Compound interest adds up fast. Pay off your credit cards and high-interest loans first. (Photo Credit: CC BY/Dan Foy/Flickr)

When it comes to personal finance, few concepts are as important to understand as compound interest. Many consumer finance products use this form of interest. Knowing about compound interest can save you from a potential bankruptcy.

Compounding snowballs

The process of adding interest to principal is called compounding. Depending upon the type of personal loans, student loans, mortgages or other loans in question, interest is compounded on a regular schedule, be it daily, monthly, etc. Keep in mind that once compounding begins, interest itself earns more interest. This is a credit card company’s bread and butter, an easy way for a consumer to fall rapidly into debt. To understand the true cost of any credit card or loan, interest-related factors like how often the remaining balance is compounded and the annual percentage rate must be considered.

Compound interest should not be confused with simple interest. Simple interest is charged on principal balance only and doesn’t charge interest on accrued interest as compound interest does. Simple interest is quite rare in the field of consumer finance.

Doing the compound interest math

Here’s the math you need to know, using hypothetical numbers:

1. Divide interest charged by the amount you owe to produce the periodic interest rate. If you are dealing with personal loans in the amount of $3,500 and you’re paying $25 monthly in interest, divide $25 by $3,500 to get 0.0071428571428571.
2. Take the answer from the previous step and add 1. Now you have 1.0071428571428571.
3. Raise the result of Step 2 to the exponential power of the number of payments you make on the loan or credit card each year. If you pay monthly, you make 12 payments per year. Using the same figures, the result is 1.089163111.
4. Subtract one from the result in Step 3, which converts the compound annual interest rate to a decimal. Here, you have 0.089163111.
5. Multiply the personal loan compound annual interest rate you changed into a decimal number by 100 to create an easy-to-read percentage. Here, you’d take 0.089163111 and multiply by 100 to produce an annual compound interest rate of 8.92 percent.

Understand interest and avoid bankruptcy

Sources

Compound interest Wiki

eHow.com

More people question whether the cost of college is worth it, and there are compelling arguments on both sides. Image from Wikimedia Commons.

The past few months have featured a lot of coverage about the booming levels of student loans. Unlike other installment loans, there’s no way to discharge the debt, and many students are left holding the bag with fewer opportunities for decent employment. Many are questioning whether college is worth it.

College not worth it, says wide swaths of media

One may notice that similar columns appear on various news and opinion sites bearing a headline implying “College is not worth it” and some that assert the opposite. Billionaire Peter Thiel controversially offered anyone willing to drop out of or forgo college a personal loan from him of $100,000 to start a business. One of the people who took Thiel’s offer wrote a column for CNN stating college wasn’t worth it because it stifled entrepreneurial innovation. The author of a recent column on the Reuters website, John Wasik, contends that because tuition has risen 467 percent since 1986 whileinflation rose 106 percent, the cost of college may not be worth it because real wages are not keeping pace with inflation.

College pays off, but for whom?

College, though, does pay off for some people. In fact, the student loans pay particularly well for some people. The government, according to the Wall Street Journal, makes more money on student loans that are defaulted on than on loans that are paid religiously. Current estimates are that 85 percent of all defaulted students loans will end up being collected. Not only that, but the government expects to collect up to $1.22 on every dollar of student loans that are outstanding and in default. Credit card companies, by comparison, usually make about 10 percent of all defaulted debts back. The reason is that defaulting on student loans is different from other kinds of loans. The typical personal loan from a bank can be discharged in bankruptcy, and a house or car can be repossessed.

Average experience says college worth it

Going by the numbers, there appears to be a real incentive to attending a four-year institution and emerging with a bachelor’s degree. According to the Bureau of Labor Statistics, the college educated have an unemployment rate of 4.5 percent as of May of 2011. Those with only a high school diploma have an unemployment rate of 9.5 percent. According to the U.S. Census, men with a high school diploma or equivalency in 2009 earned on average $36,332 and women earned $22,868. Men with a bachelor’s degree earned, on average, $70,568 and women with a bachelor’s earned $42,128 on average, per year.

Sources

CNN

Reuters

Wall Street Journal

Bureau of Labor Statistics on Unemployment

Census page on income (requires Microsoft Excel to download tables)

A college education is a wonderful thing, but be sure to check out for-profit colleges thoroughly before taking out massive personal loans to attend. Image from Wikimedia Commons.

Potential students should be cautious if considering going to a for-profit, private college. Though college is usually worth taking out some personal loans to fund, the for-profit schools have higher default rates and are often at odds with state authorities. Some schools are worth it, but people should do their homework before attending.

The Donald may come under The Indictment

It was recently ann0unced that the New York Attorney General was beginning an inquiry concerning five companies that operate private, for-profit universities, according to CNN. One of the schools involved is the former Trump University, the small for-profit college launched by Donald Trump several years ago. The organization had to rename itself the Trump Entrepreneur Initiative after the New York Department of Education said it couldn’t call itself a school. The four other companies are, according to the New York Times, the Career Education Corporation, Corinthian Colleges, Bridgepoint Education and Lincoln Educational Services. No charges are being filed just yet, but these corporations and the schools they operate are being investigated.

