Ask the Expert, Budget-Friendly Ideas, Student Life

ASK THE EXPERT: Money Management for College Students

One of the most important responsibilities students will have to take on when they go off to college is managing their own finances.  While some students may have already begun to take on this type of responsibility, many others have not.  This is why we think it is important for students (and their families) to know what they should be considering as students go off to college and become more independent.  To find out more, we spoke with Paul Golden, spokesperson for the National Endowment for Financial Education (NEFE).

What are the biggest problems students face when they first begin managing their own money?

NEFE research finds that 7 in 10 college students will engage in risky financial behaviors that could lead to serious financial trouble. These behaviors include not paying bills on time, not making full payments on credit cards, maxing out credit cards, borrowing from credit cards, and taking out payday loans. Students who are more likely to avoid financial problems are those who have had regular discussions with their parents about managing money, have had some form of financial education before leaving the nest, and have had some form of income (from a part-time job) that has given them the experience of managing their own money.

What is the best way for students to set up their banking so that they (and their parents) can track their finances?

The first bank account a college student has should be set up jointly with their parents. This allows a parent to monitor the account and help the children balance their checkbook. If a parent has access to their child’s account, they also may be able to recognize poor spending decisions and help counsel their child to make better choices.

Look for a bank or credit union that offers checking, savings, and preferably, a debit card. Some banks provide special deals such as free debit cards, checks or ATM use to students and young adults. Once your child opens an account, make sure he or she understands how to keep track of their spending and knows about any related banking fees. These include minimum deposit fees, overdraft charges, teller fees and extra charges to use an ATM not owned and operated by their bank.

What are some key things students should know when it comes to managing their own finances?

The earlier students begin working on understanding their finances, the greater the benefits they will experience. The key things young adults and college students need to understand when it comes to personal finance for their age group are:

  • Cash management (establishing a budget)
  • Spending wisely (understanding the difference between needs vs. wants)
  • Having a reserve for unexpected expenses
  • Using credit responsibly
  • Using student loans only for education-related expenses

Are credit cards a smart idea for students?

A credit card can be an effective tool to managing money, but without a solid understanding of how it works, a student quickly can get into financial trouble. There are a few basic things a student needs to understand about credit before opening an account, including how interest rates impact the ultimate price you pay for goods or services; what credit limits are and what fees are imposed if you overspend; the importance of on-time payments; negative impact on credit score if payments are late; and what kinds of purchases are appropriate for credit cards.

Alternative options for parents who want their children to have access to credit in case of an emergency are a prepaid credit card, which works much like a debit card; a bank-secured credit card, with the card’s credit limit generally equal to the amount of money in the child’s savings account; or adding the child to the parent’s account.

What are some of the biggest problems students experience upon their graduation when it comes to managing their own money?

Some of the problems recent graduates experience in terms of managing their money are the challenges many Americans face on a day-to-day basis. These include not having a budget or a savings plan, not saving for short- and long-term goals, understanding the difference between needs and wants, exercising restraint when it comes to making impulse purchases, using credit responsibly, and not having a reserve account. Unexpected expenses happen to everyone. An emergency savings account provides peace of mind, but also lessens dependency on credit when unforeseen circumstances occur.

What is your advice to students (and their families) looking to getting ready for college and getting started on managing their own finances?

NEFE research has proven that parents have the most influence over how children will learn to manage their money, more so than taking a course in finance and having their own income to manage. Therefore, teaching kids about money must start in the home. It’s up to parents to recognize that they are teaching their kids a life skill that they will use every day throughout their lifetimes.

Parents should:

  • Teach financial lessons early and often
  • Role model by setting a positive example
  • Teach kids how to set a budget
  • Make sure children understand the difference between needs vs. wants
  • Teach children the time value of money and the importance of saving

Young adults should seek out information outside the home as well:

  • Talk to people at school
  • Financial aid office
  • Student life office
  • Tap into other campus resources

More About NEFE

The National Endowment for Financial Education provides a free resource to college students and their parents that covers the basics on starting to manage money. 40 Money Management Tips Every College Student Should Know can be found online at www.smartaboutmoney.org.

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Ask the Expert

ASK THE EXPERT: Why Invest in Student Housing?

