It is that time of year: millions of students will be heading to college. For many students, this will be the first time that they will be the targets of banks’ marketing departments.
While the CARD Act changed how lenders can offer college students credit cards, young adults are still able to acquire these potentially expensive products. A study of college student credit cards by MagnifyMoney.com shows that a student new to credit is likely to pay an average APR of 21.4%. And taking out cash is even more expensive, with an average APR of 24.1%.
- We reviewed the Top 50 banks in the US by deposits
- We reviewed credit cards specifically targeting students and actively marketed on the banks’ websites
- All credit cards, with the exception of Capital One Journey, offer a range of Purchase APRs. CapitalOne offers a single, flat APR of 19.8%
- For credit cards that offer a range of APRs, the average range is nine percentage points
- The lowest possible APR is 10.99%, offered by Bank of America on the BankAmericard Credit Card for Students
Note: Bank of America charges higher APRs on student products that earn rewards. A no rewards card has a range of 10.99% – 20.99%. The cash rewards card has a range of 12.99% – 22.99%. The travel rewards card has a range of 14.99% – 22.99%. Remember: rewards can be very expensive!
- The highest possible APR is 23.99%, offered by Citi (both the ThankYou Preferred for College Students and Dividend Platinum Select Visa for College Students)
- If your student credit card is your first credit product, then you will likely have no score. No score means you are the highest risk, and it is highly likely that you will receive the highest price point. The average of the highest price points is 21.4%
If a student charges $1,000 on a credit card and only pays the minimum due at the average rate of 21.4%, it will take 7.6 years to pay back the debt. And the total amount repaid would be $1,941.
Noticeably absent from the list of banks offering credit cards that target students are American Express and Chase. Chase recently exited the business, recognizing that earning interest rates more than 20% on students still in college didn’t feel right.
The CARD Act restricted, but certainly did not eliminate, credit cards that target students. In 2012, applications for student credit cards were at 43.5% of 2007 levels. The CARD Act put the following restrictions into place:
- No pre-approved offers to people under 21, without consent
- If you are under 21, you need to prove that you have income (a part-time job, for example), or have a cosigner older than 21
- Credit card companies can no longer give out free gifts on campus to induce people into signing up for a credit card. No more frisbees or beer mugs
However, there are still plenty of student credit card offers out there. While they don’t give out frisbees, they do offer sign-on bonuses. Citi, for example, gives you 2,500 Thank You points if you spend $500 within 3 months of opening the card. We find that worse than the free frisbee. Before, they would incent you to open a card. Now they are incenting you to spend on the card!
While credit cards can be a great way to build your credit while in college, they can turn into expensive traps that send you down a dangerous path.
The only reason you should apply for a student credit card is to build your credit score. And follow these three tips:
1.Your statement balance should never be more than 30% of your limit. High utilization, early in your credit history, can have a meaningful negative impact. So, just make one to two purchases a month on the card.
2.Pay your balance in full. Credit cards are expensive, and you should not use them to borrow.
3.Never use a credit card for a cash advance. It may seem like easy money, but you will be paying for it.
How to Have to a Million Dollars in Retirement with a $50k Annual Salary
If you’re just starting out, saving for retirement can feel like an impossible goal. It’s not only decades away, but the thought of having hundreds of thousands (or even millions) of dollars in savings can seem a little ridiculous, especially when it’s still a struggle just to manage your day-to-day bills and keep a little money on hand for some fun.
But the truth is that you can build up some significant savings, even to have a million dollars in retirement, and you don’t have to make a lot of money or start saving a ton right away.
In this post we’ll go through a few examples of people who are just starting out like you and can’t afford to save a lot for retirement yet. But with a little planning and a long-term view, each of them can reach $1 million in savings.
Example 1: Steve, age 25
Steve is 25 years old and makes $50,000 per year. He’s living on his own for the first time and his budget is pretty tight due to student loans he needs to pay off, so he doesn’t have a lot of room to save for retirement.
Steve might not be able to save much right now, but he has one big advantage: he’s starting early. Because he has so much time, he can actually start pretty small and still get to $1 million.
Here’s how Steve does it:
- He sets up an automatic $50 monthly contribution to a retirement account (this is 1.2% of his annual salary).
- His employer doesn’t offer a match on 401(k) contributions (come on employer!) so he has some flexibility about where to put that money. He could choose to contribute to a 401(k) or Traditional IRA, which would give him a tax deduction today in exchange for paying taxes on the money he withdraws in retirement. Or he could choose to contribute to a Roth IRA, which wouldn’t offer any current tax break but would give him tax-free withdrawals in retirement. He chooses to go with a Roth IRA because he likes that the money will eventually be tax-free, but you can click here for a more detailed review of the two options.
- Every year he increases that monthly contribution by $50. He sets up a calendar reminder that sends him an email each December so that he remembers to do this.
- He caps out his contributions at 10% of his salary ($417 per month). If he decided to contribute more, he could either reach his goal sooner or have more money in retirement, but for now he’s decided that 10% is all he can afford. He will be making this max contribution by age 33.
If Steve follows this plan and gets an 8% annual return on his investments, he will hit $1,008,575 in retirement savings by age 64. Not bad!
Example 2: Jen and Dave, age 25
Jen and Dave are also 25 and have a combined income of $75,000 per year.
If they follow the exact same plan as Steve, they will actually end up saving a little more because that 10% cap on contributions will be based on a higher income. That little bit of extra savings will allow them to reach $1 million a few years sooner.
Starting with a $50 monthly contribution that increases by $50 each year, Jen and Dave will hit $1,002,410 in retirement savings by age 61.
Example 3: Tiffany, age 35
Like Jen and Dave, Tiffany is making $75,000 per year. But she’s starting 10 years later, at age 35, so she’s going to have to save a little more aggressively if she wants to get to $1 million.
Still, the path isn’t quite as difficult as you might think. Tiffany can still start pretty small and work her way up.
Here’s how she does it:
- She starts with $100 monthly contributions, automated of course (this is 1.6% of her annual salary).
- She chooses to contribute to her company’s 401(k) instead of a Roth IRA because she likes the current tax break and it offers plenty of good, low-cost index funds.
- She increases those monthly contributions by $100 each year.
- She caps her contributions at 15% of her annual salary ($938 per month, which she will hit at age 44).
If she sticks to this plan, she will reach $1,000,508 in savings at age 65. If she starts with $200 monthly contributions instead, she can get there about 1 year sooner.
While saving $1 million for retirement is certainly a big accomplishment, there are three big reasons why it may not necessarily be enough for you.
First, your personal spending patterns will determine your personal retirement need and $1 million is just an example. You can use one of the many retirement calculators online to get a sense of your personal needs.
Second, $1 million will be worth a lot less in 30-40 years than it is today simply because of inflation. If your Grandma has ever told you how much a loaf of bread cost back in the day, you know what I’m talking about.
And finally, if your retirement money is inside a 401(k) or Traditional IRA, it’s important to remember that your withdrawals will be taxable and therefore you may have less available to spend than you think. As an example, a married couple withdrawing $54,000 per year from a 401(k) may only have about $50,000 to actually spend (assuming they have no other income and tax rates are the same as they are today).
What does this mean for you?
If you simply start now and give yourself time, you CAN build up a sizable amount of retirement savings even without a huge salary.
None of these examples even accounted for the fact that you might get raises or that your employer might offer a match on your 401(k) contributions. Either of those would help your savings grow even faster.
So, if you’d like your own million dollar retirement fund, simply follow these steps and watch your money grow:
- Start contributing what you can right now, even if it’s small.
- Automate those contributions to a dedicated retirement account like a 401(k) or Roth IRA.
- Create a regular schedule for increasing those contributions by small amounts each time.
- Stick to your plan. Consistent progress over long periods of time is the key to the whole thing.
Sample Goodwill Letter to Remove a Late Student Loan Payment from Your Credit Report
If you’ve pulled your credit report recently and discovered that there’s been a late payment reported concerning your student loans, you might be wondering what you can do to recover.
Late payments can be damaging to your credit, especially if you stop paying your loans for an extended period of time. We’ve already gone over the repercussions of delinquency and defaulting, but today, we’re going to take a look at another method of repairing your credit report.
What is a Goodwill Letter?
A “goodwill letter” is a simple way to repair your credit report and it can be used for both federal and private loans. The purpose of a goodwill letter is to restore your credit to good standing by having a lender or servicer erase a lateness on your credit report.
Typically, those that have experienced financial hardship due to unexpected circumstances have the most success with goodwill letters. They allow you to take responsibility for your actions and to ask (in a very nice way) if your student loan servicer can empathize with the situation that caused the lateness, and erase it from your report.
It can also be used when you think the late payment is an error – for example, if you were in deferment or forbearance during the time of the late payment, and weren’t required to make any payments during that time, or if you know you’ve never been late on a payment before.
What Makes a Convincing Goodwill Letter?
If you’ve been looking for a goodwill letter that will actually work, we have some tips on what you should include in your letter.
- An appreciative tone
It’s important that the entire tone of your letter read as thankful and conscientious. If you were actually late on your payments due to extenuating circumstances, you shouldn’t take an angry tone in your letter, since you were in the wrong.
- Take responsibility
You want to be convincing and honest. Take responsibility for the late payment, and explain why it happened. They need to be able to sympathize with you. Saying you just forgot isn’t going to win you any points.
- A good recent payment history
Besides sympathy, you want to gain their trust as far as continuing to make payments goes. If your lender sees payments being made on time before and after the period of financial hardship, they might be more willing to give you a break. When you have a pattern of late payments, it’s more difficult to convince them that you’re taking this seriously.
- Proof any errors and relevant documents
If you’re writing about a mistake that occurred, still be friendly in tone, but back up the errors with documentation. You’ll need proof that what you’re saying is true. Unfortunately, errors are made on credit reports often, and it may have been a clerical error on behalf of your servicer. If you have any written correspondence with them, you’ll want to include it.
- Simple and to the point
The last thing to keep in mind is to craft a short and simple letter. Get straight to the point while telling your story. The people reviewing your letter don’t want to read an essay, and the easier you make their lives, the better.
A Sample Goodwill Letter
There are a few samples of goodwill letters circulating around, but here is a template for student loans:
To Whom It May Concern,
Thank you for taking the time out of your day to read this letter. I just pulled my credit report, and discovered that a late payment was reported on [date] for my account [loan account number].
During that time, my mother fell terminally ill, and I was the only one left to care for her. As such, I had to leave my job, and my savings went toward her healthcare expenses. I fell on very rough times after she passed away, and was unable to make my student loan payments.
I realize I made a mistake in falling behind, but up until that point, my payment history with you had been spotless. When I was able to gain employment once again, I quickly resumed paying my student loans, making them a priority.
I’m not proud of this black mark on my record, but it’s the only one I have, and I would be extremely grateful if you could honor this request to remove the lateness from my credit report. It would help me immensely in securing other lines of credit so that I can further improve my credit score.
If the lateness cannot be removed entirely, I would still be appreciative if you could make a goodwill adjustment.
If you’re writing a letter because the lateness on your credit report is inaccurate, then try this letter:
To Whom It May Concern,
Thank you for taking the time to read this letter. I recently pulled my credit report and found that [Loan servicer] reported a late payment regarding my account [loan account number].
I am requesting that this late payment be assessed for accuracy.
I believe this reporting is incorrect because [list the supporting facts you have]. I have included the documentation to prove that I made payments during this time / that my loans were in forbearance/deferment and didn’t require any payments.
Please investigate this matter, and if it is found to be inaccurate, remove the lateness from my credit report.
Make sure you delete the scenarios that don’t apply to you; you want to provide as many personal details as possible. You should also include your name, address, and phone number at the top of the letter, in case your loan servicer needs to reach you immediately.
Where to Send Your Goodwill Letter
Now that your letter is written, you have to send it! This can be done either by fax or by mail. Most student loan servicers have their contact information on their website, but you can also look on your billing statements to see if they specify a different address.
Additionally, you can try calling the credit bureau the lateness was reported to, and see if they can give you the contact information you need.
It’s important to mention that goodwill letters are not a means to immediate success. It often takes several tries of corresponding with servicers and lenders to get them to acknowledge that they received a letter from you.
Your best bet is to get a personal contact at the company that has the power to erase the late payment from your credit report.
If all else fails, try as many different communication methods as possible. Call, mail, fax, live chat (if your servicer offers it), and email them. Several people who have tried this method report that it’s possible to wear your servicer down with a decent amount of requests.
Addresses and Fax Numbers to Try
These addresses and fax numbers were found on the servicer websites directly. Again, it’s worth it to try and call your servicer to get the name of someone there that can help you.
Documents related to deferment, forbearance, repayment plans, or enrollment status changes:
Attn: Enrollment Processing
P.O. Box 82565
Lincoln, NE 68501-2565
My Great Lakes
P.O. Box 7860
Madison, WI 53707-7860
P.O. Box 3319
Wilmington, DE 19804-4319
Documents to Include With Goodwill Letter
Don’t let your efforts go to waste by forgetting to include documentation with your letter. Here’s a quick checklist of what you should include:
- The account number for your loan
- Your name, address, phone number, and email
- Statements showing proof that you paid (if you’re disputing a late payment)
- Documentation showing that you’ve paid on time at all other points aside from when you experienced financial hardship
- Identifying documentation so your servicer knows you sent the request
- Not necessarily something to “include”, but if you’re mailing anything, you should send it by certified mail with a receipt requested, this way you’ll know if your letter made it.
If you’re interested in exploring goodwill letters further, and the results that others have had, check out these websites:
- ed.gov: They cover disputes, what to do about them, and how to go about rectifying them here.
- gov: If you have loans with a private lender, and your lender has reported you as late when you weren’t, you can file a complaint with the CFPB to see if they can help you.
- myFico Forums: The forums on myFico are populated with helpful individuals that might be able to give you contact information for certain servicers. There are some people reporting success with goodwill letters, and they are willing to share the letter with others upon request.
It’s worth the time to write a goodwill letter
If you’ve discovered that a late payment has been reported on your credit, and it’s because you fell on hard times, or is inaccurate, it’s worth trying to get it erased. These dings on your credit are there to stay for 7-10 years. That’s a long time, especially if you’re young and hoping to buy a house or a car in the near future. It’s a battle worth fighting.
Get in touch with us on Twitter @Magnify_Money
18 Options to Refinance a Student Loan
Are you tired of paying a high interest rate on your student loan debt? Are you looking for ways to refinance your debt at a lower interest rate, but don’t know where to turn?
There is good news: in recent years, the student loan refinancing market has been growing rapidly. Not just with traditional banks, credit unions and finance companies, but even the addition of new businesses that specialize in refinancing student loan debt.
The loan approval rules vary by lender. However, all of the lenders will want:
- Proof that you can afford your payments. That means you have a job with income that is sufficient to cover your student loan and all of your other expenses.
- Proof that you are a responsible borrower, with a demonstrated record of on-time payments. For some lenders, that means that they use the traditional FICO, requiring a good score. For other lenders, they may just have some basic rules, like no missed payments, or a certain number of on-time payments required to prove that you are responsible.
If you are in financial difficulty and can’t afford your monthly payments, than a refinance is not the solution. Instead, you should look at options to avoid a default on student loan debt.
If you can afford your monthly payment, but you have been a sloppy payer, than you will likely need to demonstrate responsibility before applying for a refinance.
But, if you can afford your monthly payment and have been responsible with those payments, than a refinance could be possible.
Is it worth it?
Like any form of debt, your goal with a student loan should be to pay as low an interest rate as possible. Other than a mortgage, you will likely never have a debt as large as your student loan.
If you are able to reduce the interest rate by re-financing, than you should consider the transaction. However, make sure you include the following in any decision:
Is there an origination fee?
Many lenders have no fee, which is great news. If there is an origination fee, you need to make sure that it is worth paying. If you plan on paying off your loan very quickly, than you may not want to pay a fee. But, if you are going to be paying your loan for a long time, a fee may be worth paying.
Is the interest rate fixed or variable?