Latest brouhaha between schools and states

State governments and the federal government are beginning to come down on for-profit universities, and some former students are not thrilled. Donald Trump is currently being sued in California by students of the now Trump Entrepreneur Initiative because they say they were misled. Corinthian’s colleges are also under investigation in Massachusetts, California, Florida and Georgia, according to Reuters. The Massachusetts Attorney General, according to the Boston Globe, is also investigating Apollo Group, the company that runs the University of Phoenix, as well as the Kaplan Career Institute, which is operated by the Washington Post Company. Smaller private colleges can be less stable than their megacorporate counterparts, as well. For instance, Alpine College in Spokane, Wash., recently closed its doors permanently in the middle of a term, leaving students holding the bag for thousands in personal loans and no degree to show for it.

Difficult to afford and impossible to pay for

One of the considerations one must make in choosing a university is cost. For-profit, private colleges can be incredibly expensive. In 2009, 15.2 percent of students who attended a for-profit college defaulted on their loans within a year, nearly twice the 7.3 percent of public university students who defaulted in the same period, according to Reuters. Private, not-for-profit schools had a default rate of 4.3 percent. For-profit college students also account for about half of student loan defaults overall. Many people have accused for-profit universities of fraudulent advertising and of not preparing students well enough for the job market, thus making it harder for them to meet their loan obligations. The Department of Education is currently trying to institute a rule that would deny federal loans to students attending a school with a 35 percent default rate or higher.

Sources

CNN

New York Times

Reuters on for profit default rates

Reuters on for profit school investigations

MSNBC

Boston Globe

It is getting harder for people to pay off student debts. Image from Wikimedia Commons.

It is getting harder for students to make payments on the loans they borrowed to pay for an education. The default rate on students’ personal loans is rising nationwide, and lenders, including the federal government, are not forgiving despite a tough economic climate.

Loan payments not as expensive as having to lawyer up

The U.S. government and other parties are becoming far more likely to sue someone who has defaulted on a personal loan obligation for education, according to USA Today. Some student loans are so far gone that the account has to be referred to the Department of Justice to collect, and the number of loans handed over to the government’s lawyers is going up. In 2006, 918 student loans in default were given to Justice attorneys to begin lawsuits. In 2010, that number increased to 5,393. A monthly loan payment can be expensive but not as expensive as having to  hire a lawyer to fight off a lawsuit, and student loans cannot be discharged in a bankruptcy.

Worth of college being debated

Because most students must borrow money to afford a college education, some are questioning whether a it is worth the trouble and cost. One in four people making payments on student loans are having trouble making their payments, according to the Los Angeles Times, and a college degree is not a guarantee that a person won’t wind up living paycheck to paycheck. As of the year 2008, two thirds of all students left college with some debt, and the average amount of student debt was $23,200. The total amount of all student debt in the United States is expected to reach $1 trillion during 2011, according to MSNBC, and there are whispers that student loans are the next bubble due to burst. About 7 percent of all student loans are reported to be in default, and because student loans can’t be discharged in bankruptcy, delinquent loans will perpetually harm a credit score.

Good news on the horizon

Students about to graduate may have an easier time getting hired out of college, according to CNBC. The National Association of Colleges and Employers reported recently that businesses were more likely to hire recent college graduates this year than in a similar survey from last year. The NACE reported an anticipated 19.3 expected increase in hiring for spring of 2011 and a 13.5 percent increase anticipated in the fall of 2011. Granted, any actual increases in hiring remain to be seen, but there are some indications that some people will have an easier time getting hired upon graduation.

Sources

USA Today

Los Angeles Times

MSNBC

CNBC

Kiva Green Loans are intended to help individuals in low-income countries make eco-friendly changes, such as installing solar panels. Image: Flickr / theregeneration / CC BY-SA

In 2008, a small person-to-person lending company called Kiva launched. The person-to-person lending company has now added green loans and student loans to the financing portfolio. With these new products, Kiva hopes to hit $1 billion in microloans lent by 2015.

The basics of Kiva

Kiva was the first major online microloan site. The nonprofit organization matches investors with entrepreneurs and individuals who need small loans. Usually loans through Kiva are for amounts between $100 and $500, and the repayment rate is incredibly high, between 90 and 98 percent. Currently, Kiva members loan about $1 million every five days. Kiva is the only not-for-profit microlender, though there are other lenders who offer bad credit loans and microloans for a profit. There are borrowers in 59 countries that have used Kiva loans, mostly in low-income countries. Kiva also allows some loans in the U.S. , but not every type of loan.

Kiva adds green loans to lending options

In addition to the small-business loans and personal loans , Kiva now offers green loans. These loans are intended to be used for projects such as solar power, drip irrigation, converting farms to organic production and the creation of biofuels. The criteria for these loans remains the same as every other Kiva loan, and the investment amount also remains the same – $25 increments. Green loans can be personal or business-based and have the same repayment terms as every other loan offered on the site.

Student lending through Kiva

In three countries, Kiva is now also offering student microloans. Students in Bolivia, Paraguay and Ecuador are now able to get student loans through Kiva lenders. Students are given one to three years to pay back their loans, and lenders can track the progress of the student all the way to repayment. The program is stil considered to be in pilot status, but appears to be doing well.

