Download Debt Management for Recipients of Financial Aid

Debt Management for
Recipients of Financial Aid
-presented by the Office of Financial Aid-
This Presentation Will Cover…
I.
II.
Your Student Loans – General Info.
Managing debt while in school
A. Budgeting
B. Your Credit
III. Student Loan Repayment
A.
B.
C.
D.
Preparation – Your Grace Period
Repayment Info.
Default Prevention
Consolidation
IV. Understanding Credit
V. Useful Resources
I. Student Loans – General Info.
What are the differences between different
types of loans?
Aren’t Stafford loans federal loans? Why
did I have to choose a lender?
What’s the difference between a lender
and a guarantor?
In-School Deferment – How does my
lender know that I’m still attending
school?
Current Loan Information
Type of Loan
Stafford
Subsidized
Stafford
Unsubsidized
Lifetime
Aggregate
Limit
6.8% fixed rate
6.8% fixed rate
Current
Interest Rate
Grace Period
When does
interest begin to
accrue?
Other
$65,500
6 months –
beginning at date
of program
completion
Upon
graduation, or
dropping below
½ time
enrollment
Origination
and Default
fees range
from 0-2.5%
Combined
$138,500 for
M.A. /
$224,000 for
Psy.D.
6 months –
beginning when
you are no longer
enrolled halftime
Immediately
upon
disbursement
Origination
and Default
fees range
from 0-2.5%
No grace period
Immediately
upon
disbursement
Credit check
required;
origination
and default
fees range
from 0-4%
No grace period
Immediately
upon
disbursement
Credit check
required;
cannot be
consolidated
Graduate
PLUS
8.5% fixed
interest rate
$150,000
Alternative
(Private)
Variable rate,
usually tied to
credit history
Varies
depending
on lender
What’s FFELP?
~or~
Why did I need to pick a lender to get federal loans?
Adler participates in the Federal Family Education Loan
Program (FFELP), a public-private partnership in which the
federal government guarantees student loans made by
private lenders. Because these loans are guaranteed, it is
possible for all students to receive loans at a fixed low
interest rate regardless of income or credit history.
Over 4,000 schools across the country participate in FFELP
because it offers students the ability to choose their lender.
In our experience, allowing borrowers to choose their own
lender has led to healthy competition in the market,
providing a high standard of borrower satisfaction.
Lender vs. Guarantor
What are they and what do they do?
Lender – Your choice
• Source of loan monies
• Bills borrower when loan has
gone into repayment
• Determines repayment plan
options
• May offer repayment perks
• Determines how frequently
borrower receives statements
while in school
Guarantor – Great Lakes
• Acts as middleman between the
school and students’ lenders
– School approves (“certifies”)
student loans via guarantor
– Provides avenue for loan monies
to be transferred electronically
between lender and school
• Services loans while borrower is
in school
– Mails statements to borrower
– Receives loan payments made
while borrower is still in school
• Insures - “guarantees” – loans so
the lender will be repaid even if
the borrower defaults on loan
Before Repayment…
II. Managing Debt While in School
The best way to control debt is to
stay out of it
(as much as you can).
We know that a majority of students depend on loans to to attend
school, but here are some tips for keeping your debt as low as
possible:
• Find an outside source of income. There are many options, even
for people that do not have the time to work a scheduled part-time
job, such as babysitting, freelance editing or tutoring.
• Use a spending diary to create a budget. (More on this shortly!)
• Evaluate your spending. Look at the items that you spend your
money on and ask yourself whether there is a way for you to spend
less money on these things or to stop spending money on them
entirely.
Budgeting:
The Why’s and How-to’s
• Creating a budget is a useful way to keep
you in control of your spending, but in
order to create an accurate budget, you
need to know where your money goes.
• Most people don’t keep track of where
they spend their money, so they create
unreasonable budgets that they can’t stick
to. Using a spending diary can help you
prevent this.
How to use a Spending Diary
1) Determine the amount of money that you can
afford to spend in a month. Write it down.
