Transcript Default Prevention Outreach: Graduate School Issues

Debt Management Fundamentals for
Graduate/Professional Students
MIDWEST ASSOCIATION of
FINANCIAL AID ADMINISTRATORS
ANNUAL CONFERENCE 2005
Tom Cox, CCCS
Assistant Director of Public Service
Illinois Student Assistance Commission
Catherine M. Williams
Vice President of Financial Literacy
for Money Management International
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“I have a bachelor’s, a master’s and a doctorate.
I’m getting poorer by degrees.”
2
Session Objectives:
1. Learn to manage your student
loan debt while enrolled in school
2. Achieve degree completion
3. Maintain (or achieve) strong
financial health
3
Today’s Graduate Student
• Nationally, about 40% of students who
completed graduate work have loan debt
levels exceeding their current salaries.
• This inhibits about 60% of these
graduates from making major purchases,
sometimes including a home.
• Also, there is evidence that these
graduates are forced to take
employment outside of their field to
payoff debt.
4
Feedback From Students
The Most Valuable Aspect of the Program:
• FICO Score
• Discussion of Credit Rating
• Debt Management
• Credit Card Information
• IRA and 401K Plans
• Student Loan Information
5
Feedback From Students
Suggested Changes:
• Allow us to ask more questions
• More time needed
• List of Web sites
• Things to remember
• Explain IRA more
6
Feedback From Students
Comments:
• I enjoyed it – very informative – wish it
was longer!
• Thanks for the help
• Longer workshop would have been great
• Presentation was interesting & helpful
• Thanks for the advice
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Federal Stafford Loans
• Annual Loan Limits:
– Combined Subsidized
Loan Limits
– Additional Unsubsidized
Loan Limits
– TOTAL Federal Stafford
Loan Limits
$ 8,500
$10,000
$18,500
8
Graduate Debt Loads
• Loan Aggregate Maximums:
– Includes undergraduate borrowing
– Independent student status
– Aggregate maximum
$138,500*
* No more than $65,000 of this may be in
subsidized loans
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Sample Loan Repayment Chart
Interest Rate: 8.25%
Total Amount
Borrowed
$
$
$
$
$
$
$
$
$
$
$
$
5,000
8,000
10,000
16,000
20,000
30,000
40,000
50,000
75,000
100,000
125,000
138,500
No. of
Payments
120
120
120
120
120
120
120
120
120
120
120
120
Total Interest
Payments
$
$
$
$
$
$
$
$
$
$
$
$
61
98
123
196
245
368
491
613
920
1,227
1,534
1,699
$
$
$
$
$
$
$
$
$
$
$
$
2,359
3,774
4,718
7,549
9,437
14,155
18,873
23,591
35,388
47,184
58,979
65,349
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Estimate Monthly Payment
www.idapp.com/borrowers/calc.htm
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Education and Training Pay
12
Debt Management Strategies
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Ways to Reduce Higher Debt Loads
• There are several ways to finance
college studies:
–
–
–
–
Personal/family resources
Work
Scholarships/grants
Student loans
• Federal Loan Programs
• Alternative/Private Loans
• Federal Loan Consolidation
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Personal/Family Resources
• Talk to extended family members
– Low interest or interest free loans
– Put terms of loan in writing
– Leads/referrals to part-time jobs, odd jobs
• Personal savings
• Restructure debt
• Assess personal assets and liabilities
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Scholarships/Grants
•
•
•
•
Need Based Grants
Merit Based Scholarships
University or Institutional Gift Aid
Search the Private Sector
– Browse the Internet
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Scholarship Search Services
•
•
•
•
•
fastweb.com
srnexpress.com/
scholarships.com/
fastaid.com
petersons.com/finaid
17
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Scholarships Reduce Loan Debt
• Scholarships/Grants lessen student
debt by more than the award
amount due to the compounded
interest effect.
• Example:
– $1,000 year in gift aid X 3 years =
$3,000 @ 8.25% X 10 years, the cost of
repayment = $5,475. ($9,186 over 25
years, $10,425 over 30 years)
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Service-Obligation Scholarships
• Accepting scholarships with a service
obligation instead of borrowing
– Student agrees to serve a specified period of
time
– Service may take place in a branch of the
military or in a particular State
*Important for the student to weigh pros/cons
of service-obligation programs before
accepting one
20
Federal Student Loans
• As a general rule, apart from a loan from
a family member, the terms of a federal
student loan will be better than any
commercial loans.
– Relatively low interest rate
– Greatest flexibility in terms of benefits and
entitlements
– May be tax deductible
21
Alternative Loan Programs
• Eligibility requirements:
– Most require a creditworthy applicant and/or
co-signer
– Includes a good credit history and a
