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Life after Graduation…Debt Management and Loan
Repayment Strategies
Presented by: Sharon GiffordVice President
Graduate & Health Professions Programs
Types of Loans
• Stafford– Subsidized
• government pays interest during eligible periods
– Unsubsidized • borrower pays
interest– 10 year repayment– $50 minimum
monthly payment– 6 month grace period
• Grad PLUS– Fixed interest rate
8.5%– 10 year repayment – $50 minimum
monthly payment– Immediate
repayment (no grace period)
Loan Repayment
• Repayment– Standard– Graduated– Income Sensitive– Extended – Consolidation– Prepayment
• Loan Cancellation– Death– Total & permanent disability– Some courses of study (check
with FAO or guaranty agency)
What is capitalization?
• Repayment begins 6 months after graduation• Interest accrues on unsubsidized debt during
in-school, grace and deferment• Lenders retain the right to periodically add
this unpaid accrued interest to the total outstanding unsubsidized principal, usually done once at repayment
• The Result - borrowers are technically paying interest on capitalized interest that was added to principal
Standard Repayment 8.25%
Principal Amount
Monthly Payment
Total Repaid
$ 60,000 $ 735.92 $ 88,310
$ 80,000 $ 981.22 $ 117,747
$ 100,000 $ 1,226.53 $ 147,183
$ 120,000 $ 1,471.83 $ 176,620
$ 150,000 $ 1,839.79 $ 220,775
Tip: you will repay approximately $12.25/month for each thousand you borrow if repayment is at the cap of 8.25%
Standard Repayment 6.8%
Principal Amount
Monthly Payment
Total Repaid
$ 60,000 $ 690.48 $ 82,858
$ 80,000 $ 920.64 $ 110,477
$ 100,000 $ 1,150.80 $ 138,096
$ 120,000 $ 1,380.96 $ 165,716
$ 150,000 $ 1,726.20 $ 207,145
Tip: you will repay approximately $11.51/month for each thousand you borrow if repayment is at 6.80%
What If I Can’t Make
My Monthly Payment?Contact your servicer to discuss:
• Deferment Options• Forbearance Options • Consolidation Loans
Avoid Delinquency, Default
and Bankruptcy• Delinquency
• Usually occurs when 30 days late making payments
• Late payments are reported to a credit bureau
• Becomes part of your financial history• May impact eligibility for borrower
benefits• Default
• Occurs when loan payments are 270 days past due
• Serious consequences
What happens if I default?
• Bad credit• May impact employment opportunity• Income tax refunds withheld through Federal Offset• Lottery winnings withheld• Wages can be garnished• Professional license may be revoked, cancelled or not
renewed• Not eligible for future financial aid• Not eligible for Federal benefits• You will be responsible for all collection costs• You’ll lose the option of deferment and/or forbearance• Your payments may become larger and your ability to
pay more strained• There is NO statue of limitations, so your obligation to
repay this debt will never go away
Talk To Your Lender/Servicer if:
• You have questions• You move or change
names • You transfer to another
school• You can not make your
payment• You want to apply for a
deferment or forbearance
Helpful Hints• Open, read, and respond to all
correspondence sent from your school and lender
• Keep all copies of loan information in one place
• Make all payments on time– Contact your lender for options during
times when financial difficulties occur
• Use credit wisely!
Auto-Pay and Overdraft
• Most lenders offer incentives for electronic repayment of your education loans
• Many offer additional incentives for on-time payments (after a certain number of months)
• Why? Electronic payments = lower costs AND fewer delinquencies
• BUT … if you bounce a payment, you lose the on-time incentive
Auto-Pay and Overdraft
If you enroll in auto-pay AND then elect overdraft protection from your bank, you’ll never again bounce a payment to any of your creditors. This saves you overdraft fees (from both your bank and your creditor).
If you have a lender that offers repayment incentives, you will also ensure your ability to earn them without fear of eliminating yourself.
Additional Assistance
Office of the Ombudsman, Student Financial Assistance
U.S. Department of EducationRoom 3012, ROB-37th & D StreetWashington, D.C. 20202-5144
1-877-557-2575
http://ombudsman.ed.gov
Consolidation
– Combines eligible loans into a single new loan
– Longer repayment term (up to 30 years)– Lowest payments– Highest total cost potential– The fixed interest rate for a
Consolidation Loan is based on the weighted average of the interest rates of the loans you consolidate (rounded up to the nearest 1/8th percent).