2) Keep all your receipts and write down the
amount you spend each day in the appropriate
column.
3) At the end of the month total your spending.
4) Compare the amount you spent to the amount
you can afford. If you spent less than you can
afford, you have a surplus; if you spent more than
you can afford, you have a deficit.
Evaluate Your Spending Habits
• If you had a surplus you’re doing very well. Try to
maintain your spending habits, and consider putting
that extra money towards savings or towards paying off
your loan debt while you’re still in school.
• If you had a deficit you need to cut back on your
spending. Questions to ask yourself:
– How reasonable was your estimate at the beginning of the
month?
– If it was unreasonable, what is a more reasonable estimate?
– Which expenditures are fixed (e.g. rent, utilities) and which are
more flexible (e.g. entertainment, meals out of the house)?
– What are steps that you can take to reduce those flexible
expenditures?
Budgeting Guidelines
Now that you know what you can reasonably afford to
spend, write down set numbers for how much you want
to spend each month in each category and stick to them!
Tips for Staying on Track:
• Set both short-term and long-term budgeting goals
• Be honest and realistic, not too flexible
• Keep accurate records
• Budget for the unexpected
• Remember seasonal expenditures
Saving Money: General Tips
• Find a roommate; you can get a nicer place for a lot less
money.
• Take public transit, bike, or walk instead of driving.
Driving and parking are expensive!
• Inquire about student discounts.
• Use coupons and preferred cards.
• Purchase private label instead of name brand items.
• If you get a tax refund, save it or use it to pay off debt.
• Pay off your credit card balances.
• Grocery shopping: make a list, stick to it, and do not go
shopping when you’re hungry.
• Eat more meals at home and bring your lunch to school.
• Shop around for less expensive insurance.
• Drop subscriptions to publications you don't read.
Saving Money
in Chicago
-Refer to the Handout-
III. Preparing for Repayment
of Federal Stafford Loans
Capitalization of Interest
Capitalization (n.): The process of combining the principal amount
of a loan with all accrued interest to create a new principal.
• While you are in school at least half-time, interest on
unsubsidized Stafford loans is gradually accruing.
• When you go into repayment, your interest is capitalized:
Principal of
Subsidized Loans
+
Principal of
Unsubsidized Loans
+
All accrued
Interest to date
=
New Principal
Interest then begins to build on this new, larger, principal.
Even though your interest rate does not change, much more
interest is accruing!
Q. “What can I do to avoid
having a much larger
principal when my loans are
capitalized?”
A. Try to pay off as much of your interest
as possible while you are still in school.
There is no penalty for making payments on your Stafford loans
while you are still in school, and doing so can save you A LOT
of money in the long run.
Even paying a small amount of your interest while you’re still in
school can save you a lot of money.
“How much could it really save
me?”
Say, for example, that you borrowed $25,000 each year
for four years at a 6.8% interest rate (the current rate of
Stafford loans):
At the end of your fourth year, you will have received a total of
$100,000 in loans and they have accrued $17,000 in interest…
If you pay your loan off over 10 years…
…and you didn’t pay any interest while you were in school, your
repayment will look like this:
New Principal
(after
Capitalization)
Interest Accrued
During 10 years
of Repayment
Monthly
Payment
Total Amount
Paid to Lender
$117,000
$44,573
$1,346
$161,573
…but here’s what your repayment could look like if you pay off
some or all of your interest before your loans are capitalized:
Interest Paid off
before
Capitalization
New Principal
(after
Capitalization)
Interest Accrued
During
Repayment
Monthly
Payment
Total Paid
to Lender
$5,000
$112,000
$42,668
$1,289
$159,668
$10,000
$107,000
$40,763
$1,231
$157,763
$17,000 (all)
$100,000
$38,096
$1,151
$155,096
If you choose to pay that same loan
off over 25 years…
Amount Paid
before
Capitalization
New Principal
(after
Capitalization)
Interest Accrued
During
Repayment
Monthly
Payment
Total Paid to
Lender
$0
$117,000
$126,618
$812
$243,618
(almost 2.5x
the amount
borrowed!)