Variable interest rates will almost always be lower than fixed interest rates. But there is a reason: you end up taking all of the interest rate risk. We are currently at all-time low interest rates. So, we know that interest rates will go up, we just don’t know when. This is a judgment call. Just remember, when rates go up, so do your payments. And, in a higher rate environment, you will not be able to refinance to a better option (because all rates will be going up). We typically recommend fixing the rate as much as possible, unless you know that you can pay off your debt during a short time period. If you think it will take you 20 years to pay off your loan, you don’t want to bet on the next 20 years of interest rates. But, if you think you will pay it off in five years, you may want to take the bet.
Place to Consider a Refinance
- Alliant Credit Union: In order to qualify, you need to have a bachelor’s degree. The minimum credit score is 700, and you need two years of employment and a minimum income of $40,000. They offer variable interest rates, starting at 6%.
- Cedar Education Lending: In order to qualify, you need to have graduated from an eligible school. They will look at your credit history, and you must have at least 12 months of demonstrated income. You or your cosigner must make at least $2,000 per month. Fixed rates start at 5.24% and variable rates start at LIBOR + 2.65%.
- Charter One: (This company is owned by Citizens Bank) To get the best deal, you should have at least a bachelor’s degree. They will look at your credit history, and want to make sure that at least the last three payments on your student loans have been made on time. If you don’t have your degree, you need to have made the last 12 payments (principal and interest) on time. You must make at least $24,000 per year. They offer fixed rates starting at 4.74% and variable rates from 2.30%.
- Citizens Bank: Under the Citizens brand, the qualification criteria and pricing is the same as Charter One (above).
- CU Student Loans: You will need to have graduated from an eligible school in order to qualify. You need to make at least $2,000 per month, and they will review your credit history. Variable rates are available, starting at 3.97%
- CommonBond: You need to have graduated from one of the graduate schools in their network, and have good credit history. Fixed and variable rates are available, with variable rates starting as low as 2.65%.
- Credit Union Student Choice: This is a program offered by credit unions. The criteria vary by credit union, but you can easily find ways of joining the credit unions before finalizing the refinance.
- EdVest: They offer refinancing options for private loans used to finance attendance at a Title IV, degree-granting institution. If the loan balance is below $100,000 you need to make at least $30,000 a year. If your balance is above $100,000 you need to make at least $50,000. Fixed rates are available to residents of New Hampshire, and variable rates are available to everyone else – starting at 4.06%.
- Education Success Loans: You must be out of school for at least 30 months, and you must have a degree. You also need a good credit score, with on-time payment behavior. Variable and fixed loan options are available, with rates starting at 5.24%.
- Eastman Credit Union: They don’t share much of their criteria publicly. Fixed rates start at 6.5%.
- IHelp: You need to have 2 years of good credit history, with a DTI (debt-to-income) of less than 45% and annual income of at least $24,000. Fixed rates are available, starting at 6.22%.
- Mayo Employees Credit Union: You need at least $2,000 of monthly income and a good credit history. Variable rates are available, starting at 4.9%.
- Pave: This is a crowd-sourced loan. You need at least a 640 credit score, and there is no minimum degree requirement. There are fixed rates, starting at 5.49%.
- RISLA: You need at least a 680 credit score, and can find fixed interest rates starting at 3.99%.
- Sofi: You must have a bachelor’s or graduate degree in order to apply, and you must have demonstrated on-time payment behavior. Both fixed and variable rates are available, with rates starting at 2.66% and fixed rates starting at 3.625%.
- Upstart: You need to have a degree (or be graduating within 6 months). A minimum FICO of 640 is required. Fixed interest rates starting at 6.68%.
- UW Credit Union: $25,000 minimum income required, with at least 5 years of credit history and a good repayment record. Fixed and variable interest rates are available, with variable rates starting at 3.48% and fixed rates starting at 7.49%.
- Wells Fargo: As a traditional lender, Wells Fargo will look at credit score and debt burden. They offer both fixed and variable loans, with variable rates starting at 3.75% and fixed rates starting at 725%.
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How to Get Student Loan Modification and What Qualifies
If you’re one of the many people finding it difficult to pay back your private student loans, Wells Fargo recently released the promising news that they are moving forward on the private student loan modification pilot program they rolled out earlier this year.
What does this mean for borrowers? Two things:
First, it’s fantastic news for the industry in general. Private student loans have lagged behind, offering a limited number of options that are greatly dependent on your lender. In contrast, federal loans offer many benefits for borrowers such as deferment, forbearance, and a large selection of income-based repayment options.
The Consumer Financial Protection Bureau has been critical of bigger banks that haven’t been willing to extend repayment options to borrowers, and the banks have finally listened.
Second, this means that student loan payments are about to become more affordable for a select group of people. Let’s look at what loan modification programs can mean for borrowers.
Which Lenders Are Offering Student Loan Modifications?
Four big lenders are offering more flexible repayment options than they have before to lessen the burden on student loan borrowers.
Let’s look at Wells Fargo first, as their recent announcement highlighted some significant changes they’re hoping to make.
The Wall Street Journal has reported that Wells Fargo is offering reduced interest rates as low as 1% to borrowers facing financial. These reductions are temporary or permanent, depending on the situation you’re in (more on that below).
They’re also going to be offering extended repayment terms (by 5 years) come February 2015.
Wells Fargo wants to lower borrower payments to 10%-15% of their total income, and according to the bank, individuals in the pilot program lowered their monthly payment by as much as 31%.
This reduction in interest rate is extremely good news for those with private student loan debt, as the average interest rate on private loans is 10%-12%, much higher than federal loans. By slashing the interest rate, borrowers will pay less over the life of the loan as well. This is a better option as opposed to extending the repayment period, as that typically amounts to more paid with interest accounted for.
Discover has also announced that it plans on introducing a similar loan modification program early next year. The details have yet to be disclosed to the public, but they did start offering interest only payments earlier this year to borrowers who were less than 60 days late on their loans.
Discover has mentioned that they are planning on lowering interest rates, and will possibly waive balances for some borrowers that have been hit the hardest.
Aside from that, Discover has already been making headway in offering more options for borrowers, which include reduced payments, deferment, forbearance, and payment extensions. Offering private student loan borrowers similar benefits that federal borrowers get to enjoy is a step in the right direction.
The great thing about this announcement is that other private lenders who offer flexible repayment options are being mentioned. If these lenders have been offering more repayment options, your lender might be as well.
Since 2009, Sallie Mae has been offering 1% interest rates, for sometimes up to 2 years, to borrowers that were delinquent on their loans.
Similarly, PNC lowered the interest rates of select borrowers to 0.6%, for as long as 18 months, earlier this year.
This goes to show that private lenders are becoming more and more willing to work with borrowers to give them some breathing room where student loans are concerned. But who can really benefit?
What Are the Qualifying Situations for Loan Modifications?
At this point, these loan modification programs are being targeted to two groups:
- Those that are behind on payments by 30-119 days
- Those that are anticipating a loss of income in the future, thereby making it difficult for them to afford the monthly payments
Borrowers that have defaulted on their loans will not qualify for a loan modification. A loan is typically considered to be in default after 120 days have passed with no payments made.
Borrowers in the second group that are anticipating loss of income due to medical reasons, a job loss, or a pay cut, may also apply for consideration. If your income can’t keep up with your payments, and you’ve done all you can to cut your expenses, it’s worth applying.
Wells Fargo currently requires proof of income to assess your situation. As the press release states, they are evaluating borrowers on a case-by-case basis, so don’t be deterred if someone you know has tried to apply and was turned down.
For now, the exact parameters of qualification aren’t available to the public, which is why calling your lender and speaking with them regarding your individual situation is important.
Credit checks are likely to be ordered, but this is mostly for the purpose of seeing what your overall financial situation looks like, including any other debts you may have. Lenders take more than just your score into consideration.
Based on your situation, you’ll either be given a temporary loan modification or a permanent one (if it doesn’t look like your situation will improve).
For other repayment options, such as Discover’s interest-only payments, proof of income typically isn’t required.
Bottom line: you need to be able to show that you’re experiencing financial hardship, and cannot afford your payments on the term you have now.
How is a Loan Modification Different from Forgiveness, Consolidation, or Refinancing?
It’s worth noting that loan modifications are different than forgiveness, consolidation, and refinancing.
Student loan forgiveness means that the entirety of your student loan balance is forgiven, or waived. It’s widely only available to those with federal student loans. Forgiveness is usually granted to those under special circumstances, such as volunteer work, working for a non-profit, working in the medical or law field, or being a teacher in the public sector.
There are very few private lenders that offer forgiveness, and if they do offer it, it’s only under dire circumstances. For example, if a borrower dies, or is completely disabled, then their loan balance may be forgiven. For Discover to announce that they’re thinking of waiving loan balances is a huge step as far as private lenders go, but we don’t yet know what it will take to qualify.
A loan modification will not wipe out your student loans completely like forgiveness will.
Loan consolidation is useful for borrowers who are making payments to a number of different lenders, and are having trouble keeping track of it all. You can consolidate both federal and private student loans separately, but you can’t apply for a Direct Consolidation Loan with just private loans. You’d have to consolidate private loans through a private lender. When consolidating, you may be eligible for a longer repayment term, and a lower interest rate, but it’s dependent upon the loans you’re consolidating.
A loan modification means you’re adjusting the repayment terms on one of your loans. It doesn’t mean you’re combining all of your loans into one big loan, like consolidating your loans will do.
When refinancing a student loan, you’re hoping to get a lower interest rate, or a longer repayment term, to make your payments more affordable. Refinancing sounds similar to getting a loan modification, but the difference is that most lenders won’t refinance loans that are delinquent or default. The qualifications for refinancing are also much stricter.
With a loan modification, lenders are looking to work with you. If your credit isn’t the best, or if you’re delinquent (but not in default!), you still have a chance at working something out.
The Takeaway and What to Do
If you’re a borrower struggling to make payments and just squeaking by, or are already a little behind, you should reach out to your lender and ask them what options are available to you.
Bigger lenders such as the four that we mentioned aren’t going to reach out to you and tell you that you’re eligible for a loan modification. They don’t have time to sort through the millions of borrowers that have loans with them.
If you want your student loan payment situation to change, you must take action. The worst that can happen is your lender says no, and you’re back where you started. Don’t wait before it’s too late – as you should already know, having your loans default is the worst thing that you can let happen. Take advantage of the fact that private lenders are opening up their doors to struggling borrowers.
Student Loans: Private, Federal, and Alternative Funding
Student loans have become the bane of existence for millions of young professionals. According to Experian, 40 million Americans now have at least one outstanding student loan, up from 29 million in 2008. The average total balance on those loans has risen from $23,000 to $29,000.
Unfortunately, age 18, when high schoolers blindly excited by the prospect of attending their dream school start taking on those major financial commitments, is not the ideal time to be making life-altering financial decisions. These young adults have little understanding of basic personal finance, let alone the implications of the massive debt loads they’re signing on for. Even parents and professionals going back to school for advanced degrees are getting burned through the often-confusing process.
The Free Application For Federal Student Aid, or FAFSA as it’s better known, has more than 100 questions to determine aid eligibility, and a small error or accidental omission can result in being denied Federal funding altogether.
Private Student Loans vs. Federal Student Loans: What to Take Out
Despite the confusing application process however, Federal loans are the best resource for students looking to receive financial aid that they can actually manage.
Federal student loans are those funded by the government. The interest rates on Federal loans are fixed, making it simple to anticipate and plan for payments come graduation. Private loans on the other hand are offered by banks and have variable interest rates that, generally speaking, far exceed the levels of Federal loans.
Interest rates on Stafford Federal loans are currently 4.66 percent for undergraduates and 6.21 percent for graduate students. Interest rates on student loans from private lender Wells Fargo, however, can range from 3.75-12.29. While paying 3.75 percent interest may sound tempting when compared to 6.21 percent, the private lender’s variable rate can just as soon rise to 12.29, well above the fixed Federal loan rate.
For the most part, private loans require cosigners and credit checks, whereas Federal loans typically don’t subscribe to either of those requirements.
Private students loans also require payments while students are still in school, whereas federal loans generally don’t require repayment until students graduate, leave school, or change their enrollment status to less than half-time.
Finally, Federal student loans are eligible for various programs like loan forgiveness and income based repayment. They can also be postponed in certain situations or retired if a student dies or becomes disabled. Private student loans offer much less flexibility, going so far as to go after the cosigner for the remaining balance if the student succumbs to a tragedy.
Suffice it to say that Federal student loans are by far the better option when funding education and should be maxed out before ever considering a private lender. Federal aid is awarded on a first-come, first-serve basis, so it’s imperative for students to fill out and submit their properly completed FAFSA as soon as possible. If Federal aid alone isn’t enough to cover the cost of education, switching to a more affordable school or program, or researching alternative funding options may be a better choice than resorting to private loans.
Alternative and Supplemental Funding
Too many students discount scholarships when figuring out their educational funding. Unlike loans, scholarships are financial gifts towards education that don’t carry interest and never need to be repaid. Students don’t have to have the best grades or the most need or the most unique talent to qualify either.
While National scholarships, like those awarded by the National Merit Scholarship Corporation and the Coca-Cola Scholars Foundation provide major funding, they also have extremely large competition pools. Looking for state, local, and college specific scholarships are great ways for students to increase their chances of being awarded free funding.
Students should make the most of their varied resources- from their college counselor to the local library to various websites that aggregate available scholarships based on background, interests, abilities, financial need, field of study, and other pertinent information- to see what scholarships best suit them. Fastweb.com, Scholarships.com, and ScholarshipExperts.com are all great starting points for researching and pursuing supplemental scholarship funding.
Loan Repayment: Federal vs. Private
Late and missed payments on student loans can result in credit catastrophe. While Federal student loans aren’t considered in default until the borrower has missed payments for nine months, private loans have varying default windows, some kicking in after just one missed payment. Once default happens, the entire loan amount comes due and the collection agencies come calling. Ignoring either is bad news as student loans are almost impossible to discharge- even in bankruptcy.
If your required monthly payments are more than you can afford to pay, there are plenty of options to look into with your Federal loans- income based repayment, extended repayment plans, even temporary deferment of payment- to name a few. While private loans don’t offer the same flexibility in repayment, the consequences of defaulting are arguably less severe. When you default on a Federal student loan, the government can garnish your wages, social security benefits, and tax refunds. When you default on private student loans however, the lender can go after anyone who co-signed your loan, destroying their credit as well as yours. If you can’t afford all of your payments, be they private and/or Federal, it’s much better to review your various consolidation and repayment options than to simply default and accept financial ruin.
Before deciding on or signing anything, students must understand the financial implications of their higher education decisions. If not, they may resort to drowning under the crushing weight of student loan debt for the rest of their lives.
Miss A Student Loan Payment? Where To Find Help And What Happens
If you’ve missed a student loan payment or are struggling to make payments, you’re not alone. According to the Department of Education, millions of loans are currently delinquent, with many more being sent to collections every day.
What happens when you can’t afford to make a payment, and subsequently miss the due date? If you have federal student loans, at first, you’ll be delinquent. Nine months after you miss a student loan payment, your loans will then enter into default status.
If you have private loans, there’s no “grace period” of delinquency; your loans are immediately in default the day after your payment was due.
While this might sound like bad news, there are ways to recover from delinquency and default. We’re covering what the consequences are, and what options you have to get your loans current again.
What Does Being Delinquent Mean and What Are the Consequences?
Do you remember that promissory note you had to sign every semester when taking out student loans? That note was a binding contract in which you promised to make timely payments on your student loans (among other things). By missing a payment, you are in direct violation of that contract.
The day after your payment is due, you are considered delinquent on your student loans. During your delinquency, your student loan servicer will attempt to get in touch with you in the first 15 days following a missed student loan payment.
Your credit score can also suffer if you don’t make any payments within a certain time. For example, My Great Lakes will report a lateness to the 3 major credit bureaus (Experian, Equifax and TransUnion) once an account is 60 days past due, but Nelnet will wait 90 days. Different servicers have different guidelines for this, so it’s best to call yours directly to ask them for the specifics.
