Debt Management for Recipients of Financial Aid

-presented by the Office of Financial Aid-

This Presentation Will Cover…

I. Your Student Loans – General Info.II. Managing debt while in school

A. BudgetingB. Your Credit

III. Student Loan RepaymentA. Preparation – Your Grace PeriodB. Repayment Info.C. Default PreventionD. Consolidation

IV. Understanding CreditV. 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 InformationType of

Loan

Current Interest

Rate

LifetimeAggregate Limit

Grace Period

When does interest begin to accrue?

Other

Stafford Subsidized

6.8% fixed rate

$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%

Stafford Unsubsidize

d

6.8% fixed rate

Combined

$138,500 for M.A. / $224,000 for Psy.D.

6 months – beginning

when you are no longer

enrolled half-time

Immediately upon

disbursement

Origination and Default fees range

from 0-2.5%

Graduate PLUS

8.5% fixed interest rate

$150,000No grace

period

Immediately upon

disbursement

Credit check

required; origination and default fees range from 0-4%

Alternative (Private)

Variable rate, usually tied to credit

history

Varies depending on lender

No grace period

Immediately upon

disbursement

Credit check

required; cannot be

consolidated

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. GuarantorWhat 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.

• 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.

Budgeting:The Why’s and How-to’s

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 GuidelinesNow 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 InterestCapitalization (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 Paymen

t

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

• 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.

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.

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 ConsolidationPros

• 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.

• 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 Cards

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?

Payment History (35%)

Amounts Owed (30%)

Length of Credit History (15%)

New Credit (10%)

Type of Credit Used

(10%)

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 agenciesEquifax (800) 685-1111 www.equifax.comTransUnion (800) 888-4213www.transunion.comExperian (888) 397-3742 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.