In an article we read by Amy Wolff Sorter at GlobeSt.com, the student housing sector has become a rather popular one in which to buy and sell due to rising enrollment rates and diminishing supply of on-campus options.  To get an insider look at some of the other draws (and disincentives) for landlords, property owners, and investors when it comes to student housing, we spoke with RI student property manager, Diane St. Laurent.

What do you believe sets student housing apart from other types of investment properties?
As an investor, student housing is desirable because rent payment is reliable especially when the landlord has the parents of the student secure the terms of the lease.  Another positive is that demand for student housing is always high.

Is there an advantage for investing in smaller scale properties for student housing versus larger scale properties?
When the landlord can establish a relationship with the students, so open communication can exist, then problems as they arise can be easily resolved.  Building communication is easier with smaller properties.  Large properties can impact the landlord-tenant relationship that is so important to build trust and mutual respect.

What amenities do you think are essential for student-leased properties to offer?
A fixed rent price that includes utilities is beneficial, if possible.  This helps students manage their finances and ensure the property is being maintained in terms of heat and electricity.
Students sometimes require furniture to be supplied, so if basic bedroom furniture, living room and dining room furniture are supplied, the number of prospective students may increase as a result.  This opens the door for exchange students from different countries and/or out-of-state, because these students may not be able to travel with this type of furniture.

What would you say is appealing about investing in student housing?
Steady increase in student demand.

What would you say is unappealing about investing in student housing?
Some undergraduate students (freshman, sophomore, junior) are not really ready for this type of responsibility.  Student choices usually reflect in them not taking care of the property; additionally, their social lifestyles sometimes lead to damage to the property and them being a nuisance to the neighbors.

What are some of the pitfalls associated with student housing?
When the landlord and student’s expectations, regarding respect of the property, are out of sync.

How do you believe the recession has impacted these kinds of investments?
My experience is that supply and demand has changed related to rent prices.  On one hand, there is an increase in student demand, but at the same time, students have fewer dollars to spend on rent.  There is a lot of competition for investors of student housing.  First, on-campus housing (dormitories and university apartments), private on-campus housing, off-campus housing, and finally student computers.
It comes down to what the student can afford and the individual student behavior.  Essentially, what are students looking for in housing?  This places added pressure on the investor to find ways to differentiate their property from all the rest.  Additionally, what student market the investor is looking at targeting has to be answered as well.

Do you believe that making an investment in student housing is worthwhile?
Yes I do.  It needs to be managed as a business, but at the same time, investors have to embrace the responsibility of helping students make good choices so they can assimilate to independence, maturity and advance their knowledge all at once.

What should property owners and investors know when it comes to owning and investing in student housing?
Students are young adults finding their way to independence, and sometimes their lifestyles are incompatible with the expectation of the landlord and the rules of the house.

What are some difficulties you often encounter when interacting with student tenants?
Sometimes the student is just not mature enough to be living in something other than a dormitory.

What are some important things to consider when interacting with student tenants?
Take on the mentor role by treating students as adults and hold them accountable for their decisions.
With that being said, I would emphasize student safety as the top priority.  This means landlords should have house rules documented, fire alarm inspections, routine heating and electrical system maintenance checks, and door locks changed between tenants.

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Ask the Expert, Student Life

ASK THE EXPERT: Internships

Photo from money.howstuffworks.com

When you’re looking to get some field experience, an internship is a great way to “get your feet wet.”  However, many students may not know where to begin, or what they should do to get one.  This is why we decided to speak with expert, Lisa Ferns, Career Advisor and Internship Coordinator in Career Services at the University of Rhode Island, about what students should know about finding internships, the interview process, and landing an internship.

When should students start looking for internships for the fall?  Spring?  Summer?

Students seeking internships should give themselves 2-4 months prior to the start of the semester to find, interview, secure and select an internship.  If students are seeking credit they need to inquire with the appropriate department at their college/university at the start of [class registration] for the following semester.

What should they be expecting when they apply for an internship with regards to documentation?

Students should expect to submit a resume, cover letter and reference page.  This may not be the case in all instances but a student seeking an internship should be prepared to supply these if required by an employer.

