How to Understand your Student Loans How do my student loans work? (edited from Bill Pratt s Extra Credit: The 7 Things Every College Student Needs to Know about Credit, Debt, & Ca$h)
1. Borrow all federal money first before you even consider private loans. 2. Bankruptcy cannot eliminate your student loan debts. 3. The average undergraduate leaves college with $24,000 in debt- that s $276 a month out of every paycheck for 10 years. 4. Student loans must be repaid even if you drop out of college! 5. Keep an eye on your student loan amounts while you are still in school. You don t want a big shocker after graduation. 6. If you borrow just $250 extra each year for 4 years at 6% you will end up working an extra 120 hours after graduation to pay it back if you make $36,000 per year. 7. Once you graduate, you are usually given a 6-month grace period before you have to start making payments on federal student loans. 8. You will never find a more borrower-friendly loan than a student loan because there are so many repayment options. Contact your lender if you are having financial difficulty. The Truth about Student Loans (edited from Bill Pratt s Extra Credit: The 7 Things Every College Student Needs to Know about Credit, Debt, & Ca$h)
Approved Educational Expenses: Tuition Room and board Fees Books Supplies Equipment Dependent child care expenses Transportation* Rental or purchase of a personal computer What can I use my federal student loan money for?
Federal Student Loans Government loan Borrowing limits Fixed interest rate No payment while in school 6 month grace period Repayment options No credit checks Subsidized / Unsubsidized Tax Deductible Interest Can be consolidated No pre-payment penalty Private Student Loans Unsecured funds provided by banks Variable interest rate May require repayment while in school Based on credit (score) Cosigner Need to shop around READ THE FINE PRINT you could be paying interest on the interest! Federal versus Private
Federal Student Loans Borrow all federal money first before you even consider private loans.
Subsidized do not accrue interest while you are in college because the government is paying the interest for you Based on financial need (FAFSA) Unsubsidized Accrues interest while in college, which means you will owe more when you graduate than the amount you initially borrowed (capitalized interest) Not based on financial need 2011-2012 Interest Rate = 3.4% 2012-2013 Interest Rate = 6.8% Both loan types 2011-2012 Interest Rate = 6.8% 2012-2013 Interest Rate = 6.8% Must file a FAFSA Must complete a Master Promissory Note (MPN) Must complete Entrance Counseling Fixed interest rate Limit on how much you can borrow based on federal limits and each college s Financial Aid Budget 6 month grace period repayment options Subsidized versus Unsubsidized
DEPENDENT UNDERGRADUATES BASE (SUB/UNSUB ADDITIONAL UNSUB MAXIMUM (SUB / UNSUB) Level (year)1 $3,500 $2,000 $5,500 Level (year) 2 $4,500 $2,000 $6,500 Level (year) 3 and beyond $5,500 $2,000 $7,500 WVNCC can only award up to levels 1 and 2 for dependent and independent students INDEPENDENT UNDERGRADUATES BASE (SUB/UNSUB ADDITIONAL UNSUB MAXIMUM (SUB / UNSUB) Level (year)1 $3,500 $6,000 $9,500 Level (year) 2 $4,500 $6,000 $10,500 Level (year) 3 and beyond $5,500 $6,000 $12,500 ANNUAL Federal Loan Limits
DEPENDENCY STATUS Dependent Undergraduate Independent Undergraduate BASE (SUB/UNSUB ADDITIONAL UNSUB MAXIMUM (SUB / UNSUB) $23,000 $8,000 $31,000* $23,000 $34,500 $57,500* *no more than $23,000 in subsidized loans AGGREGATE Federal Loan Limits
Cost of Attendance (COA) Student Loans are Financial Aid! Financial Aid can never exceed COA! 2011-2012 WVNCC: In-State Independent COA $11,134 In-State Dependent COA $8,200 COA minus other financial aid = Loan eligibility Limits per College
Do not have to pay while in college 6 month grace period Scenario 1 borrowed $4000 TOTAL over 4 years Sub Loan @ 6% = $4000 at repayment Unsub Loan @ 6% = $4,720 at repayment Private Loan @ 8% = $5,081 at repayment Scenario 2 borrowed $8000 each year for 4 years = $32,000 TOTAL Sub Loan @ 6% = $32,000 at repayment Unsub Loan @ 6% = $37,760 at repayment Private Loan @ 8% = $40,646 Paying for Your Student Loans (edited from Bill Pratt s Extra Credit: The 7 Things Every College Student Needs to Know about Credit, Debt, & Ca$h)