Eligible Federal Loans
• Federal Stafford Loans• Federal Perkins Loans• Health Professions Student Loans (HPSL)• Federal Nursing Student Loans (NSL)• Health Education Assistance Loans
(HEAL)• Federal Graduate PLUS Loans• Federal PLUS Loans• Federal Consolidation Loans
– must consolidate at least one additional eligible loan
Ineligible Loans
• Private education loans• Spouse’s education loans
Program Guidelines
• Borrower may consolidate:– During grace period: application
may be submitted and consolidation delayed until end of grace
– When in repayment– Loans in deferred status:
deferment continues, if consolidated
Program Guidelines
• Cannot consolidate again with competing program unless you have a new loan that has not been consolidated
• Exceptions to repeat consolidation– Borrower needs income-contingent
repayment plan– Initial consolidation loan has been
submitted to the guarantor for default aversion assistance
Program Guidelines
• If you omitted a loan, it can be added to initial consolidation within 180 days
• If you return to school and obtain a new eligible federal loan AND are no longer in “in-school” status you can re-consolidate
What Happens to Borrower Benefits?
• Consolidation creates a new loan with total loan balances and has new terms and conditions
• Could lose certain benefits that were on the original loans
• Can choose which loans to include in consolidation
Things to Consider
• Look at individual loan programs and benefits offered
• Perkins Loan offers forgiveness for:– Teaching in shortage or low-income area– Social work– Nurse or medical technician– Law enforcement or corrections officer– AmeriCorps VISTA or Peace Corps
volunteer– Service in Armed Forces
Interest Rate Comparison
• Perkins Loans – Fixed interest rate at 5%
• Stafford Loans: Disbursed prior to July 1, 2006 – During Grace : 6.62% (variable rate)– In Repayment: 7.22% (variable rate)
• Stafford Loans: Disbursed on or after July 1, 2006– 6.8% (fixed rate)
• Consolidation Loans– Fixed interest rate for life of loan
• Weighted average of underlying loans (rounded up to next 1/8 of a percent)
Weighted Average
Amount Loan Type Interest Rate
$ 10,000 Perkins Loans 5.00%
$ 20,000 Stafford Loans (variable rate) 7.22%*
$ 30,000 Stafford Loans (fixed rate) 6.80%
$ 60,000 Consolidation Loan 6.75%
* Current variable rate, subject to change each July 1.
Multiple loans (currently in repayment):
Repayment Periods
* Based on outstanding amount of all education loan debt, regardless of whether or not the loan is eligible and/or if you choose to consolidate the loan.
Total Amount of Loans*
Maximum Repayment Period
Under $ 7,500 10 years (120 months)
$ 7, 500–9,999.99 12 years (144 months)
$ 10,000–19,999.99 15 years (180 months)
$ 20,000–39,999.00 20 years (240 months)
$ 40,000–59,999.99 25 years (300 months)
More than $ 60,000 30 years (360 months)
Monthly Payments• Typically reduced after
consolidation• May make monthly costs more
reasonable• Costs more in the long run• Repayment term extended up to
30 years
$ 60,000 student loan debt with various lenders/servicers:
Repayment Example
Amount Loan Type Term
Paymen
t
$ 10,000
Perkins Loans
(undergraduate) 120 $ 106.07
$ 20,000 Stafford Loans (7.22%) 120 $ 234.49
$ 30,000 Stafford Loans (6.8%) 120 $ 345.24
Loan Type
Balanc
e
Payme
nt
Ter
m
Total
Repayment
Not Consolidated $ 60,000 $ 684.97 120 $ 82,196.40
Repayment Example with Consolidation
• Consolidation extends the repayment term– You pay more if you use the full term– You can pay the loan off early with no penalty
Loan Type
Balan
ce
Payme
nt
Ter
m
Total
Repayment
Not
Consolidat
ed
$
60,0
00
$
684.
97 120 $ 82,196.40
Consolidated
$
60,0
00
$
526.
80 180 $ 94,823.00
Consolidated
$
60,0
00
$
384.