The growth of microfinance

Prosper, Lending Club and several other microlending services launched at the same time as Kiva, in 2008. The Securities and Exchange Commission shut down these for-profit companies for not registering properly. These companies are mostly back up and running, properly registered. Microlending companies are starting to cut into the business of big banks and credit cards. These microloans are still relatively new, but as long as there is a market for small-dollar credit extended to individuals that may have bad credit, financial innovation in that industry will continue.

Sources

Kiva Green
Slate.com

Younger people, like recent college graduates, are optimistic about their future, even though they expect to not be as well off as their parents. Photo Credit: apermanentwreck/Flickr.com/CC-BY-SA

People of college student age are expecting to be less wealthy than their parents but more satisfied with life, according to a recent survey. An Associated Press survey of people ages 18 to 24 revealed that younger people, especially those saddled with higher amounts of student debt, expect a lower quality of life than their parents.

Younger generation expects less money, more happiness

The college age set is less optimistic about how much money the future may bring but is confident that the long term course of their lives won’t be doom and gloom, according to MSNBC. A poll conducted by the Associated Press and Viacom of 18- to 24-year-old people found that 40 percent of survey subjects thought that traditional goals like raising a family and purchasing a home would be more difficult than it was for their parents. About 25 percent believed that life would be easier for them than their parents. About 90 percent of the survey subjects believed they would eventually find a career they find fulfilling.

Student debt increases the burden

The people in the AP survey indicated that they believed making a living would be harder because of increased costs. Among costs steadily increasing for people in that age group is student debt. The average college graduate has about $24,000 in loan debt, according to the New York Times, which at an interest rate of 6.8 percent demands a payment of $276 per month, and student loans cannot be discharged in bankruptcy. The Department of Education reports that 65.6 percent of all undergraduates from 2007 to 2008 received some sort of financial aid, and 38.5 percent of all undergraduates had student loans of some sort. The Department of Education found that 30 percent of all undergraduates took out subsidized Stafford loans and 22 percent borrowed non-subsidized Stafford loans.

Investment that does pay off

The average wage earner with a college degree grosses about $53,000 per year, according to the Bureau of Labor Statistics, but few people earn that much upon graduation. A college degree is not a guarantee of immediately falling into a healthy income, but it increases the likelihood that a person will earn a solid middle class income during their lifetime. People with college degrees also tend to have lower rates of unemployment; Americans with bachelor’s degrees had a 4 percent lower rate of unemployment than those with only a high school diploma in 2009. However, the cost of the security that a college diploma offers is going up.

Sources

MSNBC

Department of Education

New York Times

Bureau of Labor Statistics

If you're a student loan co-signer and the student fails to pay, this could be you. (Photo Credit: CC BY-ND/How to Get a Student Loan)

Have you ever agreed to be a co-signer on a friend’s student loan but regretted having done so after the fact? Let’s say you don’t talk to the person anymore, and fear risking a damaged credit rating if they default on the loan. Thankfully, Bankrate reports that all is not lost. There are ways to have your name removed from those student loan documents and improve your credit score in the process.

Student loan co-signer, know what you’re getting into

Becoming a co-signer on a student loan means you are guaranteeing the loan or the debt. If the student fails to repay the loan, it becomes your responsibility. Thus, it is wise to make sure that you’ll be able to make the payments, in the worst case scenario. If not, collectors will come to call and your credit rating will suffer severe damage, which in turn will make it much more difficult for you to obtain other forms of credit.

If you agree to co-sign on a student loan, the creditor is obligated by federal law to provide an explanation of your obligations as co-signer. You’ll want to make sure that you obtain copies of the loan contract and Truth in Lending Disclosure agreement for your records.

Release or refinance that student loan

Begin by pursuing a standard student loan co-signer release. Some private student loans allow a co-signer to cut ties if the student has made enough consecutive monthly payments on time (anywhere from 12 to 24). The student must also meet the lender’s credit standards and other requirements. Thus, the hope is that the estranged student has kept their credit history tidy.

If the lender will not allow you to obtain a co-signer release, then the student will have to refinance the loan. Refinancing enables the student to obtain an entirely new loan at a lower interest rate, and this loan pays off the original student loan. This can be done via the original lender, or through another lender if better rates and terms are available. Unfortunately, the student must have good enough credit to qualify for a refinance in the first place.

Why the student may not want you to leave

Obviously, abandoning a co-signer opens the student up to greater financial risk. If they are suddenly unable to repay their student loans and do not have a co-signer as a fallback, the lender can take them to collections. In the case of government loans, even tax return money isn’t safe.

Sources

Bankrate

eHow Family

Whalehook Loans

No co-signer? No credit history? No problem.

The cost of attending a university is going to keep increasing, which means high student debt will likely become the norm. Image from Wikimedia Commons.

Budgets are getting squeezed in practically every state in the U.S. In an increasingly conservative fiscal climate, one of the biggest items on the chopping block nationwide is education funding, which is leading to drastically less funding for state universities. The cost of higher education is likely to get higher as many universities will need tuition hikes to keep up.