Even if you become current on your loans, the delinquency can remain on your credit report for up to 7 years.
Additionally, you might incur late fees if you don’t make an effort to pay within a set time frame. Late fees vary by lender, and the amount of time passed before getting hit with a late fee also depends on the lender.
While being delinquent isn’t great, it’s not the end of the world. Simply making a payment will bring your loan into repayment again.
But what if you can’t afford that payment?
After nine months of missed payments, your loan will go into default. Nine months is a considerable amount of time to work with your student loan servicer in an attempt to lower your payments, and that’s exactly what you should do.
Steps You Can Take To Get Out of Delinquency
If you’re delinquent on your student loans, the absolute best thing you can do is to get on the phone with your student loan servicer and explain your situation to them. You want them on your side in this process, and most are willing to help you out. Many servicers have information and options on lowering payments directly on their website.
If you can afford to make any sort of payment, do so. This will show your loan servicer that you’re concerned and making every effort to rectify your delinquent status.
The worst thing you can do in this situation is to ignore what’s going on. You have 9 months in which to make things right before going into default, and you want to do everything in your power to make sure you don’t get reach that point.
When speaking with your loan servicer, ask them to review your payment options. Under certain circumstances, you may be eligible for deferment or forbearance. Both will excuse you from having to make any payments for a set amount of time. Interest doesn’t continue to accrue if your loans are in deferment, but it will accrue in forbearance. Typically, forbearance is easier to qualify for than deferment.
If you’re not eligible for either of these options, don’t lose hope. There are several different income-based repayment options out there, including Pay as You Earn, Income-Based Repayment and Income-Contingent Repayment, and your student loan servicer will point you toward the one that makes the most sense for you.
Your number one priority when your student loans are delinquent is to get them current as soon as possible so that they don’t go into default.
What Consequences Does Defaulting On Your Student Loans Have?
If you haven’t been able to make any payments toward your student loans in 9 months, and haven’t reached out to your servicer, then you will end up defaulting on your student loans.
There are serious consequences to defaulting:
- Some loan holders will require your entire balance to be paid in full. This includes the principal and the interest.
- You become ineligible for deferment, forbearance, or any repayment programs.
- You become ineligible for further federal student aid.
- Your wages can be garnished, plus your tax return can be held to repay your loans.
- Your credit score will be damaged.
- You might end up responsible for more than just your loan balance if there are late fees, collection fees, or court fees involved.
These all sound a little scary, don’t they? While defaulting on federal student loans shouldn’t be taken casually, there are ways to improve your situation.
Options for Getting Your Loans Out of Default
In order to get your loans out of default status, you have to make a plan. The unfortunate part is that you have significantly less options than you would in delinquency, and the options you do have require you to be able to make payments.
MyEdDebt.com is a great resource for those looking for more information on getting their loans out of default. The site is run by the Department of Education and highlights its Rehabilitation Program as an option for getting loans out of default.
Going through a rehabilitation program is your best chance at redemption. Upon successfully completing the program, all the negative consequences of defaulting will be reversed. That even includes the damage to your credit score (the default will be erased).
Successful completion involves making 9 monthly payments out of 10 months, so it’s important that you can make the payments according to the plan you’re given. You have to make the payments monthly; lump-sum payments or extra payments will not speed up the process.
A debt collector creates your repayment plan during rehabilitation. They’re supposed to work with you to create a manageable repayment plan, though some of them have wrongfully tried to get borrowers to pay back more than they can afford.
StudentLoanBorrowerAssistance.org has highlighted the importance of paying back only what you can reasonably afford, as a new system was put into place this past July. Under this system, the amount you must pay should coincide with what you would be paying under the Income Based Repayment formula. For “not new borrowers” this is generally 15 percent of your discretionary income, but never more than the 10-year Standard Repayment Plan amount. For “new borrowers”, it’s 10 percent of discretionary income.
New borrowers are defined by:
“… (1) no outstanding balance on a Direct Loan or FFEL program loan as of October 1, 2007 or has no outstanding balance on a Direct Loan or FFEL program loan when you obtain a new loan on or after October 1, 2007, and (2) received a disbursement of a Direct Subsidized Loan, Direct Unsubsidized Loan, or student Direct PLUS Loan on or after October 1, 2011, or received a Direct Consolidation Loan based on an application received on or after October 1, 2011. However, you are not considered a new borrower if the Direct Consolidation Loan you receive repays loans that would make you ineligible under part (1) of this definition.” – StudentLoans.gov.
Once you’ve gone through the rehabilitation program, a lender must purchase your loans in order for them to enter back into standard repayment status. Likewise, only after a lender has purchased your loans will the collection agency ask the credit bureaus to clear your credit report of the default.
Just note that you may only go through the rehabilitation program once. If your loans fall back into default, then you won’t be eligible for the program.
What About Defaulting on Private Student Loans?
Private student loans are a different beast. There’s no delinquency period associated with private loans; as soon as you miss a payment, your loans have defaulted.
Unfortunately, private loans don’t offer the same protection as federal loans do. Therefore, the repayment options associated with federal loans don’t apply for private loans.
Even worse, there aren’t any rehabilitation programs to go through for private loans, unless your lender offers such a program. It’s worth it to ask!
For instance, Discover will report your loan as late to credit bureaus during its monthly account audit, so there isn’t necessarily a time frame to consider. If you missed a payment that was due on the 10th, and their audit is on the 20th, it might take some time to be reported as late. At that time, your loan is also considered to be in default. The good news is that there are no fees associated with their loans, even late fees, which is reflected on their student loans page.
Wells Fargo reports a loan as late after 30 days have passed, and their standard late fee is $28, though this largely depends on the type of loan you have.
For Citizen’s Bank, private student loans are serviced through Firstmark. Their loans are reported as late after being 30 days past due (from the last business day of the month). The loan is considered defaulted after 120 days past due, and late fees (5% of the borrowed amount) are incurred after the loan is 15 days past due.
According to Sallie Mae, depending on the type of loan you have, you’re considered to have defaulted after 6 to 9 months of no payments.
Fortunately, there are some private lenders coming around to the fact that borrowers need help. Wells Fargo is one private lender willing to lend a hand. If you’re having trouble making payments, they offer additional repayment options, and they also have a new loan modification program which can lower your payments temporarily or permanently.
Sallie Mae offers borrowers interest-only payments on certain loans, and they also offer a graduated repayment option on their Smart Option Student Loan.
Discover also offers deferment options to those serving in the military, in public service jobs, or in a residency program.
All lenders encourage borrowers to call if they’re having trouble making payments under their current repayment terms. But you should work under the assumption that once you’re 30 days late it will show up on your credit report, which can stay there for seven years.
The Consumer Financial Protection Bureau has attempted to strip away some of the uncertainty and confusion surrounding student loans, but according to a recent report, the industry remains unchanged. More and more complaints are being received concerning private loans, as borrowers claim they don’t have enough information about the options they have.
The CFPB is encouraging borrowers to use a template that they have available for download to try and negotiate a repayment plan with their lenders. This should be done as soon as you miss a payment, as your private lender will sell your loan to a collection agency after enough time has passed without a payment. They will be more willing to help you than a collection agency will.
As a last resort, you may be able to get your private student loans discharged in bankruptcy. Private loans are slightly easier to get discharged than federal loans. If you’d like to read more about that process, StudentLoanBorrowerAssistance.org has a comprehensive write-up on it.
You want to avoid defaulting on your student loans at all costs, so if you’re delinquent on your loans, get in touch with your loan servicer to figure out the best way to bring your account current. If you’ve already defaulted, check with your loan holder to see if you can enter into a rehabilitation program. If you have private student loans, contact your lender immediately to find out if you can negotiate more manageable repayment terms. These options are available to help you, and there is no shame in taking advantage of them.
How to Get a Student Loan Forgiven
According to a recent CNBC article, 24% of millennials expect to receive forgiveness for their outstanding student loan debt balances. It’s a good thing, then, that the Consumer Financial Protection Bureau estimates that 25 percent of American workers could be eligible for student loan repayment forgiveness programs.
Here’s more good news: there are many ways of taking action to get a student loan forgiven. You can seek out programs that are career-based, meaning they provide aid for those in certain professions. Or you can look into plans based on your income level. Most of these are sponsored by the Federal government in one way or another (though some colleges do assist a select few of the students they graduate).
Those suffering the burden of student loans may qualify for one (or more) of the nine types of forgiveness programs listed below.
Public Service Student Loan Forgiveness
There are many programs available to help mitigate Federal student loan burdens — especially if you’re working in a public service position.
Specifically, employees of the government, non-profit organizations, and other public workers may qualify for the Public Service Loan Forgiveness (PSLF) program. You need to be employed full-time by a public service organization. You also are required to make 120 payments on your loans before being eligible for forgiveness.
Head to the bottom of page 8 of the program’s FAQ to find a detailed list of job descriptions that qualify. Note that as long as you’re employed by an eligible public service organization, you’re covered. In other words, you probably qualify as a teacher — and you may also qualify if you work in a public school as an administrative staff member.
Getting a Loan Forgiven Based on Income
Another way to get Federal student loans forgiven is to see if you qualify for an income-based program.
- Pay As You Earn Repayment Plan (PAYE Plan) – This plan is the newest option for those with student loan debt. It’s designed to help recent students entering the job market for the first time during the recession years, and provides an alternative to the Income-Based Repayment Plan and lower payments. The remaining balances will be forgiven after 20 years of qualifying payments and an interest subsidy. PAYE is only available for federal Direct Loans. Eligibility is often a result of student loans that are higher than a person’s annual discretionary income or makes up a significant portion of his or her annual income. So, $10,000 in student loans with a $60,000 annual salary would like make an individual ineligible for the plan. In addition, individuals are only eligible for the PAYE plan if:
- He or she is new borrower as of Oct. 1, 2007,
- Received a disbursement of a Direct Loan on or after Oct. 1, 2011.
- Income-Based Repayment Plan (IBR Plan) – This is the original plan that was designed to help those who held student loan debt that equaled more than their annual income, or a “significant portion” of annual income. Eligibility includes demonstrating a partial financial hardship. Loans will be forgiven after 25 years of qualifying payments, five years longer than the PAYE plan. Like thee PAYE plan, this IBR also offers an interest subsidy.
Keep in mind: for both IBR and PAYE, your payments are based on your adjust gross income (AGI). If you file joint taxes with a spouse, then your AGI will include your spouse’s income and impact your payments. Read more about taxes and student loans here.
- Income-Contingent Repayment Plan (ICR Plan) – This plan intends to help those who purposely chose low-income jobs but graduated with high levels of student loan debt. It provides another option for those who can’t qualify for either the Pay As You Earn Plan or the IBR Plan and is open to anyone with eligible federal student loans. Like with the IBR, the monthly payments are based on income and family size, however, the payments will likely be higher than those with IBR or PAYE. The ICR plan also forgives an outstanding balance after 25 years of qualifying payments. The debt discharged is treated as taxable income, so borrowers need to be prepared to pay taxes to the IRS.
While each of these programs has various stipulations, requirements, and limits, they all have one thing in common: they’re designed to help those with low incomes and excessive amounts of student loan debt.
They’re also a little different from the public service programs. While those in public service positions can have student loan debt forgiven after 10 years, these programs forgive loans after 20 or 25 years.
However, like the public service loan forgiveness program, these income-driven programs do require you to pay every payment on time – or you’ll be disqualified from the program. You also may need to pay taxes on the portion of your loans that are forgiven.
Use this calculator to see exactly what will happen with your payments and how much of your student loans may be forgiven.
Student Loan Forgiveness Programs for Professionals
Many student loan forgiveness programs are based on the career you choose after graduation. For those with professional degrees – think doctors, lawyers, and teachers – you have several options when it comes to shedding that student loan debt without paying it out-of-pocket and in full.
Doctors can look into the NIH Loan Repayment Program. This can help repay 25% of a doctor’s student loan balance per year with a $35,000 maximum. That’s limited to doctors conducting research and who meet certain eligibility requirements.
Lawyers can look into Equal Justice Works. This provides a list of law schools that offer loan repayment assistance programs. Afam Onyema graduated from Harvard University and Stanford Law School, and was able to decline corporate law job offers in order to establish a charitable organization thanks to repayment programs.
“I can afford to do this work only because of Stanford Law School’s uniquely generous Loan Repayment Assistance Program (LRAP),” explains Onyema. “The school is systematically paying off and forgiving 85% of my $150,000+ debt.”
Teachers can qualify for PSFL programs, they might also want to look into Teacher Loan Forgiveness. To get into this program, you need to teach at specifically designated elementary and secondary schools for five consecutive years to be eligible.
If you began teaching after 2004, you’re eligible for up to $5,000 in loan forgiveness if you were a “highly qualified” teacher, and you can receive up to $17,500 if you’re a “highly qualified” math or science teacher in a secondary school, or special education teacher.
Don’t qualify for any of the above? Don’t despair yet. You have a few more options:
Volunteer programs: These qualify under public service student loan forgiveness: Options include working with AmeriCorps and serving 12 months or volunteering as part of their VISTA program, or joining the Peace Corps.
Enrolling in the military: Some branches of the US military offer student loan forgiveness programs. Stafford and Perkins loans are eligible (among others), and the Army and Navy will “repay the maximum allowed by law for non-prior service active duty enlistments.”
The Army will pay up to $20,000 for Reserve enlistments, and that includes the Army National Guard. If you’re interested in joining the Air Force, that branch can repay up to $10,000 for non-prior service, active duty enlistments.
Both the Air Force and the Navy require a minimum of four years of service. With the Army, the minimum service is three years, and the Army and Navy Reserves and Army and National Guard require six years.
The Pitfalls Associated with Getting a Student Loan Forgiven
If you’re having trouble making your student loan payments on time and in full, it’s worth your time to do some homework and research your options. Getting a student loan forgiven isn’t always the best answer or the only solution, and you need to proceed with caution.
Let’s be clear. “Forgiveness” doesn’t mean you sit back and let someone else take care of 100% of your loan. Nor does it mean getting to completely walk away from the financial responsibilities of borrowing that money in the first place.
You’ll first need to make sure you meet all the qualifications listed out in the fine print. As we’ve seen, that can mean fitting into very specific circumstances and stipulations. And short of drastic action like declaring bankruptcy – which is not the ideal solution – you may not qualify for any of the programs on student loan forgiveness out there.
In fact, even declaring bankruptcy doesn’t always work. According to Leslie Tayne, Esq. of Tayne Law Group, P.C., “Student loans are rarely dischargeable in bankruptcy and getting a student loan forgiven is a very particular process.”
“For Federal student loans, there is a way to get your loan forgiven,” she explains. “The public service forgiveness program may forgive the balance of your loans after 10 years working in a qualified public service job.
“Once your forgiveness is approved, you will not be required to make any more payments on the loan; however it is important to note that you may be subject to a 1099 by the IRS and thus have to pay taxes on the amount forgiven.” As Tayne notes, that could have an even worse affect on your finances.
Bera provided this example: “If you had $100,000 in Federal student loans and [use a forgiveness program], after 25 years of on-time payments the balance on your student loans might be $50,000. If the government forgives this amount, you’ll have to pay the tax on $50,000 of income in addition to your normal salary or wages for that year.”
If someone only makes $40,000 annually and suddenly his or her income increases to $90,000 in a given tax year, they’ll likely owe thousands of dollars to the government.
All this isn’t said to discourage you, but to make sure you’re in tune with the realities of the situation. If you have student loans and want to look into getting involved with a student loan forgiveness program, start by familiarizing yourself with what’s available to you and your situation. Once you’ve done a bit of research you can contact your loan provider to start taking action.
How to Handle Student Loans in 4 Easy Steps
When I was 18, I was so excited to start college. I carefully packed my clothes into a few different suitcases. I bought a mini fridge. I made sure I had a couple sets of extra long sheets. I contacted my roommate ahead of time. We found out we were in a really unique loft room in an all-girls dorm. It looked so cool, and I was really, really excited.