19 360 $ 138,307.00
Interest Subsidy
• Portion of Consolidation Loan that was subsidized remains subsidized for: – FFELP and FDLP Stafford Loans
• Does not retain subsidy on portion of FFELP Perkins Loans or FDLP Perkins Loans
Consolidation Repayment
Options • Standard– Same payment each month
• Graduated– Payments start low and gradually
increase
• Income-sensitive or income-contingent– Monthly payments based on income – Adjusted annually
Think Twice Before You Consolidate• If ALL of the following are true:
• You only have eligible federal student loans with FIXED interest rates
• You qualify for Extended Repayment
• You qualify for on-time payment incentives on Federal Stafford/PLUS Loans
• Then, you could have both a lower monthly payment and pay less over the life of repayment by NOT consolidating
$40,000 Stafford Fixed 6.8%
Extended Repayment
Consolidation
Interest Rate
6.8% 6.875%
Term 25 yr 30 yr
Monthly Payment
$277.63 $262.77
Total Amount
Paid$83,289 $94,598
$100,000 Stafford Fixed 6.8%
Extended Repayment
Consolidation
Interest Rate
6.8% 6.875%
Term 25 yr 30 yr
Monthly Payment
$694.07 $656.93
Total Amount
Paid$208,222 $236,494
$40,000 Stafford Combination 6.8% &
7.14%Extended Repayment
Consolidation
Interest Rate
6.97% 7.0%
Term 25 yr 30 yr
Monthly Payment
$281.95 $259.44
Total Amount
Paid$84,584 $93,398
$100,000 StaffordCombination 6.8% &
7.14%Extended
RepaymentConsolidation
Interest Rate
6.97% 7.0%
Term 25 yr 30 yr
Monthly Payment
$704.87 $665.30
Total Amount
Paid$211,460 $239,509
What should you do?
• May still want to consolidate the federal student loans with variable interest rates
• Can consolidate only the variable rate loans as a separate Federal Consolidation Loan
• Can retain fixed rate loans as separate loans
• May not want to include a prior consolidation loan as part of a new consolidation so that any prepayments can be targeted at the highest cost debt
Consolidating Private Loans
Factors to Consider• Interest rate may be higher
• Increasing repayment period increases total costs
• Grace period may be lost
• Additional fees may be assessed
• Borrower benefits will be lost
Consolidating Private Loans
MORE Factors to Consider• If you have good credit
• If you don’t have borrower benefits to lose
• If you have loans from multiple lenders
Graduation -Time for a Budget
Update• How much will you earn?• What are your new expenses?• Education loan payments
start soon.
• Build savings into your budget.
• Be prepared for emergency expenses.
• Your money earns more money - for you.
Taxpayer Relief Act of 1997
Highlights• Interest Deductions:
– Potential education loan interest deduction if income less than $40M single filers, $60M married filers.
• Tax Credits:– Students and families may be eligible for
either HOPE ($1500 maximum for 1st two years of post-
secondary study) or Lifetime Learning Credit ($1000
maximum annually); certain income limitations apply.
• Contact a tax advisor to determine your personal eligibility
Debt Management Strategies
Create a spreadsheet showing the following:
type of credit balance mo pmt APRstudent loan $87,000 $ 361
6.8%car loan $14,000 $ 350
8.9%Visa $ 7,200 $ 144 15.9%MasterCard $ 2,400 $ 48
18.9%mortgage $95,000 $ 750
6.3%
TOTALS $292,000 $1653
Debt Management Strategies
Now sort by APR - highest to lowest:
type of credit balance mo pmt APRMasterCard $ 2,400 $ 48
18.9%Visa $ 7,200 $ 144
15.9%car loan $14,000 $ 350
8.9%mortgage $95,000 $ 750
6.3%student loan $87,000 $ 361
6.8%
TOTALS $292,000 $1653
Credit
The only reason a great many American families don’t own an elephant is that they have never been offered an elephant for a dollar down and easy weekly payments.
-Mad Magazine
Credit Cards
Free t-shirts aren’t free.Low rates won’t stay low.Airline miles are paid for
somehow.Cash saved is better than cash
back.
How bad is the current crisis?
Top Credit Card Interest Rate?35.20%
Average Credit Card Debt?$8,000
2003 Profits by Credit Card companies?
1.5 trillion globally / 60 billion nationally
– Elizabeth Warren, Harvard University School of Law
But Worse Yet…
•Fees have doubled. •Income from over-limit
charges, calendar manipulation and returned checks has far outpaced actual interest rates.
Interest Rates
•One late payment can eliminate all low teaser rates, raising interest from 3.9% to over 20%.
•Cash advance interest rates may capitalize daily, not monthly.
•Annual fees, points program fees, authorized user fees all add up.
Lets talk about those rates . . .
There are no regulations which prevent credit card companies from changing your rate at any time for any reason
•Failing to make a timely payment to another creditor
•Account balances deemed too high (sufficiently obligated)
The lure of the “minimum payment”
$2,500At an interest rate of 24%, making only the minimum payment:
•304 payments over 25 years (to 2031)
•Interest payments of $7,625.48•Increase the cost to $10,125.48
Why not the day to day?
