Poor Student No More

We live in a nation in which higher education has become the goal of many, a necessity for most, and certainly a step in the right direction toward achieving the “American Dream.” Politicians base entire speeches on the promise of ensuring the opportunity to go to college exists for all. Teachers in primary and secondary education design their curriculum to prepare students for college, not necessarily for life (which is why we have such a problem with personal financial education — but I won’t digress to that topic here).

Since a college education has become such a commodity (with such a high price) in our nation, wouldn’t you think the government would offer students more opportunities and incentives to go?

There are federal loans (of which only some are subsidized) and grants, but overall, the federal government has not done an adequate job of protecting students from the debt trap that college can cause. Quite ironic considering they are encouraging American youth to go to college and achieve their dreams.

So, what is our government doing to protect students from high interest rates, defaults, and unforgiving lenders? What happens when higher education’s promise of a better financial future isn’t kept?

Right now, Congress is considering ending a program that backs private loans with government money. Instead, the money used to back the private loans would go directly to students, increasing the funds available for Stafford, Perkins and PLUS loans. This would not only save the federal government money, but also save students from high interest rates, unforgiving deferment policies and ridiculous calls from lenders telling you it’s time to start paying up. Yes please.

The most important legislation, however, comes from state legislatures. When there are budget cuts in the state, student aid often goes down, tuition for state universities goes up, and student debt goes up. For example, New York is thinking of cutting its student aid programs mid-year in response to a huge budget cut.

Jon Chattman wrote an article for The Huffington Post arguing that forgiving student debt would stimulate the economy because it would put extra money in pockets without decreasing taxes or giving stimulus packages.

Debt forgiveness is extremely rare, but there have been some ideas floating around Congress in recent years. The late Senator Kennedy introduced the Student Debt Relief Act of 2007 that increased the Pell grant, introduced a student aid reward program, cut interest rates in half, and offered fair payment assurance — meaning that there were less restrictions on granting forgiveness for all or part of student loans.

Keep pushing for more protection for students against private lenders, especially at the state level!

Student debt, credit cards and any other liability can pose a serious threat to personal finances because of interest rates. We seem to be bombarded by the phrase “interest rates” in business, financial and economic news — but what does it all mean, and what kind of impact will it have on your personal finances?

Let’s start with a basic definition: An interest rate is the price a borrower pays to use money from an external source. They are normally expressed as a percentage of the loan amount (Ex: My credit card has an annual interest rate of 13.8%). Another way of thinking of interest is the difference between the amount paid back to the lender and the original amount loaned. Interest rates create profits for lending companies.

The Federal Interest Rate

• Federal Funds Rate - The interest rate at which private depostitory insitutions (banks) lend federal funds to other banks. The Federal Open Market Committee (part of the Federal Reserve) sets the target interest rate (nominal interest rate), which is what is meant when it is reported that the Federal Reserve increased or decreased the interest rate. The effective interest rate — the weighted average of all interest rates in lending transactions between banks — falls within a range of this target interest rate. This rate affects short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money and credit available, and a variety of other economic variables.
• Generally, interest rates charged by private lenders to you are largely based on the federal interest rate.

How can your interest rate change?

• The economy changes - in general, if the economy slows, interest rates go down to increase lending and borrowing.  If the economy grows, interest rates generally go up as there is more demand for loans.
• The lower your credit score, the higher your interest rate. Check to see if you have a variable interest rate (most loans do) — this means that they can change the interest rate at any time. MAKE SURE YOU DON’T DEFAULT AND KEEP YOUR CREDIT SCORE UP!
• These two factors play into determining interest rates the most — Macro and Micro causes — the state of the national economy and the state of your individual economy.

How can you lower your interest rate?

• Consolidate — consolidation can often decrease the total amount of interest you are paying, but be wary! Make sure you are proactive in reading the terms and conditions of your consolidation.
• Pay more each month — even just a few dollars a month can add up to a huge savings in the long run. Don’t short yourself though. Make sure you can afford what you are paying.
• Debt forgiveness — sometimes students working in the public service can have a portion or all of their debt forgiven. The most common example of this is the Peace Corps. However, this does not always apply to private loans.
• Talk to your lender — often, this is your best resource. Sometimes you can negotiate a lower interest rate or find out if there are any special benefits that you are qualified for. So pick up the phone and talk to a loan officer.

Please note — all Federal loans taken out after July 1, 2006 have a fixed interest rate.

Current interest rates:

• Stafford Loan (subsidized undergraduate) — 5.6% for loans disbursed from July 1, 2009 - June 30, 2010
• Stafford Loan (subsidized graduate/professional) — 6.8% for loans disbursed from July 1, 2009 - June 30 2010.
  
