to use, but I do think we need to start there just to get some answers to solve this puzzle of where the money is going.
Liz Weston: And Kim, when we got this question, we thought of you immediately because this is your wheelhouse. You've dealt with the high cost of child care in a high-cost-of-living area. So how did you and your partner work this out?
Kim Palmer: Well, first of all, we're still working it out because we have our youngest who's still in day care. And I think the hardest was when our two children, our two older children, were in day care at the exact same time. So I get it. I mean that is a massive payment when you are doubling up on those day care payments.
And I would say the way that we did it was just by being as frugal as possible in all other areas. I mean, we cut out fancy vacations, takeout, fancy restaurant meals. We really tried to scale back on everything because there's no getting around it that these are very hard years to get through. And I mean, to me, the key is just understanding that it is temporary. You have to kind of power through those years, especially the years of doubling up on day care payments. And then you'll see the other side because when kids do start kindergarten age 5 or 6 or so, you do get to say goodbye to those day care payments even though of course there's other expenses like sports and activities.
Sean Pyles: Yeah. Well, I'm glad that you mentioned the part about this being a temporary situation. A lot of people see how much child care costs and wonder if they shouldn't become stay-at-home parents instead. But there are some real financial costs to that decision as well, right?
Kim Palmer: There are. Basically, you don't want to only focus on that short-term gain of quitting work so you can save on the day care payments because the fact is leaving the workforce does have some longer-term financial impacts on you as well. Because you're giving up income, you're also giving up raises, you're giving up the retirement savings that you would accrue during that time. It might be hard to rejoin the workforce when you are ready to. And then it also leaves you vulnerable to unexpected things like a divorce or a partner's job loss. And so you really want to think through all of those factors. And Liz, I'm sure you have thoughts on this, too.
Liz Weston: Yeah, I really worry about people that make this decision without thinking it all the way through. If you are in a situation where you've taken time off to raise children or for other purposes, it's really important to redouble your efforts to save for retirement later. And a lot of women especially find themselves later in their working lives needing to work a few more years to boost those Social Security payments to boost that retirement savings. So it can be done, obviously, but there is a big cost to it, and you really want to investigate that and weigh your options first.
Sean Pyles: Kim, you mentioned that when you were having to pay for child care for two kids at the same time, you were cutting back on vacations and eating out. I'm wondering if you and your husband thought about making any bigger trade-offs, like maybe contributing less to retirement accounts or moving to a less expensive area. How did you guys think about that?
Kim Palmer: Well, it's really hard. And we did consider all of those things. I am such a big proponent of retirement savings, so we did try to keep those going.
But one area we did cut back on is college savings. So we try to set money aside for college savings for our three kids. And we sometimes, when we're going through a really tough spot when we're paying double day care payments, we scale that back because, of course, retirement savings are so essential, so I always want to put that first even before college savings. I know that's something that a lot of people debate. But to me, retirement savings, they're just so important. So you can't forget about that altogether.
Liz Weston: Well, and you've heard the cliche so many times, is that the kids can get loans for college, nobody's going to lend you money for your retirement.
Sean Pyles: Yep.
Kim Palmer: Exactly.
Sean Pyles: Was it ever hard for you to avoid the temptation of maybe lifestyle creep or “keeping up with the Joneses” as you saw parents of other kids have things that you maybe weren't spending money on? Because I wonder if that's maybe going on with our listener's situation. Maybe they're spending more with some lifestyle creep things like a nicer car or going out or buying their kids nice toys, and that could be draining their budget, too.
Kim Palmer: Absolutely. I mean, I think it's so easy to look at what other people have and feel like, "Oh, let me just spend more so I can have that, too." But it's really something that hurts yourself by doing that because you can never have everything. And so it's just really hard to keep that perspective. I definitely feel like we made some sacrifices, like that's just staying in a much smaller house and skipping some of those big vacations, but it just felt like the only way to make this work. I totally get how hard it is for parents as we go through this, but I think you just have to make some of those trade-offs even though it's hard.
Sean Pyles: Yeah. The one thing that can be kind of reassuring for folks if they are trying to create a certain image to convey to the neighbors, the truth is that no one is thinking about you as much as you are thinking about you. So your neighbor's not really going to be too worried whether you're wearing a certain type of shirt or are driving a certain type of car.
Kim Palmer: That's so true. And I also think you don't know what's really going on with other people. So for example, you might be a little envious of someone's huge house, but maybe they're very stressed out by their mortgage payments. There's just no way to understand the situation unless you're in it. So I think it helps to remember that, too.
