Overview. Develop a plan Understand financial aid Be a responsible borrower Take charge of credit cards Understand your credit Prevent identity theft

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1 Lisa Croat and Andrea Clark Lunch provided by the Higher One Financial Literacy Counts Grant Overview Develop a plan Understand financial aid Be a responsible borrower Take charge of credit cards Understand your credit Prevent identity theft 1

2 Budget A tool for controlling your finances A budget can help you Stay out of financial trouble Know if you re spending too much Avoid impulse spending Achieve financial and savings goals Prepare for emergency situations Manage your student loan obligations Identify your income Track your expenses Check out the result Create a Budget Fixed Expenses Do not usually change from month to month Rent or mortgage Auto insurance Monthly payments on outstanding debt Student loan interest Car loan payment 2

3 Variable Expenses Amount can change from month to month Food and meals Utilities (electricity, gas, water) Phone, cable, Internet Gas for car Clothing and personal items Entertainment (subscriptions, movies, hobbies) Periodic Expenses Occur every few months Car Maintenance Registration Health Doctor visits Prescriptions Student Loans and Budgeting Identify your approximate monthly student loan payment Find your approximate starting salary based on your major Consider all your upcoming expenses 3

4 Monthly Budget Work Sheet Income $2,167 Expenses Expenses $2,651 Deductions $433 Balance $484 Insurance $100 Based on: Major in Education: Special Needs Five years in school $14,500 in federal student loans $8,000 in private (supplemental) student loans Retirement $65 Housing $700 Food $250 Transportation $450 Utilities $150 Entertainment/Communication $150 Personal $100 Student Loan Payments $253 Total Expenses $2,651 Use Money-Saving Techniques Take advantage of student discounts Buy used books Carry only the cash you ve budgeted for the day or use a prepaid debit card Drink tap water instead of bottled water Use coupons, buy generic brands or purchase items in bulk Rent a DVD instead of going to a movie Stick to a basic cell phone plan What You Can Do Now Spend less every day Strategy Estimated Monthly Savings Make your own coffee instead of getting a large gourmet coffee every day. $72 Skip the fast-food lunch twice a week. $48 Rent a dollar movie instead of going out twice a month. $27 Use your dining plan instead of ordering pizza on Friday nights. $54 Rent or buy used books. $47 Downgrade to a basic cell phone plan. $34 Go to free Wi-Fi hotspots instead of paying for high-speed Internet. $50 Total Estimated Monthly Savings: $332 Total Estimated Yearly Savings: $3,984 4

5 Set Financial Goals Identify and write down specific goals Set a deadline Create a plan of action Take action Don t give up Short- and Long-Term Goals Short-term goals could include saving to buy a new outfit or computer Long-term goals could include saving for a car or graduating with as little debt as possible so you can pay off your student loans early 5

6 Fill Out the FAFSA Complete the Free Application for Federal Student Aid* Qualify for financial aid File as soon after Jan. 1 as possible each year enrolled in college FAFSA results determine your financial aid eligibility Iowa Tuition Grant due date: July 1 *The FAFSA is a free form that may be completed without professional assistance online or via paper forms provided by the U.S. Department of Education at Types of Student Loans Federal Subsidized Direct Loan Federal Unsubsidized Direct Loan Federal PLUS (parent loan) Private (supplemental) student loans 6