satisfactory income-to-debt ratio
– May require proof of income (recent
paycheck stub and federal income tax
return)
22
Alternative Loan Programs
• Interest Rates:
– Most have variable interest rates
– Determine how often the interest rate is
adjusted
– Determine if there is a cap on the interest
rate
– Most alternative loan programs have
significant fees associated with their
origination that are deducted from the
amount you borrow
23
Alternative Loan Programs
• Repayment:
– Determine the repayment terms including monthly
payments, repayment period, and conditions of
deferment
– Remember that deferment of interest will result in
capitalization (interest will be added to the principal)
which results in a higher overall cost of borrowing
– Some alternative loan programs have maximum
limits, while others will allow you to borrow up to
your total cost of attending school
24
Purpose Of Loan Consolidation
• Consolidation Loans were designed for
the convenience of the borrower (one
place to pay) rather than as a financial
tool!
• So, why all the sudden interest in
consolidation loans? Interest rates are
still relatively low!
25
Advantages of Loan Consolidation
• Interest rate is fixed
• Lower the monthly payment by
extending the term (up to a maximum of
30 years depending on the size of the
loan)
26
Deferment/Forbearance Options
•
•
•
•
•
•
In-school deferment
Graduate fellowship deferment
Rehabilitation deferment
Unemployment deferment
Economic hardship deferment
Other deferments available for borrowers with loans
prior to 07/1/93 - check with lender for eligibility
• Forbearance – at lender’s discretion
• Administrative Forbearance
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Forgiveness/Cancellation Options
• School Closure
• False Certification/ Disqualifying
• Unauthorized Signature/Payment
• Total & Permanent Disability/Death
• Childcare Provider Forgiveness
• Teacher Forgiveness
• Perkins Forgiveness
• Bankruptcy*
*bankruptcy usually will not result in forgiveness or cancellation of student loan
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Disadvantages of Loan Consolidation
• In many cases a loss of borrower
benefits or incentives
• Loss of some deferment benefits
• In some cases loss of grace period
• In some cases if the term is extended
you will pay more interest
29
When to Consolidate?
• If you consolidate while your loan is in
grace, you can use the “in school” rate
when determining your weighted
average. However, you will lose your
remaining grace period
• Around the 5th month of grace so that
you lose less of your grace period
• Watch for changes in rates July 1st
30
Catherine M. Williams
Vice President of Financial Literacy
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Money Management International
• The largest non-profit, full service credit counseling
program, offering in person counseling in 19 states,
141 locations, phone counseling 24/7 and internet
counseling
• Recently approved the The EOUST office as one of
three national providers of pre-filing counseling
Accredited by Council on Accreditation
• Member of National Foundation for Credit Counseling
(NFCC)
• Member of Assoc.of Independent Consumer Credit
Counseling Agencies (AICCCA)
• Licensed in all 50 states
32
Perspective From A Credit
Educator
• The need for financial literacy
• Financial skills all students must master
• Overview of credit counseling and
financial services industry
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The Need for Financial Literacy
for all Consumers
•
•
•
•
Basic Economic knowledge
Basic Consumer knowledge
Money Management knowledge
Investment knowledge
34
Every Student Must Have
the Ability to:
•
•
•
•
•
Learn the difference between NEED/ WANT
Set and track Financial Goals
Develop good decision making skills
Make comparisons for selecting goods/services
Create a realistic written budget
– Income and Expenses
• Adjust the budget
• Create a workable and organized system
35
Factors Impacting Today’s
Students
• Wage increases are modest
• Mass consumerism
• Credit scores
• Privacy laws
• It is on sale - It is a markdown
36
12 Components of Financial
Wellness
Your Financial Check Up:
1. Financial Goals
2. Net Worth Calculation
3. Cash Flow Analysis
4. Spending Plan
5. Financial Ratios
6. Credit Card Analysis
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12 Components of Financial
Wellness
Your Financial Check Up:
7. Income Tax Analysis
8. Insurance Analysis
9. Retirement Analysis
10. Investment Performance
11. Asset Allocation/ Rebalancing
12. Estate Planning
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Credit Reports –
What’s in a Credit Report?
 Identifying Data
 Phone Number
 Name, Addresses
 Credit History
 Birth Date
 Inquiries
 Spouse’s Name,
 Public Record
 Current &
Information
Previous
Employers, Social
Security Number,
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Who Sees the Credit Report?
 Individuals
 Creditors