$5,000
$112,000
$121,208
$777
$238,208
$10,000
$107,000
$115,798
$743
$232,798
$17,000 (all)
$100,000
$108,221
$694
$225,221
…so, you can see, paying off as much interest as
possible before your loans are capitalized can both
lower your monthly payment and save you
thousands of dollars.
Amortization of Stafford Loans
Amortization (n.): The allocation of a lump sum amount to different time
periods, particularly for loans and other forms of finance, including related
interest and other finance charges.
• After your loans are capitalized, your lender will amortize your loans for
repayment. This involves performing a calculation which determines how
much you must pay each month to pay off your loan over a certain number
of years.
• If you have a “level payment plan” you will pay the same amount each
month until your loan is paid off. Your lender probably offers other
payment plans that allow you to pay a lower amount each month for the
first few years and more later on.
• You can use one of the many amortization calculators available online to
figure out how much you would pay with different payment plans.
For those who are interested: The mathematics behind
amortization are complicated. Essentially, while you pay
the same amount each month, the division of your
payment into going towards your interest and going
towards your principal varies over time.
Q. “What if I can’t afford to
make my payments when
my grace period ends?”
A.The most important thing is to contact
your lender and let them know! You
may be eligible for either a deferment or a
forbearance.
Remember: your lender does not want you to go into
default on your loans, and they will work with you!
“What’s the difference between
deferment and forbearance?”
Deferment
• This is preferable to
forbearance because your
subsidized loans do not
accrue interest while they
are deferred.
• Your unsubsidized loans
will continue to accrue
interest while you’re in a
deferment.
Forbearance
• Easier to get than a
deferment
• Your loans will continue
to accrue interest while in
forbearance.
The Good: both of these options will keep you out of default and keep
your credit current!
The Bad: the longer you leave your loans unpaid, the more interest
you’ll have to pay on them later.
Default and its Consequences
• Your federal student loans will go into default if
unpaid for 270 days (9 months).
• Your default will be reported to all national
credit bureaus and will stay on your credit
report for 10 years.
• Your wages may be garnished and your tax
refunds may be withheld
• You may be taken to court and be required to
pay all attorney fees and collection costs.
• You can lose your professional license
in the state of Illinois.
One way to make your payments more
manageable is to consolidate your loans.
Consolidation (n.): The process of combining all of your federal
loans into a single loan with a fixed interest rate.
• When you consolidate your loans, you choose a
lender to buy out all of the federal loans you have
received from other lenders. You then only need
to make payments to the lender that you
consolidated with.
• You can extend your repayment period up to 30
years with a consolidation loan, which can
significantly lower your monthly payment (but
increases the total amount of interest you must pay
back).
Loan Consolidation
Pros
• Allows you to combine
all federal loans so that
you only have to pay one
lender.
• Allows you to extend
your repayment period
so that you pay less each
month
Cons
• May increase your
interest rate
• May make you ineligible
for various loan
repayment / forgiveness
programs
• Extending your
repayment period means
that you will pay much
more in interest over
time.
Everyone’s situation is different! Consult a loan consolidation
specialist to see if consolidation is right for you. Great Lakes has
consolidation counselors available to speak with you: (800) 950-0152
Repayment Plans: Income
Contingent and Income Based
• These are two repayment plans that can significantly
lower your monthly payments in accordance with your
income and save you a LOT of money. They are
especially good for students with a high debt-to-income
ratio and even better for students who intend to seek
employment in public service.
• You can participate in either plan if you have
consolidated your loans as long as your consolidation
does not include any Parent PLUS loans (Graduate PLUS
loans are fine).
• See the handouts for more information. We will also
offer seminars for students who are just about to
graduate specifically about these repayment programs.