7 Student Loan Game Plan See real salaries and recommended borrowing limits for people who graduated with your major Learn ways to reduce your need to borrow loans Understand Your Student Loan Payments Federal Loans Private Loans Totals Total Amount Borrowed for College $14,500 $8,000 $22,500 Estimated Interest (Capitalized) $1,011 $1,084 $2,095 Balance at Repayment $15,511 $9,084 $24,595 Monthly Payment $179 $75 $254 Interest Paid $6,980 $10,000 $16,980 Total Paid $21,480 $18,000 $39,480 Estimated capitalized interest is based on past plus present loan amounts amortized over remaining years, including a six-month grace period, and constant interest payments capitalized once at the beginning of repayment Interest rates in this example are 6.80% with a 10-year repayment term for federal loans and 7.75% with a 20-year repayment term for private (supplemental) student loans Federal loans are based on national averages and assume 50% are subsidized and 50% are unsubsidized Origination fees are not factored into this example Student Loan Repayment Chart Federal Unsubsidized Stafford Loan (6.80% Fixed Interest Rate) Standard 10-Year Repayment Plan Maximum Amount Annual Salary Monthly Salary 8% of Monthly Salary Could Borrow $8,631 $719 $58 $5,000 $21,578 $1,798 $144 $12,500 $30,209 $2,517 $201 $17,500 $43,155 $3,596 $288 $25,000 $60,417 $5,035 $403 $35,000 $99,257 $8,271 $662 $57,500 $112,203 $9,350 $748 $65,000 $138,096 $11,508 $921 $80,000 Note: This chart is intended to show only the estimated amount of monthly payments required at various debt levels for Federal Unsubsidized Stafford Loans with a 6.80% fixed interest rate under the 10-year standard repayment plan (120 monthly payments) compared to annual salaries. The 8% of monthly salary amount represents both the estimated monthly payment amount for the total balance outstanding at the time of repayment as well as 8% of a monthly income at various salary levels. The final payment may be more or less than the amount indicated. 7

8 Change Your Perspective Understand the consequences of paying with credit Live off a small amount of cash Prepare early for your career Use Resources and Lower Costs Apply for financial aid Don t automatically borrow the maximum allowed Research grants and scholarships Explore loan forgiveness programs Find paid internships Volunteer in exchange for tuition payments Graduate in a timely manner Rent textbooks 8

9 Cut Living Expenses Live at home Eat what you bought and buy in bulk Find roommates Walk or bike instead of driving Reduce entertainment expenses Stay healthy Raise Your Income Work part-time Tutor other students Take a job where you can study Work over breaks and holidays See if relatives can help Save what you can Apply for scholarships! Reduce Your Student Loan Debt Make interest payments while you re in school Make extra payments While you re in school During your grace period During repayment There is no penalty for prepayment of student loans 9

10 Make Interest Payments To Save Deferring payments may increase your loan balance Make payments to cover your accrued interest Contact your lender or servicer to receive interest accrual statements Make Your Payments on Time Be responsible and make your monthly payments on time once you start repayment This will reflect well on you in the future with a good credit score 10

11 Decide If You re Ready for A Credit Card Do you really need one? Do you have the self-control to handle one responsibly? Will you be able to pay off the balance in full each month? Can you afford the interest charges and other fees? Consider Your Other Debt How much do you have in student loans? What other payments/debts will you have? What can you afford to pay toward credit card debt? How can you avoid using credit cards to pay for daily expenses? Are Credit Cards Worth It? Advantages Disadvantages Convenience High-interest loans Emergencies Added expenses Positive credit history Negative credit history Alternatives to Credit Cards Prepaid credit cards ATM/debit cards Cash 11

12 Be a Smart Consumer Research Compare several offers, paying attention to the length of the offer Look for the lowest annual percentage rate (APR) Recognize that no annual fee and other benefits may not always be the best choice Success Strategies for Managing Your Credit Cards Pay the monthly balance in full If you pay only the minimum required payment You ll pay additional interest It could take a long time to pay off your debt Success Strategies for Managing Your Credit Cards Use your credit card wisely Keep track of how much you owe throughout the month Ask yourself if the purchase is a necessity or something you can live without for now 12

13 Learn About Credit Reports Historical record of how you managed credit in the past Major national consumer reporting agencies Equifax, Experian, TransUnion Each report contains Your personal information Your payment information A record of inquiries Public record information Understand Credit Scores Quick and consistent way for a lender to determine your credit risk Based on information in your credit reports FICO scores are the most widely used scores and range from 300 to

