Why are you here today? Credit and Budgeting for Graduate Students Professor Margaret Reed, Ph.D., CPA Lindner College of Business You are interested in preventing or avoiding financial problems in the future You have entered a period of some financial stress and are looking for some suggestions to help things from getting worse You know you have major debt and cash flow problems that are looming and are looking for a simple solution How do people get into financial difficulties? By spending more than you have By signing contracts you don t understand By being overly optimistic Once you get behind, the system works against you. Personal Money Management: Keys to Success Know your current financial situation Think about where you want to end up Figure out how to get there Don t fall into various financial traps along the way 1
Agenda for Graduate Students Goals and Budgets Setting goals Creating a budget Monitoring your spending Borrowing Credit cards Student loans and loan consolidation Credit record and credit score Setting Financial Goals Goal setting is an important part of good money management Organize goals by short, intermediate and long-term Make the goals as specific as possible Change the goals whenever necessary Creating a budget Gather your financial records for the past quarter, six months or one year Accumulate the data so that you know what your income and expenses were Use an Excel spreadsheet or start to use Quicken or Microsoft Money Project your income and expenses for the next period, decide where you can cut back Ongoing monitoring required Once you have a budget, then you have to keep track of your spending to see where you were able to stay within budget and where you were not Your goal is to make a realistic budget, because then you can plan where the money will come from rather than haphazardly spend using your credit cards Be sure to include some budget slack 2
Credit Cards Understanding how credit cards work Revolving loan, grace period and minimum payments Credit Limit Annual Percentage Rate Interest Computation Cash advances Annual fees and other charges Credit Card Agreements What is a revolving loan? A revolving loan is one that does not have to paid off each month There is a grace period, usually 14-20 days at then end of the cycle, when no interest is charged at all if the balance is paid in full A minimum payment equal to about 4% of the balance on the card, but not less than the interest charged, must be paid each month Credit Card Limit Annual Percentage Rate (APR) This is the maximum amount you can borrow on the card The credit limit can be increased Once you have a good payment record, the credit card company will offer to increase your limit You can request to increase your limit, which is often a better choice than getting additional cards The APR in the interest rate plus the annual fee (the nominal annual rate does not include the annual fee) If you won t carry a balance, choose a card with no annual fee but a higher nominal rate If you will or might carry a balance, choose a card with an annual fee but a lower APR The APR can be changed with 15 days written notification from the credit card company 3
Interest Computation (approx.) Exact Interest Calculation Take the nominal annual rate and divide by 12 to get the monthly interest rate Multiply the monthly interest rate by the average daily account balance The average daily account balance is calculated in one of several possible ways Average daily balance without a grace period or the average daily balance with a grace period are two of the most common methods to calculate account balance Assume average unpaid balance of $350 for the month and an interest rate of 16% Approximate calculation would result in interest of $4.67 for the month Daily compounding calculation would result in interest of $4.78 for the month Cash Advances Annual fees and other charges Using your credit card to get cash is very expensive There is no grace period for interest charges on cash advances Cash advances can cause your purchase transactions to be subject to finance charges Many cards charge an annual fee, payable up front when you get the card and due each year after Late payment charges for making your minimum payment late Overlimit charges for going over your credit limit 4
Credit card agreements Difficult to read but important to understand Changes to the interest rate can occur with 15 days written notice Changes occur after any event that affects your credit record You buy a house and take out a mortgage You are late with a payment on another credit card or utility bill What if you get overextended? Stop using your credit cards and start paying off the credit card with the highest rate first Consolidate your credit card balances with balance transfers to a zero-rate card, and then pay as much as you can during the zero rate period Seek lower cost financing to pay off your credit cards, but only if you stop using the cards How long to pay it off? Assume you have a $675 balance outstanding on your credit card (interest rate of 17%) and you have $32 per month to pay it off. How many months will it take you to pay it off? Two years and one month Credit Score Basics What is a credit score and why is it important? FICO score ranges from 330 to 830 Average score in Ohio was 685 in 2008 What affects your score? Amount of debt available and used Timely payments on debt and other bills Bounced checks 5
Credit Score Access Sources of funds for Education Your credit score must be provided to you for free once each year, upon request, by each of the three credit reporting agencies Request online or in writing Checking your score will not affect it Having creditors check your score will lower your score Scholarships and grants Parent/guardian or spouse support Work-study employment Subsidized student loans Unsubsidized student loans General loans or credit cards Scholarships and grants Subsidized Student Loans Scholarships from a variety of sources Federal grants, like Pell Grants, FSEOGs, Academic Competitiveness Grants, SMART Grants Awarded based on low expected family contribution Subsidized Stafford Loans Based on financial need, interest currently at 6.0%, repayment begins 6 months after leaving school, no interest accrual during school Unsubsidized Stafford Loans Not based on financial need, interest currently at 6.8%, repayment begins 6 months after leaving school, interest accrued during college is added to the loan principal balance 6
Lifetime limits Know the lifetime limits to make sure you don t run out of money before you finish college Graduate and professional students $65,000 subsidized, $138,500 total(may be higher for certain health professions) Repayment of Student Loans Keep an inventory of your loans Payments on most loans begin six months after you drop below half-time status Repayment options: standard (10 years), graduated (rising pymts), income sensitive (fluctuating pymts), extended (over 25 years, if balance greater than $30,000) Deferment: up to 3 years max while in grad school or if you can t find a job Forbearance for volunteer work like Americorps (no interest accrual for one year) Loan Consolidation Student loan consolidation after you graduate can be a good idea or not, it depends on the interest rates and terms of the loans Calculate the payments under each of the loans and add them up, then compare to the payments on the consolidated loan Many consolidators extend the term of the loan, decreasing the monthly payment but dramatically increasing the amount of interest you will pay over the repayment period Minimizing Student Loans Estimate how much you will borrow over your college years and calculate the payments that will be due starting 6 months after you graduate (these should not exceed 15% of your projected monthly take-home pay) Try to cut expenses to reduce your student loans (live at home, don t get a car, etc.) Try to find scholarship money to reduce your student loans (check with the university, your department, your high school guidance counselor) Increase your income to reduce your student loans (find a work-study position, become a tutor, get a part-time job) 7
Student Loans They stick with you until you pay them off Student loans cannot be discharged in bankruptcy They impact your credit score They reduce the amount of credit you can qualify for They increase the interest rate you will pay on other debt Good luck with your financial future 8