What are some red flags students should watch out for when applying for an internship? 

  • Students need to be aware that most recruiters paint their organization in the best possible light and they need to determine whether or not the organization will be a good fit for them and their internship/learning objectives.  Asking pointed questions based on research and having an understanding of individual needs will assist a potential intern to evaluate the internship objectively.
  • Valid information regarding the company should be available when researching.  Look for an actual contact person and company email.
  • Internships should be learning experiences that are supervised and have a reflective piece.  When interviewing, ask about the specific work tasks required of the new hire and how learning objectives can be incorporated into the agenda. You don’t want to be doing “grunt” work or filing all day.
  • I usually don’t recommend internships that require a student to pay any kind of fees.

How many internships should they apply for?

Students can apply for as many internships as they see fit.  Finding and securing the best fit for each individual is the main objective.

How long should they wait to hear back?

If applying electronically, students should wait approximately two weeks before contacting the organization.  If applying by snail mail, a three-week time frame is suggested.

What if they don’t hear back?

It is perfectly acceptable and recommended for a student to “check on the status” of their application if an appropriate amount of time has passed with no response from the company.

How should they prepare themselves for an interview?

Research the company, conduct a self-assessment (know your strengths and challenges), be able to articulate concrete examples of your skills and abilities, conduct a mock interview with Career Services, and practice, practice, practice…

What are some key pieces of advice you would give to someone going on an interview for an internship?

Be comfortable and very familiar with your resume; have an understanding of the company and its culture, do your research and a mock interview with Career Services (practice, practice, practice).  Also, have 3-5 questions prepared that reflect your research and needs, and ask the employer these towards the close of the interview.

If the company calls them back for a second interview, how should they prepare themselves?

Be prepared to meet with a variety of people within the company and to delve deeper into the questions asked previously.  Otherwise, all the rules remain the same as for the initial and second interviews.

If they have multiple internship offers, what should they do?

Students should have a solid understanding of their time/geographic restraints, learning objectives and goals.  They need to evaluate the experience they will have within the organization as well as the kind of supervision they will receive.

How should they prepare themselves for their internship?

You prepare for an internship similar to the way you would prepare for a job.  Try to research the company and complete all necessary forms and paperwork for your college/university ahead of time.  Know who your supervisor will be both at work and at school, and plan accordingly for transportation, mid and end of semester reviews, as well as for a balance of academics and work.

What should students wear to their internship?

It is best to wear business attire initially and then, once established within the organization, a student can acclimate to the organization’s environment accordingly. 

What are some tips you have for students on the first day of their internship?

Look, listen and learn; on the first day it is good to get a sense of your surroundings, observe the people and the culture of the work place and try to absorb as much as possible.  No doubt, newcomers may be overwhelmed and the first day of an internship is not the appropriate time to make bold gestures.

How can students make the most of their internship?

Ask questions, take the initiative and become involved.  An internship is a learning experience and by asking questions you further expand your knowledge base.  Employers expect that interns don’t know everything and hopefully they will want to instruct or teach students the correct ways to complete tasks.  Likewise, employers are not familiar with the rate at which a new intern can grasp concepts or complete assignments. Therefore, if you complete all that is assigned to you, do not hesitate to ask as to how you can be of further assistance.  If you want to know more about a certain department or process and it is not within your job description, ask if you can shadow or conduct an informational interview with people from that department.  Many companies have philanthropic affiliations or recreational teams; join in these events or groups to expand your network of contacts.

What should students avoid while working at their internship?

Always have goals that you want to achieve within the internship experience.  Try to avoid being passive within the internship by taking the initiative.  Do not be a “know-it-all” and listen carefully and thoughtfully to supervisors, co-workers and colleagues.  Be cognizant of the employer policies, adhere to them and try to never to be unreliable.

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Ask the Expert, College Planning, Finances

ASK THE EXPERT: College Financial Planning, Part 5

For the last part of our college financial planning series, we wanted to know what students should consider when they are repaying their loans and what they should do if they have accrued a large amount of debt.  We once again spoke with Mark Kantrowitz, publisher of FinAid.org and FastWeb.com, to help us answer these questions.