Entrance Counseling CAN BE DONE EVERY TIME YOU BORROW A LOAN Understand Rights and Responsibilities Interest Costs Repayment options Keep Track of What you Owe Look at the total amount you already owe before you borrow again Review your federal loans online at www.nslds.ed.gov Think about what you are doing when you make purchases with your student loan money: Since most student loans are paid off over 10 years or more, you are essentially paying for your purchases with interest charges that you ll be paying for 10 years after you graduate Smart Borrowing (edited from Bill Pratt s Extra Credit: The 7 Things Every College Student Needs to Know about Credit, Debt, & Ca$h)
Your monthly payment is determined by the interest rate, the amount you borrow, and the number of years it will take to pay off the loan. The more you owe, the higher your monthly payment. The higher your interest rate, the higher your monthly payment. The longer you take to pay off your loan, the lower your monthly payment, BUT you will pay more interest and use more of your monthly income over a longer period to make your payments. Managing Your Loan Payments (edited from Bill Pratt s Extra Credit: The 7 Things Every College Student Needs to Know about Credit, Debt, & Ca$h)
Signing a promissory note means you agree to repay the loan! 1. Standard (Default repayment plan) 2. Graduated 3. Extended 4. Income-Based (IBR) 5. Income-Sensitive 6. Income-Contingent Federal Loan Repayment Options
1. Deferment a period in which repayment of the principal balance is temporarily postponed if you can meet certain requirements In-school No full-time employment for up to 3 years Most Common Economic hardship for up to 3 years Military service 2. Forbearance allows you to postpone or reduce your monthly payment amount for a limited and specific period if you are willing but unable to make your scheduled loan payments for reasons including, but not limited to, financial hardship or illness and you do not meet the eligibility requirements for deferment What if you can t make your monthly payment?
Your credit history will be affected You will owe late fees even for one missed payment After 270 days of missed payments your loan will go into DEFAULT Credit rating will be damaged Denied future educational or consumer loans Could be denied a mortgage, apartment, car, and even employment Entire unpaid balance is due immediately Lose eligibility for federal student financial aid Lose eligibility for deferments Loan is turned over to a collection agency Federal government can take your federal tax refund Late fees, additional interest, court costs, collection fees, attorney s fees, and other costs will increase your debt Wages can be garnished by your employer at the request of the federal government Legal action can be taken against you What happens if you miss a payment?
Don t ignore debt! It won t go away! Your credit history will be affected up to 7 years if you do not repay your loans.
1. What is it? Combine multiple federal student loans into one loan 2. When can you consolidate? During your grace period Once you ve entered repayment During periods of deferment or forbearance 3. What are the advantages? Your monthly payment might be lower Extended repayment period Defaulted loans may be included 4. What are the disadvantages? Total cost may increase due to longer period of repayment = more interest 5. How do I apply? www.loanconsolidation.ed.gov Consolidation Loans
www.nslds.ed.gov 1-800-999-8219 Information about all Student Loans, except Private loans National Student Loan Data System (NSLDS)
How is Interest Calculated?
Interest is a loan expense charged by the lender and paid by the borrower for the use of borrowed money. The expense is calculated as a percentage of the unpaid principal amount (loan amount), which includes the original amount borrowed and any capitalized interest. What is Interest?
Number of days since last payment X Principal Balance Outstanding (PBO) X Interest Rate Factor* = Interest Amount *See next slide Simple Daily Interest Formula
The Interest Rate Factor is used to calculate the amount of interest that accrues on your loan. It is calculated by dividing your loan s interest rate by 365.25 (the number of days in a year). Interest Converted to Decimals 8.99%.0899.0899/ 365.25 8.25%.0825.0825/ 365.25 7.59%.0759.0759/ 365.25 Divide by 365.25 Interest Rate Factor.00024613.00022587.00020780 Interest Rate Factor
PBO = $9,500 Interest Rate = 8.25% (Interest Rate Factor =.00022587) Last Payment of $160 made 32 days ago How much of the payment went towards your principal balance? 32 (days) x $9,500 (PBO) x.00022587 (interest rate factor) = $68.66 of payment applied to interest $160 (payment) - $68.66 (interest) = $91.34 applied to principal loan balance New Total: $68.66 towards interest and $91.34 toward principal balance New principal loan balance = $9,408.66 Practice Example