Higher education budgets slashed in 43 states

A total of 43 states have had to cut funding for higher education during the recession of the past few years, according to MSNBC, and it is not a trend that will likely be reversing soon. During times of fiscal hardship, higher education is one of the first spending items on a budget to find itself in the cross hairs of legislators — especially because raising taxes is tantamount to political suicide. As a result of deep cuts to state funds for higher eduction and fewer federal funds to go around, tuition hikes will not be far behind. More students will have to take out considerably larger personal loans for a post-secondary education.

Federal funding slashed

Legislators at the federal level are also focusing on spending cuts, and federal funding for higher education has fallen under the ax in recent months. Federal Pell Grants, which provide financial aid based on need, could be reduced by up to $5.7 billion in the 2012 national budget, according to the Christian Science Monitor. The maximum amount of the Pell could be reduced to just more than $4,000 per year, which is not enough to cover the cost of tuition at most four year universities. The cost of attending one year at a public, non-profit university is $16,140, according to College Board.

Harder to go to college

College Board, the educational organization that creates and administers the Scholastic Aptitude Test (SAT), asserts that enrollment at public universities has increased by 33 percent in the last 10 years. Tuition at public four-year universities has increased by at least 6 percent per year since 2001, and students will bear the brunt of those increases. The installment loans needed to pay for school will be larger, and the sheer cost of attending college may become a disincentive.

Sources

Christian Science Monitor

MSNBC

College Board report on Trends in College Pricing

Some schools are choosing to opt-out of federal funding, which will make getting to graduation even more expensive. Image: Flickr / jamesalmond / CC-BY-SA

For most post-secondary schools in the United States, federal student loans are a large portion of funding. New rules enacted last year set limits on the percentage of loans that can go into default. Some schools are considering rejecting federal loans all together, even though they are not hitting this limit.

The federal student aid program

The federal government provides several programs to help students finance their education. Federal grants do not need to be paid back – they are simply money given to students to help their education. Federal student loans, on the other hand, are low-interest installment loans backed by the government that students must pay back after they leave school. The federal student loan program guarantees billions of dollars in loans each year. The American Recovery and Reinvestment Act committed another $195 billion to purchase even more loans.

New rules on student loan defaults

In late 2010, the Government Accountability Office suggested new rules intended to target for-profit schools. Called the “gainful employment” rule, the amount of debt a student carries is measured against their income after graduation. If that ratio is consistently high, the government reconsiders the school’s eligibility for receiving loans. The rule is also tripped if a high proportion of students default on their loans after graduation. In short, any school that turn out graduates that cannot make enough money to pay back loans would no longer qualify for these personal loans.

Pulling out of the student loan program

Though the new rules are intended to cut for-profit schools out of the federal student loan program, other schools could get caught in the net. Small community colleges often cater to underserved communities — groups that take out a higher proportion of their income in student loan debt. Student loans cannot be written off by bankruptcy, and if the student eventually defaults, the school is responsible for at least a portion of the debt. Facing these realities, many small schools are considering pulling themselves out of the federal student loan program entirely.

What no federal loans could mean

For both for-profit and community colleges, pulling out of the federal student loan program could have wide-ranging effects. Students who wish to attend school would still qualify for higher-rate, more-difficult-to-qualify-for federal loans. This means students will have to find co-signers or outside funding for their average $23,000 in educational loan debt. For the average taxpayer, this means fewer people in college and fewer federal student loans.

Sources

News Channel 5
New York Times
Miami Herald
FinAid.org

Student loans for middle-income students are available for those willing to put in the legwork. (Photo Credit: CC BY-ND/Federal Student Loan Debt)

Financial aid is a necessity for many low- to middle-income students and their families. Thankfully, there are student loan programs designed specifically for people who fall within the low- to middle-income brackets. Banknote suggests those looking for ways to pay for college use this three-pronged attack.

Aim high for need-based qualification

If a student doesn’t qualify for student loans at one college, it is quite possible that student could qualify at a more expensive university. Sally Donahue, Harvard’s director of financial aid, points out to Banknote that need-based financial aid is contingent upon income and assets, relative to admission costs. Thus, not qualifying at a $20,000-per-year school doesn’t mean a $60,000-per-year option is out of the question.

“We have probably 600 families with incomes over $180,000 receiving grant aid right now, and that’s usually because they have two or three students in high-cost colleges,” says Donahue. “It just depends on where you go.”

Harvard happens to be a “no-loan” school that enables students to obtain the necessary financial aid via grants, scholarships and work-study programs. The Institute for College Access and Success indicates that there are more than 50 such no-loan schools across the U.S. from which to choose. Keep in mind that most require family income to be below $50,000 annually.

Tax credits offer long-term help

Carol Stack, co-author of “The Financial Aid Handbook,” claims that 2011 is a banner year for student loan tax credits. Specifically, the American Opportunity Credit is one to watch. Extended through 2012, this credit can mean an extra $2,500 for families, as long as at least $4,000 is spent each year on college-related expenses. Intended for the first four years of post-secondary education, the American Opportunity Credit applies 100 percent to the first $2,000 spent during the tax year, and 24 percent to the next $2,000. At least half-time enrollment is required and family income must not exceed $160,000 per year. Check with the IRS for more information.

The Lifetime Learning Credit is great for part-time students and those who attend college for more than four years. Approved college expenses up to $10,000 are reimbursed at a 20 percent clip.