14 How Credit Scores Are Calculated Payment History Amount Owed Length of Credit History New Credit Types of Credit Used Information for this chart was obtained from Fair Isaac Corporation. FICO is a registered trademark of Fair Isaac Corporation. Know Why Credit Matters Typically, good credit equals lower interest rates Save money Bad credit equals higher interest rates May be denied for credit cards or loans How Your Credit History Really Affects Your Everyday Life Compared to a 7.00% loan, an 18.00% loan will cost you: $84 more each month More than $5,000 extra in interest Good Credit History Average Credit History Bad Credit History Amount Borrowed $15,000 $15,000 $15,000 Repayment Term 60 months (5 years) 60 months (5 years) 60 months (5 years) Interest Rate 7.00% 12.00% 18.00% Monthly Payment $297 $334 $381 Total Amount Spent $17,821 $20,020 $22,854 14

15 Build and Maintain a Good Credit Score Keep balances and credit limits low on credit cards Don t open new credit cards that you don t need Limit the number of credit cards you have Don t close established accounts that show a long history of managing credit responsibly Build and Maintain a Good Credit Score Remember that closed accounts will remain on your credit report for up to seven years Reestablish your credit history if you ve had problems in the past Reduce your debt by making extra payments on loans and credit cards Building Credit Without A Credit Card Save bills and records of payment Get a secured loan Make sure loan is reported to consumer reporting agencies Become an authorized user on someone else s credit card 15

16 How to Build a Nontraditional Credit History Demonstrate your history of paying bills on time each month Save copies of bills and records of payments Request detailed reference letters Understand the Consequences Of Bad Credit Higher interest rates on loans and credit cards Higher deposits for services Higher rates for insurance Lost job opportunities Lost housing options Complete credit denial Review Your Credit Reports Review your credit reports annually for accuracy Request your free reports Online at By phone at (877)

17 Correct Errors Immediately Write a letter to the consumer reporting agency Include copies of documents that support your claim Send your letter by certified mail Add a personal statement to your credit report Impact of Identity Theft Identity theft affects millions of people in the United States each year Victims spend time and money to repair damage and restore their good names Protecting yourself is important for your financial future 17

18 How Criminals Get Information Dumpster diving Stealing mail Personal theft Insider compromise Hacking Internet and phone scams What a Criminal Can Do Run up charges on existing credit cards Authorize electronic funds transfers from accounts Acquire new loans in your name Open new bank accounts in your name Obtain a driver s license or passport with your name and their picture Sell your information to other criminals Consequences Do you carry your Social Security card in your wallet or purse? Criminals can steal your card and Obtain a driver s license or passport with your name and their picture Open new bank accounts in your name Acquire new loans in your name 18

19 Consequences Are you required to use your Social Security number as a student or employee identification number? Do any of your passwords contain the last four digits of your Social Security number? Criminals can Hack into computer systems to steal this information Create Internet and phone scams that try to trick you into giving out additional information Protect Yourself Do you regularly receive preapproved credit card applications in the mail? Protect yourself by Securing your incoming and outgoing mail Being aware of calls about accounts you did not open or the arrival of new credit cards you didn t apply for Going to or calling (888) 5-OPT-OUT to be excluded from offer lists Protect Yourself Has it been more than 12 months since you reviewed your credit report? Protect yourself by Regularly monitoring your bank and credit card account activity, statements and free annual credit reports Looking for credit card or loan requests you did not authorize Being alert for unusual or unfamiliar charges or withdrawals 19

20 Protect Yourself Do you throw away your bank statements, billing statements, credit card applications and other sensitive paperwork containing your personal information? Protect yourself by Cross-shredding these types of documents Requesting online bill delivery General Rules to Stay Safe Keep your personal information secure Safeguard your methods of payment Protect your computer(s) Take Action If You Become a Victim 1. File a report with the local police department 2. Contact your bank 3. Contact your credit card companies 4. Contact consumer reporting agencies 20

21 Take Action If You Become a Victim 5. Order copies of your credit reports 6. File a complaint with the Federal Trade Commission 7. Call the Social Security Administration 21