• Stafford Loan (unsubsidized undergrad/grad) - 6.8% for loans disbursed from July 1, 2009 - June 30, 2010
• Stafford Loans disbursed after July 1, 2006 - variable but will never exceed 8.25%
  
• PLUS loan (disbursed before July 1, 2006) — variable but will never exceed 9%. Currently 3.28%
• PLUS loan (disbursed after July 1, 2006) — 8.5% fixed
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Building credit is no easy task — especially when you think that the only way to do it is to get a credit card or a loan, as this can very easily trap you in a never-ending cycle of debt (see previous post on credit cards).

Let me start with a question: What exactly is credit?

Credit is recognition of a person’s ability to fulfill his or her financial commitments based on previous actions. It provides a rating standard for lending companies, banks and other financial institutions (a credit score). They can estimate how likely you are to pay back your loan, mortgage or other liability. Your credit score helps to determine your interest rate and whether you get the loan at all. Credit is imperative if you plan on buying a house, applying for a credit card, applying for any loans, and even getting insurance.

So what exactly are the best ways to build your credit?

First, you should know exactly what your credit report looks like. You do not have to pay for this! Under the Free File Disclosure Rule of the Fair and Accurate Credit Transactions Act (FACT Act), the three nationwide consumer reporting companies — Equifax, Experian, and TransUnion — must provide you with a free copy of your credit report once every 12 months. But you have to ask for it!

These three companies do not provide your credit score for free. You must pay an additional fee for this.

A “good” credit score is usually anything above 620. But of course, it all depends on what you are applying for and who the provider is. Usually, if your score is below 620, the provider will require further inquiry into your credit report. This does not necessarily mean that you won’t get the loan, but it does mean you will have a higher interest rate.

Things that lower your credit score:

• Late payments - pay your bills on time!
• Maxing out your credit card - keep the balance at no more than 35% of the credit limit!
• Closing credit cards - don’t close the account, just cut up the card and never use it again!
• Opening a lot of credit cards in a short period of time - Don’t let Banana Republic or Gap sell you on those in-store credit cards. It may signal that you are a credit risk!

Things that raise your credit score:

• Check your credit report very carefully and look for any inaccuracies. Write a letter to the consumer reporting company explaining the inaccuracy. Sometimes these companies make mistakes and it can unnecessarily lower your score.
• If the info in your report is all accurate, then only time will raise your credit score. Negative information can stay on your credit report anywhere from 7-10 years.
• Pay your bills on time. No questions asked.
• Try to pay more than the minimum payment on credit cards or loans. Prioritize paying these off in order from highest interest rate to lowest interest rate.
• If you don’t have sufficient accounts on your credit report, try applying for a credit card with your bank. Credit cards are not a bad thing if you use them with caution and care.

Building good credit is extremely important for your financial future. Don’t let careless mistakes lower your credit score!

Peace, love and loans

Jess

I have applied for and received two credit cards since I’ve been in college. The first I got during freshman year when I purchased some of my text books off of Amazon. There was a special offer (anyone surprised?) that lured me in — it gave me $60 off of my purchase. I could basically buy the books I needed for free.

WRONG.

The special offer wasn’t applicable until after I received the card in the mail. So I paid for my books out of my checking account and after receiving the card, tucked it away for about a year.

I never used the card until one weekend when I went back to New York for the premier of my sister’s documentary. I left my cell phone in my car along with my debt card. Once I arrived at the movie theater, I paid the cab fare with that credit card. This is where it all began.

Honestly, if I had never started using that credit card that day, I probably wouldn’t have gotten another one. I applied for my second card this past March to ensure I had overdraft protection on my checking account. Then I started paying for doctors’ appointment fees, prescriptions and gas on this card. Then it spilled over to dinners and scented candles for my room.

When you purchase items on a credit card, you end up paying much more for them in the long run. Is a $40  framed photograph of Marilyn Monroe to hang on your college room wall really worth the $300 you will end up paying for it over the 4 years it takes you to pay off your credit card? Didn’t think so.

It was a slippery slope, and I tumbled down head first. My balances are not outrageous, but high enough that I have to make monthly payments on these cards. This is not helping my plight to get out of debt — only making it much longer and more difficult. A few weeks ago, I had finally had enough — the cards faced death by scissors.

I always try to pay more than the minimum payment each month, but sometimes cannot afford to because of that particular month’s earnings. Paying more than the minimum payment improves your credit score and will pay off your card in less time, but make sure you do not short yourself for the month’s other expenses. Pay more when you can.