• Snacks at coffee shop ($5 x 4) $ 20.00• Gum or mints ($1.20 x 4) $ 4.80• Soda or bottled water ($1.25 x 4) $ 5.00• Movie & snacks ($12.00) $ 12.00• Occasional magazine ($4.50) $ 4.50• Gas $ 25.00 • A music CD $ 15.00
The costs of the “Little Things” $ 86.30
Total over 52 weeks? $ 4,487.60
Who looks at credit?
• Apartment managers• Employers• Car dealers• Retail creditors• Banks
How is FICO Measured?
FICO measures your financial responsibility based on your credit history calculated from 5 categories:
FICO Scores
• 75% of Americans have a recorded credit history (225M)
• Median credit score – “good” – is 720• Highest score is 850• The riskiest population – those who will most
likely charge off debt or file bankruptcy – is below 600
• According to USA Today, Texas is one of the states with the lowest average scores - 649
Hits Against Your FICO Score
• Late payments• Uncollected debt• High debt• High potential debt• Frequency of applications &
inquiries
Effect of a FICO score
on a loan’s total costA $10,000 loan with no fees at a 15-year
repayment term.Prime rate @8.25%
FICO Score
Interest Rate
Formula
Interest Rate
Monthly
Payment
Total Cost of Loan
723 Prime –0.25%
8.00% $95.57 $17,201.74
619 Prime + 3.5%
11.75% $118.41 $21,314.36
www.annualcreditreport.com
Review reports at least once a year.
Follow instructions to dispute any errors.
Ask creditors to reduce unnecessarily high limits.
Close unused accounts.
You don’t need a “credit repair” company!
Always Opt Out
1-888-567-8688 or
www.optoutprescreen.com
What is Identity Theft?
Wrongful use of your personal identification to obtain services in your name – can include credit, loans, services, rentals or mortgages. Crimes may be committed while impersonating you.
Am I at Risk?
According to a national survey of students, 49% discarded credit card applications without destroying them and rarely, if ever, reconciled their credit card and bank statements.
Am I at risk?• The FTC reports identity theft is
the fastest growing crime today
• Affected more than 9.9 million new victims in 2003
• Losses to victims were estimated at more than $5 billion in 2003
• Losses to business and financial institutions were estimated at $50 billion in 2003
Protect Yourself
• Never give any personal information over the telephone
• Never mail checks or personal information from your home mail box
• Never put phone or social security numbers on personal checks
• Never respond to E-mail spam telling you to click an address if you don’t want to receive further e-mails
• Never carry social security cards or pin numbers in your wallet
• Never use your SSN for your driver’s license or medical cards
Always
• Cover your calling card and ATM pin numbers
• Update virus and firewall software
• Carry only the credit cards and ID that you need
• Shred credit card offers and any form on which your signature can be forged
Protecting Yourself
• Obtain your credit report from each credit bureau each year
• Guard your mail! Planning to be away? Request a vacation hold or temporary forwarding request from the USPS
• Shred charge receipts, ATM receipts, old bank statements, obsolete insurance forms, physician statements, expired charge cards and credit card offers
If you are a victim of fraud
The responsibility lies with you to right the wrong. Contact:
– Your local police and complete a police report
– The Social Security Administration– Your bank– Your credit card companies– Each of the Credit Bureaus
If you are a victim of fraud
The responsibility lies with you to right the wrong. Contact:
– Your local police and complete a police report
– The Social Security Administration– Your bank– Your credit card companies– Each of the Credit Bureaus
Tonight’s To-Do List
Get the beverage of your choice.
Order a copy of your credit report.
Ask your credit card companies what your current
Annual Percentage Rate is, and ask if they’ll lower it.
Create a monthly budget, using APR sorting.
Your Graduation To-Do List
Consider consolidating all remaining education debts,
weighing how consolidation terms may have changed.
If you need to defer, request deferments from your loan servicer while still in your grace period.
Enroll in auto-pay for all possible debts.
Enroll in overdraft protection.
Find a good accountant.
Resourceswww.nslds.govNational Student Loan Data
System
www.ombudsman.ed.govOffice of the Ombudsman
www.annualcreditreport.com
One free report from each bureau
www.optoutprescreen.com 1-888-567-8688
www.myfico.comFair Isaac Corporation
www.finaid.org/calculatorsRepayment calculators
www.bankrate.comFor competitive credit card
rateswww.donotcall.gov 1-888-382-1222
www.tgslc.org TG (State Guarantor)
Sharon GiffordStudent Loan [email protected]
m
Good Luck in All Your Future Endeavors!
