Last week I wrote about federal loan consolidation and emphasized the importance of reviewing offers closely. There are two changes I wanted to point out: (1) Educational Loan Company - mentioned as a good baseline for comparing “medium-term” repayment offers – had required a minimum consolidation amount of $20,000; that has been reduced to $10,000. (2) The North Carolina Program, which had offered a 2% rate reduction incentive, offers incentives totaling 2% for on-time payment and an additional .25% reduction for auto payment (2.25% total rate reduction benefit available).
Contrary to popular belief, private loans can be consolidated … Here is what you should know if you have them and are considering consolidation:
• DO NOT consolidate them with federal loans even if they provide the option.
• They can’t be consolidated until you’re out of school and beginning repayment.
• In most cases, consolidating private loans will leave you with a variable rate loan – it will not typically fix your loan rate [like federal consolidation].
• Keep in mind that the best option is often to leave them alone. How to know?
1) Look at the benefits of your current lender. There are only about ten lenders that will consolidate any private loans. Most companies require that you have loans with them to be eligible to consolidate with them. The amount will vary – some will require that you have one or more loans with them – some will require 50% or more of the consolidating amount be with that lender. Researching your lender is a good start …
2) Shop around. As mentioned, there are a few companies that don’t have stipulations in order to use their consolidation/refinance program. Here’s a published list - http://finaid.org/loans/privateconsolidation.phtml. The lender, not the government, dictates the interest rates provided [most are linked to the Prime Rate or LIBOR].
Private loan are credit-based loans [as is the refinancing/consolidation process]. If you had poor credit when getting the loan initially, consolidating them may make sense if you now have better credit and/or a co-signer with good credit. The difference in rate from poor to excellent credit can be as much as 6%+ with some lenders. If you had good credit from the beginning, consolidation is not likely to provide much benefit to you. There are distinct costs to weigh in the decision. All of the criteria used to assess the ‘utility’ of the original loans should be examined when evaluating consolidation options. See my alternative loan article on the OFS website - http://financialsuccess.missouri.edu/altloanselection.pdf - for more detailed information about ‘cost’ considerations such as fees, potential prepayment penalties, borrower benefits, etc.
December 21, 2006
December 14, 2006
FEDERAL STUDENT LOAN CONSOLIDATION
As the end of the semester is upon us, it seems timely to review the issue of student loan consolidation. This week I’ll address consolidation of federal loans and will address consolidation of private loans next week.
First off, some reminders about some of the recent law changes:
- In-school consolidation is no longer an option. You will need to be out of school in order to be eligible to consolidate.
- You are no longer required to have multiple lenders in order to be able to choose your lender – even if all of your loans are with one lender [i.e., DMU], you are able to shop for the best deal for you.
- You are now unable to consolidate your loans with your spouses’ loans – this was never smart, but is no longer an option.
Other important consolidation considerations:
- You do not want to consolidate Perkins loans [or other loans] if they may be forgiven or repaid by your employer, state, etc. It is ok to consolidate them otherwise.
- If a lender is offering to combine your federal loans with private loans, credit cards, or any other non-federal loan debt, RUN!
- You can AND SHOULD consolidate even if you consolidated prior to take advantage of lower rates. You can always reconsolidate (to combine) loans as long as you have loans to consolidate that haven’t been consolidated prior. As most of you heard last year from me, doing this WILL NOT negatively impact your interest rate. Your overall rate will be a weighted average of your loans rounded up to the nearest 1/8th. For example, if you consolidated $5,000 of loans at 6.8% and $5,000 at 4.8%, you would now have a $10,000 consolidation loan at 5.8% … view resources below to access a calculator to find out your weighted average.
- Some people are afraid to consolidate because their repayment will be extended (thus more interest paid). Keep in mind that you can select the repayment option you want as well as choose to pay whatever amount you want (no legitimate program will assess a penalty for early payoff). Consolidation, however, is the only way to ‘lock’ the rate of otherwise variable rate loans.
“How do I decide where to consolidate – I get so many offers?”
This is perhaps the most important question to address … My experience with consolidation issues over the past several years has drawn me to one primary conclusion – the ‘financially smart’ place to consolidate is not going to be the same for every student; it is largely a factor of how you plan to repay your debt.
(1) If you haven’t borrowed much or plan to repay your debt quickly, you should search for a company that will reward you for doing so. This benefit will normally come as a principal balance credit. For example, Key Bank offers a 5% credit for consolidating with them. Some companies will provide a max credit, as well as other ‘fine print’ caveats, so read the application. While a couple ‘Benjamins’ is nice if this is my situation, if I have a long-term repayment scenario, being enticed by this type of benefit would be a big mistake!
(2) If I find myself in a ‘long-term’ repayment situation (I’m going to define this as 10 years or more of repayment anticipated), the best “deal” for me would be the company that will reduce my interest rate the most. This won’t solely be people that have large debt levels; these will also be individuals that wisely consolidated during the past couple years when rates were at historic lows and they see an opportunity to repay their debt at amazingly low levels and want to minimize that payment while they invest, prepare for homeownership, and focus on other financial goals. Your baseline when comparing rate benefits is to understand that an “average” company will offer a 1.25% reduction (normally .25% reduction for auto pay will be provided along with a 1% reduction in rate for on-time payments [normally of 36-48 months]). As part of the resource links below, I provide links to state programs that provide ‘above average’ benefits, like North Carolina, which offers a 2.25% total benefit for automatic and on-time payments. Information about the programs as well as other information are available below …
(3) The first two scenarios will cover most individuals, however, some individuals will have borrowed too much to pay off quickly; others may be debt averse and don’t want to extend it, so they fall somewhere in between the above two options. In this case, where you plan to repay your debt over an ‘intermediate’ term, review a company that will provide interest rate benefits (these will almost always work out better than the principal credit benefits) where the benefits are offered up front. For example, the Educational Loan Company offers a better than average rate reduction benefits (1.75%), but rather than needing 4 years of on-time payment, .5% of the benefit is up front for auto pay and 1.25% is available after only 24 months of on-time payments.
NOTE. Three things I want to emphasize. (a) These are general guidelines/rules of thumb – run the numbers to see what will make sense for YOUR LOAN SITUATION. (b) Read the applications to see if there are caveats – for example, the principal balance credit by Key Bank is foregone if you defer or forebear the loans during the first 36 months of repayment; Educational Loan Company requires you to be consolidating at least $10,000 total in debt. So read through to make sure the program fits with your situation. Don’t, however, assume that you’re not eligible either. It’s easy to say “I’m not from North Carolina, so I can’t do that” when the reality is that if you’re willing to spend 5 minutes, you can create a connection that will enable you to be eligible for their program. Thus, (c) BE SMART and take a few minutes to figure things out, it will be well worth your time!
*CONSOLIDATION RESOURCES.
- Calculating your loan payment
- Calculating your weighted average
- Consolidation strategies
- Repayment options
- State consolidation programs
* All of these links are available via the OFS site click on the “student issues” button …
December 07, 2006
EXTENDED WARRANTIES - UNWARRANTED?
A lot of electronics will be purchased this holiday season. For those of you that will find yourself in this situation, the inevitable question awaits … “Would you like to purchase our extended warranty?” What do you do …?
What do the experts say … Consumer groups [and common sense] will normally tell you to turn down the urge to accept the offer. A fast-growing $15 billion dollar industry has been built on the likelihood, however, that you’ll succumb to the impulse to say yes. Millions of people each year pay anywhere from 10% to 50% of a product’s original purchase price to extend a warranty. The decision to buy the extended warranty defies the recommendations of most economists, consumer advocates, and product quality experts who warn that the plans rarely benefit consumers and are almost always a waste of money.
What are they … Extended warranties were first introduced as a high-pressure sales tool by large electronics stores in the late 1980s. Now, they are a core product sold by all kinds of retailers and cover a wide range of products. The warranties are technically insurance products where the premium is paid in a lump sum at the time of purchase. Extended warranties generally lengthen the coverage provided by the manufacturer’s warranty on a product. While terms vary dramatically, the plans typically add from one to three years of protection.
How do they work … In terms of service, most warranty providers use third-party contractors to repair broken items, and consumers don’t get to choose who performs a covered repair. Many policies won’t cover accidents or normal wear and tear (the most common causes of breakdowns in common household goods). Most importantly, however, is the fact that the vast majority of extended warranties are never used.
One distinct disadvantage for consumers is its vast difference versus selecting other “insurance-type” products. When buying auto insurance, for example, it’s relatively easy to make an informed purchasing decision by comparing terms and prices among different providers. It’s not nearly as simple a process to comparison shop for an extended warranty at the checkout counter. Not all salespersons are provided a commission for selling the product but be certain that they’re trained to make sure you know about the warranty and its benefits.
By the numbers … Warranty Week, an industry publication, last year estimated that of the $15 billion in premiums charged to consumers in 2004, $7.5 billion went straight into the pockets of the stores that sell warranties. Of the remaining $7.5 billion, it was estimated that only $3 billion was paid in claims by the insurance companies that back the plans (20% payout ratio). Contrast that with the auto insurance industry that paid out $66 in claims for every $100 in premiums during the same year (Insurance Information Institute).
Bottom line … Consumer Reports almost never recommends buying an extended warranty, especially on automobiles. But even Consumer Reports makes exceptions to the rule. Last year, for the first time, they discovered that repairs on some products (namely laptop PCs, treadmills, and plasma TV sets) were common enough and expensive enough that a decently priced extended warranty would make sense. So what does that mean for you? More times than not, an extended warranty is an unnecessary, expensive option – think twice about it when making that purchase this holiday season.
(SOURCE – Washington Post, October 2006)
ADDITIONAL RESOURCES:
- Extended Warranties & Service Contracts (Univ of FL)
- Extended Warranties: Are They Worth Buying? (Univ of KY)
- Take a Hard Look at Extended Warranties (CUNA)
What do the experts say … Consumer groups [and common sense] will normally tell you to turn down the urge to accept the offer. A fast-growing $15 billion dollar industry has been built on the likelihood, however, that you’ll succumb to the impulse to say yes. Millions of people each year pay anywhere from 10% to 50% of a product’s original purchase price to extend a warranty. The decision to buy the extended warranty defies the recommendations of most economists, consumer advocates, and product quality experts who warn that the plans rarely benefit consumers and are almost always a waste of money.
What are they … Extended warranties were first introduced as a high-pressure sales tool by large electronics stores in the late 1980s. Now, they are a core product sold by all kinds of retailers and cover a wide range of products. The warranties are technically insurance products where the premium is paid in a lump sum at the time of purchase. Extended warranties generally lengthen the coverage provided by the manufacturer’s warranty on a product. While terms vary dramatically, the plans typically add from one to three years of protection.
How do they work … In terms of service, most warranty providers use third-party contractors to repair broken items, and consumers don’t get to choose who performs a covered repair. Many policies won’t cover accidents or normal wear and tear (the most common causes of breakdowns in common household goods). Most importantly, however, is the fact that the vast majority of extended warranties are never used.
One distinct disadvantage for consumers is its vast difference versus selecting other “insurance-type” products. When buying auto insurance, for example, it’s relatively easy to make an informed purchasing decision by comparing terms and prices among different providers. It’s not nearly as simple a process to comparison shop for an extended warranty at the checkout counter. Not all salespersons are provided a commission for selling the product but be certain that they’re trained to make sure you know about the warranty and its benefits.