Consolidation is definitely an option, but be careful. Check the interest rates, terms and any other possible options you may have (refer to the earlier post on consolidation).

Stop using the cards — If you can’t pay cash, don’t buy it. Unless of course it is necessary for your survival.

Come up with a payment plan and try to stick to it for as many months as possible. It’s ok it you can’t follow the plan every now and then, but make sure you budget for your credit card payment plan as often as possible.

Credit isn’t evil and it’s not even a bad idea –  unless you are a college student. Remember what happened to the U.S. economy at the end of 2008? Don’t get yourself into a situation in which you are calling your family and friends asking for an economic bailout.

One more tip — if your credit cards are higher interest than your student loans, pay these off first. Pay off your debts in order of interest rates (highest to lowest).

Peace, love and loans,

Jess

Student Debt Statistics for your viewing pleasure.

Private 4-year institutions:
State with highest average debt - Arizona - $41,302
State with lowest average debt - Alaska - $10,197
State with highest percentage of students with debt - Alaska - 93%
State with lowest percentage of students with debt - Utah - 36%

Public 4-year institutions:
State with highest average debt - Alaska - $27,043
State with lowest average debt - Hawaii - $12,583
State with highest percentage of students with debt - South Dakota - 80%
State with lowest percentage of students with debt - Hawaii - 30%
Source: Calculations by the Project on Student Debt on student debt data from Petersons’s Undergraduate Financial Database, copyright 2007, 2008 Peterson’s, a Nelnet company; state and sector data from National Center for Education Statistics, Integrated Postsecondary Education Data System (IPEDS), Fall 2006.

Average cost of a 4-year university (public or private), including tuition, room and board 2007-2008: $19,362
Average cost of a 4-year public institution including tuition, room and board 2007-2008: $13,424
Average cost of a 4-year private institution including tuition, room and board 2007-2008: $30,393
*note - cost of 4-year university is consistently more than “other 4-year institutions.”  Explain the difference!
Source:  Digest of Education Statistics 2008.  Institute of Education Sciences - National Center for Education Statistics.  U.S. Department of Education, March 2009.

Total fall 2007 undergraduate enrollment in degree-granting institutions: 15,603,771
Total fall 2007 undergraduate enrollment in 4-year private institutions (full-time and part-time): 3,172,377
Total fall 2007 undergraduate enrollment in 4-year public institutions (full-time and part-time): 5,813,773
Source:  Digest of Education Statistics 2008.  Institute of Education Sciences - National Center for Education Statistics.  U.S. Department of Education, March 2009.

Total freshman enrollment in institutions: 2,707,213
Total freshman enrollment in their home state: 2,178,745
Total freshman enrollment out-of-state or out-of-country: 528,268

Percentage of undergraduates receiving aid 2005-2006: 70.3
Percentage receiving aid from public 4-year institutions: 76.6
Percentage receiving aid from private 4-year institutions: 85.4

Average amount of financial aid awarded to full-time, full-year undergraduates 2003-2004: $9,899
Federal Grants: $3,247
Federal Loans: $6,426
Private Grants: $4,828
Private Loans: $6,089
Work Study: $1,942

Number of undergraduates, full-time, full-year, all institutions 2003-2004: 7,824,000
Cumulative amount borrowed for undergraduate education 2003-2004 (average per student): $12,750

Percentage of undergraduate students who have credit cards 2008: 84%
Average number of credit cards 2008: 4.60
Percentage who have 4 or more cards: 50%
Average credit card debt: $3,173
Median credit card debt: $1,645
Estimated amount charged for direct education costs: $2,200
Source: “How Undergraduate Students Use Credit Cards.” Sallie Mae’s National Study of Usage Rates and Trends 2009.

How to make your own financial statement:

This is going to be the very, very basics of making your own personal financial statement.  Reading Rich Dad, Poor Dad inspired me to do this, and though it is an extremely simplified version of the common financial statement prepared by an accountant, it is a simple reminder of your goals and how to get there.

There are only four simple categories that you should absolutely list in your first financial statement: Income, Expenses, Assets, and Liabilities.

Income: List all income that you receive monthly from your work.
Expenses: List all of your monthly expenses.  These are the things that you must pay money for each month like rent, utilities, food, alcohol (if you are the average college student), cell phone bill, etc.
Assets: Things that put money into your pocket. Should be forms of passive income that are secure.  Example: Poor Student No More.
Liabilities: Things that take money out of your pocket.  A mortgage or rent, credit card bills, fruit of the month club.