I was a complete and utter nerd in high school, and it paid off. I received a full-tuition scholarship to Tulane, in New Orleans. All my parents had to do was write a check for $5,000 or so, which covered room and board for the semester. Comparatively, a student who lives in the dorm at Tulane without a tuition scholarship will pay almost $50,000 a year for the privilege today. My parents were thrilled, and they wrote the check right when we arrived on campus and did orientation.
Of course, a few hours later, my life changed forever.
Move in day at Tulane in 2005 was also the same day the city began evacuating for Hurricane Katrina. I was buying my first semester books in the bookstore with my dad when an announcement came over the loudspeaker. It was time for everyone to get out – really out. As in, leave the city.
Because I am from just outside of New Orleans, having my college plans messed up was actually the least of my family’s worries. A few days later, I found myself in a hotel room just outside of Baton Rouge. My childhood home had 8 feet of water. Tulane closed for the semester. But, most importantly, my parents’ business was completely disrupted, and they had major income losses in addition to the losses in our home.
My First Student Loan
I went to L.S.U. because Tulane closed, and I had to take out my first set of student loans. Everything so was incredibly uncertain at the time that my mom encouraged me to go take out loans.
My parents were busy dealing with the aftermath of the storm, and I had to figure the whole college/loans/new campus logistics out on my own. I don’t remember completing entrance counseling for my loans, although I know I did because they were subsidized federal loans.
I transferred schools again two years later to William and Mary. I never went back to Tulane, and I was still craving that small school atmosphere after two years at a large university that I never meant to go to in the first place.
In order to go to William and Mary as an out-of-state student, though, I had to come up with the cash. I received a generous grant due to our financial circumstances from the storm, my parents helped a little, and I took out the rest in federal loans. Again, I don’t remember doing entrance counseling.
It wasn’t until I graduated that I learned how to check my credit score and find out how much I had taken out in loans in total. Luckily all my loans were federal loans and the majority was subsidized, which meant that I did not have to pay interest while I was in school.
You would think, though, that as someone who graduated early from one of the best colleges in the country (after transferring twice and experiencing a huge natural disaster) I would know how much money I took out. But I didn’t. Unfortunately, many other students and recent graduates are like me and unaware exactly how their student loans are structured and how repayment works.
Ultimately, I’m not upset that I took out student loans.
They were necessary in order to make my dreams come true. They were necessary to help me escape what had become a very sad situation in my home state. They were there for me when I needed to take one really expensive summer school class so that I could graduate a semester early. And, when I got a grant to do a fully paid for study abroad program, a student loan helped me buy plane tickets so I could see more of Europe while I was there. I don’t regret these decisions or experiences, but what I do regret is not understanding interest rates or the impact of student loans in general.
Learn From My Mistakes
If I had any advice to students going to college today and their parents, it would be as follows:
Step 1: Shop Around For Your Loan
Do not take the first loan that you’re offered. Please shop around. Just like any big investment, going to college deserves your full attention. If you have to fund it with loans, make sure you’re getting the best rates.
Private loans are historically worse for students because may of them require immediate payments, higher interest rates, more fees, and less flexible repayment terms.
Federal loans are the route most students take since those are the most widely accessible through colleges and universities. Although it seems like federal loans are the answer, don’t discount your local banks. If your parents have a good reputation with their local bank, they might be able to secure a lower interest rate than the federal government, but those instances are rare. It’s important to remember, though, that local banks will likely not be able to offer you deferred interest, so you will need to compare interest rates between these private loans and federal loans and weigh the pros and cons to find out the best plan of action for you.
In sum, shop around and know the difference between private and federal loans like the back of your hand.
Step 2: Pay Attention to the Entrance Counseling
Entrance counseling is there for a reason. It’s typically automated with a quiz that you need to take online and pass to get your loans. The quiz asks questions to make sure you understand terms like deferment, repayment, interest accrual, and forbearance. Could it be better? Yes. Could it be more effective in helping students understand the risks? Yes. However, at a minimum it will explain the benefits and consequences of loans and what’s expected of you during your repayment. Remember, don’t complete entrance counseling until you fully understand everything about your loans. If you get to a section of entrance counseling that does not make sense, put in a call to your school’s financial aid office and ask them to explain the concept. If you don’t understand your interest rate, know your repayment period, or know what to do if you cannot make your payment in the future, ask your student loan counselor these questions.
Step 3: Take Out As Little As Possible
You might think that you’re going to college for engineering but most college students change their majors. In fact, the New York Times reported in 2012 that 80 percent of freshmen at Penn State were unsure about their major.
Maybe you’ll fall in love with acting even though you thought you wanted to go to medical school. Or, perhaps you’ll enjoy psychology and want to pursue being a social worker instead of becoming a business owner.
Either way, it’s important you only take out as much money as you need and work to subsidize other living costs of college, because you won’t know your ability to repay the loans until you start your career.
Just to give you an example, if you take out $26,000 in student loans, (which is about the national average for a four-year public university) at 6.8%, you would pay around $300.00 a month for 10 years to pay it off. You would also pay nearly $10,000 in interest! That $300 a month could be an incredible investment opportunity or a car payment. That $10,000 in interest could go towards a down payment on a house or a great emergency fund. So, before you take out anything extra, put your information in a loan calculator and find out how much money you’ll actually pay in the long run in interest charges. That should inspire you to take out as little as possible.
If all of this sounds daunting, don’t forget to regularly look for scholarships and find unique ones that apply to you. There are scholarships for just about everything whether you were a preemie as a baby or have German ancestry. To find unusual scholarships, click here.
Also, remember it’s okay to feel a little uncomfortable. College students are notorious for living on ramen noodles. Essentially, do whatever you can to take out the least amount of money possible. Your older self will thank you.
Step 4: Research Repayment Options
There are many careers that will offer you loan repayment assistance including teaching in underserved areas and joining the military. Make sure to take the time during your senior year to find places to work that will help you pay back you loans and know if they apply to private loans as well as federal. Sometimes you only have to sign a two or five-year contract to receive that benefit, and trust me, that seems like a long time but it will fly by.
Really, the most important takeaway is that you and only you can become educated about your student loans. The financial education system that is currently in place with respect to disseminating information to college students about the loan process is not as effective as it could be. Thus, it is up to you, the college student, to become an adult and start making adult decisions about your money.
Good luck. Remember, student loans can definitely help you follow your dreams like they did for me, but be wise about how much you take out.
3 Steps to Handle Being Mistreated by a Student Loan Servicer
A college diploma no longer promises a guaranteed path to success. A harsh reality that hits after the excitement of finally completing college dwindles down and the pressure to find a good paying job sets in. Deciding on whether or not you should embark on an extended vacation after four grueling years of study should be a no brainer, but the reality of student loan repayment quickly extinguishes any thoughts of lying on a beach.
Borrowers know that time is of the essence. The six-month grace period post-graduation is crucial in building a solid financial future. However, some borrowers aren’t able to find a job within that six-month time span, and if they do, their entry-level pay may barely cover living expenses. The last thing borrowers need in times of financial hardship is maltreatment by their student loan servicer. In fact, servicers are required by law to work with struggling borrowers, yet some do the complete opposite.
The alarming part of all this is that a majority of borrowers aren’t even aware of the fact that they’re being mistreated. In fact, in the midst of supervising for compliance with federal consumer financial laws, the Consumer Financial Protection Bureau (CFPB) found that one or more student loan servicers were:
- Allocating payments to maximize late fees
- Misrepresenting minimum payments
- Charging illegal late fees
- Failing to provide accurate tax information
- Misleading consumers about bankruptcy protections
- And abusing the ever-popular debt collection calls to consumers at illegal times.
If you believe that you’re a victim of mistreatment by your student loan servicer then you’ve already started the three-step process.
Step 1: Identify problems
You have successfully identified your issue and are ready to start the resolution process.
Step 2: Gather relevant evidence
Just saying that you have an issue isn’t enough; you need relevant proof to support your claims. Relevant evidence includes:
- Promissory Notes that outline the any agreements made between you and your loan servicer
- Canceled checks
- Correspondence between you on your loan servicer via phone, email or snail mail
Step 3: Make Contact
Now that you’ve identified your problem and gathered relevant evidence to support your case, you can now contact your loan servicer. If you’re not sure who your loan servicer is, you can find out at http://www.nslds.ed.gov. Prior to making contact with your servicer keep the following tips in mind:
- Take detailed notes of all conversations and be sure to follow up in writing so there is a physical record of what has been said and done.
- Request a copy of your customer service history. Some loan servicers make available copies of the notes that customer service representatives make on their accounts.
- When you speak with someone on the phone, take down the representative’s name, when the call took place, and what was said.
- Save the originals of all receipts, bills, letters, and e-mails regarding your account. Be sure to provide copies of the originals if you are asked for them. Send letters via certified mail, with return receipt requested.
- No matter how frustrating the situation, always be polite and courteous.
- Request for a response at a reasonable times, and be sure to tell the customer service representative how you can be reached.
Problem not solved?
To be sure that you’ve done everything in your power to resolve your student loan problem take this self-resolution test.
For Federal Student loans: If after completing the self-resolution test you find that you are in need of further assistance, contact the Federal Student Aid Ombudsman Group to request a consultation. They will collect information about your case and offer assistance in identifying a suitable resolution.
For Private Student Loans: The Consumer Financial Protection Bureau recently started accepting student loan complaints. They will forward your issue to the company, provide you with a tracking number and keep you updated on the status of your complaint.
Need more help?
Although there is little recourse for private student loan issues, you can still get help with federal student loans through the Federal Student Aid’s Myeddebt.com. Through this portal, you can get information on how much you owe on your defaulted federal student loans, your payment history, and options for resolving your issues. You can also access forms to request a hearing, review, or discharge of your debt, as well as forms to submit a complaint.
Ignoring your own debt won’t make it go away, so do yourself a favor and seek help as soon as possible.
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Trade School or College: Which Should You Choose?
Despite being inundated with news about student loans and the seemingly insane cost of college, high-school students are often still set on attending a four-year institution to receive a diploma. But perhaps it’s time we start evaluating if the traditional college route should be the path to success we continue preaching to America’s youth.
Trade schools (often known as vocational, technical, career or correspondence schools) provide students with career opportunities at a much lower price tag.
Differences between trade school and college
Cost and time are two of the biggest differences between trade school and college. Trade school typically takes less than four years, the average length for a bachelor’s degree. The cost of trade school is often significantly lower than that of a college. However, some may be close to the cost of four-years at a low-cost state school (if a student lives at home).
Other than cost and time, trade school prepares students to graduate and enter the workforce with a practical skill. College may prepare you to write 3,000 words on Aristotle’s Appeals (ethos, pathos and logos in case you forgot) – but that probably won’t come up in a job interview.
Trade schools include programs such as:
- Commercial pilot
- Hair stylist/ cosmetologist
- Dental hygienist
- Computer specialist
- Fashion design
An associate’s degree from a community college is another way to maximize employment opportunities while minimizing cost of tuition.
A 2013 report concluded only 27 percent of college graduates work in jobs directly related to their majors. The report also noted the odds of finding a position related to a college major did increase in major cities with larger job markets.
A report from early 2014 found nearly 44 percent of young college graduates, ages 22 to 27, with a bachelor’s degree or higher worked in jobs that didn’t actually demand a B.A.
Suffice to say, college by no means equals employment or employment related to four years of study and the cost of tuition.
However, it cannot be overlooked that many jobs in today’s world require a bachelor’s degree or higher. Even jobs that may not have demanded the same education level just a generation ago.
Alternatively, trade school takes less time and gives a student a practical skill, which often makes it easier to:
- Find employment, and probably in most places around the country
- Reduces the likelihood of losing a job to recession or outsourcing
Given the turbulent economy and job market most millennials have experienced their entire careers, a recession-proof job (like electrician or even hair stylist) may sound like an ideal alternative.
A lot can change for a college student between the time he or she picks a major at 18 or 19 and enters the workforce at 22. A graduate may try out a career in the field she majored in and realizes it isn’t actually well-suited for her, so she either switches to a job unrelated to her major, but still requiring a college degree, or perhaps she spends tens-of-thousands of dollars to return to graduate school.
[Saving for college? Be sure it’s in a high-yield savings account. Compare them here.]
Price point difference
To compare the cost of trade school and college, the following is a break down of attending trade school, state school and private school in New York State.
Empire Beauty School [Queens, NY]
Tuition – $12,100
Room and board – $5,536
Books and supplies – $1,688
Estimated other expenses (transportation, personal etc) – $5,992
Estimated grant aid: $3,433
Estimated price tag for program (8 months to complete as a full-time student): $21,883
*Estimate taken from the school’s online net price calculator, which accounts for tuition and fees, living expenses, books, tools and grand aid. Estimated cost was based on the following information:
Tuition & Fees: One semester (12 credits) for in-state students: $3870.25
Tuition & Fees: One semester (12 credits) for out-of-state students: $8695.25
Cheapest (non-commuter) meal plan: One semester: $2,260
On-campus housing: One semester: $3,600 (standard dorm with roommate)
Estimate for books: $500
Total cost for instate: $10,230.25 (One semester)
Total cost for out-of-state: $15,055.25 (One semester)
Total cost for in-state 4 years*: $81,842
Total cost for out-of-state 4 years*: $120,442
*Excluding the annual rise of tuition and increased cost of books.
New York University
Full-time student, one semester, 12 to 18 credits: $21,873
Service fee: $461 (per semester)
Registration fee per unit after first unit: $65 ($715 for 11 credits)
Full-time student, one semester, 12 to 18 credits: $22,130
Registration fee (per semester): $1,212
School of Business academic support fee (per semester): $495
Registration and service fee for NYU (per semester): $461
Registration fee per unit after first unit: $65 ($715 for 11 credits)
Room and board estimated by collegefactual.com to be $18,692 per year
Total cost for College of Arts and Science student: $184,392 before cost of room & board and books and excluding tuition inflation. $259,160 with room and board.
Total cost for School of Business student: $200,104 before cost of room & board and books and excluding tuition inflation. $274,872 with room and board.
These figures are low as they don’t account for inflation and increase cost of books and board.
The $21,883 trade school option may seem steep for a program that usually takes eight months, but a student will be ready for the job market and employable. He or she will also start working three years before the college students. The next cheapest option would be instate at $81,842 and in last position, private school students in New York City paying over a quarter-of-a-million dollars for a degree.
How to find the right trade school or college
Unfortunately, there are plenty of scammers and con artists hoping to take money from hopeful youngsters looking to further their educations and improve their hiring potential.
Both trade school and college scams exist, especially with the rise of Internet-based schools.
Savvy students can avoid these scam schools (often referred to as a diploma mill), by being aware of a few key traits to look out for.
- No transcript needed to apply – If a school doesn’t want to see if you’re a quality addition to and eligible for their program, they probably just want your money.
- Minimal requirements – There isn’t much work involved in completing the degree or certification. Why would a thief want to put more effort in than required?
- Lack of interaction – It seems awfully hard to track down a professor, because he or she doesn’t actually exist!
- Tuition per-degree or discounts for taking multiple programs – colleges and trade schools typically charge for a full semester or course not based on a degree.
- Job Guaranteed – Schools shouldn’t make this claim. They aren’t job sourcing departments, but educational facilities. While you should check the employment statistics, don’t believe a job is ever a guarantee.
Prospective students can also check the accreditation of schools and programs they’re interested in by looking it up in The Database of Accredited Postsecondary Institutions. This database does include trade schools, such as aforementioned Empire Beauty School.
If you’re interested in learning more about which trade school to pick, be sure to explore the FTC consumer information here.
6 Ways to Protect Your Identity and Money While Banking Online
I always considered myself lucky to be a part of Generation Y or as I like to call it, the generation of convenience. Unlike my parents who were paid with cash and checks, payday for me is just a direct deposit away. When it comes to paying bills, I can easily link a monthly charge to my checking account and schedule a day for the money owed to be transferred to the payee with just a brush of a thumb through my bank’s handy mobile app.