The first thing Kantrowitz advises is that if a student can make the required monthly payments and accelerate their payment of the loan, then they should consider making extra payments on the loan with the highest interest rate (after making the required payments on the loan). While not everyone can do this, students who can will pay off their loan earlier, reduce the interest accrued on the loan, and ultimately save a significant amount of money.

If a student runs into financial hardship and is unable to make their monthly loan payments, Kantrowitz advises students to speak with their lender immediately to find out their options.  For federal loans, in particular, there are a variety of options that will help them to continue to make payments without causing too much financial strain.

The first option for federal loans is a temporary suspension of repayment, such as a deferment or forbearance.  Kantrowitz explains that this is an option best suited for those who experience temporary or very short-term financial hardship, which could include things like short-term job loss, mental leave, maternity leave, etc.  The problem with this option is that the interest on the loan will continue to accrue on at least a portion of the loan, which will increase the size of the loan.  However, Kantrowitz explains that this will not be a major problem should one require this assistance for only about 3 or 4 months, as not much interest will have accrued over that time.  He advises that students not extend this type of assistance for much longer than that, and explains that this type of assistance will also have only a 3-5 year limit (depending on whether it is a deferment or forbearance).

For those requiring more long-term assistance on their loan, Kantrowitz advises students to choose an extended or income-based repayment plan. The extended repayment plan will reduce the monthly loan payment by extending the term of the loan.  For example, if a 10-year unsubsidized Stafford loan’s repayment term is increased to 20 years, this will cut the monthly loan payment by one-third.  However, Kantrowitz explains that this will also double the interest paid over the term of the loan, and will ultimately increase the total amount you pay on the loan.  “The longer the term of the loan,” says Kantrowitz, “the more you’ll pay.”

The second long-term option for repayment would be the income-based repayment plan.  This repayment plan will base the monthly loan payment on 15% of one’s discretionary income.  According to Kantrowitz, discretionary income is defined as the amount by which one’s income exceeds 150% of the poverty line.  Therefore, if your income is below that amount, your monthly loan payment would be $0.  However, this option also extends the term of the loan and can end up increasing the amount you pay over time.

According to Kantrowitz, there are a few benefits to choosing the income-based repayment option.  He first explains that this is a good safety net should one run into financial difficulties and become unable to make monthly loan payments.  This option is also beneficial in that after 25 years of repayment, all remaining debt will be forgiven (a feature not offered by private lenders).  In fact, a new version of the income-based repayment will reduce the percentage of discretionary income charged from 15% to 10%, and it will shorten repayment from 25 to 20 years before the remaining debt will be forgiven.  Kantrowitz also explains that should one work in the field of public service [jobs such as a teacher, public defender, prosecutor, member of the military, city, state, or federal worker, or for any 501(c)(3) charitable organization], then all remaining debt will be forgiven after 10 years of repayment.

According to Kantrowitz, students should avoid defaulting on their loans as this can greatly limit their options.  In fact, in many cases, it will actually get much more difficult to repay the loan as there are many ways in which the debt will continue to be collected.  One way in which this is done is through a wage garnishment of up to 15% of total discretionary income.   This can also be done through the interception of federal and state income tax refunds.  On top of this, there will also be an increase of the term of the loan by almost 100%, in that 25% of each payment made (whether voluntary or involuntary) will be used to pay collection charges.  Therefore, a student will not only have to pay off the principal of the loan and the interest, but also the collection charges that come with defaulting on the loan.

Overall, there are things students can do before they run into trouble paying back their loans.  As mentioned previously, talking to one’s lender is perhaps the most important step whenever they are experiencing financial difficulties or hardship.  While their options may increase the amount they pays on the loan, it will prevent students from both going into significant debt and forcibly making payments on their loans.  By choosing to repay loans in these ways, students can greatly limit stress and misfortune by repaying their loans in the way that is right for them.

 

 

 

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Ask the Expert, College Planning, Finances

ASK THE EXPERT: College Financial Planning, Part 4

For the fourth installment of “Ask the Expert: College Financial Planning” series, we wanted to know how college housing choices effect financial aid decisions. To find out more, we spoke again with Mark Kantrowitz, college financial planning expert and publisher of FinAid.org and FastWeb.com.