Understanding Credit
Establishing Credit
• Good, Bad or Insufficient credit history
• Getting Started
– Credit cards
• Secured credit cards
– Loans
– Low Credit Limits
– Start with Familiar Institution
Debit Cards vs. Credit Cards
• Debit Card
– Operates like cash or personal check.
– Withdrawn next business day.
– Does not affect credit score.
– Never use on-line.
• Credit Card
– Borrowing money that be will paid back.
– Does affect credit score.
– Shop on-line.
Credit Cards
•
•
•
•
Designed for people with income.
Why solicit students?
Higher risk = higher rates & fees.
Students pay higher interest rate to
establish credit.
• Minimum payment increase
Credit Card Guidelines
• Intended for short-term borrowing.
– Not for carrying a balance long-term.
– Have a repayment plan in mind beforehand.
• Always pay more than the minimum!
– Pay off every month when possible.
– Pay at least 2x the minimum.
• Always pay on time!
– Avoid late fees.
– Pay online for convenience.
The Minimum Payment Trap
Original
Balance
APR
Monthly
Payment
Number of
Payments
Years to
Pay
Total
Paid
$2,500
18%
Min. Pmt.
(2%)
123
10.25
$3,916
$2,500
18%
Min.Pmt.
+ $50
94
8
$4,698
$2,500
18%
Min.Pmt.
+$100
32
3
$3,163
What is a Credit Score?
• Numerical expression based on a statistical
analysis of a person's credit files.
• Determines likelihood that the person will
pay his or her debts.
• Fair, Isaac & Company (FICO®)
– 300 - 850
What Factors Affect a FICO® Score?
New Credit
(10%)
Type of
Credit Used
(10%)
Payment
History
(35%)
Length of
Credit History
(15%)
Amounts Owed
(30%)
How can I Boost my Credit Score?
• Keep balances low.
• Pay bills on time and as agreed.
• Do not let accounts get to a collection
status.
• Pay off rather than moving debt around.
• Do not open accounts just to get discounts.
• Refuse increases in limits.
• Limit Inquiries.
Your Credit History Affects
• Your interest rate on some loans
• Your ability to rent an apartment
• Your employment
• Your ability to get more credit
• Your credit score
What is a credit report?
• Factual record regarding an individual’s
credit history.
• Used by credit grantors to determine whether
or not to grant a person credit.
• Individual credit reports consist of:
–
–
–
–
Negative Credit Ratings
Positive Credit Ratings
Personal Information
Previous Credit History Requests
– Personal Statements Made to Report
Getting Your Credit Report
• Fair Credit Reporting Act requires one free credit report
annually from each credit
reporting agency.
• Victim of identity theft
• Unemployed or on public
assistance
• Denied credit
annualcreditreport.com
• Centralized site developed by all three credit
reporting agencies (CRAs)
– Each CRA manages its own free credit report
ordering process
• Authentication process verifies consumer’s
identity before delivering a report online
– Asks multiple choice questions about information
not typically found in consumers’ wallets
• System will not send e-mails; beware of scams
• 888-5OPTOUT
Consumer Credit Reporting
Agencies
• 3 national credit reporting agencies
Equifax
(800) 685-1111
TransUnion (800) 888-4213
Experian
(888) 397-3742
www.equifax.com
www.transunion.com
www.experian.com
Useful Websites
• www.nslds.ed.gov – Database controlled by the Department of
Education. Log on using your FAFSA PIN and view your entire
loan history.
• www.youcandealwithit.com – Excellent budget calculators and
tools, created for recipients of federal student loans.
• http://www.finaid.org/calculators/icr.phtml - Income
Contingent Repayment Calculator – See what you can save with
the Income Contingent Repayment Plan
• www.apa.org/students/funding.html - The APA has a number of
scholarships and grants available for graduate psychology
students
• www.ace.uiuc.edu/cfe/ccs/ - Information about credit, credit card
comparisons and info about obtaining your credit report
• financialtip.blogspot.com – Blog with financial tips and useful
links
• www.annualcreditreport.com – Provides you with a free credit
report each year taken from all three credit bureaus.