Since I opted for direct deposit and conduct most of my banking online, I rarely ever carry cash. Like most Gen Y, I use my debit card (or credit card) for a majority of transactions, and when I say majority, I really mean all.
But my happy-go-lucky swiping resulted in a harsh reality check. Remember Target’s data breach in 2013? Over 40 million credit and debit card accounts were compromised. Stolen information included customer names, credit or debit card numbers, the card’s expiration date and CVV (Card Verification Value). Basically everything needed to drain your account or rack up fraudulent charges.
At the time, I banked with Bank of America. I only had a couple hundred dollars in my checking, but to a broke college student, that’s a whole lot of money. So, you can pretty much guess my reaction when I woke up the morning after using my debit card at Target to an alert stating that my checking account had a negative balance. I was petrified.
Even though BofA was aware of the breach, and credited the money back into my account while they investigated, I was left a bit uneasy about the security of my personal information. Is the convenience of banking online compromising the security of my identity? Should I resort back to the primitive ways of my parents and just use cash to prevent this from ever happening again?
One thing is for certain, convenience definitely comes at a price, but that price doesn’t have to be your identify. To be extra safe, after BofA discovered fraudulent activity on my account and restored my funds fully, I switched banks. Only for the same exact thing to happen again, except this time, it was with the bank I switched to, JPMorgan Chase.
However, this time, I was prepared. That’s right hackers; I’m keeping my convenience, and my identity. Here’s what you can do to protect yourself in light of Chase’s Cyber breach:
1. Don’t switch banks
Though my first instinct post Target’s data breach was to switch, I advise you stay put. Switching does nothing, because in reality, all banks are under attack. No matter where you go, you’ll still be at risk. However, if you do decide to switch, switch to a bank that has the means to protect you with their top–notch security systems. Be sure to look out for security features that don’t hold you liable for unauthorized charges, or better yet, goes beyond liability and provides smart security features like debit card blocking, photo credit cards and two factor authentication.
2. If it feels too good to be true, it is.
Only your contact info has been compromised in Chase’s data breach, so be cautious of any communications that ask for your personal information. DO NOT click on links or download attachments in emails from unknown senders or other suspicious email. Always double check the domain name by double-checking the URL in the “from” field as well as in any embedded hyperlinks. If you ever happen to receive an overtly animated email that says; “CONGRADULATIONS, you’ve won a trillion dollars”, don’t click, no one’s that lucky.
3. Change your password regularly
Though Chase has stated this isn’t necessary in their most recent Customer Service Notice, I’d rather be safe than sorry. Do change your password on a regular basis, especially if you frequently access your account through multiple computers and devices. Most importantly, change your password to a ‘strong password’- one that is not easily guessed by a human or a computer and only access your financial information when you’re connected to secured WiFi.
4. Check your bank statement regularly
When it comes to your hard earned money, always be overprotective. Review your bank and credit card statements for any unexpected charges—especially tiny ones. To avoid catching your attention, hackers test a stolen debit or credit card by charging a few cents on the card in hopes to avoid catching your attention.
5. Timing is everything
Unlike Target’s data breach in 2013 where both banking and general contact info was compromised, according to Chase, there is no evidence that account numbers, passwords, user ID’s, date of birth or social security numbers were breached. However, Chase does admit that contact info was stolen (etc. name, address, phone number and email address), so you need not worry about your money mysteriously dwindling down. If you do happen to wake up in total and utter despair like I did, don’t wait, call the bank and file a report as soon as possible so that your funds can be quickly restored.
6. Overall, keep calm.
Be sure you only trust your money with an FDIC insured bank. FDIC insurance guarantees your money is protected up to $250,000. Also be sure your bank abides by protection like this one from Chase:
“… You are not liable for any unauthorized transactions on your account that you promptly alert us to”
You can’t prevent these security breaches from happening. But, what you can do is protect yourself and take necessary precautions to ensure your money and identity remains secured and you can cyberbank with ease.
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10 Questions Every Student Should Ask the Financial Aid Office
Congratulations! You’ve been accepted into the college of your dreams, unfortunately, that acceptance letter didn’t state that you’ll be attending college tuition free. Perhaps your parents saved up for you to attend or maybe you plan on taking on a part-time job. Either way, tuition plus those extra expenses that come along with being a student are a bit too much to bear.
Luckily, you’ve got options. Colleges have financial aid offices, which may feel for some like a magical place you can go to receive free money. If you both qualify and uphold your end of the bargain, you can actually receive money to cover most, if not, all of your educational expenses. But, don’t just walk in there blindly and expect a handout.
To save yourself from an overwhelmingly long wait, schedule a formal interview with your financial aid officer. This way, you have ample time to ask all the necessary questions needed to be sure that your specific needs are met.
According to Patrick Wong, a financial aid representative at Brooklyn College, students should be prepared to ask the financial aid office at their school 10 important questions to maximize the odds of receiving financial aid or obtaining scholarships.
1) What is the total cost of the program including books, fees, tuition and housing?
“Once a student receives a financial aid offer, knowing the true cost can help the student compare the bottom line at any of the schools they’re considering,” Wong explained.
Don’t assume the sticker price on the college’s website is showing you the full picture of what it costs to attend the school. Wong insists that students inquire about student fees, room and board, average book costs per semester, and miscellaneous items that will appear on your student bill.
2) Does your college have a full-need financial aid policy?
The majority of U.S colleges and universities are committed to meeting the full amount of demonstrated financial need for all admitted students. This aid may be met through grants, scholarships, work-study, and loans (federal or institutional). However, if your college doesn’t offer a full-need policy, you may need to find alternate funding sources, such as private student loans to help cover left over expenses.
3) Is there one application for financial aid?
Many schools use one form to determine your eligibility for any and all financial aid available, but according to Wong, not all schools work this way.
“Some colleges require individual applications for separate awards, such as department grants or alumni scholarship programs. Ask the financial aid office to ensure that you aren’t missing any opportunities,” says Wong.
4) Is there a deadline to apply for financial aid?
You definitely don’t want to be the one that misses out on receiving free money for school because you were unaware of the deadline.
“There are many deadlines to meet during the college application process, so it’s easy to get confused or even miss a date if you’re not careful,” explains Wong.
Although the federal deadline for filling the Free Application for Federal Student Aid (FASA) is June 30th of each year, every state and college has its own deadline. Be sure to ask the college’s financial aid office for deadlines concerning the FASA and any scholarship applications you may be submitting. It will be best to set reminders in your phone calendar or write down deadlines on a desk calendar to remind yourself of impending due dates.
5) How do I know if I qualify for financial aid?
There are a number of factors that determine whether or not you qualify for aid like: the number of people in your household, number of students in college, price of the college, parents’ income, income taxes paid and so forth. Wong suggests that students use the Expected Family Contribution (EFC) Calculator to determine their eligibility to receive aid.
6) What types of scholarships are available?
Depending on the college, grade point average, and other factors, you may be eligible for need-based, merit-based, or other types of scholarships.
“Some schools will offer generous scholarships based on your academic and athletic abilities, as well as participation in certain clubs, organizations, and societies,” says Wong.
Be sure to ask sure to ask if the awards are competitive or given to any admitted student who meets the criteria.
7) Are scholarships renewable?
If any one of the available scholarships is renewable, it’s important that you inquire about what you must do to keep the awards. Wong insists that students ask about required enrollment (full-time or part time), expected grade point average, and other stipulations that may result in the loss of the award.
8) How will outside scholarships affect my financial aid?
Some colleges offer a very attractive financial aid package the first year, only to reduce the aid offer the following year. Knowing this upfront will help you determine the long term costs of attending the school of your choice.
9) When will my financial aid offer be mailed to me?
“It’s good to know when to expect offer letters so that you can give yourself time to review and consider all possibilities,” says Wong.
All too often, students will accept admission to one college, only to receive a better financial aid offer from another later. Save yourself the regret by waiting for all prospective offers before making a decision. Remember, you can always change your mind after sending in your deposit – and sometimes even after decision deadlines depending on the school. You may have to sacrifice your deposit, but a few hundred dollars is likely worth changing your mind if it saves you thousands in the long run.
10) Will you match another college’s financial aid offer?
Hey, doesn’t hurt to ask right? If you find that you really love one college, but another is offering a better financial aid package, check to see if the financial aid department will match the offer.
“Depending on the type of year, the college may have access to additional funding and may be able to offer you more generous package, so go ahead and ask,” insists Wong.
Knowing how you’re going to finance your education is the most important part of your college career. By visiting the financial aid office and asking the right questions, you can attend the college of your dreams for a lot less than the advertised sticker price.
Have questions? Get in touch with us via Twitter (@Magnify_Money) or email (firstname.lastname@example.org).
The 4 Worst Financial Mistakes to Make in College
College is one of the most exciting, memorable times in a young person’s life. It allows you to gain an education, meet lifelong friends, and discover new passions. College can also heavily impact your financial future, because earning a degree can open doors to lucrative careers with rewarding salaries. But, money mistakes during college years can leave graduates dealing with debt and ruined credit scores for decades after getting a diploma. Insight into mistakes made by others can protect future and present college students from falling into the same traps.
Clueless about Financial Aid
Many students attend college oblivious to the amount of financial assistance that is just waiting to be claimed. Mushy Borisute, a senior majoring in psychology, regrets not educating herself about financial aid sooner.
“My parents paid for my tuition out of pocket, so I didn’t see the need to look into any of these financial aid programs,” Borisute explains.
It wasn’t until her senior year that Borisute ventured into the financial aid office to inquire about the tuition assistance program.
“After spending no more than 40 minutes in the financial aid office, I learned that I qualify for full tuition assistance!” Bourisute exclaims. “My parents worked so hard to pay off the first three years of my studies. If only I was a bit more inquisitive, I could have saved them the financial burden.”
Interestingly enough, Borisute is not the only one to ignore tuition assistance programs. According to a survey done by the Institute for College Access and Success, 65 percent of college students are unaware of their eligibility to receive financial aid, and 72 percent are clueless to the amount of scholarships and grants they may qualify for.
Credit Card Abuse
Jeet Singh, a junior majoring in geology, shared his run in’s with his new shiny piece of plastic.
“My mother actually signed me up for my first credit card,” Singh says. “She told me that it’s only for emergencies, nothing more. But, I figured a few small purchases here and there wouldn’t hurt.”
Singh’s small purchases quickly added up to a hefty $7,000. With no job, Singh was unable to keep up with payments, which landed him and his mother who cosigned with him, in a pit full of credit card debt.
“I’ve long since realized that I can’t be trusted with money, even if its borrowed money, I’ll spend it,” Singh explains.
Credit cards have high interest rates and multiple layers of hidden fees. The damage of irresponsibly using credit affects both your financial state and credit rating for years to come.
Misuse of Student Loans
Student loans are supposed to be used to pay off education-related expenses, but some students misuse their borrowed funds, which causes a lot of financial pain post-college.
Joseph Dewitt, a graduate student, recalls his irresponsible use of student loans.
“I guess my worst financial mistake post college was using some of my student loans to catch up on bills,” Dewitt says.
At the time, Dewitt was newly married with two young daughters. As an undergrad, he worked as a security guard making only $10 an hour. When his salary didn’t make ends meet, Dewitt used $2,000 in student loans each year to stock his fridge and catch up on delinquent bills.
“I took whatever I could for student loans each year and put it towards food and outstanding bills” Dwight explains, who owes $51,600 in federal loans.
What most students fail to realize, until it’s too late, is that the interest on these loans can add up fairly quickly, sometimes defeating the whole purpose of attending college to increase salary potential. By the time Dewitt finished his undergrad and landed his first job, he ended up making less than he expected after his student loans, miscellaneous bills, and graduate tuition was paid off each month. His undergrad loans ate away a huge chunk of his income.
“If I used my loans for tuition, and tuition only, I could be contributing more to my 401(k) and enjoying more of my take home pay,” Dewitt says.
Staying in college too long
Yes, college is a great investment, but before enrolling, it’s important that you plan out the next four years. Extra semesters due to poor planning can cost thousands of dollars. For Sangee Kumar, a senior majoring in accounting, the extra year was needed for him to become a CPA.
“I knew that I needed 150 credits to become a CPA, but I thought that I could do it in four years,” Kumar says.
The intense accounting classes became too much for Kumar to bare, so, for the sake of maintaining a GPA above a 3.5, Kumar decided to stay in school for an extra year to reduce his workload.
“Financially, I didn’t plan on it. I mean, tuition rises every year, now I have to find the extra money to pay for the remaining two semesters,” Kumar explains.
The extra tuition payments could have been avoided if Kumar, planned accordingly. Students should not only look into the return on investment when choosing a degree, but whether or not the intended workload can be completed within four years or less. Some degree’s, like accounting require five years to complete. Proper research can prevent unexpected expenses in the future.
The Bottom Line
It’s important that you learn from these four financial mistakes that are frequently made by college students. Save yourself a future of financial heartache and make the necessary adjustments to your spending habits to guarantee you use your money (borrowed or not), wisely.
Be sure to check out the MagnifyMoney tools to ensure you are getting the best deals on your financial products.
Simple Guide to Setting Up Your 401(k)
A new job means one thing: lots of paperwork. Signing contracts, human resources papers, taking mind-numbing seminars about company policy and hidden in all those stacks of paper, often in the benefits package, is one piece of very important paper: the paper containing details of your retirement plan.
Why save for retirement now?
We often hear about young professionals entering the work place and forgoing the company retirement plan in order to pay down debt or have a little extra money to spend. In a majority of cases, this is a bad idea.
Two words sum up why you should starting saving for retirement now: compound interest.
Compound interest is the practical embodiment of the expression “money begets money.” When your money is introduced to compound interest, you will be earning interest on your interest. This is important, because the earlier you start investing, the longer you have to accumulate wealth.
Let’s say you invested $1000 in year one and earned $150 in interest. In the second year, you would be earning interest on $1150 instead of just your original $1000. It may not sound like much at first, but as you diligently contribute money to your fund and it continues to compound, it adds up quickly.
The earlier you begin saving for retirement, even in small amounts, the longer your money has to compound and grow. The difference between starting a 401(k) or similar retirement fund at age 22 and age 30 can be hundreds of thousands of dollars.
Using this calculator, you can see that if you start contributing $4,000 each year towards retirement at the age of 22, with an estimated 6% annual rate of return, you will have $750,030.31 by 65. If you wait until 30 to do the exact same thing you will only have $445,739.12 by 65.
What is a 401(k)?
There are several ways, which all depend on your employment status. One of the most common is a 401(k) – which is also known as a 403(b) for those working in the non-profit realm.
A 401(k) is often offered by employers to their employees as a way to save for retirement with the employer matching a certain percent. For example, an employer may offer to match up to four percent of the employee’s contribution. So, if an employee makes $30,000 a year and contributes six percent (or $1,800) into a 401(k) then the employer would match up to four percent (or $1,200). This means, the employee would only contribute $1,800 to her 401(k) but end up with $3,000 thanks to the match.
Some employers may vest your match immediately, while others may have a timeline over how long it takes for you to get the money your employer contributes.
A 401(k) is offered through providers like Fidelity, Charles Schwab or Vanguard. Employees then need to determine asset allocation, which is a fancy way of saying “where are you putting your money?”
How do I pick my investments?
First, see if your company offers the opportunity to speak with a financial professional. If you feel overwhelmed going through the process of starting your 401(k) he or she will be able to help.
Your 401(k) should offer a variety of investments to take you from conservative to aggressive. If you’re young, it’s best to be aggressive with your investments and modify that to moderate and conservative, as you get closer to retirement age.
Aggressive investors will focus more of their assets on stocks than bonds (the old rule of thumb is 100 – your age = the percent of your investment that should be in stocks, but feel free to take more risk if you’re young). If there is a dip in the market, there will still be ample time for young investors to see the market rise again, unlike investors closing in on retirement age.
Depending on your provider, there may be a “model portfolio” for you to follow. These portfolios are often based on risk tolerance; so younger investors are better served to follow the “aggressive” path. If you’re wary of selecting your own funds, then consider following the model portfolio.