According to Kantrowitz, room and board are factored into the cost of college attendance, making it an expense covered by a student’s financial aid package. If a student chooses to live on-campus, their room and board would be based on the dormitory fees and the standard meal plan fee. If the student chooses to live at home with their parent(s) or guardian(s), rarely will they receive any financial aid for their housing accommodations.

If the student lives in an off-campus property (other than at home), the student will be afforded an allowance within their financial aid package to cover the cost of their housing. However, this price will be an arbitrary average rent price that is based on occasional rent surveys, and as Kantrowitz explains, universities are very reluctant to change these figures once they have been set. This means that if a student chooses to live in a property that is more expensive than the housing allowance, the university will not alter their allowance to accommodate the greater price. The only circumstances in which Kantrowitz sees this change being made is when the student has extenuating circumstances, such as a disability or having a dependent, which would require them to choose a more expensive residence.

For this reason, Kantrowitz advises students to try to stay within their budgets when it comes to off-campus housing. He explains “Just because you have an allowance that says you can pay up to this amount per month for rent, doesn’t mean that you should spend that amount. This is because in most cases the money that you’re spending on your living expenses is going to come in the form of loans, not grants.” By spending up to the allotted amount or above that amount, this will not only increase the student’s expenses per month, but it will also increase the amount of debt the student will have to pay off when they graduate.

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Ask the Expert, College Planning, Finances

ASK THE EXPERT: College Financial Planning, Part 3

For the third installment in our college planning series, we wanted to know what were some of the biggest issues encountered by students when applying for financial aid.  Once again, we spoke with Mark Kantrowitz, publisher of FinAid.org and Fastweb.com and expert on paying for college, to give us his perspective on this issue and how students can maximize their federal student aid.

According to Kantrowitz one of the major problems he identifies is that students often do not fully understand the reality of the loans they receive.  Kantrowitz explains that students will sign their name to a loan so long as it enables them to fulfill their dreams.  Many believe that they will figure out how to pay back the loan when they graduate from college.  However, this is a major problem, explains Kantrowitz, as it is much more difficult to figure out how to pay back the loan after you have incurred that cost, rather than before.   He urges that “If you’re choosing a college and your dream is to study a field that doesn’t pay very well, you need to make sure you borrow less to match your expected income when you graduate.”  While this could mean going to a cheaper school, it could also mean just limiting other costs while attending school.  Kantrowitz suggests buying used textbooks, selling textbooks back to the bookstore, taking fewer trips home, and eating out less.  He advises  “You have to live like a student while you’re in school so that you don’t have to live like a student after you graduate.”

Another major problem Kantrowitz identifies is that student often will not file their Free Application for Federal Student Aid (FAFSA) early enough, and will consequently receive less financial aid.  Instead he urges students not to wait until they have filed their income tax information, but rather file their FAFSA based on projected income information and their previous income tax information.

To maximize financial aid with FAFSA, Kantrowitz urges students to be aware that income is weighted much more heavily than assets, and assets in a child’s name count much more heavily (about 20% are counted against aid eligibility) than those in the parent’s name (5.64% or less is counted against aid eligibility).  He explains that if you currently have a Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA) account to help save for college, you may want to consider moving the money to a custodial 529 college savings plan account.  Kantrowitz advises that this is the most tax advantageous ways of saving for college, and that this will help students to maximize the financial aid they receive.

By saving, being frugal and being mindful, Kantrowitz explains that students can make the most of their experience, while still being able to afford college.  It is important that students stay informed when it comes to paying for college so that they may make decisions that are right for them.

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Ask the Expert, College Planning, Finances

ASK THE EXPERT: College Financial Planning, Part 2

For the second installment of “Ask the Expert:  College Financial Planning” series, we wanted to know what types of loans are available to students, and what are the distinctions between each of these types.  To find out more, we once again spoke with Mark Kantrowitz, an expert on paying for college, to give us the lowdown on loans.

Kantrowitz explains that there are two major types of student loans:  federal education loans and private student loans.  According to Kantrowitz, the federal loan has greater availability, better repayment plans, and is generally cheaper than a private loan.  He advises that the federal loan should be a student’s first choice when applying.  They will also be much easier to obtain in that they are offered through the Direct Loan program where students obtain federal loans through their college or university.