By the numbers … Warranty Week, an industry publication, last year estimated that of the $15 billion in premiums charged to consumers in 2004, $7.5 billion went straight into the pockets of the stores that sell warranties. Of the remaining $7.5 billion, it was estimated that only $3 billion was paid in claims by the insurance companies that back the plans (20% payout ratio). Contrast that with the auto insurance industry that paid out $66 in claims for every $100 in premiums during the same year (Insurance Information Institute).
Bottom line … Consumer Reports almost never recommends buying an extended warranty, especially on automobiles. But even Consumer Reports makes exceptions to the rule. Last year, for the first time, they discovered that repairs on some products (namely laptop PCs, treadmills, and plasma TV sets) were common enough and expensive enough that a decently priced extended warranty would make sense. So what does that mean for you? More times than not, an extended warranty is an unnecessary, expensive option – think twice about it when making that purchase this holiday season.
(SOURCE – Washington Post, October 2006)
ADDITIONAL RESOURCES:
- Extended Warranties & Service Contracts (Univ of FL)
- Extended Warranties: Are They Worth Buying? (Univ of KY)
- Take a Hard Look at Extended Warranties (CUNA)
November 30, 2006
ELIMINATING DEBT (Psychological vs. Financial)
Is one way better than another to get rid of debt? The answer to your question will likely differ depending on who you’re asking.
“FINANCIAL” METHOD. Nearly every ‘financial’ person will advise that debts should be paid off in a particular order: start with highest interest rate and move to the lowest interest rate (done by rolling the payment from one debt to another as debts are paid off). While this method makes perfect sense from a mathematical point of view, more and more people are finding that there is another method [often overlooked] that works better on their psyche ...
PSYCHOLOGICAL METHOD. This system of debt repayment, often referred to as the “debt snowball,” organizes one’s debt from the smallest balance to the largest balance. This method is not likely to save the most money or time (as the interest rates are not likely to align in that manner), but many find this approach very empowering and motivating because they see progress quickly. Focusing on the smallest balance first will accomplish this end.
In both of these methods, pay the minimum amount on all debts except for the “focus” debt (smallest balance in psychological method; highest interest rate in financial method); pay as much as possible on the focus debt until it is eliminated and then approach the next debt in the list with similar intensity.
I’m not arguing against the merits of the financial method as outlined above. Obviously, if someone has the discipline to adhere to the plan, you’ll save the most time and the most in interest expenses. The psychological method merely takes a seemingly more “human” approach to finances that suggests that people will be more likely to stick with their ‘financial diet’ if they see some ‘debt pounds’ come off quickly … that is what Personal Finance is all about – doing what works best for you (which very well may be something different than the next person). After all, the point is getting out of debt [the end]; don't get caught up in the means to the end. How you decide to do it is much less important than doing it.
Check out the following Excel spreadsheet if you want to play around with the different methods …
“FINANCIAL” METHOD. Nearly every ‘financial’ person will advise that debts should be paid off in a particular order: start with highest interest rate and move to the lowest interest rate (done by rolling the payment from one debt to another as debts are paid off). While this method makes perfect sense from a mathematical point of view, more and more people are finding that there is another method [often overlooked] that works better on their psyche ...
PSYCHOLOGICAL METHOD. This system of debt repayment, often referred to as the “debt snowball,” organizes one’s debt from the smallest balance to the largest balance. This method is not likely to save the most money or time (as the interest rates are not likely to align in that manner), but many find this approach very empowering and motivating because they see progress quickly. Focusing on the smallest balance first will accomplish this end.
In both of these methods, pay the minimum amount on all debts except for the “focus” debt (smallest balance in psychological method; highest interest rate in financial method); pay as much as possible on the focus debt until it is eliminated and then approach the next debt in the list with similar intensity.
I’m not arguing against the merits of the financial method as outlined above. Obviously, if someone has the discipline to adhere to the plan, you’ll save the most time and the most in interest expenses. The psychological method merely takes a seemingly more “human” approach to finances that suggests that people will be more likely to stick with their ‘financial diet’ if they see some ‘debt pounds’ come off quickly … that is what Personal Finance is all about – doing what works best for you (which very well may be something different than the next person). After all, the point is getting out of debt [the end]; don't get caught up in the means to the end. How you decide to do it is much less important than doing it.
Check out the following Excel spreadsheet if you want to play around with the different methods …
November 16, 2006
NEGOTIATING A LOWER CC RATE
There have apparently been some 'issues' with registration for the 1-credit Financial Success class. They should [hopefully] be resolved now - there are no prerequisites or requirements for class entry. More info below ...
Negotiating a lower credit card rate:
Any “get out of debt” strategies/plans you come across will consistently tell you to lower your credit card rates. Obviously this is good advice and a no-brainer strategy – if I can repay my credit card debt at 10% instead of 20%, I’ll be better off. What most of these plans leave out is how you go about getting a lower rate on your credit card. Let me share some ideas with you if you find yourself in a high rate CC situation.
Negotiating a lower credit card rate:
Any “get out of debt” strategies/plans you come across will consistently tell you to lower your credit card rates. Obviously this is good advice and a no-brainer strategy – if I can repay my credit card debt at 10% instead of 20%, I’ll be better off. What most of these plans leave out is how you go about getting a lower rate on your credit card. Let me share some ideas with you if you find yourself in a high rate CC situation.
- Call your credit card company and ask for a lower rate. Most have lower rates available to good customers (customers paying on time every month), but they don't volunteer the information ... you have to ask. This is likely to work if your high rate was the result of a missed payment and not a long-term problem.
- If your card refuses to give you a lower rate, find one that will. Do some homework – there are over 30,000 credit cards out there. In this highly competitive industry, if someone won’t treat you the way you deserve, someone else will. A few websites to search for no-fee, low rate cards [assuming you haven’t already gotten several acceptable offers in the mail] include:
- CardRatings.com
- CardWeb.com
- CreditCards.com
- Index.Credit.Cards
After you’ve done your homework, contact your company to inform them of your offer. Being specific is important, because an offer in hand will create leverage for you. Let them know that you wanted them to have the opportunity to match the competitors offer before you transferred your balance. Ask to speak with a supervisor if necessary. Click here for a sample script. - Be prepared to switch. If what you’ve tried to this point hasn’t worked, consider switching to a card that is more interested in your business [willing to work with you]. If you have a card without a balance, call that company first to see if they have a balance transfer special prior to opening a new account.
Call confidently – a 2002 study found that more than half of the people [from a wide variety of credit situations] that called to request a lower credit card rate were granted their request – from an average starting rate of 16% to a lowered rate of 10.47%. I met with a student this afternoon and we talked about her credit card rate and tactics she could explore to try to lower her rate. All of these things above were discussed – the source of these three suggestions to negotiating with your CC …? AMERICAN EXPRESS!
Seats in the 1-Credit courses for spring are filling quickly ...
Financial Survival -- FIN PLN 1183 (Ref #43500) - (68 seats left)
Financial Success -- FIN PLN 4318 (Ref #43587) - (117 seats left)
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University of Missouri-Columbia
Department of Personal Financial Planning
Office for Financial Success
Dr. Mark Oleson - OFS Director
For those receiving the weekly blog via e-mail, you can click this link [or go to http://financialtip.blogspot.com] to view prior tips and other resources.
November 09, 2006
SUCCESSFUL MODELS IN FINANCIAL EDUCATION
As I sit here in a hotel room in Washington D.C. contemplating what to write about in this week's tip, I think I'll take the opportunity to toot our horn a little bit ...
Since arriving at the University of Missouri about 15 months ago, the Personal Financial Planning Department has been supportive of just about everything I've wanted to do in starting/operating the Office for Financial Success. We've had many rewarding successes along the way - today among those. I was very honored to be invited to D.C. by Freddie Mac to receive two awards that provide national validation to the good things being done at MU.
2006 Successful Models in Financial Education Awards:
Freddie Mac today announced their 2006 successful models within four financial education categories. The OFS was proud to be recognized in two of the four!
Since arriving at the University of Missouri about 15 months ago, the Personal Financial Planning Department has been supportive of just about everything I've wanted to do in starting/operating the Office for Financial Success. We've had many rewarding successes along the way - today among those. I was very honored to be invited to D.C. by Freddie Mac to receive two awards that provide national validation to the good things being done at MU.
2006 Successful Models in Financial Education Awards:
Freddie Mac today announced their 2006 successful models within four financial education categories. The OFS was proud to be recognized in two of the four!
- Successful Outreach and Marketing Efforts for Financial Education.
We received the top recognition in this category for our Financial Tip of the Week. Time has only increased the popularity/readership of the tip; the new conversion to a weekly blog has been popular as well. - Successful Tools or Resources Used in Financial Education Initatives.
We were runner up in this category for our Financial Survival course for college students. The unique 1-credit pass/fail Financial Success course that hasn't even been offered yet (next semester will be the first offering) is already receiving attention.
Seats in the 1-Credit pass/fail courses are filling quickly ...
Financial Survival -- FIN PLN 1183 (Ref #43500) - (<100 seats left)
Financial Success -- FIN PLN 4318 (Topics) (Ref #43587)
The "award winning" Financial Tip of the Week is a service of ...
University of Missouri-Columbia
Department of Personal Financial Planning
Office for Financial Success
Dr. Mark Oleson - OFS Director
November 02, 2006
PERSONAL FINANCE - EDUCATIONAL RESOURCES
It is amazing the amount of resources available in the area of Personal Finance. Some resources are stellar, some are poor, and a whole lot fall in between. My objective this week is to expose you to some of these resources [the better ones]. Keep in mind that this is not an endorsement for any of them – my hope is that you’ll be able to find some that will be beneficial to you [as a teacher, a parent, a student, or whatever situation you find yourself in]. You will find that some of the resources are geared toward beginners; others are geared toward individuals that have a good understanding of beginning personal finance principles … all of these resources [at least the basic information] are available at no cost. This should not be considered an exhaustive list of resources, merely a broad brush stroke. Here are a dozen different resources covering various aspects of personal finance:
- Checkbook Basics
- FDIC - Money Smart
- Florida State - Fundamentals of Financial Planning
- Freddie Mac - Credit Smarts
- MoneySKILL
- MU Extension - Info Sheets
- My Money
- NEFE - Get Smart About Your Money
- NEFE - High School Financial Planning Program
- Practical Money Skills for Life
- Rutgers - Investing for your Future
- Smart Money - Investing 101
SUMMARY of LAST MONTHS WEEKLY TIPS:
- 10/05 - 8% Rule
- 10/12 - Pension Protection Act of 2006
- 10/19 - Credit Card Trap Widens
- 10/26 - Credit Myths
--> TIP ARCHIVE
THE FINANCIAL TIP OF THE WEEK IS A SERVICE OF...
University of Missouri-Columbia
Personal Financial Planning Department
Office for Financial Success
Dr. Mark Oleson - OFS Director
October 26, 2006
CREDIT MYTHS ...
Myth [mith] – noun – an unproved or false collective belief that is used to justify something; any invented story, idea, or concept. In the world of credit, innumerable myths abound. Let’s explore a few …
MYTH. When delinquent accounts, judgments, missed payments and other “negatives” are paid, they will be removed from my report. TRUTH – the information will remain. Your credit file is a credit HISTORY, it will simply reflect that it has been paid [which is obviously better than unpaid].
MYTH. Credit reporting agencies make credit decisions. TRUTH – credit reporting agencies provide information [nothing more] to lenders who make the decisions.