When should I decide against investing in my employer’s 401(k)?
If you have an employer contribution, you should at least contribute enough to receive the match. But if you feel there are too many fees or not a lot of options to maximize your investments, then there are other places to put your money.
Most personal finance experts advise to save at least 10 percent of your income for retirement. So, if you only get a four percent match from your employer, what should you do with the other six percent?
One of the easiest options is to open an IRA with Vanguard, Fidelity or Charles Schwab, among others. However, if six percent of your income is more than $5,500, you’ll have to invest the rest elsewhere. In 2014, you can only contribute $5,500 of your income to a traditional or Roth IRA.
401(k) Quick Tips:
- Starting contributing to your retirement account as soon as you’re eligible
- Understand if your employer-match vests immediately, or if you have to work a set number of years before you see the match
- Contribute at least enough to get your full employer match!
- Compound interest is your best friend when it works for you
- Diversify your portfolio – never invest all (or even a majority) into your company stock.
- If you’re young, be aggressive
- Understand the fees associated with your 401(k), and if they’re too high then search for other ways to invest for retirement (likely an IRA)
- Check in with your 401(k) – see how your funds are doing and if your portfolio is still appropriate for your retirement goals
Growing Up in a Family Without a Bank Account
This may sound ludicrous to most, but I spent a huge chunk of my life “unbanked”. Every transaction I made was with cash or money orders; and when it came to savings, let’s just say it wasn’t a frequently practiced habit of mine. Fast forward a couple years later, at 24 years old I finally opened up my very first bank account equipped with a checking account. I also have two credit cards that are great for everyday purchases, and even better for building credit. Not to mention, I’m already contributing to a 401(k).
To think, two years ago I didn’t even know what credit was or why it was so important. Now, I wouldn’t say that I’m a financial guru, but I know enough to live a financially healthy lifestyle. However, I my time living off the financial grid forced me take initiative and take control of my money.
Growing up, my father never discussed money with me. I naturally assumed that it was something that I didn’t need to worry about, and would probably tackle in my later years. When I started college, I realized my peers seemed to have a different relationship with money than I did. While I paid for tuition, books, and miscellaneous college expenses with cash, my peers paid with credit cards and checks. I always felt very uncomfortable heading to school with three thousand dollars in my bag. But, at the time, it was the only way I knew how to pay off my tuition.
College made me aware that carrying thousands of dollars in cash isn’t how other parents teach their children to handle money.
During an economics class, a good friend of mine shared a financial lesson from his parents. He said they encouraged him to invest in mutual funds, and to make sure the benefits package from his first job after graduation would be up to par. My father never even mentioned a lick of financial gibberish to me. So, all that valuable financial information that my friend shared, pretty much went in one ear and out the other. If I needed money, my father would simply hand it to me in cash. And saving for him consisted of stashing money in a safe in his closet.
The turning point
Intimidated, yet curious about the mainstream financial community, I felt compelled to sit in on a financial literacy workshop hosted by the business department of my college. During this hour-long seminar, I was enlightened about the Do’s and Don’ts of consumer banking. Then, it hit me, my father an immigrant from Trinidad who’s accustomed to handling cash, and only wanted to stick with what he knew. He always cashed his checks at the cash-checking store for a fee, while the majority of people have their income directly deposited into their checking or savings accounts for free.
Little did I know, my father’s financial behavior was rubbing off on me. If I were never exposed to the vast amount of financial information available in college, I probably wouldn’t have transitioned to using mainstream financial products.
An immigrant myself, I understood my father’s inability to deal with banks but refused to be left behind.
My first bank account
After much deliberation and a pep talk, I finally found the courage to walk into a Bank of America branch. Undocumented at the time, my hopes of opening an account were very low, but to my surprise BofA didn’t require you to have certain documents to open up an account. With just my passport, college ID, and a recent tuition bill, I opened up my very first checking account, no hassle. I walked out of the bank with three complimentary checks, a temporary debit card to use until my permanent piece of plastic came in the mail, and a folder filled with information on how to manage my new checking account.
I used the overdraft horror stories from my peers to discipline myself. It felt great to enter this new world of banking, and to take full advantage of the range of financial products that were out there.
Today, I put my tuition money in the bank and pay from the comfort of my home, which is a lot safer than carrying a stash of cash to the Bursar office. Instead of traveling to stores, I now shop online. Every transaction has become a breeze, and living off the mainstream financial grid became a relic of my past.
Building my credit score
After spending close to a year with Bank of America, and with the new changes made to my immigration status, I decided to switch banks. Equipped with the necessary documents that made me eligible to open up accounts with a range of banks outside of BofA, I switched to Chase Bank and also signed up for the Chase Freedom credit card.
My new credit card enabled me to start building credit. My score at the time was in the 400 bracket. Apparently, I didn’t have a long enough credit history. After a year of paying off my balances in full every month, my credit limit was raised and my credit score slowly increased.
Overtime, the rewards program connected to my Chase Freedom card started to make more sense. I learned fairly quickly that if I purchased certain items I would be rewarded with one percent cash back. I realized that I should have a credit card with a cash-back program that maximizes rewards for my spending habits. After doing some research, I learned that American Express- Blue Cash Card was the right card for me. Now I was improving my credit score, earning cash back on daily purchases and being fiscally responsible.
Living off the financial grid gave me ample time to observe how those around me handled money and learn how to best move into using mainstream financial products. Though my father still uses cash for all of his transactions, I’m eager to introduce him to a more convenient, safe and rewarding way of handling money. By switching to a checking and savings account, my Dad can protect his money and earn interest. I also plan to find him a fee-free banking experience. While I teach my Dad how to change his banking habits, I’m going to continue expanding my financial knowledge and finding the best financial products for me.
A Crucial Money Skill: Evaluating Return on Investment
The stuffed animal sat in a bin of with other oddball cuddly creatures that had yet to find a permanent home with a child. At eight years old, I already had a plethora of other animals to snuggle at night, but something about this gray and black lynx tugged at my heartstrings. I picked up the lynx and walked over to my mother asking if I could have him. She looked down at me and asked, “Are you willing to pay half?”
Far from shocking me, her comment made me check his price tag to see if I could indeed cover my fifty percent share. The lynx would cost me about seven of my hard-earned dollars. And they were indeed hard earned. By eight, I had already established my first business by pet sitting for some local animals, primarily, my next-door-neighbor’s vicious cat.
I spent the next thirty minutes carrying the lynx around while my mom continued her shopping. After much internal debate in my eight-year-old mind, I finally walked back to the bin and returned the lynx. I simply couldn’t justify spending seven dollars on him when I already had so many other stuffed animals to play with. (My mom actually ended up buying the lynx and surprising me with him a short while later).
The beauty in this lesson – that many often see as mean – is that I learned how to curb impulse spending and evaluate my return on investment at an incredibly young age.
My parents insisted my sister and I pay for fifty percent of toys we wanted (outside of Christmas and our birthdays). Later on, this same lesson applied to our college educations.
This simple lesson of evaluating the ROI of a purchase is a primary factor for me avoiding debt (both consumer and student loans) thus far in my 25 years of life.
But why do teenagers need to be concerned with ROI?
ROI applies to more than actual investments. Most college students aren’t stock picking, or even contributing to a retirement fund or any other type of investment. Instead, consider the ROI of other opportunities in your life. For example: Should I get a job in college? A job in college offers more than just a paycheck. You can develop a network, learn valuable skills and it can help build out your resume for future job opportunities.
How about, “should I take an unpaid internship?” It’s certainly important to evaluate the ROI of unpaid work. But there can actually be cases when working, even unpaid, will benefit you in the long run. Personally, I accepted an unpaid internship at CNN because I knew the connections I’d be making could pay off in great dividends in the future. It was worth saving up, penny pinching and preparing myself to live off ramen for the summer.
A big one for college students is, “should I buy [insert unnecessary item here]?” College is a time ripe for young adults to incur awful consumer debt. Droves of students are living on their own for the first time, have never had proper financial education and view credit cards as a magical tool to buy anything they want. If a student graduates with $2,500 in credit card debt at an interest rate of 21% (average for college credit cards) and can only afford to pay $100 a month, it will cost him $816 in interest and take just shy of three years to pay it off. Learning to curb impulse spending and evaluate the ROI of purchases can help recent graduates avoid a lot of financial pain.
But one of the most important moments to evaluate ROI at the tender age of 18 is with the simple question: where should I go to college? Year-after-year, the lure of a name brand school or the top ranked school a student can gain admission, lands young adults in tens-of-thousands of dollars of student loan debt. High school seniors need to seriously consider the financial ramifications of their college decisions. They must evaluate the earning potential of their intended career, how long it would take to pay off any student loans, if there are available scholarships or grants, if they will require a masters degree in order to even be eligible for a job in their field, and if they could get a similar caliber of education at a less expensive school.
But also learn when to let go
Don’t feel paralyzed with indecision because you are constantly evaluating the ROI of a simple choice. Debating whether or not to spend the extra $1.50 on organic spinach over the regular kind really shouldn’t leave you wandering around the store locked in a tumultuous inner debate.
Personal Finance 101 Should Be a Required Course for College Students
Debt among students has reached astronomical levels. While much of a young person’s debt stems from student loans, young adults are also plagued by car loans and overwhelming amounts of credit card debt. According to the Wall Street Journal and data compiled by analyst Mark Kantrowitz, the average 2014 graduate will carry a whopping $33,000 in student loans. Annual tuition increases will cause student loan debt to continue rising, making it difficult for students to lead a healthy financial life after college.
This high-debt burden has led students and researchers on a quest for a solution that’s all too obvious: financial literacy. The best way to curb debt later on in life is to learn basic financial lessons and debt management strategies before college. Understanding how to budget, the impact of compound interest, how credit cards work and how to save money on simple financial products could save young adults thousands of dollars. ?
It’s important now, more than ever for colleges to start incorporating financial literacy courses into the mandatory curriculum.
Recently, the MagnifyMoney team went to Brooklyn College to host a two-hour seminar covering the basics of personal finance. The workshop attracted nearly 45 inquiring minds, who were not required to attend by a professor or course requirement. Judging by the plethora of questions asked throughout, and even after, the presentation, today’s college students desperately need more information about personal finance.
Workshop attendee, Jamal Charles said that he was elated to take advantage of an opportunity to increase his financial literacy. His personal dilemma with finances occurred last semester when he was forced to pay for school out of pocket.
“I would usually get financial aid, but unfortunately I didn’t qualify that semester,” Charles explained.
This unexpected expense put restrictions on his day-to-day purchases, making it difficult for him to afford food and transportation. Like a majority of students, Charles earned a small salary from his job interning at a local tax preparation office. Even though he only brought in minimum wage, Charles tried to refrain from taking out additional loans.
?“I found myself stretching my budget while on a very limited income. If I knew better, I would have had an emergency fund, and use that to pay off that semester,” he said.
After attending MagnifyMoney’s Financial Literacy workshop, Charles says there are a number of things he’s going to start doing differently.
“The workshop introduced great budgeting strategies that I was never aware of. I also had no clue that the monthly maintenance fee on my checking account could be waived. I’m definitely going to look over MagnifyMoney’s list of fee-free checking accounts and switch as soon as I can.”
Liana Melendez, a Brooklyn College junior opened up about her credit card debt woes.
“Credit card debt was something that I’ve always carried with me, and I didn’t expect to get out of debt anytime soon, until now.”
After MagnifyMoney’s workshop, Melendez understands the effect of compounding interest and how to use balance transfers. Melendez now feels empowered to take control of her financial situation.
“It’s insane the difference that knowing can make. There was a time when I had to use my credit card in an emergency, and I’ve been paying for that emergency for months now. If only I knew more about compounding interest then, I probably would have never used my credit card. I’m glad I learned about balance transfers, now I can pay off my debt without having to worry about paying interest to the bank,” said Melendez.
Prior to the workshop, Melendez also didn’t know what her credit score was, how to find her score or why it was even important.
“You know, no one ever sat me down to explain the significance of a credit score. I do want to buy a home one day, and I may want to qualify for an auto loan pretty soon,” explained Melendez. “My credit score right now probably isn’t prime, but now I know how to get it there, and that’s what’s important.”
There’s no trick to leading a healthy financial life. The solution to preventing students from falling into a black hole of debt lies in educating the masses about basic financial literacy. The students at Brooklyn College proved even a two-hour seminar covering the basics can help get young adults on the right track.
4 Lessons We Learned From Hosting a Financial Literacy Workshop
The MagnifyMoney team took a field trip from our Manhattan office and traveled to Brooklyn College to present a workshop on how to handle money with confidence. Even though classes have yet to officially start, over 30 students joined us for nearly two hours. Barely 10 minutes into our presentation and suddenly hands started waving around in the air.
We spent our time overviewing what we considered the important financial basics: understanding credit scores and reports, grasping the importance of compound interest, how to budget, paying yourself first, saving for retirement, and picking the right financial products.
The team could barely get through a slide without stopping to answer questions.
We were thrilled to talk about money with such a group so engaged in the topic, but the experience also emphasized how imperative it is to integrate financial literacy into our education system.
All of the Brooklyn College students were there on their own initiative. They weren’t required to attend as part of a class, nor did they receive any type of extra credit. Everyone in the room was simply there to learn and fill in knowledge gaps they may have in their financial lives.
MagnifyMoney Team’s Takeaways
1. Students desperately need financial education
The simple fact that a bunch of college students gave up part of their afternoon during the final days of summer shows just how desperate they are for financial education.
We watched them furiously scribble down notes for two hours and had about half the students stayed back to ask more questions after we’d wrapped up our seminar.
They are undoubtedly interested in getting financial education, but unsure of where to turn. The world of personal finance can be incredibly intimidating without guidance and a way to turn potentially complex topics in laymen’s terms.
2. People need to know you don’t need to be rich to have a good credit score
We noticed this being a problem during our trip to the Chambliss Center, and it was reiterated during our presentation: people believe your financial assets factor into your credit score.
Your credit score doesn’t reflect how much you have in the bank, and people even have high credit scores with thousands of dollars of debt.
The credit score simply reflects your responsibility when handling money from your lenders.
We want everyone to understand this so they can proactively build better credit and therefore set themselves up for protection against high interest rates and predatory lending.
Emergencies will happen. We advocate people build healthy credit so they can acquire protection in the form of a line of credit with a low interest rate (ie: a credit card with a flat 9.99% interest rate). This way they have a place to turn when an emergency happens and won’t be subjected to painfully high interest rates from banks, payday lenders or title loans.
3. Credit can be difficult to understand without proper instruction
Between the fine print, understanding credit scores and figuring out whether or not to pay just the minimum due or the bill in full (the latter) – people get quite perplexed about handling credit.
We empathize, but our biggest tips are:
- Don’t close credit card accounts – length of credit history plays into your score and having no credit cards will mean you lose/never create a credit score.
- Always pay your balance on time– failing to pay on time can be one of the biggest hits to your credit score.
- Always pay in full – don’t believe the myth that paying just the minimum due can help your credit. It doesn’t boost your score and just leaves you paying money in interest to your lender.
- Don’t spend more than you can afford to pay off – lenders want you trapped in a debt cycle. Don’t let them get you there!
4. People feel trapped with their banking products
It doesn’t take much for a bank to make you feel pretty helpless, especially when they’re housing your money. We want to make sure people feel empowered to make the switch from a bank that charges ridiculous fees (looking at you Bank of America) to a more consumer-friendly version like Ally or Simple.
It isn’t just us thinking all these things:
This kind comment on our Facebook page from an attendee really sums up the importance of financial literacy being taught in schools:
“Really enjoyed the workshop yesterday at Brooklyn College. Thank you guys for coming out and I hope the team over at the Magner Center invites you back. It was an invaluable experience for someone like me who didn’t grow up in a household where money matters were frequently discussed. I learned a lot and will continue you visit your site to improve and expand of my financial literacy! Thank you so much!…University’s make us take all of these other courses that make us well rounded academically but rarely are we required to take anything that could help us with the “real world” and a lot of students complain about that. So thanks again!”