These are EXTREMELY simplified definitions, but they certainly keep it simple and get the job done.  I’ve found that keeping it simple keeps me focused on my ultimate goal: grow my assets larger than my liabilities (in monetary value) and make my passive income greater than my expenses.

So, put these into four columns and start listing your items with descriptions and amount ($).  Total up the values for each column.

Next, make a prospective financial statement for exactly 1 year after.  What do you want this sheet to look like?  Be sure to keep it realistic though! Work with what you have, but don’t sell yourself short either!

Post both of these statements somewhere where you can see them every day — your wall, mirror, in your closet, on the fridge — and every month make updates on your progress.  As you go along, you’ll find out what works, what doesn’t, and how to optimize your progress.

Don’t freak out if you don’t reach your goals in 12 months! Keep working and figure out why you didn’t hit that goal.

After you reach your 12 month financial plan goals, start setting longer term goals — 3 years, 5 years, and 10 years.  These will be less detailed, but very worth it in the long run!

Peace, love and loans,

Jess

Assets and Liabilities

I recently finished reading Rich Dad’s Guide to Investing, the follow-up to Rich Dad Poor Dad that provides an in depth look into the worlds of business and investing. The book provides substantial and valuable insight into not only the philosophies of the rich, but specific practices and tools to use as well.  I highly recommend this book to those who wish to change their way of thinking and move toward a life of financial freedom and independence.

One of the greatest lessons I learned from Rich Dad’s Guide to Investing is that you do not have to acquire assets through purchasing them.  You should, in fact, learn how to create your own assets.  This got me thinking of my own assets and liabilities on my own personal financial statement.  My assets column doesn’t really have anything in it, and while I stared at that blank column, I felt absolutely worthless.

So, I decided to start thinking about the potential assets I could create and how I could turn the ideas into realities, no matter how crazy or outlandish they seemed. I also found during this process that I do have assets now that I should list.  I started filling my assets column and it now looks like this:

Education - knowledge of international relations, conflict resolution, and development
Passion
Work ethic
Perseverence
Creativity
PSNM (Poor Student No More)

The first six are not putting money into my pocket as of now, but I always want to remember what my REAL assets are. Those characteristics will be the driving force behind my financial success.

My suggestion is to look at your personal financial statement at least once per month and each time, have a short brainstorming session in which you write down ideas for creating assets. Most importantly, you do not need an already existing amount of money to transfer ideas into tangible assets. Use your intellect, experience, creativity and character to find a way to make it happen.

My liabilities column heavily outweighs my assets column in terms of monetary value, but I know that this is only temporary. Don’t sell yourself short and realize what your true assets are — then take it and run with it.

My goal by May 2010 — grow my assets column bigger than my liabilities.

It has been six weeks since my decision to get out of debt before I graduate and since my first post on my introduction to debt.  Since then, I have successfully set up and learned how to use Google Analytics and Google Adsense, learned how to optimize my use of keywords for search engines, and written 14 posts on student debt, debt consolidation, good debt and my plan to get out of debt.

My Progress

• To date, I have made $26.05.

• I have had 115 visits, 188 pageviews, and 91 absolute unique visitors.

• Out of the 115 visits, 14 are direct traffic, 28 are from search engines, and 73 are from referring sites (Twitter, Stumbleupon, Twellow).

• I have increased my Twitter followers from zero to 467 in about two weeks and started tweeting about my journey, which has driven the majority of traffic to my site.

So what’s next?

I am hoping that with more legitimate and valuable content, my site will rise in the search engine ranks under keywords like “student debt,” “student loans,” and “debt consolidation.”  To make this process a bit quicker, I am planning on building links on other websites, encouraging feedback and comments from readers, creating an email list-serv, and continuing to use social media for direct marketing (Twitter, Facebook, and Stumbleupon).  The goal is to increase the amount of “organic traffic,” or visitors that come from search engines.

I am also planning to learn more about online marketing techniques that can be valuable in driving more traffic to my website.  I am very new to online marketing and have not yet figured out how to optimally reach my target audience.

As the weeks go on, I am learning extensive information about student debt and college loans — things that I should have known long before I got myself into this mess.  Ultimately, I hope that this will eventually help others look before they leap into the black hole of student debt.

Peace, love and loans,

Jess

Most Recent Posts:

• October 17, 2009: Student Debt in Politics (1 Comment)
• September 16, 2009: A visceral emotional response to my debt. (2 Comments)
• September 16, 2009: Video Post 3 (4 Comments)
• September 9, 2009: Interest Rates and Debt (No Comments)
• September 2, 2009: How To Build Credit (2 Comments)