MYTH. Personally viewing my credit report will lower my credit score. HUGE MYTH. TRUTH – viewing my credit report will have no negative bearing on my credit score.
MYTH. In the case of divorce, the divorce decree will always carry more weight than the credit obligations. TRUTH – the credit obligation will override a divorce decree.
MYTH. I need to keep a balance on my credit cards and other debts to build a credit history. TRUTH – credit use and on-time payment are what build a credit history. I can do this and still pay the balance in full each month.
MYTH. Shopping for the best rate for an auto loan or home mortgage is not a good idea because the multiple inquiries will be a negative. TRUTH – while many inquiries can hurt one’s credit, inquiries for auto loans and mortgages will be lumped and treated as one inquiry. Shop for the best deals!
MYTH. While poor credit has obvious financial consequences, it doesn’t really affect anything beyond that. TRUTH – an estimated 70% of employers will review your report prior to a hire. Money problems have been linked to less productivity at work, more missed work days, problems at home, and other “baggage” many employers don’t want.
MYTH. I must give permission for a company to see my credit report. TRUTH – with the exception of an employer, permission is not needed. Just look at the inquiry section of your report and you’ll see a lot of people that “pre-approved” you for a credit offer that you never gave consent to.
MYTH. If I’m responsible with credit, I have no need to review my reports. TRUTH – depending on which study you read, it is estimated that as much as 80% of consumer reports contain errors; about 1/3 of those errors are big enough to result in the denial of credit! Ensuring the information in your report is accurate is ultimately YOUR responsibility.
MYTH. Credit reports are the same from company to company. TRUTH – although most companies will report to all three bureaus (Experian, Equifax, and TransUnion), this was not always the case. Also, the speed at which they update information is not the same. I’ve never seen a scenario where the reports were identical with all three …
MYTH. Credit repair companies can fix my credit problems. TRUTH – most are scams. Most are attempting to either (1) work illegally; or (2) try to fix errors that I can fix myself for no cost. Be careful.
MYTH. Credit is too difficult to understand. TRUTH – everyone can AND SHOULD understand their credit. Schedule an appointment if you need help.
HELPFUL CREDIT RESOURCES.
- Ordering your free credit report(s)
- Credit Scoring - MYFICO
- Improving credit, Disputing errors - OFS Resources
- Register for 1 credit Financial Survival (PFP 1183)
- Register for 1 credit Financial Success (PFP 4318)
The Financial Tip of the Week is a service of ...
University of Missouri-Columbia
Personal Financial Planning Department
Office for Financial Success
Dr. Mark Oleson - OFS Director
October 19, 2006
CREDIT CARD TRAP WIDENS
Credit card companies are notorious for many of their “business” tactics. Many consumers [often students] fall prey to various credit card traps. Many of the more common ‘traps’ are well documented – others, not so much … I want to take the opportunity this week to talk about the more common [as well as new] traps. This is not intended to be an exhaustive list. My initial intent was to write about the most recent trap I’ve read about (Trap #10) – as I started, however, I thought it might be also beneficial to remind you about some of the other more common traps as well.
1. FEES. Fees continue to become an ever-so-important part of a credit card companies revenue. The most common fees include: over-the-limit, late payment, convenience check and balance transfer fees. According to Carddata.com, over-the-limit and late fees have risen 138% and 160% respectively over the past 10 years.
2. PENALTY RATES. More and more companies are becoming less forgiving of late payments. Bank of America, Citibank, and other notable card companies currently raise rates to 30%+ for a single missed payment! OUCH.
3. INTRO OFFERS. Most people are aware of the tactic used by companies to lure in customers with a low rate offer for a short period of time – most people aren’t aware of the cards terms once the intro period expires.
4. USING A CARD WHERE YOU’VE TRANSFERRED A BALANCE. If taking advantage of a intro rate or balance transfer “special” be certain not to use the card for other purchases – your payments don’t go to your higher rate purchases, the payment will go to the ‘special rate’ portion of the balance.
5. CONVENIENCE CHECKS. These are awfully enticing – the checks often come made out to you and advertise that you can use them for anything. The catch? Most charge cash advance rates (~20%), most charge an average transaction fee of 3% of your check amount, and you normally will lose your grace period [even if you pay in full at the end of the month]. Not a great deal in most instances.
6. UNIVERSAL DEFAULT CLAUSE. A tactic initiated in recent years that creates penalty rates not only in the instance where you miss a payment with that particular card. In this agreement, the card is entitled to raise your rates even if you miss a payment elsewhere!
7. “YOU’RE PRE-APPROVED”. This ‘announcement’ makes many feel warm and fuzzy. The reality? All this means is that the company has reviewed your credit report and won’t reject your application based on that information. If you apply for the card, you can still be turned down because of insufficient income or other reasons that won’t be reflected within your credit report.
8. BAIT AND SWITCH. I’ve got a credit card that I use to obtain benefits – cash back on gas and other purchases, etc. If someone else were to apply for that card [or any other credit card requiring someone to have excellent or well established credit], instead of being turned down, on the application, there will be a statement where you are essentially giving permission to the CC company to give you their ‘base’ card if you are turned down for the card in which you are applying.
9. DECREASING MINIMUM PAYMENTS. One of the most financially rewarding tactics (for the CC company) is to decrease your required minimum payment as your balance decreases, essentially keeping you in debt longer. This is a smart tactic on their part because many people that can’t afford to pay the balance in full will simply pay the minimum payment. This required payment will decrease over time, extending the repayment period and interest paid over time.
10. NO MISSED PAYMENT PENALTY RATE. I’m sure this heading is perplexing. The idea of an interest rate going up because of missed payments is rational. But is it legal for a rate to go up for someone that doesn’t miss any payments? That’s what I’ve been reading recently. More and more “savvy” consumers in past years have taken advantage of 0% balance transfers, intro offers, and other “deals.” What many consumers saw as a loophole is now beginning to be closed by CC companies. Smart Money magazine wrote of an individual with what most would consider near perfect credit (790 credit score) – never missed a payment, never over the limit … He carried $8,000 on a credit card because he was taking advantage of the 0% rate for life offer. It was obviously quite a shock to open his statement and see a rate of 29.99%! Apparently, his card company viewed him as a higher credit risk because of his debt and thus, according to the card agreement, had the right to bump him to the ‘default rate’ … Normally, default rates are triggered by missed payments, but apparently, high balances can also trigger a default rate [due to higher risk on the part of the company]. A 2005 study by Consumer Action found that 90% of card issuers would use a universal default rate hike if a customer's credit score decreases, 86% would do so if they paid a mortgage or any other loan late. Nearly half (43%) would hit you with universal default if they decide you have too much debt, while 33% would do it for the exact opposite reason: too much credit available. You can see a rate hike even if all you do is get a new credit card (33%) or shop around for a car loan or mortgage (24%). BE CAREFUL – THE CREDIT CARD TRAP IS WIDENING!
*Schedule a Financial Counseling/Planning Session at the OFS
*Monday/Wednesday walk-in appointments at SSC
The Financial Tip of the Week Blog is a service of ...
University of Missouri-Columbia
Personal Financial Planning Department
Office for Financial Success
Dr. Mark Oleson - OFS Director
October 12, 2006
PENSION PROTECTION ACT OF 2006
Last August, The Pension Protection Act of 2006 was passed, providing many benefits to savers. It was created with an eye on helping to “Protect pension and retirement plan participants and promote individual savings.” In a nutshell [don't worry, we won’t dive into the entire 1,304-page Act today], we’ll focus on five of the prominent areas in the plan …
1. Permanency to retirement plan and savings incentives. Contribution limits to IRAs, 401(k)s, and other workplace savings plans were increased in 2001 but were due to expire in 2010. This legislation makes these increases permanent. It also makes permanent the relatively new Roth 401(k) option which was slow to catch on for fear it would also disappear in 2010.
2. Automatic 401(k) enrollment. The new plan makes it easier for corporations to set up automatic enrollment in 401(k) plans. They can also set the plans to increase contributions automatically over time. I think this is great. If you don’t, you can ‘opt out’ – the issue now is that you may need to opt out of your company plan rather than opting in. In a study of four large companies that made 401(k) enrollment automatic, researchers found that 96% of employees were saving in a 401(k) plan six months after being hired [compared with 43% that were saving after six months prior to the switch to automatic enrollment]. According to the Employee Benefit Research Institute, it is expected that automatic enrollment would increase 401(k) participation from about 66% (currently) of eligible workers to more than 90%. Employers will be able to start contributions at 3% of salary and increase it over time to 6%. “Lifecycle” or “Target Retirement” funds are likely to be the default fund.
3. Deposit your tax refund automatically into an IRA. Starting in 2007, you can directly deposit all or a portion of your federal tax refund into an IRA. Consider this – the average tax refund of $2,400 is more money than the average person now saves for retirement annually!
4. Other IRA Enhancements. Beginning in 2010, it will be possible for anyone to convert eligible workplace savings plans or traditional IRA assets into a Roth IRA [regardless of income]. There are many other enhancements [primarily estate planning-related] which you can read more about below.
5. 529 College Savings Plan benefits are now permanent. The benefits of this college savings tool, established in 1996, were set to expire in 2010. This uncertainty kept many potential parents on the sidelines or in other vehicles because of their uncertain future.
ADDITIONAL RESOURCES.
- White House Pension Act Fact Sheet
- Fidelity Investments
- TIAA-CREF – Pension Protection Act of 2006 Guide
*Schedule a financial counseling/planning session at the OFS
*Walk-ins (M/W from 3-5pm) at the Student Success Center
The Financial Tip of the Week is a service of ...
University of Missouri-Columbia
Personal Financial Planning Department
Office for Financial Success
Dr. Mark Oleson - OFS Director
1. Permanency to retirement plan and savings incentives. Contribution limits to IRAs, 401(k)s, and other workplace savings plans were increased in 2001 but were due to expire in 2010. This legislation makes these increases permanent. It also makes permanent the relatively new Roth 401(k) option which was slow to catch on for fear it would also disappear in 2010.
2. Automatic 401(k) enrollment. The new plan makes it easier for corporations to set up automatic enrollment in 401(k) plans. They can also set the plans to increase contributions automatically over time. I think this is great. If you don’t, you can ‘opt out’ – the issue now is that you may need to opt out of your company plan rather than opting in. In a study of four large companies that made 401(k) enrollment automatic, researchers found that 96% of employees were saving in a 401(k) plan six months after being hired [compared with 43% that were saving after six months prior to the switch to automatic enrollment]. According to the Employee Benefit Research Institute, it is expected that automatic enrollment would increase 401(k) participation from about 66% (currently) of eligible workers to more than 90%. Employers will be able to start contributions at 3% of salary and increase it over time to 6%. “Lifecycle” or “Target Retirement” funds are likely to be the default fund.
3. Deposit your tax refund automatically into an IRA. Starting in 2007, you can directly deposit all or a portion of your federal tax refund into an IRA. Consider this – the average tax refund of $2,400 is more money than the average person now saves for retirement annually!
4. Other IRA Enhancements. Beginning in 2010, it will be possible for anyone to convert eligible workplace savings plans or traditional IRA assets into a Roth IRA [regardless of income]. There are many other enhancements [primarily estate planning-related] which you can read more about below.
5. 529 College Savings Plan benefits are now permanent. The benefits of this college savings tool, established in 1996, were set to expire in 2010. This uncertainty kept many potential parents on the sidelines or in other vehicles because of their uncertain future.