Liz Weston: And speaking of a mortgage payment, Mike and his wife are thinking about taking out a home equity line of credit to pay for their child care. On this show, we talk a lot about using debt strategically as a tool, but this gave both Sean and I some pause. What are your thoughts about this?
Kim Palmer: I agree with you. I mean, I'm just a little worried about the idea of doing this. To me, it sounds quite risky, especially given that there does seem to be room in their budget to cut back spending first before turning to a loan, which I think should really be a last resort. I mean, anytime you take out a loan, you really have to think about all those future repercussions because eventually you do have to pay that loan back. And other expenses will probably come up in the future too that you have to think about like college. And if you're taking out this HELOC, you're actually using your home as collateral. And the last thing you want to do is risk losing your home because you can't make those payments.
Sean Pyles: And our listener also said that he and his wife are on track to deplete their savings by winter, which also makes me really, really nervous for them. So let's maybe talk about a few ideas for how folks who are in a serious budgeting shortfall and burning through their savings can reverse this trend.
Kim Palmer: Yeah, I would definitely like to hear both of your ideas on this, too, but I would start by cutting back on spending. One of the best places to look is at food spending, so cutting any takeout restaurant meals. And then you can look closely at any recurring costs like subscriptions that you can cut back. And then maybe there's some annual costs that you haven't really considered because they're outside your normal monthly budget, but things like vacations, holiday expenses, big insurance payments. Maybe it's time to shop around for those big payments instead of just auto-renewing. So there might be a way to cut back in some of those areas.
Liz Weston: We find a lot of times that when people are having a budget crunch, it's because they're overspending in one or two areas, big areas like the home or the car. And in this case, Mike mentioned that their mortgage payment is $3,000, which seems appropriate for their income, but maybe there are other housing costs that are inflating that. Maybe there's homeowners association fees, maybe there's a lot of repairs the house needs, or the utility bills are high. It's really hard to know from the information that we got. And Mike mentions small loans on the cars, which is great because a lot of times people can't make ends meet because of what's sitting in their driveway. The cars are really expensive, and the payments can be really high.
Sean Pyles: Yeah, this might be a good time for Mike and his wife to consult some outside help. That might be calling up a nonprofit credit counselor for an evaluation of their budget, maybe a financial coach or even hiring a fiduciary financial planner, someone who can sit down with them and show them really what is happening with their money, where it's going every single month.
Because you're right, Liz, that a lot of times it's just a few big-ticket things that can have such a negative impact on people's budget and make it so they're not able to save and are maybe going into the red. But sometimes it can be sort of debt by a thousand subscriptions, and you have so many small things draining your budget, you don't realize it until you take a step back and realize, "Oh, wow, I do not need to be spending 200 bucks a month on all these different services," things like that.
Well, Kim, do you have any final thoughts for Mike and his wife or anyone else who's struggling with their budget and child care?
Kim Palmer: I think my biggest final thought is that, first of all, acknowledging that this is a hard thing. It's not easy to afford day care. It's so expensive, especially in big cities. And so you just want to really take a really hard look at the rest of your budget and see if there is any room to cut back, maybe something that you haven't thought of yet. So just do a deep dive on your last credit card statement, your banking statements, and see if there's any room to cut something else out.
Sean Pyles: Great. Thank you so much for joining us, Kim.
Kim Palmer: Thanks for having me.
Sean Pyles: And with that, let's get on to our takeaway tips, and I'll start us off. First, start with a budget review. We like the 50/30/20 budget, but there are other options that you can consider, too.
Liz Weston: Next, prioritize savings. Look at your emergency savings as well as future savings such as for retirement.
Sean Pyles: Finally, use debt cautiously. Debt can create financial strain on your budget and limit future options.
Liz Weston: And that's all we have for this episode. Do you have a money question of your own? Turn to the Nerds and call or text us your questions at 901-730-6373. That's 901-730-N-E-R-D. You can also email us at [email protected].
Also visit nerdwallet.com/podcast for more information on this episode. And remember to follow, rate and review us wherever you're getting this podcast.
Sean Pyles: Here's our brief disclaimer. We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. This episode was produced by Liz Weston and myself with help from Tess Vigeland. Kaely Monahan mixed our audio. And a big thank-you to the folks on the NerdWallet copy desk for all their help.
Liz Weston: And with that said, until next time, turn to the Nerds.