Good aid for good students

Merit-based aid exists for men and women who may not qualify for need-based student loans, grants or scholarships. Collegiate financial aid search engines, like College Navigator and Meritaid.com, state that $11 billion in merit-based aid is distributed annually. Thus, there are plenty of opportunities for good students to take advantage. Chris Long from Cappex, a Meritaid.com sister company, advises students to find schools outside their geographic area that would benefit from their test scores and GPA.

“You should also apply to schools where you’re at the upper end of the academic scale. You’re going to be very attractive to those schools because they want to increase their average GPA, SAT and ACT (scores),” he said.

Sources

Bankrate

Cappex

College Navigator

IRS.gov

Considering scholarships and grants

Consumer borrowing rose from non-revolving credit sources, as fewer people are borrowing money by using credit cards. Photo Credit: MoneyBlogNewz/Flickr/CC-BY-SA

An increasing number of people are borrowing money, but more people are getting personal loans rather than using credit cards. The Federal Reserve released data that show consumer borrowing rose by several billion dollars in January, but it was from non-revolving credit sources. Credit card use dropped at the same time.

Debt levels rise as consumer borrowing increases

Americans are borrowing money from loan lenders again, and it is reflected in the recently released report by the Federal Reserve detailing economic activity from January of 2011, according to Business Week. The increase in consumer debts in January was fueled by non-revolving credit sources, such as personal loans or auto loans, instead of revolving lines of credit or credit cards. Non-revolving debt increased by $9.26 billion, but consumer debts increased overall by an estimated $5 billion, in the fourth straight month of increasing numbers of people going to loan lenders for credit. The increase was fueled by strong auto sales, according to MSNBC, as the amount of money lent for auto purchases increased for the sixth straight month.

Credit card use falls

Credit card use has been plummeting for some time, as the amount of debt held by Americans on credit cards declined by $4.25 billion. Credit card debt has fallen in 28 of the past 29 months, but it increased in December 2010 for the first time since December 2008. Credit card charge-offs, or debts written off by credit card companies, declined to 7.45 percent for January 2010. Delinquencies and charge-offs have been declining for the past five consecutive months. Consumers appear to have used their plastic to cover a December shopping spree but paid down the balance quickly. Credit card interest rates have been steadily rising as new regulations prevent banks and card companies from applying fees surreptitiously, forcing them to raise fees and interest rates up front.

Student borrowing increases

Part of the increase in non-revolving debts for the month of January 2011 was a $24.9 billion increase in student loans from the federal government. However, students are likely to begin borrowing more from private lenders than from the government in coming years, as the looming federal budget cuts are likely to decrease available capital. The federal budget recently submitted by the House of Representatives cut more than $5 billion from the Pell Grant program, according to the Christian Science Monitor, though the Pell Grant program is expected to run a $20 billion deficit starting next year. A college education is still viewed as one of the most worthy investments a person can make, though the cost has been rising dramatically for years.

Sources

Business Week

MSNBC

Christian Science Monitor

Direct Loan Program

With the Direct Loan Program, students and parents borrow directly from the federal government instead of through a private lender. The loans are made available via the college’s financial aid office. Like most federal student loan programs, Direct Loans typically offer low fees, low interest rates and lenient payback policies. Federal loans are usually available for students with poor credit.

Stafford Loan

Stafford Loans are also provided by the federal government and are based on students’ financial needs. Most students qualify for some type of financial aid via the Stafford Loan program. To be eligible, students are required to be enrolled at least half-time in college. The loans are available to both undergraduate and graduate students.

Subsidized Stafford Loans: These are also need-based loans. One huge benefit of these loans is that the government pays the interest while the student is attending school and during a six-month grace period upon graduation. No credit check is required for these.

Unsubsidized Stafford Loans: These loans are not based on financial need, and students are responsible for accrued interest as soon as the loan is disbursed. However, they have the option of deferring the payments until after they graduate from college, and there is a six-month grace period after graduation.

Perkins Loan

Perkins Loans are another need-based program operated by the Federal government. They’re low interest, low cost loans that are available through individual colleges and universities. It’s up to the schools to determine which students are most financially deserving of Perkins funds. Money is provided on a first-come, first served basis. Perkins Loans are available to undergraduates and graduate students.

Perkins Loans have no fees and no credit checks. Like subsidized Stafford loans, the government pays the interest on the loans while the student is attending school as well as during a nine-month grace period after graduation. Undergraduate students are limited to $4,000 per year, with a lifetime limit of $20,000. Graduate students are limited to $6,000 per year and $40,000 over the course of their lives.

Parent PLUS Loan

Parents take these loans out specifically to pay for their kid’s college education. Parent PLUS Loans are provided by the federal government at a low interest rate. Students must be dependents and younger than 24. After the full loan is dispersed, the parent is required to begin paying it back within 60 days.

Parent PLUS Loan repayment options

Graduated Repayment Plan: A parent can begin with lower monthly payments that gradually increase over time until the loan is paid in full.

Extended Repayment Plan: Eligible parents are provided payment relief via an expanded repayment term of up to 25 years.

Income Sensitive Repayment Plan: Monthly payment is based on parents’ yearly income and loan amount. Parents are eligible for this plan if their monthly loan payment is greater than 10 percent of their annual gross income.

The Parent PLUS Loan website provides more information.