ADDITIONAL RESOURCES.
- White House Pension Act Fact Sheet
- Fidelity Investments
- TIAA-CREF – Pension Protection Act of 2006 Guide
*Schedule a financial counseling/planning session at the OFS
*Walk-ins (M/W from 3-5pm) at the Student Success Center
The Financial Tip of the Week is a service of ...
University of Missouri-Columbia
Personal Financial Planning Department
Office for Financial Success
Dr. Mark Oleson - OFS Director
October 05, 2006
8% RULE ...
In an interview earlier this week, I was asked the question of what financial pitfalls most befall college students. I’ve come to the conclusion that I am much more concerned about pride (why students don't come to seek financial assistance than why they do come). Aside from pride, the biggest financial problem I’ve witnessed is student loans. There are a lot of potential factors here: overspending, no budget, borrowing more than can afford to be repaid, having a ‘head in the sand’ approach and not really having a clue about what they owe or anything else about their financial situation, and increasing educational costs, just to name a few.
I want to share a couple of free resources designed to help people evaluate their student loan situation. One uses a needs-based approach, and one uses a rule of thumb to gauge your financial situation.
Financial Path to Graduation.
The Path, developed at Brigham Young University nearly ten years ago, takes a needs-based approach to asking questions to evaluate your situation. Where will my current course of action take me? Will I be able to afford this situation? This process requires a student to evaluate their individual path to determine if it will lead them to firm footing at graduation, as opposed to an all-too-common scenario of owing more than can be afforded. After witnessing the benefits of the program for students, BYU began requiring that students complete The Path prior to being given new loans – the results have been impressive: lower default rate, fewer borrowers, lesser loan amounts … not bad in the current environment of more borrowers and more borrowing. Read more about early results of their Path program.
SLOPE Calculator (8% Rule).
I think when reviewing ones student loan situation that a rule of thumb can also offer insight into the “path” that one is on. A generally accepted rule of thumb in the student loan arena is that one can afford a payment that is 8% or less of your gross income (if you don’t have an idea of what starting salaries are in your field of study, The Path can help). Obviously 8% is a guideline only, 8% for one person may create a hardship (picture someone with a large car payment, credit card debts, etc.) vs. someone with similar student loan debt but no other debts. That is the exact reason I prefer a needs-based approach. The advantage of the 8% rule is it allows me at any stage of my education to take stock in where I am. A really nice tool to help in this process was developed by the Colorado Student Loan Program. The Illinois “Mentor” program uses this tool and provides detailed information about what it is and how it works. It is well worth the few minutes it would require to examine your current student loan borrowing.
- Schedule a financial counseling/planning session
- Walk-in sessions available Mondays/Wednesdays (3-5pm) at the Student Success Center
The Financial Tip of the Week is a service of ...
University of Missouri-Columbia
Personal Financial Planning Department
Office for Financial Success
Dr. Mark Oleson - OFS Director
I want to share a couple of free resources designed to help people evaluate their student loan situation. One uses a needs-based approach, and one uses a rule of thumb to gauge your financial situation.
Financial Path to Graduation.
The Path, developed at Brigham Young University nearly ten years ago, takes a needs-based approach to asking questions to evaluate your situation. Where will my current course of action take me? Will I be able to afford this situation? This process requires a student to evaluate their individual path to determine if it will lead them to firm footing at graduation, as opposed to an all-too-common scenario of owing more than can be afforded. After witnessing the benefits of the program for students, BYU began requiring that students complete The Path prior to being given new loans – the results have been impressive: lower default rate, fewer borrowers, lesser loan amounts … not bad in the current environment of more borrowers and more borrowing. Read more about early results of their Path program.
SLOPE Calculator (8% Rule).
I think when reviewing ones student loan situation that a rule of thumb can also offer insight into the “path” that one is on. A generally accepted rule of thumb in the student loan arena is that one can afford a payment that is 8% or less of your gross income (if you don’t have an idea of what starting salaries are in your field of study, The Path can help). Obviously 8% is a guideline only, 8% for one person may create a hardship (picture someone with a large car payment, credit card debts, etc.) vs. someone with similar student loan debt but no other debts. That is the exact reason I prefer a needs-based approach. The advantage of the 8% rule is it allows me at any stage of my education to take stock in where I am. A really nice tool to help in this process was developed by the Colorado Student Loan Program. The Illinois “Mentor” program uses this tool and provides detailed information about what it is and how it works. It is well worth the few minutes it would require to examine your current student loan borrowing.
- Schedule a financial counseling/planning session
- Walk-in sessions available Mondays/Wednesdays (3-5pm) at the Student Success Center
The Financial Tip of the Week is a service of ...
University of Missouri-Columbia
Personal Financial Planning Department
Office for Financial Success
Dr. Mark Oleson - OFS Director
September 28, 2006
OPTING OUT OF UNWANTED CREDIT CARD SOLICITATIONS
Last week I got an e-mail from a frustrated student. She was ruining her paper shredder destroying all of the credit offers she was inundated with on a daily basis and she was fed up. Probably a familiar cry -- over 6 billion offers entered U.S. households last year alone. Her query – how do I stop them? She referenced the helpful tip on opting out of solicitations, which provided information on stopping unwanted phone solicitations (via state and national ‘do not call’ registries).
Stopping the MADNESS!
Under the Fair Credit Reporting Act (FCRA), credit reporting agencies are permitted to include your name on lists used by creditors or insurers to make firm offers of credit or insurance. What you may not have known is that the FCRA also enables you to “Opt-Out,” which prevents the credit reporting agencies from providing the information contained in your credit file to others [unsolicited offers]. NOTE. This does not keep you from obtaining additional credit, it merely keeps you from receiving pre-approved, unsolicited, and otherwise unwanted offers. If you’re wondering what the benefit(s) of receiving unsolicited offers, you can view the credit reporting agencies report to Congress (pp. 32-40).
How to do it.
There are two good ways to stop the offers [or at least slow them down]:
(1) Go to www.OptOutPrescreen.com (or call 888-5-optout). These are the credit reporting agencies opt in/opt out resources which will stop the agencies from selling your information to direct marketers. You can opt out for a five-year period of permanently. You can always opt back in if you miss the mail. If you use the website provided, you can fill out a brief, simple form to opt out. It will provide a screen with the information you provided that you will need to print, sign, and mail to the address provided in order to permanently opt out. If you don’t do that last step (print, sign, and mail), it will opt you out for the 5 year period instead.
(2) Add your name to the Direct Marketing Associations (DMA) Do Not Mail file. You can access this online – this process costs $1. You can also send a letter or postcard with your name, address and signature to: Mail Preference Service; Direct Marketing Association; PO Box 643; Carmel, NY 10512. The ‘mail method’ also costs $1 [+ postage]. Your name stays on the list for 5 years, and you can re-register at the end of that period.
Credit card companies get consumer information from other sources in addition to those mentioned above, so, while these two methods will considerably slow down credit card offers, the offers won't necessarily stop completely. SORRY.
ADDITIONAL RESOURCES.
Direct Marketing Association FAQ
FCRA Summary
Opt Out/Opt in Online Form
Opt Out FAQ
Last Weeks Tip - Emergency Funds
Schedule a Financial Session with the OFS
The Financial Tip of the Week is a service of ...
University of Missouri-Columbia
Department of Personal Financial Planning
Office for Financial Success
Dr. Mark Oleson - OFS Director
Stopping the MADNESS!
Under the Fair Credit Reporting Act (FCRA), credit reporting agencies are permitted to include your name on lists used by creditors or insurers to make firm offers of credit or insurance. What you may not have known is that the FCRA also enables you to “Opt-Out,” which prevents the credit reporting agencies from providing the information contained in your credit file to others [unsolicited offers]. NOTE. This does not keep you from obtaining additional credit, it merely keeps you from receiving pre-approved, unsolicited, and otherwise unwanted offers. If you’re wondering what the benefit(s) of receiving unsolicited offers, you can view the credit reporting agencies report to Congress (pp. 32-40).
How to do it.
There are two good ways to stop the offers [or at least slow them down]:
(1) Go to www.OptOutPrescreen.com (or call 888-5-optout). These are the credit reporting agencies opt in/opt out resources which will stop the agencies from selling your information to direct marketers. You can opt out for a five-year period of permanently. You can always opt back in if you miss the mail. If you use the website provided, you can fill out a brief, simple form to opt out. It will provide a screen with the information you provided that you will need to print, sign, and mail to the address provided in order to permanently opt out. If you don’t do that last step (print, sign, and mail), it will opt you out for the 5 year period instead.
(2) Add your name to the Direct Marketing Associations (DMA) Do Not Mail file. You can access this online – this process costs $1. You can also send a letter or postcard with your name, address and signature to: Mail Preference Service; Direct Marketing Association; PO Box 643; Carmel, NY 10512. The ‘mail method’ also costs $1 [+ postage]. Your name stays on the list for 5 years, and you can re-register at the end of that period.
Credit card companies get consumer information from other sources in addition to those mentioned above, so, while these two methods will considerably slow down credit card offers, the offers won't necessarily stop completely. SORRY.
ADDITIONAL RESOURCES.
Direct Marketing Association FAQ
FCRA Summary
Opt Out/Opt in Online Form
Opt Out FAQ
Last Weeks Tip - Emergency Funds
Schedule a Financial Session with the OFS
The Financial Tip of the Week is a service of ...
University of Missouri-Columbia
Department of Personal Financial Planning
Office for Financial Success
Dr. Mark Oleson - OFS Director
September 21, 2006
EMERGENCY FUNDS
“Pay off your debt.” “Max out a Roth IRA.” “Buy a house.” Personal finance professionals bombard us with a litany of things we ought to do in order to achieve financial independence. All of the things that need to be done can become extremely overwhelming. Where’s a person to start? Most tend to agree that the first thing you should do — after meeting basic needs, and while reducing spending — is to start an emergency fund.
What is an emergency fund?
An emergency fund is an easily accessible source of money for use only in case of emergency. Emergencies do not include a new car, a PlayStation, a vacation … [I think you get the idea]. It is for use only in the case of an emergency.
Why do you need an emergency fund?
- A golf ball smashed your windshield.
- Mole problems.
- Job layoff.
- Health problems.
- Because “life” happens.
Insurance is purchased protection to assist with many of life’s emergencies. It won’t, however, cover everything – in addition, there will normally be a required deductible or co-pay as part of the insurance coverage.
People with an emergency fund tend to be in better shape than those without one. Studies show that those without emergency savings are more likely to accumulate debt. It may feel like you can’t afford to have one, but the truth is you can’t afford not to have one. Emergency funds are essential, even for college students. Why? There is a tendency for people that don’t have an emergency fund to turn to credit cards, payday loans [and other forms of debt] to cover the emergency if they don’t have the savings otherwise.
How much is enough?
Though personal finance experts agree emergency funds are necessary, there’s no consensus on how much is enough. Some say you need to save a year’s salary. Others believe $1000 is sufficient. Most advice tends to fall someplace in the middle. My recommendation is to do what will suit you. There is not one right answer. Examine your situation — your income and your needs — to decide how much you should save. I would look at an emergency fund in a vastly different way if I were a tenured professor than if I were self-employed.
What do the “experts” say?
The Wall Street Journal’s Complete Personal Finance Guidebook says: “How much is enough? The answer is different for different people in different situations. For those in careers with a large, ongoing demand or who have relatively strong job security, three months’ worth of expenses is probably enough of a cushion. Those with bigger career demands, such as higher-paid managers and executives or couples who work in the same industry or at the same company, might want nine months to a year’s worth of expenses in the bank.