Why It’s Important to Have a Job in College
For some students, working in college is a necessity; for others, it fulfills a major requirement while padding a resume. Whatever the reason, working in college provides both a financial and practical foundation for life after graduation.
I’ve managed to work a number of jobs and internships during my academic career, and found the experience to be challenging, yet extremely rewarding.
I started off as an Administrative Assistant for a local alarm company, then moved onto internships at CNN and NBC in positions closely related to my major. On top of getting compensated while attending college, I broadened my network and learned new skills while simultaneously keeping an arm’s length away from borrowing money for school.
Although it does take extra effort to hold down a job and keep grades up to par, the choice to work during college can be very beneficial.
Working in college can help avoid debt.
Many students struggle with student loan payments, and I was determined to graduate debt free. I chose to attend a city college where tuition is affordable and scholarships were plentiful. So even if I made minimum wage, I could still afford to attend college full time and cover miscellaneous expenses such as books, travel and food. Unfortunately, this isn’t the norm for many college students today.
Student loans are a burden to pay back, and can slow down progress when it comes to buying a home or starting a family. According to a recent survey conducted by American Student Assistance (ASA), 73% of students said they have put off saving for retirement or other investments. The vast majority of students—75%—indicated that student loan debt affected their decision or ability to purchase a home.
Even with jobs, it’s difficult for many students to pay today’s tuition costs without the assistance of loans. However, holding down a steady job through college will enable students to graduate with fewer financial obligations, by reducing the amount of money they need to borrow for tuition and living expenses.
Working in college can make your resume stand out.
Every time I go out on a job interview, employers are impressed by the amount of work experience and skills I possess. When I interviewed for a Production Assistant internship at CNN, the employer skimmed through my resume in amazement and even referred to me as an overachiever. Later on that day, I received an email stating I got the job.
CNN is a large and well-known network, so you can only imagine the amount of people I had to compete with for that position. Thankfully, the fact that I was able to work fulltime and attend school fulltime while maintaining a GPA above a 3.5 made me stand out. With that information alone, employers can automatically conclude that you’re hard working and focused and that’s often enough for you get hired.
Throughout your college career, you should find jobs or internships related to your major. Relevant job experience not only enables a college graduate to become competitive in the job market, it also provides a network to reach out to when searching for employment.
In fact, even if the job isn’t directly related to your specific field of study, the fact that you possess prior job experience will work in your favor. Just figure out how to make the skills you acquired at a previous position fit into the requirements of the job you’re interviewing for.
Working in college teaches time management skills.
I used to struggle with effective time management, but when I started working in high school, my window to study and get homework done became fairly small. It took a lot self-discipline to ensure I could get my studying done, and put in time at work after spending a full day at school. This new busy schedule took a lot of getting used to, but over the course of time it became second nature.
Learning to balance time with classes and work will help students adapt to post college life. It will also teach students how to deal with people at work. There is a difference between working with people at school and collaborating with colleagues. These skills will make adjusting to the real world, much easier.
Working in college can improve academics.
I must say, working through school definitely motivated me to stay diligent with my schoolwork and time management skills. I was surprised to see that my grades actually improved when I started working. This is a result of learning how to organize and plan study time effectively. The added focus made the difference between an A and B.
It’s up to you to find a point where it’s most effective. Some people can handle forty hours a week; some people can handle twenty hours a week. Stress levels should not be so great that it is a distraction, and you should still be able to stay on top of all projects.
Working in college can provide employee benefits.
When I worked as an administrative assistant during high school I had all the great benefits and perks. I was particularly excited about contributing to a 401(k) at such an early age.
Many companies, such as Starbucks, Home Depot., and Whole Foods offer full-time benefits to employees if they work a minimum of twenty-five hours a week. This means students can begin a 401(k), qualify for health insurance, or better yet, a tuition assistance program, all while still attending college.
Working in college allows students to save for an emergency.
During my sophomore year of college, my father, the primary bread winner of my family suffered severe injuries to his back while on the job. He stayed out of work for almost a month, and without his income my family was afraid that our home will fall apart. Luckily, my brother and I both had an emergency stash and was able to maintain some bills until my father’s recovery.
Regardless of how many expenses you’re facing, or how little you’re is able to put aside; it’s imperative that you have an emergency fund. In life, especially as a college student, you should always expect the unexpected. An emergency fund is one way to financially prepare for the unknown. Financial emergencies can come in the form of job loss, significant medical expenses, home or auto repairs or something you’d never even dream of.
Working in college will enhance networking skills.
There is truth in the saying: “it’s not what you know, but who you know.” Working during college not only develops your networking skills, but expands your network of people to turn to for a job after graduation. All you have to do is connect with that person and ask to chat over a cup of coffee. It’s that simple.
Networking is exactly how I ended up in the office of CNN’s Director of Business News. I knew someone that knew someone who worked there, and was able get my resume on that director’s desk.
Networking isn’t just a job search strategy; it is a critical professional career development enrichment strategy. Working in college can enhance networking skills, and broaden your horizons well beyond the college campus. More importantly, networking with the right people in your industry can open doors and help your career flourish.
Moral of the story: get a job in college
It doesn’t matter if you’re bussing tables, bartending or fetching coffee for a network executive – working in college helps both financially and professionally. Okay, maybe fetching coffee for a network executive helps more for networking purposes, but working in college provides a foundation to build on post-graduation. From a monetary perspective, any paid job will help college students learn how to budget and pay for some of their lifestyle to prevent sinking (often deeper) into debt. The skills of communication, time management, collaboration and conflict resolution are useful in almost any job interview – even if you developed those talents cleaning plates or mixing drinks. Ultimately, it is always good to be self-sufficient, regardless of your present financial situation and future employment outlook.
A Beginner’s Guide to Using a Credit Card
So, you want to open a credit card? It’s a good idea – most of the time.
Opening a credit card provides a simple way to establish and build credit history. Yes, certain credit cards can earn users rewards for cash back, travel miles, and redemption points, but the road to reward chasing is littered with people who slipped into credit card debt. Beware of your budget and your personality if you elect to pursue the path of reward chasing.
If you have trouble paying bills on time, saying no to purchases you can’t afford or just sense a credit card may not be a good idea for you – then trust your gut. While a credit card is a great tool to build financial health, it can also lead to painful consumer debt when used improperly.
Still think you’re ready to take on the responsibility of owning a credit card? Then let’s walk through how to select, understand, apply and manage your credit card.
Step One: Select your type of credit card
Credit cards were not made equal and we’re not just talking in terms of interest rates and rewards. Your unique situation will determine which credit card you should (and could) apply for.
Lenders understand college students aren’t flushed with cash. In fact, college students’ debt-to-income ratios are commonly skewed in the wrong direction. But lenders still make it possible for young adults to acquire credit cards through student card programs.
(Yes – they’re hopefully you’ll fall into debt.)
College students with an established bank account or credit union can likely get a credit card from their current financial institution. Other options include:
Fine Print Alert: these cards often come with high interest rates – so be sure to read the tips in step four and mind your spending.
The secured card offers an option for anyone looking to build (or rebuild) his or her credit history.
With a secured card, a potential borrower puts down a deposit in exchange for a credit card from a lender. Often the borrower’s credit limit is the same amount as the deposit, but this isn’t always the case. In the instance of CapitalOne’s Secured MasterCard, a borrower puts down approximately $50 for a $200 credit limit.
The deposit works as collateral for the lender. If the borrower cannot make payments, he or she will forfeit the deposit. If the borrower proves to be dependable over time, he or she will receive the deposit back after closing the secured card for a regular, unsecured credit card.
A secured card gives a lender a sense of assurance, while the borrower proves his or her responsibility. The borrower will see his or her credit score improving over six months to a year and can eventually leave behind the secured card for a traditional credit card.
Fine Print Alert: Be sure to take a secured card from an FDIC-insured organization, like your bank or local credit union. It’s important not to spend much on the card because your credit limit is likely to be quite low. Read more about secured cards here.
Store credit card
Odds are high you’ve been offered a store credit card at least once in your life. Store cashiers inquire if you’d like to open a store credit card, often in exchange for a certain percent off your purchases.
In general, a store card can be a trap into consumer debt. Just one round of missing a payment in full can lead to painful interest rates and leave consumers struggling to pay down their bill.
However, store cards often accept lower credit scores than traditional cards. Someone looking to rebuild credit, but carrying a score in the low 600s, could apply and feasibly get approved for a store card when they’d likely get rejected for a card from another lender.
Naturally, the bank hopes said person will have trouble paying off his bill – but the diligent borrower can use a store card to help rebuild a credit score.
Fine Print Alert: Store credit cards often have incredibly high APRs (annual percentage rate). For example, the Gap Visa starts at 23.99%. While a traditional card, like CapitalOne’s Quicksilver has an interest range of 12.9% – 22.9%. Read more about store credit cards here.
Traditional credit card
If you have a good to excellent credit score (often 680 or higher) then you’ll likely qualify for most credit cards. There is no need to deal with a store card and their monstrous APRs or secured cards with their low credit limits.
Do some research to see what type of credit card best suits your needs. You can use our cashback tool to input your spending habits and find a card to maximize your rewards.
Step Two: Understand the details of your card
Once you decide the type of card to apply for, it’s time to do your research.
You need to understand the details of your card, before signing on the dotted line.
Evaluate the APR (interest rate) on the card. It’s ideal to have a credit card with a low interest rate, like PenFed’s 9.99%. You want to avoid ever paying interest, but in the case you do end up not being able to pay your bill in full, you need to understand the rate you’ll be charged.
Is there an annual fee associated with your card? With the exception of needing to get a secured card, don’t bother spending money on an annual fee when you’re starting out with a credit card. There are plenty of great cards with no annual fee – so why spend the extra $50 to $100?
What’s your credit limit? You likely won’t find out until after you’ve applied and been approved for a credit card. It’s imperative you remember your credit limit to avoid maxing out your card. In fact, you will want to stay well below your limit, but we’ll get to that in step four.
While we don’t recommend beginners focus on credit card rewards, it is good to understand the perks (if any) associated with your card. Be careful not to increase or change your spending habits simply to churn points.
Step Three: Apply for your card (and read the fine print)
The simplest step, apply for your card.
You can often apply online, but if you’d prefer to go in person then head down to your local bank or credit union.
Be sure to give that fine print one last look while you’re in the application process.
Step Four: Properly handle your credit card
Now that you have a credit card at your disposal, it’s time to use it properly.
- Understand the difference between borrowing and spending
Credit cards are structured to create debt. It’s a simple, not often discussed, truth. To avoid debt, it’s important you understand the difference between borrowing and spending. Do you set a strict budget and only spend what you can afford to pay off each month? Check for spending. If you eye a purchase you know you can’t afford and whip out your credit card, well that’s borrowing. Credit cards are often not the best route to go if you need to borrow money. However, if you are going to turn to a card for borrowing, then have the lowest interest rate you possibly can (ie: the PenFed 9.99%). Borrowing at a 15 to 23% interest rate (common on many cards) will do major harm to your bank account.
- Ignore “minimum due” and pay your bill in full
Credit card companies like to offer a “minimum due” in hopes customers will just pay a fraction of their total bill, so interest will start accruing. For credit card rookies, this can be incredibly confusing when they see minimum due on the first billing statement. The simplest thing to do is act as if the minimum due doesn’t exist. Always pay your bill in full. Paying the minimum just means you’ll end up paying more to your lender in the form of interest.
- Pay your bill on time
Paying your bill on time is possibly more important than paying your bill in full. Being just one day late on your credit card bill could crush your credit score. If the bill is due Tuesday, but you won’t have the money to pay in full until Wednesday, then pay as much as you can (at least the minimum) on Tuesday and pay off the remainder on Wednesday. In your mind, it might seem that paying it off in full a day later makes more sense than just paying part by the due date – but that isn’t how your lender will see the situation. They’ll see you as irresponsible for missing your payment deadline.
- Keep your utilization rate low
Your utilization rate (or ratio) is the amount of your overall credit limit you spend. Ideally, you should try to keep your credit used below 30% of your available credit (ie: if your available credit is $1,000 then only spend $300). A low utilization rate will show responsibility to lenders and help improve your credit score.
- Don’t do a cash advance
Don’t use your credit card like a debit card. Just don’t do it. You’ll be paying high interest rates (typically higher than store cards – around 25%) for withdrawing cash from an ATM.
- Careful where you share your card information
In the end, you need to protect your credit card. Odds are high you’ll experience fraud at one point in your life, but it’s best to be proactive and be careful where you share your credit card information.
Don’t forget to use your card, because a lender can discontinue an inactive card. If you feel a little uncomfortable using your card, but need to build your credit then buy one small item a month (perhaps a cup of coffee) and set up an automatic payment, so you know you’ll never be tardy with your bill.
College Students: Employers Check Your Credit Report, Not Credit Score
The summer after my college graduation I came face-to-face with the reality of needing a good credit report and strong credit score. As a naïve co-ed, I’d never truly pondered the consequences of using a credit card. All I knew is that utilizing it properly would help build something called credit history. A fact I became familiar with after my father insisted I get a credit card my freshman year of college.
Pushing a credit card on an 18-year-old college kid may sound like bad form to some, but my father’s strategy was sound.
I entered college with no student loans thanks to a combination of parental support and scholarships. With this in mind, my father suggested I get a credit card in order to start establishing credit history.
He took the time to walk me through the important points of credit card use:
- Don’t max it out
- Pay it off in full each month (aka only buy what you can afford)
- If you only pay the minimum then you’re just throwing away money in the form of interest to the banks
Thanks to his foresight, I graduated college with no debt and a 720 credit score from the responsible use of one credit card. At the time, I only recognized the no debt part; I never thought to check out my credit report and score (rookie mistake).
Fast-forward three weeks and my new roommate and I were pounding the streets of New York City looking for suitable housing. We hit up Craigslist, tried referrals from friends and ultimately succumbed to using a broker to help us find an apartment. When we finally found a roach-and-rodent-free apartment in our price range, we scurried back to the broker’s office to submit the paper work. She looked up at us and said, “And we’ll need $50 to run your credit check?”
“Huh?” I thought to myself while wondering how much an unexpected $50 would damage my budget.
“Your landlord will need to see your credit report and score to determine if you’re a responsible tenant,” she emphasized.
“What is she talking about?” I thought (probably aloud).
This is when I realized my Dad’s advice to get a credit card was some of the best he’d ever given me. Thanks to him, I had a 720 credit score (instead of no credit score) and was able to get my first apartment with minimal stress.
So, why does this matter for the average college kid?
Landlords aren’t the only ones using your credit report to see if you’re responsible: employers do too.
Note that a credit report is different than a credit score. The score is merely a gauge of what is reflected on the report. The credit report is a thorough history of your life as a borrower and includes details on things like: loans, credit cards, mortgages and if any of your bills went to collections.
Why do employers want to see your credit report?
There are a variety of reasons an employer may run your credit report.
- To see if you’re responsible
- To verify you are who you claim to be
- To determine if you could handle a company credit card
- To see if you’re financially stable – even though your bank account information is not reflected in this report, they can see your loans and how you utilize credit cards
In fact, the use of pulling a credit report is two decades old, according to Experian spokeswoman, Kristine Snyder. (Experian is one of the three credit bureaus.)
“Some companies have been using them for 20 years, mostly when they hire people who will be dealing with money. Traditionally, the biggest users of credit reports for employment purposes are companies in the defense, chemical, pharmaceutical and financial services industries because of the sensitive positions many of their employees hold,” wrote Snyder in an email.
Will you know if they run a credit report?
“Federal law does prohibit anyone from accessing an employment report without first obtaining written permission from the consumer,” Synder emphasized.
What can employers see when they get a credit report?
Experian offers a report called Employment Insight, specifically for employers.