Give new credit

Increase or decrease credit limit

Change terms of credit (length, interest rate)
 Insurers

Deciding to sell you insurance or not

Whether to increase cost
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Who Sees the Credit Report?
 Current and potential employers
 Deciding to hire, fire, reassign or
promote
 Must have your permission first
 Potential investors, loan servicing
companies, and current insurers

Evaluate risks associated with existing relationship
 State & local child support enforcement
agencies

A FACTOR how much child support you must pay
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Correcting Errors
 Three companies reports are different
and may contain different errors and
information.
 Both the credit bureau and the
information provider are responsible by
law to correct inaccurate information.
 Always correct information in writing

Keep copies

Keep track of dates
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Credit Bureaus: Correcting Errors
 Must investigate within 30 days of receiving
notice of inaccuracies



Forward all relevant information to information
provider
If information provider finds information is inaccurate,
they must notify all three nationwide companies
If you provide them with more information, may take
additional 15 days to investigate
 When investigation is complete, must give you
written results

Also revised copy of credit report if it was changed
due to the investigation
 Double-check report in a couple of months
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What is a Credit Score?
 A snapshot of your credit risk at a particular
point of time.


Updated weekly
In a three month period, ¼ people have a 20point change in score
 Mathematical formula provides one number
 Most common are FICO scores
 Developed by Fair Issac company
 Provides scores to each three major credit
bureaus – will differ based on information
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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%)
45
FICO Scores
FICO scores range from 300 to 850
46
Fair and Accurate Credit
Transaction Act of 2003
• Requires each of the three bureaus
to furnish a free report once a year
to each consumer.
www.FTC.gov
47
“The Perfect Storm”
• The State of the Consumer Credit
Counseling Service Industry
• Every factor in the service delivery
system has changed in the past 10 years
48
Consumer Bankruptcy
• Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005
– How will it impact consumers
– New Regulations for every one involved
– Key Changes in the Law
49
Graduate
Student
Brochure
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www.collegezone.com
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www.Mapping-Your-Future.org
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Deferment Chart
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Money Matters
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www.nfcc.org
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Helpful Websites
1.
2.
3.
4.
5.
www.collegezone.com
www.mapping-your-future.org
www.myfico.com
www.handsonbanking.org
www.360 financialliteracy.org
(click on college)
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Conclusions &
Recommendations
• Present debt management early and
often
• Don’t try to reinvent the wheel
• Partner with your guaranty agency
• Partner with an NFCC member
• Good materials, good presenter, captive
audience
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Contact Information
• We appreciate your feedback and comments. Tom Cox
can be reached at:
–
–
–
–
–
Phone: 800-899-ISAC x3709
Direct: 847-831-8298
Fax:
847-831-8508
Web: www.collegezone.com
Email: [email protected]
• Cate Williams can be reached at:
–
–
–
–
–
Phone: 800-698-6512
Direct: 708-209-5898
Fax: 815-788-9388
Web: www.moneymanagement.org
Email: [email protected]
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