Parent PLUS Loan versus private atudent loans

If your child has reached the annual maximum for Stafford Loans, a Parent PLUS Loan or private student loans are your options. The Parent PLUS Loan has a fixed interest rate, whereas private student loans typically have a variable interest rate. Currently, interest rates are low and parents may be able to obtain a private loan at a lower interest rate than a Parent PLUS Loan. Many banks also offer special incentives. Private loans may have additional fees, however, so keep this in mind.

Federal student loan consolidation

Students who have taken out multiple federal student loans have the option to consolidate these loans into one payment. A consolidation loan reduces monthly payments and provides a longer term for the loan. The borrower’s loans are paid off, and a new consolidated loan is created. The interest rate may be lower than one or more of the previous loans.

Co-Signing a student loan

Private student loans are awarded based on a person’s credit history. Because many undergraduate students don’t have much of a credit history, they will typically need a cosigner for the loan. If you go this route and your son or daughter defaults on the loan, you’ll have to make the payments.

Career training student loans

Private, credit-based career training student loans are provided to students attending technical or trade schools. They offer some attractive incentives as well as interest rates that reward good credit. Students can use these loans for expenses in addition to tuition, such as room and board. Some of these loans may have extra fees that you should keep in mind.

Student loan obligations are blindsiding many grieving families. Image: Flickr / MoneyBlogNewz / CC-BY

In the United States, students in college have racked up more than $885 billion in student loan debt. While students are on the hook for the majority of that debt, some families are facing heart-wrenching decisions. Some families are being held responsible for student debt even after the student dies.

The student loan market

Student loans are big business. Federal loan programs offer up to $5,000 per year per student. That money, however, is barely enough to cover books at most schools. Private student loans are not always government-backed and often require cosigners for students with little or no credit history. In many cases, getting a student loan is easier than getting a no fax payday loan. One of the reasons it is so easy, however, is because student loans are not affected by bankruptcy — they are practically impossible to write off.

Student loans and death

As families in Nevada, Texas and across the country have discovered, death does not necessarily cancel out student loans. If there is a cosigner on a student loan, the responsibility of paying back the loan transfers to the cosigner. This leaves many parents who are grieving the death of their child with the added, unexpected responsibility of paying back thousands of dollars worth of debt for their adult children.

Death and default

Student loans that have no cosigner, much like any other unsecured loan, are technically considered to be “in default” if the loan holder dies. A person’s estate — whatever items of value left behind — is responsible for paying back the loan debt. If the estate cannot pay back the loan, then the bank has to write off the debt. Due to the fact that most students use cosigners to qualify for loans, that debt is passed along.

Sources

Wall Street Journal
KCTV5

A recent Department of Education study found that students who attend for-profit colleges default on student loans the most. Image from Wikimedia Commons.

The rate of default on student loans is higher for students who attended a private, for-profit university. New data from the U.S. Department of Education indicates 25 percent of students who attended for-profit schools defaulted on their student loans. Public school attendees had a default rate of less than 11 percent.

Nonprofit school students default the least on student loans

Students who attend institutions of higher education often get saddled with a lot of debt. The huge loans students have to borrow to finance education means some are going to default on repayment. Those who attend a private, for-profit university are most likely to default on the unsecured loans needed to cover tuition, according to Reuters. A recent report by the Department of Education examined default rates from the year 2008 and found students who were borrowing money to fund an education at a private, for-profit college defaulted 25 percent of the time. Students at public universities had a default rate of 10.8 percent.  Students from private, non-profit universities defaulted least, defaulting 7.6 percent of the time.

Government could pull funding

Pending legislation could yank the rug out from under private, for-profit colleges when it comes to federal funding. A new proposed rule would cancel any federal advance cash to any university with a loan default rate of 30 percent or more. Numerous for-profit universities already fit that criteria. A trade group of for-profit universities, the Association of Private Sector Colleges and Universities, protested the proposed ruling and the DOE report, saying that the dismal economy contributed to those figures. The APSCU also contends that data from 2008 doesn’t apply to 2011.

Students under growing strain

Worries about post-education employment and debt, among other factors, has led to far more students having a negative view of their own mental health, according to the New York Times. Whether someone is off to be an Arizona Wildcat or to roll with the tide in Alabama, having to take out larger loans and come out of college needing debt consolidation is not the most pleasant prospect.

Sources

Reuters

New York Times

Credit card companies are considering student loan debt "income" to be used to pay back credit. Image: Flickr / MoneyBlogNewz / CC-BY

The Credit Card reform act of 2009 was supposed to fundamentally change how credit card companies worked. Many aspects of the credit card business have changed. For students, however, student loan debt can be considered as income to pay off debts.

Student loans versus credit cards

In June of 2010, student loan debt surpassed credit card debt for the first time ever. Student loans are a form of debt, though they are deferred until the student graduates or leaves school. For the purposes of taxes, loans and most other financial products, student loans are not considered income. For many credit card applications, though, student loans may actually count as “income” to be used to pay back the credit card. This seems to be the case for credit card companies advertising on campuses from Reno, Nevada, to Irving, Texas.