In You Don’t Have to Be Rich, Jean Chatzky recommends three to six months of living expenses. Your Money or Your Life recommends six months of living expenses, but only once you’ve achieved financial independence.
In Dave Ramsey’s The Total Money Makeover, Ramsey’s very first step is to save $1000 in an emergency fund. Then he advocates eliminating debt; then he recommends building a three- to six-month cushion.
How do you get started?
Starting an emergency fund can be as simple as depositing a little money into a savings account. I think it’s wise to keep your emergency money someplace that’s not too easy to access. In other words, I wouldn’t advise that your funds be kept in your checking account or a savings account that you use regularly. Put it somewhere where the money is easily accessible, but not a regularly used expense account. Many experts suggest money market accounts as the best place to park emergency fund money. I’m a big fan of the high-yield online savings accounts – ones that are FDIC insured with no fees and no minimums. HSBC (hsbcdirect.com), ING (ingdirect.com), and Emigrant Direct (emigrantdirect.com) are all good examples that are currently paying above 5% in some instances. (SOURCE – Get Rich Quick Slowly).
Last Weeks Tip: Vesting
Schedule a Financial Counseling/Planning Session
The Financial Tip of the Week is a service of:
University of Missouri-Columbia
College of Human Environmental Sciences
Department of Personal Financial Planning
Office for Financial Success
Dr. Mark Oleson - OFS Director
What is an emergency fund?
An emergency fund is an easily accessible source of money for use only in case of emergency. Emergencies do not include a new car, a PlayStation, a vacation … [I think you get the idea]. It is for use only in the case of an emergency.
Why do you need an emergency fund?
- A golf ball smashed your windshield.
- Mole problems.
- Job layoff.
- Health problems.
- Because “life” happens.
Insurance is purchased protection to assist with many of life’s emergencies. It won’t, however, cover everything – in addition, there will normally be a required deductible or co-pay as part of the insurance coverage.
People with an emergency fund tend to be in better shape than those without one. Studies show that those without emergency savings are more likely to accumulate debt. It may feel like you can’t afford to have one, but the truth is you can’t afford not to have one. Emergency funds are essential, even for college students. Why? There is a tendency for people that don’t have an emergency fund to turn to credit cards, payday loans [and other forms of debt] to cover the emergency if they don’t have the savings otherwise.
How much is enough?
Though personal finance experts agree emergency funds are necessary, there’s no consensus on how much is enough. Some say you need to save a year’s salary. Others believe $1000 is sufficient. Most advice tends to fall someplace in the middle. My recommendation is to do what will suit you. There is not one right answer. Examine your situation — your income and your needs — to decide how much you should save. I would look at an emergency fund in a vastly different way if I were a tenured professor than if I were self-employed.
What do the “experts” say?
The Wall Street Journal’s Complete Personal Finance Guidebook says: “How much is enough? The answer is different for different people in different situations. For those in careers with a large, ongoing demand or who have relatively strong job security, three months’ worth of expenses is probably enough of a cushion. Those with bigger career demands, such as higher-paid managers and executives or couples who work in the same industry or at the same company, might want nine months to a year’s worth of expenses in the bank.
In You Don’t Have to Be Rich, Jean Chatzky recommends three to six months of living expenses. Your Money or Your Life recommends six months of living expenses, but only once you’ve achieved financial independence.
In Dave Ramsey’s The Total Money Makeover, Ramsey’s very first step is to save $1000 in an emergency fund. Then he advocates eliminating debt; then he recommends building a three- to six-month cushion.
How do you get started?
Starting an emergency fund can be as simple as depositing a little money into a savings account. I think it’s wise to keep your emergency money someplace that’s not too easy to access. In other words, I wouldn’t advise that your funds be kept in your checking account or a savings account that you use regularly. Put it somewhere where the money is easily accessible, but not a regularly used expense account. Many experts suggest money market accounts as the best place to park emergency fund money. I’m a big fan of the high-yield online savings accounts – ones that are FDIC insured with no fees and no minimums. HSBC (hsbcdirect.com), ING (ingdirect.com), and Emigrant Direct (emigrantdirect.com) are all good examples that are currently paying above 5% in some instances. (SOURCE – Get Rich Quick Slowly).
Last Weeks Tip: Vesting
Schedule a Financial Counseling/Planning Session
The Financial Tip of the Week is a service of:
University of Missouri-Columbia
College of Human Environmental Sciences
Department of Personal Financial Planning
Office for Financial Success
Dr. Mark Oleson - OFS Director
September 14, 2006
VESTING ...
When beginning a job, there are many nuances and intricacies related to the benefits offered through your new employer (elements that should be part of your analysis when evaluating job offers). Among these is the vesting schedule of your retirement plan. What is vesting? Good question …
VESTING is your right of ownership to retirement plan benefits. Your employer determines the vesting schedule for the basic retirement plan, which can be either immediate or delayed. Vesting schedules apply only to employer contributions and earnings on employer contributions. Your contributions (as well as any earnings attributable to your contributions) are always immediately vested, meaning that if you were to leave the company tomorrow, those funds could leave with you.
Immediate Vesting. After you begin your retirement plan, all contributions and earnings vest automatically if it is an immediate vesting plan. The maximum participation requirements for eligibility for a plan with immediate vesting are two years of service and the attainment of age 21, or, for educational institutions, one year of service and the attainment of age 26.
Delayed Vesting. Individuals in delayed vesting plans don't have ownership rights to the contributions (and any earnings on those contributions) made by the employer on their behalf until they meet the vesting requirements. There are two objectives to Delayed Vesting: (1) Reward employees with longer service; and (2) Reduce the cost of providing benefits to employees who leave after only a few years of service.
There are two types of delayed vesting. (1) Cliff Vesting - you work several years and then the employer contribution vests fully at a threshold date. In three-year cliff vesting, for example, none of the client's accumulation would vest during the first two years of participation. But at the end of the third year, the employee's entire accumulation would be 100 percent vested. Under (2) Graded Vesting, in contrast, ownership of retirement benefits accrues in stages -- for example, 20 percent after two years, 40 percent after three years, and so on, until the entire accumulation is completely vested. For employer matching plans, contributions must vest by the end of the third year. To find out more about your vesting schedule, contact your employers benefits department.
(SOURCE – TIAA-CREF)
Last Weeks Tip: Record Keeping
Schedule a Financial Counseling/Planning Session
The Financial Tip of the Week is a service of:
University of Missouri-Columbia
College of Human Environmental Sciences
Department of Personal Financial Planning
Office for Financial Success
Dr. Mark Oleson - OFS Director
VESTING is your right of ownership to retirement plan benefits. Your employer determines the vesting schedule for the basic retirement plan, which can be either immediate or delayed. Vesting schedules apply only to employer contributions and earnings on employer contributions. Your contributions (as well as any earnings attributable to your contributions) are always immediately vested, meaning that if you were to leave the company tomorrow, those funds could leave with you.
Immediate Vesting. After you begin your retirement plan, all contributions and earnings vest automatically if it is an immediate vesting plan. The maximum participation requirements for eligibility for a plan with immediate vesting are two years of service and the attainment of age 21, or, for educational institutions, one year of service and the attainment of age 26.
Delayed Vesting. Individuals in delayed vesting plans don't have ownership rights to the contributions (and any earnings on those contributions) made by the employer on their behalf until they meet the vesting requirements. There are two objectives to Delayed Vesting: (1) Reward employees with longer service; and (2) Reduce the cost of providing benefits to employees who leave after only a few years of service.
There are two types of delayed vesting. (1) Cliff Vesting - you work several years and then the employer contribution vests fully at a threshold date. In three-year cliff vesting, for example, none of the client's accumulation would vest during the first two years of participation. But at the end of the third year, the employee's entire accumulation would be 100 percent vested. Under (2) Graded Vesting, in contrast, ownership of retirement benefits accrues in stages -- for example, 20 percent after two years, 40 percent after three years, and so on, until the entire accumulation is completely vested. For employer matching plans, contributions must vest by the end of the third year. To find out more about your vesting schedule, contact your employers benefits department.
(SOURCE – TIAA-CREF)
Last Weeks Tip: Record Keeping
Schedule a Financial Counseling/Planning Session
The Financial Tip of the Week is a service of:
University of Missouri-Columbia
College of Human Environmental Sciences
Department of Personal Financial Planning
Office for Financial Success
Dr. Mark Oleson - OFS Director
September 07, 2006
RECORD KEEPING - (What do I keep? How long?)
The following are some general suggestions/guidelines about how long you should keep personal finance and investment records on file (Source - Bankrate.com) ...
Tax Information. Keep returns, canceled checks/receipts, charitable contributions, mortgage interest and other information for 7 years. Why so long? The IRS has 3 years from your filing date to audit your return if it suspects good faith errors. They have 6 years to challenge your return if it thinks you underreported your gross income by 25% or more. There is no time limit if you failed to file or filed a fraudulent return.
IRA Contributions. Keep indefinitely. If you have made a nondeductible contribution, keep the records indefinitely to prove that you already paid tax on this money when the time comes to withdraw.
Retirement/Savings Plan Statements. Keep from one year to permanently. Keep the quarterly statements from 401(k) or other plans until you receive the annual summary ... if everything matches up, you can then toss the quarterly statements. Keep the annual summaries until you retire or close the account.
Bank Records. Keep from one year to permanently. Go through your checks each year, keeping those related to taxes, business expenses, housing, and mortgage payments.
Brokerage Statements. Until you sell the securities. You need the purchase/sales slips from your brokerage or mutual fund to prove whether you have capital gains or losses at tax time.
Bills. Keep from one year to permanently. In most cases, when the canceled check from a paid bill has been returned (or cleared), you can get rid of the bill. Bills for big purchases (jewelry, appliances, cars, furniture, computers, etc.) should be kept in an insurance file for proof of their value in the event of theft/loss or damage.
Credit Card Receipts and Statements: Keep from 45 days to 7 years. Keep your original receipts until you get your monthly statement; toss the receipts if the two match up. Keep the statements for seven years if tax-related expenses are documented.
Paycheck Stubs. Keep for one year. When you receive your annual W-2 form from your employer, make sure the information matches - if it does, toss the stubs, if it doesn't, demand a corrected form.
House. Keep from 6 years to permanently. Keep all records documenting the purchase price and the cost of all permanent improvements (remodeling, additions, and installations). Keep records of expenses incurred in selling and buying the property (legal fees, real estate agents commission) for 6 years after you sell your home. Holding onto these records is important because any improvements you make on your house, as well as expenses in selling it are added to the original purchase price or cost basis. This adds up to a greater profit (capital gain) when you sell your house, thus lowering your capital gains tax.
Additional Resources.
- Recordkeeping for Individuals (IRS Pub. 552)
- Our Family Records (Univ of Wisconsin Extension) - very detailed!
- Record Keeping (Iowa State Univ Extension)
Last Weeks Tip: The Latte Factor®
Click to Schedule a Financial Counseling/Planning Appointment
Tax Information. Keep returns, canceled checks/receipts, charitable contributions, mortgage interest and other information for 7 years. Why so long? The IRS has 3 years from your filing date to audit your return if it suspects good faith errors. They have 6 years to challenge your return if it thinks you underreported your gross income by 25% or more. There is no time limit if you failed to file or filed a fraudulent return.
