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 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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Finances, Roommates

Splitwise

If you don’t watch TV that often, but your roommate does, is it fair for you to pay half of the cable bill?  If you have the bigger room in the apartment, is it fair for your roommate to pay half of the rent?  Well, with Splitwise, you can make sharing expenses a more fair, and less awkward process.  Recently we sat down with Splitwise CEO, Jon Bittner, about what his company does and what Splitwise can do to make splitting the bill fun and easy.

What is Splitwise?

Spitwise is a great way for roommates to keep track of their shared expenses, make sure everyone pays their bills, know who owes who, and make living with room­­mates a harmonious and fun experience.

What is the philosophy behind Splitwise?

At Splitwise, we want to make it stress-free to split expenses with your friends.  One part of that is that it’s really fun and easy if people don’t have to be constantly paying each other.  It’s annoying to collect money from your friends because no one ever has the right amount of cash on hand and sending checks or e-payments around is all very annoying.  What we have created is a virtual account or tab for your group that makes it really simple to keep track of who’s paid for which bills, make sure everyone has paid their fair share every month, and then they can settle it up.

Another thing that we do, that might be helpful to students who are looking for apartments on JumpOffCampus, is to help you to figure out how you should split the rent with your roommate.  Our philosophy about rent splitting is that it is really awkward to haggle about how much each person should be contributing to rent.  As soon as you decide to share a new apartment, you can just put in the variables and our rent calculator will give a neutral recommendation for how much each bedroom should cost. It takes into account bedroom size, windows, whose sharing a room, and some other stuff like that. At Splitwise, we want to make it really fun and enjoyable to live with roommate.  Splitting up the rent for roommates is just one way to avoid a fight. We’re very excited to have JumpOffCampus feature it on their site.

How did Splitwise get started?

A few years ago I was living with my then-girlfriend, now fiancé, and we had a roommate named Tory who was wonderful.  We had agreed to split the rent equally (each person).  It was an expensive place in Boston; we each had to pay, I think, $800 a month for this really nice place. It seemed fair because we had a huge bedroom and Tory had a normal-sized bedroom.  It seemed fair to do it this way – we had a lot of space, maybe twice as much space as her.  But I started to think, was that fair?  Was I being unfair to my friend?  I thought about it, and so I created a survey and sent it to my friends asking a bunch of hypothetical questions about what would be fair for all these different variables.  Some of them were about the situation that I was in, and some were just in the abstract.  When I put it all together I decided to create a little rent calculator that would incorporate all of that data I had just taken.  I put that on the Internet and people have just loved it.  We’ve had over 100,000 people use it, even just in the first month, and hundreds of thousands more since.  It’s a great tool and I know that people get a lot of value from having some suggestions, some sort of neutral arbitrator or neutral third party, that can recommend something when you’ve never done this before, or even if you’ve done it before but you haven’t been in this exact situation.

What do you believe is the hardest part of splitting the bill?

There’s doing the math, having the cash on hand (the exact change which no one ever has), and the awkwardness of “Did you put in enough?”  “Why are we short? Did you have an appetizer?”  “Oh, there’s too much money.  Who does it go back to?”  That could be for a restaurant bill, of course (a common one), or even for like a utility bill when you don’t know why you’re paying so much for the cable and you don’t watch it.  The best thing to do with sharing is to make sure you know what you’re getting into, have a good sense of expectations. And it’s obviously good to discuss how bills are getting split in advance, even if you’re not going to have a formal roommate agreement.

What value do you place on providing people an easier way to split the bill?

I see the value in the relationships saved or in just having a more fun experience; where you feel like you have this little virtual bar tab or house account and you don’t have to think about money so much. It’s always fun to not to have to think hard about money and not have it be so transactional.  All of the people on our team were doing something like Splitwise before we came together and made an official version with the app and the website.

In general what factors would you say lead to a bad roommate experience?  A good roommate experience?

I think bad communication is always the root of it . . . or just terrible people.  If you have people who are very stubborn or unworkable then sometimes it will ruin everything.  Of course, people who are lazy and who don’t do their share are always the people everyone gets so frustrated with, and I think they make bad roommates unless everyone has the same attitude.  Mostly it comes down to picking people who you can communicate well with and those who have a shared set of expectations.  It’s also really great not to have to be explicit about your expectations.  No one really wants to sit down and make a roommate agreement.  I know some people do that and that’s a sensible idea, but it’s not necessarily very fun.  I’ve never made one. I think bad roommate experiences come from bad communication, people who don’t do what they say they do, or roommates who are just horrible people.

Good roommate experiences can be so wonderful.  Actually, it’s much nicer than living alone; living alone can be very isolating and roommates are like free friends.  So if you pick people who trust, people whom you think are fun or who are sensible (bare minimum sensible), I think it can be very pleasant.  Even if they’re not going to be your best friend, they could be really positive influence in your life.  We hear all kinds of good stories as well as bad; most of the bad stories come when people haven’t talked with each other and have started assuming what the other person is thinking.

How do you feel about best friends rooming together?

It can definitely work well; it’s certainly a risk.  I think that it’s a good idea to do it on a short-term basis first.  A good test is to go on a trip together.  That’s also a good test for people whom you want to work with.  When you travel you experience most of the same troubles.   How do we deal with the money?  How do we deal with the space?  “I want to go to bed now.” “I want to invite people over.”  Traveling is a good way to test it, but it’s definitely a risk.  I think it’s easier to make friends with your roommates than it is to have your friends become your roommates.

Can you share an experience you had with a bad roommate?

Fortunately I’ve only had one really bad experience with a roommate, but maybe it’s too colorful for the Internet, if such a thing is possible.  I probably wrote my best essay in college about how frustrating I found him.

Who can use Splitwise?

Splitwise is great for anyone who has friends, but it’s especially good for roommates and couples too.  The people who love it best are the people who have roommates that they’re really tight with and they share a lot of things with.  So people who are like, “Let’s all go out and I’ll get groceries for us” or  “We’re going to throw a party, and I’m going to buy all the beer this time.”  Or couples who are like, “Every time we buy plane tickets together, I just throw it up on Splitwise and I don’t have to try to move around big chunks of money.”  I know couples who are unmarried (who don’t have shared bank accounts), and roommates love it.  It’s great for sharing vacations too.

How can people access Splitwise?  How can they get started?

If you’ve got a room and you’re not sure how to split up the rent, check out our calculators (Splitwise.com/calculators).  If you’ve been living in a place and you’re trying to keep track of all the bills go to Splitwise.com or in the app store at Splitwise (the iPhone or the Android app store).  Just search for Splitwise.

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