The problem with student credit

Student credit cards were one product specifically targeted by the Credit Card Act of 2009. Credit cards can be a particularly damaging form of short-term credit, because interest and fees for paying late can build up quickly. Credit card companies were accused of targeting students with credit card offers, offering high-limit cards that were essentially unsecured loans with no credit check. Students were often graduating from college with  more credit card debt than student loan debt.

Credit cards for students

Many new credit card regulations try to limit the amount of debt a person can take on. Students can include just about anything as income on a credit card application — including the income of other people who live in their household. There nothing specific in the law that says whether student loans can be considered income to apply for more credit. In the rules of good financial management, though, using debt to apply for more long-term credit does not add up to a way to improve your financial situation.

Sources

Daily Finance
Wright State University Guardian

Credit cards were not among the forms of consumer credit that increased in November. (Photo Credit: CC BY-SA/Colin/Flickr)

Bloomberg reports that consumer credit rose for the second straight month in November, a sign that consumer confidence may be on the rise. The $1.3 billion November increase in consumer lending, paced by government-held student loans, followed a $7 billion increase in October.

Consumer credit increased in auto, education fields

Non-revolving loans such as auto loans and student loans were up by $5.6 billion, according to November figures. Revolving consumer credit continued its 27-month nosedive by falling $4.2 billion, which indicates that maintaining high interest debt over time is becoming less attractive to U.S. consumers. It also means that even though consumer confidence may be increasing, times when emergency cash is needed still lend themselves to products like payday loans rather than credit cards.

Positive economic signs, with more to come

Theresa Chen, a Barclays Capital Inc. economist in New York, reportedly told her clients that the road ahead will be long.

“Consumer credit is still rebounding off the bottom. This is broadly in line with the rise in household spending that we have already seen over the past few quarters,” she said.

Even though a full recovery is far away, November’s $1.3 billion consumer credit increase still outpaced the $500 million recovery many economists forecast for the month. This pleasant surprise, along with a larger than expected U.S. jobs increase and unemployment rate decrease to 9.4 percent, helped bolster the Standard & Poor’s 500 Index. The S & P 500 ended 2010 with a 13 percent gain.

November auto sales another positive sign

The November consumer credit increase translated into another good month of sales for the automotive industry. According to Bloomberg, auto sales hit a seasonally adjusted 12.26 million annual rate in November, followed by a further increase to 12.53 pace in December. Combined, the 37.04 million rate for the final quarter of 2010 was the strongest the auto industry has seen since 2008′s third quarter.

Sources

Bloomberg

Financial Football is an online game that blends personal finance and the gridiron endorsed by Super Bowl MVP Drew Brees. Image: Ian Rainsley Design + Illustration/Flickr

Financial Football 2.0 is a video game developed by Visa Inc. and endorsed by New Orleans Saints quarterback Drew Brees. Financial Football is available online to play for free. Players control the action on offense and defense by answering multiple choice questions about personal finance. Brees said he learned about personal finance the hard way and wanted to help others avoid the same mistakes he made. Whether Financial Football 2.0 helps accomplish that is unknown, and people who have played the game were underwhelmed.

Drew Brees: personal finance the hard way

Financial Football, developed by Visa Inc. in cooperation with the NFL, uses Drew Brees’ name to promote financial education by teaching children and young adults how to manage their money through the context of the gridiron. The Washington Examiner reports that Brees, the reigning Super Bowl MVP, has been working with Visa to publicize the game for about five years. Brees told the Examiner about financial lessons he learned the hard way, including a delinquent cell phone bill that came back to bite him later. He went over his minutes, didn’t pay the bill and it was sent to collections. Even with NFL millions in his bank account, the blemish on his credit report boosted the interest rate he paid on his first mortgage.

How to play Financial Football

Financial Football can be played online for free at practicalmoneyskills.com. The game features three different levels: Rookies age 11-14, Pros age 14-18 and Hall of Famers age 18 and older. Players can match up against the computer or match up head-to-head. On offense, players move the football with correct answers to questions about personal finance, student loans, credit cards, credit scores, debt collection, economics, retirement and investments. On defense, correct answers generate tackles, quarterback sacks and negative yardage for the opposing team. Players choose real NFL teams, and Financial Football shows stats about wins and losses for each team.

Struggling offense all too realistic

Gamers used to the cutting edge graphics of Madden NFL 11 will be gravely disappointed in Financial Football. Connie Prater at creditcards.com said her biggest complaint was that the game doesn’t tell players why their answer is wrong or provide more details about the correct answer. The game clock is always on and players only have 40 seconds to call a play, read the question and pick from the selection of answers. Running out the play clock results in a five yard penalty for delay of game. Apparently some people play without moving the ball enough to score any points — a feature that may seem all too realistic for some current NFL teams.

You think midterms are hard? Try paying off your student loans. Image from Wikimedia Commons.

Recently, it was announced that debt from higher education has outpaced debt from credit cards. Current students and recent graduates are obviously not surprised, but for many it comes as a shock. The cost of attending a four-year university has increased dramatically over the last 20 years, and many have had to turn to getting federal loans, bank loans or education loans from other loan lenders. The amount that students are having to borrow is  also increasing, and so is the number of loan defaults. Student debt is fast becoming another obstacle in the pursuit of the American Dream.