There are several different types of federal loans that are available to students.  The most common is the Stafford loan, in which there are two versions:  the subsidized and the unsubsidized.  According to Kantrowitz, there are a few main distinctions students should note when applying for subsidized and unsubsidized federal loans.  The first is that the subsidized version is based on financial need, while the unsubsidized version is not.  Even wealthy students can qualify for the unsubsidized Stafford loan.  Second, with the subsidized version, the government will pay the interest on the loan while the student is in school, and with the unsubsidized version, the government will not.  Thirdly, the interest rates for subsidized loans will be half of the rate (3.4%) as the rate for unsubsidized loans (6.8%) until tomorrow, in fact.  While there was a great deal of debate over how the government could afford to keep the rate the same, Senate majority and minority leaders  established an agreement that would enable the rate to remain at 3.4%.   According to Kantrowitz, this agreement will modify pension insurance premiums and drop eligibility for subsidized Stafford loans from students who are taking too long to graduate.

The other major distinction between subsidized Stafford loans and unsubsidized Stafford loans is the limit to which a student can borrow.  For the subsidized Stafford loan, a student may borrow up to $3,500 for their freshman year, $4,500 for their sophomore year, and $5,500 each for their junior and senior year.  Should the student require more aid, they may apply for unsubsidized loans.  However, there are limits as to how much one can borrow, either with a combination of subsidized and unsubsidized, or just from unsubsidized alone.  Overall, the limits are $5,500 for dependent freshmen students, $6,500 for dependent sophomore students, and $7,500 each for dependent junior and senior students.  If the student is filing as an independent, or their parents have been denied a loan, the borrowing rate is increased to $9,500 for their freshman year, $10,500 for their sophomore year, and $12,500 each for their junior and senior years.

The second type of federal loan available to students is the Perkins loan, which is given to students with exceptional financial need.  However, Kantrowitz explains that this is a very small loan program, and most students will not receive this type of loan.  Those students who do receive this type of loan will obtain between $1,000 and $2,000, on average.

The last type of federal loan Kantrowitz identifies is the PLUS loan, which is granted to the parents of undergraduates and to graduate students.  In either case, there is a 7.9% fixed interest rate, and eligibility is dependent on the borrower’s credit history. The PLUS loan also has a limit up to the full cost of education, minus any other aid received.  The Plus loan program is very popular, and only about one-fifth of those who apply will be denied due to bad credit.

While Kantrowitz explains that federal loans should be a student’s first choice, he also explains that a student may take out private loans should they require more funding.  However, Kantrowitz warns against some of the major pitfalls with private loans and denotes the differences between the federal and the private loans that should play into a student’s decision.    The first is that private loans are determined by individual lenders (not by the government), therefore these loans will vary significantly and will often have variable interest rates.  While some are introducing fixed interest rate options, this is something that students should consider when applying for private loans.

The second major consideration is that eligibility for these loans depends on one’s credit history and credit score.  In fact, Kantrowitz explains, more than 90% of these loans require a creditworthy cosigner as many students do not have any credit history or if they do, it is oftentimes very poor.  The higher of the two scores will then determine eligibility and the cost of the loan.  Kantrowitz gives us the example that if the loan has a variable rate, the interest on the loan would be a combination of a variable index plus a fixed margin, which depends on one’s credit score.  This means that the higher one’s credit score is, the less they will have to pay in interest on the loan.

Kantrowitz advises that “Your debt at graduation should be less than your expected annual starting salary.”  He explains that ideally, students should not be borrowing more than $10,000 each year for college.  If total student loan debt is less than annual income, the borrower will be able to repay their loan in 10 years or less.  Kantrowitz explains that “If your debt exceeds your annual income, you’ll struggle to repay the loan, and you’ll have to alter your repayment plan by income-based repayment or extended repayment in order to afford the monthly loan payments.”  This means that students will not only be stretching out their repayment, and therefore the amount of time they are in debt, but they will also be increasing the cost of the loan.  This means that they may still be repaying their own student loans when their children are looking to attend college.

For more information on financial aid and scholarships, visit www.finaid.org and www.fastweb.com.

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