IRA Contributions. Keep indefinitely. If you have made a nondeductible contribution, keep the records indefinitely to prove that you already paid tax on this money when the time comes to withdraw.
Retirement/Savings Plan Statements. Keep from one year to permanently. Keep the quarterly statements from 401(k) or other plans until you receive the annual summary ... if everything matches up, you can then toss the quarterly statements. Keep the annual summaries until you retire or close the account.
Bank Records. Keep from one year to permanently. Go through your checks each year, keeping those related to taxes, business expenses, housing, and mortgage payments.
Brokerage Statements. Until you sell the securities. You need the purchase/sales slips from your brokerage or mutual fund to prove whether you have capital gains or losses at tax time.
Bills. Keep from one year to permanently. In most cases, when the canceled check from a paid bill has been returned (or cleared), you can get rid of the bill. Bills for big purchases (jewelry, appliances, cars, furniture, computers, etc.) should be kept in an insurance file for proof of their value in the event of theft/loss or damage.
Credit Card Receipts and Statements: Keep from 45 days to 7 years. Keep your original receipts until you get your monthly statement; toss the receipts if the two match up. Keep the statements for seven years if tax-related expenses are documented.
Paycheck Stubs. Keep for one year. When you receive your annual W-2 form from your employer, make sure the information matches - if it does, toss the stubs, if it doesn't, demand a corrected form.
House. Keep from 6 years to permanently. Keep all records documenting the purchase price and the cost of all permanent improvements (remodeling, additions, and installations). Keep records of expenses incurred in selling and buying the property (legal fees, real estate agents commission) for 6 years after you sell your home. Holding onto these records is important because any improvements you make on your house, as well as expenses in selling it are added to the original purchase price or cost basis. This adds up to a greater profit (capital gain) when you sell your house, thus lowering your capital gains tax.
Additional Resources.
- Recordkeeping for Individuals (IRS Pub. 552)
- Our Family Records (Univ of Wisconsin Extension) - very detailed!
- Record Keeping (Iowa State Univ Extension)
Last Weeks Tip: The Latte Factor®
Click to Schedule a Financial Counseling/Planning Appointment
August 31, 2006
THE 'LATTE FACTOR®' ...
Latte Factor (LAT.ay fak.tur) n. Seemingly insignificant daily purchases that add up to a significant amount of money over time.
The Latte Factor® is perhaps a concept that isn't foreign to you. It was a concept coined by David Bach, author of The Automatic Millionaire. The Latte Factor® is based on the simple idea that all you need to do to finish rich is to look at the small things you spend your money on every day and see whether you could redirect that spending to yourself (as opposed to the more common approach of trying to cut 'big' items from your life OR SIMPLY DOING NOTHING) . Putting aside as little as a few dollars a day for your future rather than spending it on little purchases such as lattes, bottled water, fast food, cigarettes, [plug in whatever your "personal latte" is here] and so on, can really make a difference between accumulating wealth and living paycheck to paycheck.
If you take a closer look at your 'small spending,' you can quickly see the great cost of those small habits. Investing a small habit (such as $5/day, at historical rates of return, ~10%) would yield close to a million dollars in roughly 40 years!
What's your Latte Factor®? Take action!
To get started, identify what your Latte Factor® is. The most beneficial way to do this is to track your spending for a full day. I've provided some links below to assist in the process ... Once you know where your money is going and how much your Latte Factor® is costing you, use the calculator below to see just how much you could save in a few years. You'll be amazed at how much you could be saving.
Even if you make a lot of money, it doesn't necessarily mean you're building wealth. That's because the more we make, the more we tend to spend. I believe that an awareness of our personal Latte Factor® will only help down our paths to "Financial Success" ...
Useful Resources:
- 'Fix the Leak in your Wallet' (USA Today Article)
- Latte Factor® Calculator
- Latte Factor® Worksheet - What is your Latte Factor Worth?
- OFS Budgeting Resources
- Stop Buying Expensive Coffee and Save Calculator
Last Weeks Tip: Grad PLUS vs. Alternative Loans
August 24, 2006
GRADUATE PLUS VS. PRIVATE LOANS
For college students, there is little argument that the first line of financing education should be Federal Stafford Loans (obviously after all "free" sources have been exhausted - grants, scholarships, etc.). For an ever-growing number of students, the amount they're able to borrow in Federal Loans has been insufficient to meet their educational costs - the result? A 700% increase in private loan volume between 1995 and 2004 (according to College Board).
A recent tip (see blog tip archive to read) outlined the substantive changes to student loan legislation that took place on July 1 (2006). One of the primary [good] changes for graduate and professional students was the introduction of the Grad PLUS Loan, allowing grad/professional students to borrow up to the total cost of education with this type of loan (ultimately eliminating the need to take out [typically] higher-cost private loans unless specifically chosen). PLUS loans had initially only been available to parents of undergraduate students. One of the benefits of the new Grad PLUS Loan is the fixed rate it offers (8.5% for most -- 7.9% for Direct Loan-provided Grad PLUS Loans). A fixed rate is a huge sigh of relief relative to the variable rate that private [credit-based] loans provide (with many currently topping 9% with interest rate caps (if they even have a cap) of 20% OR MORE!). Obviously, you should speak with someone that can inform you of your options relative to your individual circumstances before making loan decisions.
Several sites provide helpful charts/breakdowns of the primary differences between Grad PLUS and Private Loans. Some of these include:
- Ed America
- Texas Guaranteed Student Loan Corp
- University of Minnesota Financial Aid
- USA Today Article on 8/15
If you feel that a private loan is necessary, view this former tip on selecting the best possible loan for you. Click here.
A recent tip (see blog tip archive to read) outlined the substantive changes to student loan legislation that took place on July 1 (2006). One of the primary [good] changes for graduate and professional students was the introduction of the Grad PLUS Loan, allowing grad/professional students to borrow up to the total cost of education with this type of loan (ultimately eliminating the need to take out [typically] higher-cost private loans unless specifically chosen). PLUS loans had initially only been available to parents of undergraduate students. One of the benefits of the new Grad PLUS Loan is the fixed rate it offers (8.5% for most -- 7.9% for Direct Loan-provided Grad PLUS Loans). A fixed rate is a huge sigh of relief relative to the variable rate that private [credit-based] loans provide (with many currently topping 9% with interest rate caps (if they even have a cap) of 20% OR MORE!). Obviously, you should speak with someone that can inform you of your options relative to your individual circumstances before making loan decisions.
Several sites provide helpful charts/breakdowns of the primary differences between Grad PLUS and Private Loans. Some of these include:
- Ed America
- Texas Guaranteed Student Loan Corp
- University of Minnesota Financial Aid
- USA Today Article on 8/15
If you feel that a private loan is necessary, view this former tip on selecting the best possible loan for you. Click here.
August 11, 2006
Welcome ...!
Today marks a new day at the Office for Financial Success - the Financial Tip of the Week, a service I've been providing via e-mail for over 6 years is being converted to a weekly blog. Increasing subscriptions (over 50,000) have made e-mail an outdated mode of sharing information. Bear with me as I learn the 'tools of the [blogging] trade' ...
Dr. Oleson
Dr. Oleson
August 10, 2006
Opting out of Solicitations
Everything You Need to Know About Opting Out of Unwanted Solicitations
The other day in my Financial Survival class, we discussed consumer protection legislation – one of the things discussed was the ability to opt out of unwanted solicitations. It was nearly three years ago that the Federal Government created the "Do Not Call Registry" to make it easier and more efficient for you to stop getting telemarketing sales calls you don’t want. This is informational only – not a personal "recommendation" – simply an FYI …
You can register [both land line and cell phones] online at (http://donotcall.gov/) if you have an active e-mail address (seems like a safe assumption by virtue of receiving this e-mail). You can also call toll free 1-888-382-1222 (be sure to call from the number that you want to register). Registration is free and is effective for a five year period.
Enforcement began on October 1, 2003. Solicitors affected by the legislation are now required to stop the calls within 31 days of registration. Unfortunately, it won't stop all telemarketer calls. Banks, phone companies, airlines, insurance companies, nonprofit charitable organizations, and politicians are not under the jurisdiction of the FTC, and won't be impacted by the list. In addition, the list only applies to calls across state lines. Sales calls within a State will still be permitted unless you also opt out of solicitations through your State ‘do not call’ registry (or if your State integrates their list with the national registry - read info regarding your state to find
out). State registration eliminates in-state solicitations the national registry won't.
- State registry info: http://www.the-dma.org/government/donotcalllists.shtml
- For Missouri Residents: http://www.ago.mo.gov/nocalllaw/nocalllaw.htm
- Additional info: http://www.natlconsumersleague.org/privacy/stopcalling2.htm
- 888-5-OPTOUT
The above information will stop most phone solicitations. You can also request to get off mailing lists (http://www.dmaconsumers.org/consumerassistance.html). The Federal Trade Commission has also developed a form letter you can send to the credit bureaus that sell your information to other agencies. The opt-out form is located at http://www.ftc.gov/privacy/cred-ltr.htm as are the addresses of the bureaus to mail the form.
The other day in my Financial Survival class, we discussed consumer protection legislation – one of the things discussed was the ability to opt out of unwanted solicitations. It was nearly three years ago that the Federal Government created the "Do Not Call Registry" to make it easier and more efficient for you to stop getting telemarketing sales calls you don’t want. This is informational only – not a personal "recommendation" – simply an FYI …
You can register [both land line and cell phones] online at (http://donotcall.gov/) if you have an active e-mail address (seems like a safe assumption by virtue of receiving this e-mail). You can also call toll free 1-888-382-1222 (be sure to call from the number that you want to register). Registration is free and is effective for a five year period.
Enforcement began on October 1, 2003. Solicitors affected by the legislation are now required to stop the calls within 31 days of registration. Unfortunately, it won't stop all telemarketer calls. Banks, phone companies, airlines, insurance companies, nonprofit charitable organizations, and politicians are not under the jurisdiction of the FTC, and won't be impacted by the list. In addition, the list only applies to calls across state lines. Sales calls within a State will still be permitted unless you also opt out of solicitations through your State ‘do not call’ registry (or if your State integrates their list with the national registry - read info regarding your state to find
out). State registration eliminates in-state solicitations the national registry won't.
- State registry info: http://www.the-dma.org/government/donotcalllists.shtml
- For Missouri Residents: http://www.ago.mo.gov/nocalllaw/nocalllaw.htm
- Additional info: http://www.natlconsumersleague.org/privacy/stopcalling2.htm
- 888-5-OPTOUT
The above information will stop most phone solicitations. You can also request to get off mailing lists (http://www.dmaconsumers.org/consumerassistance.html). The Federal Trade Commission has also developed a form letter you can send to the credit bureaus that sell your information to other agencies. The opt-out form is located at http://www.ftc.gov/privacy/cred-ltr.htm as are the addresses of the bureaus to mail the form.
Payday Loans
Payday Lending … (Source: Center for Responsible Lending)
Payday lending (often called cash advance) is the practice of using a post-dated check or electronic checking account information as collateral for a short-term loan. Research indicates that the payday lending business model is designed to keep borrowers in debt, not to provide one-time assistance during a time of financial need [as they’re often thought of] …
Payday lending is often referred to as a "debt trap" – here’s a few reasons why:
- 91% of payday loans are made to borrowers who use 5+ payday loans/year.
- 99% of payday loans go to repeat borrowers.