Debt increasing for students

It is incredibly likely that college students will have to borrow money to go to a university. According to FinAid.org, 66.5 percent of all students that obtained a bachelors’ degree from 2007 to 2008 had to get loans to pay for school and ended up $22,656 in debt. Public university students, of which 61.1 percent had to borrow, graduated with $19,839 in debt on average. Private schools take a heavier financial toll. Of private university students, 70.6 percent of students at private nonprofit schools and 97 percent at private for-profit schools have to take out loans. Private nonprofit graduates averaged $27,349 and private for-profit students averaged $24, 635 in debt for their educations.

Harder to discharge

Student loan debt is the hardest to discharge. Unlike credit cards or a mortgage, student loans cannot be discharged in bankruptcy. Also, a frustrated borrower cannot get debt settlement relief with student loans. The payments have to be made exactly as demanded; there is no loan modification for student loans. Not only that, but the number of people that default is going up. According to the Chronicle of Higher Education, 20 percent of all loans that had to be repaid since 1995 have been defaulted on. The rate is higher for students of two-year and private for-profit institutions, and the likelihood increases every year post-graduation.

Students pay dearly for their education

The consequences are that students have to put things off longer. Graduate school, or even buying homes and having children are things which must be put off in order to pay down student loan debt.

Further Reading

FinAid.org

Chronicle of Higher Education

The income-based repayment calculations are now based on joint taxes, if you're married. Image from Flickr.

With the fall semester of 2010 coming up for many college students, recent changes to student loan programs are taking effect. Some of the biggest changes include an alteration of income based repayment standards. This help for graduates with student loan debt will reduce payments on this easy loan for some. New formulas and rules for student loans will, in the end, help make higher education more affordable for most.

Dropping rates for student loans

As of July 1, rates on a form of small loan subsidized by the government did drop. Rates for Stafford loans that have been subsidized dropped from 5.6 percent to 4.5 percent. Subsidized loans that originated before July 1, 2010, and unsubsidized loans will maintain the same rate as before.

Changes to income based repayment

The changes to student loan programs that will have the biggest effect are changes to income based repayment formulas. Many recent graduates are discovering that with a tough job market and banks with no money to lend, it’s nearly impossible to make student loan payments. This income based repayment recalculation adjusts the program introduced last year. The point of income-based repayment is to keep debt manageable for students who are saddled with huge loans and few job prospects.

Removing the marriage penalty

For married couples who have two sets of student loans, the new income based repayment formula will no longer penalize married couples. Combined loan payment amounts can be used to calculate eligibility as long as couples file their taxes jointly. Previously, only a single money loan balance could be measured against total household income.

Current balance vs repayment balance

Previously, income based repayment was calculated using the amount borrowers owed when they first entered repayment. Now, income-based repayment calculations will be calculated using the current amount owed. This will help reduce the load on former students who have had loans in deferment, building interest without making payments.

Federal student loans are issued directly by the Department of Education now, eliminating banks and their lucrative taxpayer subsidies from the equation. Flickr photo.

Getting government loans for college changed radically on July 1. All federally guaranteed student loans are now issued directly through the Department of Education. The change was part of the health care reform bill passed in March that had bank lobbyists kicking and screaming. The government has removed banks as the middleman for federally guaranteed student loans, and ended the billions of taxpayer dollars in subsidies paid to banks for pushing paper on those loans

Federal student loan shift saves taxpayers billions

The end of student loan subsidies for big banks will create $68 billion in savings over the next 10 years, according to government estimates. As of July 1, all colleges and universities participating in federal student loan programs will be required to offer all new loans through the Federal Direct Loan Program (FDLP). The government claims the FDLP is a more reliable lender for students and more cost-effective for taxpayers.

Federal student loan changes

All new government loans for college are now issued directly through the Department of Education’s Direct Loan program. USA Today reports that the FDLP eliminates the Federal Family Education Loan Program (FFELP), which had allowed banks and other commercial lenders to offer federally guaranteed loans. Affected loans include subsidized and unsubsidized Stafford Loans for undergraduate and graduate students, as well as PLUS (Parent Loan for Undergraduate Students) for parents and PLUS loans for graduate and professional degree students. Changes to these loans under the new program include:

All PLUS loans now have lower interest rates than they did under FFELP (7.9 percent vs. 8.5 percent).
Origination fees for Direct Stafford loans dropped to 1 percent from 1.5 percent.
Rates for subsidized Stafford loans, which are available to borrowers who demonstrate economic need, fell to 4.5 percent from 5.6 percent.

Bank profits moved into scholarships

Most of the savings reaped by eliminating commercial banks from government loans for college will be applied toward the Federal Pell Grant program. Pell Grants are scholarships given to students from lower-income families that don’t have to be paid back. Native Times reports that beginning this fall the maximum Pell Grant amount increases by $200 to $5,550, where it will remain until 2013-2014. In addition, from the 2013-2014 through 2017-2018 academic years, the amount will be indexed for inflation, maxing out at $5,975.

Students must get organized now

This year students with a federally guaranteed student loan must file electronic forms through the federal government’s secure site for the new program at www.studentloans.gov. Kenosha News reports that The change is putting pressure on colleges and universities in both responsibility and the volume of students that must be processed. Financial aid directors are advising students and/or their parents to contact their college’s student financial aid office with questions sooner, rather than later.