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
• 
  

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

10 confessions for the sake of transparency:

1.  I highly dislike twitter. In fact, I loathe it. Quite surprising since I use it. Maybe I’m just not “up with the times.” Maybe I’m just a fan of organic connections between people. Maybe it’s because I just really hate the word “tweet” and every other spawn of it. Whatever it is, I have to admit that I can’t stand twitter, but it is definitely useful in reaching out to people (I’ll cede that point).

2.  I used to think business created every evil in the world. I almost classified myself as socialist once. I sincerely thought businesses were only in it for themselves — and while this is still sometimes true, I think there is a new generation of entrepreneurs who believe in corporate social responsibility and socially responsible products and practices. Business is simply a creation of value, which in turn leads to development.

3. I love expensive sunglasses. I fight against materialism and I preach about being frugal, but I get weak in the knees when I see a pair of designer sunglasses that are obnoxiously large and cover the majority of my face. Hey, we can’t all be perfect. I’m a work in progress.

4. Sometimes I wish I were a brunette so that people would take me more seriously. I hate when people look at me and write me off as a dumb sorority girl (note - I am in no way saying that sorority girls are dumb, just referring to a very false stereotype). It’s made me quite bitter and rebellious. Now I stay blonde just to prove them wrong — and the fact that I can’t afford to have my hair dyed. In fact, I had a guy on my flight to Raleigh ask me if I knew where Kuwait was. Seriously?

5. I can remember the moment I decided I was going to transfer out of NYU. A homeless man puked on me on the subway and I thought to myself, “There’s no way I’m paying for this.” I also mourned for the pair of shoes that gave their life to save my feet from that vile vomit.

6. I put off making my simple financial statement for weeks. IT’S SO BORING.  And it’s really not fun to look at your cashflow. But I finally did it, and it’s worth it.

7. I still haven’t made a more detailed personal financial statement. This may take a lot more motivation and actually having a more experienced person help me.

8. I almost quit poor student no more. My frustrations and my personal dilemmas (I described these in a previous post) really almost deterred me.

9. 25,000 CHILDREN WILL DIE TODAY FROM PREVENTABLE DISEASES. Shameless plug for international development.

10. I am now $45,000 in debt thanks to a new loan this year! Thanks FAFSA and UNC for lowering my grants!

Peace, love and loans,

Jess

As my senior year begins at UNC, I am increasingly aware of the deadline that approaches: Graduation. After this I can no longer enroll as a full-time student at an institution of higher learning, and quite honestly that scares the crap out of me. If I do not have control of my personal finances by that time, I will have to take a job out of desperation. I will fall into the trap of working for a paycheck that goes straight out of my bank account to my expenses, most of which will be student loan payments.

Deferring is obviously an option, but I can only hide for so long from the looming gray skies of student debt.

With the state of the U.S. economy, recent graduates will have much more incentive to apply to graduate and professional schools. It has many short-term advantages — full-time student status, deferment of undergraduate loans, and less stress concerning one’s professional life. In the long-term, it increases skills, education and most likely you will gain immense experience in a very narrow field.

I thought very seriously about applying directly to graduate schools. It was a chance for me to change locations, continue school and avoid my student loans for one, two, even three years. And the chance to go to grad school abroad? Yes, please.

But on second thought and with a bit more analyzing, I knew I could easily double my student debt with just a year of grad school. More importantly though, I know that my true passion does not lie within a grad school. I get antsy just sitting in classes now, eager to be in a more action-oriented environment.

Grad school is a great option for those who have minimal student debt from their undergraduate degree, and those who feel very passionately about their ability to achieve their goals within academia. But if you do not fit these categories, do not let the fear of the recession or entering the “real-world” influence your decisions. You make your own world, and if you let fear drive your world it will inevitably hold you back from achieving not only financial freedom, but your personal goals as well.

There is no doubt that grad school can be a great investment. Especially if you skip the entry-level jobs and go straight into a six-figure salary. How often do you think that really happens though? My sister went to one of the top grad schools for broadcast media and still quivers with fear when her student loan payment is due. Getting a higher paying job does not ensure control of your personal finances.

For me, grad school can wait because one of the major reasons I would go is fear — and I will not let fear increase my debt so greatly or stifle my potential success.

Align your actions with your goals. Analyze your motivations. Question everything.

For more info, check out this great article on the grad school debate.

Peace, love and loans,
Jess

Contrary to my assertions on this website, student debt is not a major problem, according to New York Times writer Jack Madden. The article “Student Debt Rises, but Is Termed ‘Manageable’ for Most,” says that the majority of students who take out loans actually graduate with a manageable amount of debt according to a brief released by the College Board.

A concern arises in reference to the word “manageable.” What exactly do they mean by that? That may mean that you will be able to afford to pay the minimum monthly payment, finally paying off your loans in 30 years. Rather vague, isn’t it?

What if it means that, based on your salary, you can afford to pay your loan payments but can only afford to pay $200 per month for living expenses. Here’s another twist: your job is in New York City. Do you really think that’s “manageable?” I hope you can find a roommate for the refrigerator box you’ll be living in.

Of course, this is all a bit far-fetched, and probably not the scenario in most cases. Graduates usually find a way to make their monthly payments — otherwise the whole model would fail. But being able to make your payments and having the ability to pay off your debt are very separate and different things. Paying off your debt requires more than “manageable” payments — it requires an action-oriented plan toward your own financial freedom.
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.