- The average payday borrower pays $800 to borrow $325.
- It is estimated that payday lending costs US families $3.4 billion annually.
Payday lenders typically allow borrowers just two weeks to repay, and borrowers regularly find they cannot come up with the cash to pay back their loan so quickly. To avoid defaulting, borrowers often agree to renew the loan and pay the interest again. Interest fees are usually $15-$20 per $100 borrowed. A PIRG study found the average interest nationally was 680% APR. The Department of Defense lists payday lending as one of the top ten key issues impacting the quality of life of U.S. soldiers. A "New York Times" article in Dec. 2004 revealed that more than 1/4 of military households (26%) have been caught up in payday lending. In many university towns, students are a primary "user" of these products. Many states have seen the problems these types of lenders have created for consumers [and 14 states] have banned payday lenders. Unfortunately, lenders have found ways around these state laws. National chains use partnerships with out-of-state banks to ‘skirt’ the law. They also use this arrangement (known as the rent-a-bank model) to avoid limits on interest rates and other provisions in states that do authorize payday lending.
The Center for Responsible Lending provides "9 Signs of a Predatory Payday Loan" to help educate consumers on the pitfalls that entrap many …
1. Triple digit interest rate – fees equal to 400% APR and higher.
2. Short minimum loan term – 75% of payday customers are unable to repay their loan within the allotted two weeks and are forced to get a loan "rollover" at additional cost.
3. Single balloon payment – payday loans do not allow for partial payments to be made during the loan term. The entire loan must be repaid at the end of the two weeks.
4. Loan flipping – 90% of the payday industry’s revenue growth comes from making more and larger loans to the same customers.
5. Simultaneous borrowing from multiple lenders – many consumers on the "debt treadmill" get a loan from one payday lender to repay another.
6. No consideration of borrower’s ability to repay – consumers are usually encouraged to borrow the maximum, regardless of their credit history.
7. Deferred check mechanism – consumers who can’t make good on a deferred (post-dated) check covering a payday loan may be assessed multiple late fees and NSF check charges or fear prosecution for writing a "bad check."
8. Mandatory arbitration clause – by eliminating the borrower’s right to sue for abusive lending practices, these clauses work to the benefit of the lender, not the consumer.
9. No restrictions on out-of-state banks violating local state laws – federal banking laws were obviously not enacted to enable payday lenders to circumvent state laws, but that is what is happening in many instances.
In addition to payday lending information, the Center for Responsible Lending (http://www.responsiblelending.org) also provides education on other abusive financial practices such as: tax refund anticipation loans, rent-to-own, car title loans, and more.
Payday lending (often called cash advance) is the practice of using a post-dated check or electronic checking account information as collateral for a short-term loan. Research indicates that the payday lending business model is designed to keep borrowers in debt, not to provide one-time assistance during a time of financial need [as they’re often thought of] …
Payday lending is often referred to as a "debt trap" – here’s a few reasons why:
- 91% of payday loans are made to borrowers who use 5+ payday loans/year.
- 99% of payday loans go to repeat borrowers.
- The average payday borrower pays $800 to borrow $325.
- It is estimated that payday lending costs US families $3.4 billion annually.
Payday lenders typically allow borrowers just two weeks to repay, and borrowers regularly find they cannot come up with the cash to pay back their loan so quickly. To avoid defaulting, borrowers often agree to renew the loan and pay the interest again. Interest fees are usually $15-$20 per $100 borrowed. A PIRG study found the average interest nationally was 680% APR. The Department of Defense lists payday lending as one of the top ten key issues impacting the quality of life of U.S. soldiers. A "New York Times" article in Dec. 2004 revealed that more than 1/4 of military households (26%) have been caught up in payday lending. In many university towns, students are a primary "user" of these products. Many states have seen the problems these types of lenders have created for consumers [and 14 states] have banned payday lenders. Unfortunately, lenders have found ways around these state laws. National chains use partnerships with out-of-state banks to ‘skirt’ the law. They also use this arrangement (known as the rent-a-bank model) to avoid limits on interest rates and other provisions in states that do authorize payday lending.
The Center for Responsible Lending provides "9 Signs of a Predatory Payday Loan" to help educate consumers on the pitfalls that entrap many …
1. Triple digit interest rate – fees equal to 400% APR and higher.
2. Short minimum loan term – 75% of payday customers are unable to repay their loan within the allotted two weeks and are forced to get a loan "rollover" at additional cost.
3. Single balloon payment – payday loans do not allow for partial payments to be made during the loan term. The entire loan must be repaid at the end of the two weeks.
4. Loan flipping – 90% of the payday industry’s revenue growth comes from making more and larger loans to the same customers.
5. Simultaneous borrowing from multiple lenders – many consumers on the "debt treadmill" get a loan from one payday lender to repay another.
6. No consideration of borrower’s ability to repay – consumers are usually encouraged to borrow the maximum, regardless of their credit history.
7. Deferred check mechanism – consumers who can’t make good on a deferred (post-dated) check covering a payday loan may be assessed multiple late fees and NSF check charges or fear prosecution for writing a "bad check."
8. Mandatory arbitration clause – by eliminating the borrower’s right to sue for abusive lending practices, these clauses work to the benefit of the lender, not the consumer.
9. No restrictions on out-of-state banks violating local state laws – federal banking laws were obviously not enacted to enable payday lenders to circumvent state laws, but that is what is happening in many instances.
In addition to payday lending information, the Center for Responsible Lending (http://www.responsiblelending.org) also provides education on other abusive financial practices such as: tax refund anticipation loans, rent-to-own, car title loans, and more.
Alternative Student Loans
ALTERNATIVE/PRIVATE LOANS
With educational costs at an all-time high, it should come as no surprise that educational debt is also at an all-time high. Variables such as high education costs, high levels of discretionary spending, and more reliance on the student to pay for their educational costs [among other issues] have resulted in a tremendous increase in the usage of alternative/private loans for student [and parent] borrowing.
What you should not do [if looking at alternative loans] is assume that they are all created equal – believe me, they’re not! Also consider the name – ‘Alternative’ Loan – this avenue shouldn’t be pursued until all primary avenues have been explored: i.e., grants, scholarships, federal loans. If you’ve exhausted these options and have determined that an alternative loan is necessary, here’s what you should consider (always look at more than one loan option before making any decision):
FEES & INTEREST RATES.
Most of the common loan fees can be avoided if you shop around:
- Application fees (can be avoided)
- Loan origination fees (can be avoided)
Interest rates vary dramatically (as much as 2.5%+) – rates will particularly vary depending on the credit of the individual; fees charged, borrower benefits, repayment terms, and most other aspects of the loans will vary dramatically from program to program. Spending a few minutes researching the various loan products can save literally thousands of dollars over the repayment of the loan.
LOAN ELIGIBILITY ISSUES.
- Do I need a cosigner?
o If so, is there a cosigner release option (will the company release the cosigner from liability after 24 payments (or after some on-time period of time))?
o Will a cosigner reduce the loan costs to me (better rate, reduce/eliminate fees, etc.)?
- Do I need to be enrolled full-time in school to be eligible?
BORROWER TERMS.
- What is the interest rate? (A good rate is typically Prime + 0%). What is the formula they utilize?
- What is the interest rate cap? As interest rates rise, most alternative loan rates will also raise because they are linked to the Prime Rate or LIBOR Rate –- many companies cap rates at 20%-25% - ouch!
- Are there fees? What are they? When are they assessed (rolled into loan?)?
- What are the minimum/maximum borrower limits?
- What is the aggregate (total) borrower limit?
- Will loan terms change if my debt-to-income ratio changes?
REPAYMENT TERMS.
- When does repayment begin?
- What are my repayment options?
- Are payments required while I’m in school?
- Is interest capitalized? [probably] - If so, when?
- What will my monthly payments be?
- What will be the total costs of the loan (interest, principal, fees)?
BORROWER BENEFITS.
- Are there any discounts for on-time and/or automatic payments?
- Is consolidation available? Benefits for doing so? (NOTE. YOU DO NOT WANT TO CONSOLIDATE ALTERNATIVE LOANS WITH FEDERAL LOANS EVEN IF THE PRIVATE LOAN COMPANY WILL ALLOW IT!)
- Are there deferment/forbearance options during repayment if needed?
- What benefits does this company offer that makes their loan better for me than another lender’s program (some programs are offered to specific audiences: MBA students, medical students, etc.)?
LOAN PROCESS.
- Can I apply online?
- Is the money disbursed (paid out) electronically?
- How long before I can expect the money?
- Other elements that would simplify the process? Save me time/money?
OTHER RESOURCES.
- Loan Comparison Worksheet (www.nela.net/~content/~downloads/chart.pdf)
- Loan Analyzer – cost of loan (www.finaid.org/calculators/loananalyzer.phtml)
- Payment estimator (www.mapping-your-future.org/features/loancalc.htm)
- Your school may have a list of approved lenders as a starting point – MU does: (http://sfa.missouri.edu/altloanlender.php)
- You may want to speak with a financial aid representative and/or schedule an appointment with a financial counselor at the OFS before taking action.
CAN YOU AFFORD IT??
Remember – the fact that you find an alternative loan product that is better than another doesn’t mean you can afford it. Make sure you know what you’re getting into. Understand the obligation and the costs, so that you can weigh those issues versus the benefits to you of the loan (continuing school, etc.). Bottom line – will you be able to afford the pending monthly payments?
With educational costs at an all-time high, it should come as no surprise that educational debt is also at an all-time high. Variables such as high education costs, high levels of discretionary spending, and more reliance on the student to pay for their educational costs [among other issues] have resulted in a tremendous increase in the usage of alternative/private loans for student [and parent] borrowing.
What you should not do [if looking at alternative loans] is assume that they are all created equal – believe me, they’re not! Also consider the name – ‘Alternative’ Loan – this avenue shouldn’t be pursued until all primary avenues have been explored: i.e., grants, scholarships, federal loans. If you’ve exhausted these options and have determined that an alternative loan is necessary, here’s what you should consider (always look at more than one loan option before making any decision):
FEES & INTEREST RATES.
Most of the common loan fees can be avoided if you shop around:
- Application fees (can be avoided)
- Loan origination fees (can be avoided)
Interest rates vary dramatically (as much as 2.5%+) – rates will particularly vary depending on the credit of the individual; fees charged, borrower benefits, repayment terms, and most other aspects of the loans will vary dramatically from program to program. Spending a few minutes researching the various loan products can save literally thousands of dollars over the repayment of the loan.
LOAN ELIGIBILITY ISSUES.
- Do I need a cosigner?
o If so, is there a cosigner release option (will the company release the cosigner from liability after 24 payments (or after some on-time period of time))?
o Will a cosigner reduce the loan costs to me (better rate, reduce/eliminate fees, etc.)?
- Do I need to be enrolled full-time in school to be eligible?
BORROWER TERMS.
- What is the interest rate? (A good rate is typically Prime + 0%). What is the formula they utilize?
- What is the interest rate cap? As interest rates rise, most alternative loan rates will also raise because they are linked to the Prime Rate or LIBOR Rate –- many companies cap rates at 20%-25% - ouch!
- Are there fees? What are they? When are they assessed (rolled into loan?)?
- What are the minimum/maximum borrower limits?
- What is the aggregate (total) borrower limit?
- Will loan terms change if my debt-to-income ratio changes?
REPAYMENT TERMS.
- When does repayment begin?
- What are my repayment options?
- Are payments required while I’m in school?
- Is interest capitalized? [probably] - If so, when?
- What will my monthly payments be?
- What will be the total costs of the loan (interest, principal, fees)?
BORROWER BENEFITS.
- Are there any discounts for on-time and/or automatic payments?
- Is consolidation available? Benefits for doing so? (NOTE. YOU DO NOT WANT TO CONSOLIDATE ALTERNATIVE LOANS WITH FEDERAL LOANS EVEN IF THE PRIVATE LOAN COMPANY WILL ALLOW IT!)
- Are there deferment/forbearance options during repayment if needed?
- What benefits does this company offer that makes their loan better for me than another lender’s program (some programs are offered to specific audiences: MBA students, medical students, etc.)?
LOAN PROCESS.
- Can I apply online?
- Is the money disbursed (paid out) electronically?
- How long before I can expect the money?
- Other elements that would simplify the process? Save me time/money?
OTHER RESOURCES.
- Loan Comparison Worksheet (www.nela.net/~content/~downloads/chart.pdf)
- Loan Analyzer – cost of loan (www.finaid.org/calculators/loananalyzer.phtml)
- Payment estimator (www.mapping-your-future.org/features/loancalc.htm)
- Your school may have a list of approved lenders as a starting point – MU does: (http://sfa.missouri.edu/altloanlender.php)
- You may want to speak with a financial aid representative and/or schedule an appointment with a financial counselor at the OFS before taking action.
CAN YOU AFFORD IT??
Remember – the fact that you find an alternative loan product that is better than another doesn’t mean you can afford it. Make sure you know what you’re getting into. Understand the obligation and the costs, so that you can weigh those issues versus the benefits to you of the loan (continuing school, etc.). Bottom line – will you be able to afford the pending monthly payments?
Student Loans [legislative update]
A list of the primary legislative changes:
- Direct Loan repayment programs (i.e., standard, graduated, & extended repayment options) to be aligned with the FFEL program.
- Eliminates in-school consolidation option (effective 7/1/06).
- Increases the amount of wages that can be garnished from 10% to 15%.
- Reduces the number of payments needed to rehabilitate a defaulted loan.
- Eliminates spousal consolidation loans (effective 7/1/06).
- Allows students to earn more money without negatively impacting their eligibility for federal financial aid.
- New aid available for need-based, Pell Grant-eligible undergraduates with focus on math and science.
- Expanded loan forgiveness provisions for [qualified math, science, and special education] teachers. Qualified teachers can receive up to $17,500 in loan forgiveness (up from $5,000).
- Expansion of PLUS loans to graduate and professional students, allowing them to borrow up to the cost of attendance on their own behalf.
- Reduction of origination fees (fees students pay when taking out student loan).
- Interest rates on loans disbursed after 7/1/06 will be set at a fixed rate of 6.8% for Stafford loans and 8.5% for PLUS loans (8.5% PLUS loan provision not applied to Direct PLUS loans at this stage – obvious oversight).
- Increased loan limits on federal loans during first two years (does not, however, increase aggregate borrowing limits): Effective 7/1/07, first year undergrad borrowing increase to $3,500 from $2,625 and to $4,500 from $3,500 for second-year undergrads.
- Unsubsidized borrower loan limits will increase to $12,000 from $10,000 for graduate students.
- Direct Loan repayment programs (i.e., standard, graduated, & extended repayment options) to be aligned with the FFEL program.
- Eliminates in-school consolidation option (effective 7/1/06).
- Increases the amount of wages that can be garnished from 10% to 15%.
- Reduces the number of payments needed to rehabilitate a defaulted loan.
- Eliminates spousal consolidation loans (effective 7/1/06).
- Allows students to earn more money without negatively impacting their eligibility for federal financial aid.
- New aid available for need-based, Pell Grant-eligible undergraduates with focus on math and science.
- Expanded loan forgiveness provisions for [qualified math, science, and special education] teachers. Qualified teachers can receive up to $17,500 in loan forgiveness (up from $5,000).
- Expansion of PLUS loans to graduate and professional students, allowing them to borrow up to the cost of attendance on their own behalf.
- Reduction of origination fees (fees students pay when taking out student loan).
- Interest rates on loans disbursed after 7/1/06 will be set at a fixed rate of 6.8% for Stafford loans and 8.5% for PLUS loans (8.5% PLUS loan provision not applied to Direct PLUS loans at this stage – obvious oversight).
- Increased loan limits on federal loans during first two years (does not, however, increase aggregate borrowing limits): Effective 7/1/07, first year undergrad borrowing increase to $3,500 from $2,625 and to $4,500 from $3,500 for second-year undergrads.
- Unsubsidized borrower loan limits will increase to $12,000 from $10,000 for graduate students.
Lost Your Wallet?
I wanted to provide information this week to arm people with knowledge about what to do in the disheartening event of having one’s wallet or purse lost or stolen. If you’ve had it happen before, you understand the high level of stress involved. This week’s tip is designed to help minimize that stress somewhat by giving you some specific steps to take to minimize the potentially damaging effects.
- Cancel your credit cards immediately. That’s easy in theory, but in the event this were to occur, do you have filed handily away your creditors, their toll free numbers, and your card numbers so you know who to call?
- File a police report immediately in the jurisdiction where it was stolen. Ultimately, this will prove to creditors, insurance company, etc. that you were diligent. It is a first step toward an investigation if there is one.
- Call the three national credit reporting organizations immediately to place a fraud alert (contact info below) on your name and SSN. The alert is a ‘flag’ to companies that check your credit. They will know that your information was stolen and they will need to contact you by phone to authorize new credit. This can be quickly added and also removed when desired.
- Report the information to your bank. Cancel checking and savings accounts and open new ones.
- Report your missing drivers’ license number to the Department of Motor Vehicles. Get a new number assigned (preferably not your SSN).
- Prepare now! Take steps now so that in the unfortunate event that this does happen to you, you will be prepared. Gather necessary documentation and records and keep them in a safe, secure place.
CONTACT INFO FOR CREDIT REPORTING AGENCIES (FRAUD AREA):
Equifax (800-525-6285)
Experian (888-397-3742)
TransUnion (800-680-7289)
FTC Identity Theft Hotline (877-ID-THEFT)
Other Identity Theft Government Resources:
(http://www.consumer.gov/idtheft) – Federal Trade Commission’s national identity theft resource. Information to help protect yourself, file a complaint, or read more on different identity theft topics.
(http://www.consumer.gov/idtheft/con_pubs.htm) – Federal Trade Commission publications on identity theft.
- Cancel your credit cards immediately. That’s easy in theory, but in the event this were to occur, do you have filed handily away your creditors, their toll free numbers, and your card numbers so you know who to call?
- File a police report immediately in the jurisdiction where it was stolen. Ultimately, this will prove to creditors, insurance company, etc. that you were diligent. It is a first step toward an investigation if there is one.
- Call the three national credit reporting organizations immediately to place a fraud alert (contact info below) on your name and SSN. The alert is a ‘flag’ to companies that check your credit. They will know that your information was stolen and they will need to contact you by phone to authorize new credit. This can be quickly added and also removed when desired.
- Report the information to your bank. Cancel checking and savings accounts and open new ones.
- Report your missing drivers’ license number to the Department of Motor Vehicles. Get a new number assigned (preferably not your SSN).
- Prepare now! Take steps now so that in the unfortunate event that this does happen to you, you will be prepared. Gather necessary documentation and records and keep them in a safe, secure place.
CONTACT INFO FOR CREDIT REPORTING AGENCIES (FRAUD AREA):
Equifax (800-525-6285)
Experian (888-397-3742)
TransUnion (800-680-7289)
FTC Identity Theft Hotline (877-ID-THEFT)
Other Identity Theft Government Resources:
(http://www.consumer.gov/idtheft) – Federal Trade Commission’s national identity theft resource. Information to help protect yourself, file a complaint, or read more on different identity theft topics.
(http://www.consumer.gov/idtheft/con_pubs.htm) – Federal Trade Commission publications on identity theft.
August 09, 2006
FACTA (Fair and Accurate Credit Transactions Act)
FAIR AND ACCURATE CREDIT TRANSACTIONS ACT.
Signed into law by Pres. Bush in December of 2003, the Fact Act [as it’s often referred] was designed to ensure that all citizens are treated fairly when applying for credit. Specifically, the bill was designed to significantly increase consumer protections against the growing problem of identity theft. FACTA also extends the current provisions of the Fair Credit Reporting Act.
Some of the major provisions of FACTA ...
- Provide consumers with a free credit report every year.
- Give consumers the right to see their credit scores (for a fee).
- Provide consumers with the ability to opt-out of information sharing between affiliated companies for marketing purposes.
- Ensure that consumers are notified if merchants are going to report negative information to the credit bureaus about them.
- Allow consumers to place "fraud alerts" in their credit reports to prevent identity thieves from opening accounts in their names (includes special provisions to active duty military).
- Allow consumers to block information from being given to a credit bureau and from being reported by a credit bureau if such information results from identity theft.
- Restrict access to consumers' sensitive health information.
- Provide consumers with one-call-for-all protection by requiring credit bureaus to share consumer calls on identity theft, including requested fraud alert blocking.
- Require creditors to take certain precautions before extending credit to consumers who have placed "fraud alerts" in their files.
- Stop merchants from printing more than the last five digits of a payment card on an electronic receipt.
Consumer credit is such a vital thing for most consumers – the ability to have protections in place to help consumers protect the credit they work so hard to build and develop is critical.
FACTA Press Release:
http://www.whitehouse.gov/news/releases/2003/12/20031204-3.html
Summary of FACTA changes to FCRA:
http://www.consumerlaw.org/initiatives/facta/nclc_analysis.shtml#1
Fair Credit Reporting Act:
http://www.ftc.gov/os/statutes/fcra.htm
Signed into law by Pres. Bush in December of 2003, the Fact Act [as it’s often referred] was designed to ensure that all citizens are treated fairly when applying for credit. Specifically, the bill was designed to significantly increase consumer protections against the growing problem of identity theft. FACTA also extends the current provisions of the Fair Credit Reporting Act.
Some of the major provisions of FACTA ...
- Provide consumers with a free credit report every year.
- Give consumers the right to see their credit scores (for a fee).
- Provide consumers with the ability to opt-out of information sharing between affiliated companies for marketing purposes.
- Ensure that consumers are notified if merchants are going to report negative information to the credit bureaus about them.
- Allow consumers to place "fraud alerts" in their credit reports to prevent identity thieves from opening accounts in their names (includes special provisions to active duty military).
- Allow consumers to block information from being given to a credit bureau and from being reported by a credit bureau if such information results from identity theft.
- Restrict access to consumers' sensitive health information.
- Provide consumers with one-call-for-all protection by requiring credit bureaus to share consumer calls on identity theft, including requested fraud alert blocking.
- Require creditors to take certain precautions before extending credit to consumers who have placed "fraud alerts" in their files.
- Stop merchants from printing more than the last five digits of a payment card on an electronic receipt.
Consumer credit is such a vital thing for most consumers – the ability to have protections in place to help consumers protect the credit they work so hard to build and develop is critical.
FACTA Press Release:
http://www.whitehouse.gov/news/releases/2003/12/20031204-3.html
Summary of FACTA changes to FCRA:
http://www.consumerlaw.org/initiatives/facta/nclc_analysis.shtml#1
Fair Credit Reporting Act:
http://www.ftc.gov/os/statutes/fcra.htm
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