According to Synder, this report contains:
- Consumer identification: including Social Security number
- Address information: including length of time at current and previous addresses
- Employment information: providing insight regarding an applicant’s previous work history
- Up to two places of employments
- Other names used: such as maiden names and aliases
- Public record information on bankruptcies: liens and judgments against the applicant
- Credit history providing an objective overview of how financial obligations are handled
- Demographics Band (including driver’s license and phone number verifications)
- Profile Summary (including payment patterns)
What will be kept private from an employer?
- Your credit score – but they can probably make an educated guess based on the information in your report.
- Your year of birth
- Information about a spouse
- Account number information
What if you don’t get hired?
The credit bureaus don’t offer any sort of recommendation about whether or not to hire you with your credit report. It’s simply supplemental to other portions of the interview process: skills tests, in-person interview, references, etc.
However, if you aren’t hired based on information in your credit report, then federal law does require your potential employer to give you both a copy of the report and a written description of the consumer’s rights.
Why it won’t impact your credit score
Don’t fret about this damaging your credit score. Your employer performs what is known as a soft pull (or soft inquiry), which doesn’t cause any sort of drop in your credit score nor is it reflected on your credit report moving forward.
Moral of the story
Bad credit history can impact more than just your ability to get a credit card or a lower interest rate on a loan. It could actually prevent you from getting a job. If you have questions about building credit start here and then check out our Fine Print Blog for plenty of articles on ways to build and improve your credit history.
Switching from a Student to a Non-Student Bank Account
This is our first post from our new contributor Kelly Harry. Kelly is joining us from Brooklyn College where she’s majoring in journalism and finance.
When you’ve completed college, it is in your best interest to change your student bank account into a non-student account. Why you ask? For one, your bank will do it for you, whether you notice or not. And second: loyalty costs.
As a college student, you’re seen as a hot commodity to banks. To entice you they’ll offer exclusive deals, such as free banking during your college years. However, when you graduate, your account will graduate with you, and all those wonderful perks and savings will unfortunately come to an abrupt end.
Once you graduate to a non-student bank account, most banks have minimum deposit amounts, monthly fees (if you fall below that minimum) and expensive overdraft structures. Even worse, you can only use ATMs of that bank, and can pay pesky fees if you use an out-of-network ATM. While they’re trying to sneak money out of your account in fees, they pay almost nothing on your deposits. The typical interest rate on savings accounts is 0.01% at traditional and community banks. So why waste your money on unnecessary fees when you can switch banks and protect your cash?
I know what you’re thinking, and believe it or not, switching isn’t as complex as it seems. Post-graduation life is full of change, and miscellaneous inquiries anyway, so while you’re hunting for that new job, why not shop around for the best “non-student” banking deal.
Here are a few tips on how to avoid costly banking fees:
Never pay a monthly fee
When you first graduate from college, you may be living from paycheck to paycheck, with minimal money in your account. Monthly fees for bank accounts can add up quickly. You should find a bank that has no minimum deposit amount and no monthly fee. A minimum deposit is a set amount of money you must keep in checking or else the bank will slap you with a monthly charge. For Bank of America’s Core Checking Account, you need to either have a qualifying direct deposit of $250 each month or a daily minimum of $1500 in your account. Otherwise, BofA will charge you a maintenance fee of $12. These fees are waived for students, but college grads get the unhappy gift of a “real-world” account. Beware, if you’re searching for a job and don’t have a direct deposit going into your account each month (or a spare $1500 sitting in there each day) you’re going to get charged a monthly fee.
Never pay an overdraft fee
Big banks can charge you a fee per incident when you go overdraft. These fees can high as being $35, per overdraft charge. Those fees can add up quickly, and when you have a low balance in your checking account, it is easy to make a mistake. You may have signed up for overdraft protection, but many of the big banks still charge a fee to transfer money from your savings account to cover the cost of overdraft. Make sure you choose an account that doesn’t punish your mistakes with massive fees or nonsense charges to move your money.
Make your ATM visits free
Many Internet-only banks offer a free ATM visits at any ATM in the country. In most cases, you’ll be charged initially, but your bank will reimburse you for the fee.
Returned deposit fee
If you deposit a check that bounces, some banks charge a fee. Big banks can charge up to $15 for returned deposit items, and $25 for an internationally returned deposit item. However, small banks and credit unions don’t. Hopefully you won’t encounter any bounced checks, but it’s better to be safe than sorry.
Lost debit card fee
If you misplaced your debit card, it’ll cost you up to $7.50 to replace. If you need it replaced ASAP, then it’ll cost you up to a hefty $25 expedited delivery fee for a new shiny piece of plastic. To lessen the blow, you don’t have to request expedited delivery on your new card—you can simply use cash you have on hand or your credit card for payments until the new debit card arrives.
Paper statement fee
Banks charge customers $2 a month for paper statements. To avoid this fee, search for a bank that waives this fee or look into an account that enables you to bank entirely electronically.
Returned mail fee
When you move, a mail-forwarding request with your post office may not be good enough for your bank. Many banks print “return service requested” on their envelopes, so your mail gets sent back to the bank if it can’t be delivered, upon which, a number of banks charge a fee. These fees can add up, so make sure you update your address with your bank upon moving.
Human teller fee
Some banks charge a fee for using a person to handle transactions. If you’d like the ability to consult a teller, seek out bank accounts that don’t levy this charge.
How to eliminate those fees
Don’t limit your banking options to banks with branches. Internet-only banks, like Ally, Bank of Internet USA and Charles Schwab’s online banking, don’t have monthly maintenance fees, ATM fees and offer higher interest rates. Credit unions also tend to offer fewer, and cheaper, fees than traditional banks.
In fact, if you’re interested in opening a savings account, credit unions and Internet-only banks often pay higher interest rates on savings accounts in opposed to brick-and-mortar banks. Luckily, you don’t have to do all of the work when searching for a fee-free checking account with perks because Magnify Money’s got you covered. Just fill out the simple tool here.
Now that you’re aware of these fees, you can take necessary steps to avoid the ones that may put a strain on your finances. After all, as a new graduate, these pesky fees should be the last of your worries. When all else fails, just keep in mind, you’re not obligated to stay with your current bank. If you’re not too fond of the features they offer, revisit, it’s that easy. Chances are, you’ll find another convenient institution where you can bank without being charged any fees.
Reduce Money Stress: Learn How to Budget with 4 Easy Strategies
Creating a budget has the same thrill level as getting an impacted a wisdom tooth removed. For some, the wisdom tooth might even be preferable. But a budget will prevent that “where did all my money go?” feeling and subsequently help you build wealth.
Fortunately, there are multiple ways to budget so you can find one that suits your personality. But first, you need to learn the building blocks of a budget.
What you need
- Figure out how much money is coming in each month
- Tally up your monthly expenses including: rent (or mortgage), groceries, transportation expenses, debt repayment (credit cards and/or student loans), cell phone bill, utilities and your “fun fund.”
- Set a percentage of money you save each month.
- Subtract your monthly expenses and set savings from your monthly income to determine how much wiggle room you have each month
These steps are the foundation of budgeting. Next, you need to figure out which style of budgeting is right for you.
Types of budgeting
The penny tracker
A budget extraordinaire subscribes to the penny tracking lifestyle. Every item he or she buys is meticulously tracked, totaled and compared against an allotted budget.
The penny tracker will create itemized lines of how much can be spent per month on specific categories, ie: food, rent, bills, and entertainment.
All the money a penny tracker spends is carefully written down (or monitored through an online service).
For example, if Tammy has $300 allocated for food each month, she’ll write down all the money she spends on groceries, morning lattes and going out to eat. Each time she spends money on food, Tammy writes it down and then subtracts it from her budget to see how much is left for her to spend.
The beauty of this method is the ability to see where all of your money is going. There is never a surprise about the sudden drop in a bank account or a particularly high credit card bill. It keeps accountability high and also helps plug leaks in a budget.
By tracking each penny you spend, you’ll be able to see if you’re consistently throwing cash at a non-essential purchase that could be put elsewhere, like debt repayment or saving up for a large purchase.
If you don’t want to be a penny tracker for life, you should still take a month to track all of your spending. This exercise will help illuminate any trouble areas you may have and keep you from wondering, “where did all my money go?”
The “leftovers” spender
A slightly more practical style of budgeting, the “leftovers” spender subscribes to the mentality of paying him or herself first, taking care of all the bills and then using the remaining money at his or her own discretion.
Save it, spend it, do what have you because it’s the “leftovers” in your budget.
It looks something like this:
Sam earns $2,200 a month (after taxes and a 401(k) contribution).
Each month he owes:
- $800 for rent
- Approximately $120 for utilities
- $65 for his phone bill
- $250 for student loans
- $250 for car insurance and gas
- $300 towards savings
- $200 to groceries
$215 is leftover each month. This means Sam can use that $215 towards entertainment or pad a different area of his budget, perhaps food, or throw money towards debt repayment or savings.
This style of budgeting keeps people from feeling the need to constantly track every penny and keep rigid tabs on their spending, but it still can prevent overspending by simply being aware of how much you have to spend.
The 50/30/20 Rule or the Envelope Method
It’s a common rule of personal finance, but the 50/30/20 rule is similar to the leftover spender mentality. You allocate 50% of your budget towards fixed expenses (all those delightful bills), 30% towards saving or other financial goals and the spare 20% towards flexible categories (which might include groceries because the cost fluctuate). Some experts might say 30% for “fun/flexible” spending with 20% towards savings and debt repayments.
Regardless, it’s a method which distributes your income towards various categories and it’s up to you to monitor your spending to ensure your 20% flexible spending doesn’t really turn into 50% of your monthly pay.
The envelope method uses a similar strategy and is not meant to be taken literally.
Instead, it’s a mentality similar to the 50/30/20 rule in which you allocate a specific amount of your budget to certain expenses (or saving goals).
If you do take the envelop method literally, keep your cash in a locked safe box in your home and recognize you’ll be losing money on interest by not keeping your funds in the bank.
Tracking your money doesn’t have to mean whipping out pen and paper to jot down a note to yourself, nor does it mean tallying up all the receipts you have stored in your wallet.
Instead, you can use apps or online tools to help monitor your budget. Popular tools like Mint.com, a free service which allows you to sync credit cards and bank accounts with your profile, help keep track of your spending automatically. Mint provides a weekly email update with an overview on your spending habits. If you spend cash, you’ll have to proactively add in what you spent.
You can also try your hand with apps like Level Money, Budget Ease or Billguard. Plenty more exist, so if one doesn’t appeal to you then move on to try something else.
Or, just kick it old school and track your money with pen, paper and a spreadsheet.
Budgeting saves you money
Without any sort of budget, it’s easy to let yourself slip into debt, rack up a large credit card bill or stop saving for the future. Budgets may not be the most enjoyable task, but they’re an important part of financial health — consider them the broccoli of personal finance.
7 Financial Must-Dos for College Students
MagnifyMoney’s financial back-to-school checklist for college students
1. Understand your student loans
Ensure you know if your loan is federal or private and understand the difference
Don’t take out loans for discretionary spending. Each $100 you take out can cost you $170+ over your lifetime.
2. Set up a budget
Spend a month tracking all your spending to understand how much money you have coming in vs going out.
Set up a budget outline to keep yourself from spending more than you have coming in.
3. Switch to an Internet-only bank
Avoid bank fees eating up your hard-earned money by switching to an Internet-only bank – many have no ATM or overdraft fees.
4. Have a little wiggle room? Pay yourself first
If you can put even $2 a month into a savings account, get into the habit now. Having the foundation of saving will serve you well in the future.
5. Build a strong credit history
Use your four years in college as preparation for your post-graduation financial health. Begin establishing your credit history so it’s easier to rent an apartment, buy a house or get a car loan after graduation.
6. Consider a credit card
A credit card is a simple way to build your credit history, but you must use it responsibly.
Make a small purchase or two each month and pay your bill on time and in full
7. Parents, send your student an allowance without any bank fees
If you’re kind enough to send your student an allowance, consider using an account that avoids overdraft fees and ATM fees.
Details for all these tips can be found below.
Handling Student Loans
We know that times have changed, and college is much more expensive now than before. You used to be able to get a side job to pay for your education. But we still think you should get a side job – to pay for your living expenses.
There is a big temptation to use loan proceeds to fund a lot of your discretionary spending, including nights out, vacations and some luxury items. But, be careful. Every $100 you spend could end up costing you almost $170 or more over your lifetime (3.86% interest rate over 30 years).
Although $100 may not seem like a lot, it will translate into hours of your working life to pay it back. So, take that side job and keep your debt load as low as possible. You will thank yourself later.
When deciding on loans, we recommend seeking federal loans and maxing out those options before taking on any private loans. Here’s why:
- Federal loans are at fixed interest rates while private are variable (some up to 18%)
- Some private loans can require repayment while you’re still in school
- Federal loans could include income-based repayment plans or student loan forgiveness while private loans typically don’t.
- Private loans are not subsidized
- Undergraduate students who qualify for subsidized loans will have their interest paid by the government while they’re still in school
Find an extensive break down of federal vs. private student loans here.
Learn how to budget (seriously, just do it)
It’s a tale as old as time, and usually elicits eye rolls, but budgeting is essential to financial health.
There are various ways to budget your money. Some track each and every penny, while others focus on saving money, paying off bills and then evaluating how much is left to spend for the month.
Regardless of your preferred method, you need to have a solid grasp on how much money you have coming in each month and perhaps more importantly, how much is leaving your bank account.
There are various apps and online products you can use to track your spending including Mint.com and Billguard.
If you seem to be constantly low on money – or heaven forbid a serial overdraft offender – then commit to spending a month tracking each penny you spend so you can spot the leaks in your budget and plug them up.
Consider automating your savings and at least some of your bills, so you don’t have to take the time to do it manually. Don’t forget that one missed credit card payment does major damage to your credit score.
Switch to an Internet-only bank
As a student, you most likely will have a low balance in your checking account. Your goal is to avoid monthly fees, ATM fees and the overdraft trap.
The best way to avoid all of these fees and traps is to open an account with a branch-free (Internet-only) bank. Most Internet banks charge no monthly fee and have no minimum deposit requirement.
Even better, some Internet banks (like Ally and Bank of the Internet USA’s Rewards Checking) give you free, unlimited use of any ATM in the country. They won’t charge you a fee for using an ATM, and will reimburse any fee charged by the other bank. Ally reimburses at the end of every month, and Bank of the Internet reimburses the next business day.
Overdrafts can become incredibly expensive very quickly.
Making mistakes at large banks (like Bank of America) can cost you up to $140 per day. Fortunately, online banks can drastically reduce the cost. Ally will charge a maximum of $9 per day. Bank of the Internet USA and Simple have no overdraft fees and no returned payment fees.
There are two limitations to Internet banks: depositing cash and check posting times. If you need to deposit a lot of cash, Internet banks are less convenient. You can buy a money order at a grocery store, post office, WalMart, or convenience store to deposit cash into an online account.
If you have a check to deposit, you can now use your mobile phone. At Ally Bank, you can deposit up to $25,000 per day. And at Bank of the Internet USA you can deposit $10,000 per day. However (and especially during the first month), the hold can be longer than depositing at a branch.
As a digital native, you probably get paid electronically, you use Venmo to pay friends and you rarely visit a bank branch. To make banking free, use an Internet bank and never think about fees again.
You can see our list of online fee free accounts here.
Pay yourself first and set up a savings account
From Ramsey to Orman to Chatzky, personal finance experts everywhere are unified in one piece of advice: save money.
The schools of thought on how to save may vary, but college students should get in the habit of embracing the mantra “pay yourself first.”
Instead of seeing how much money is left at the end of the month, you should always save a percentage of each paycheck. Even if that percentage is 0.5 and all you can afford to tuck away is two dollars a paycheck, it’s about developing the habit now.
Your savings should also be squirreled away in a savings account, not kept in your checking account. Setting up a savings account is simple. You can look into doing one with your current bank, but we recommend using an Internet-only bank. Why?
1) No minimum deposit with an Internet-only bank like Ally. You can open up a savings account with your two dollars a month. Bank of America would require you put down at least $25.
2) They have higher interest rates. Ally offers 0.87% while Bank of America will dish over a whopping 0.01%. It might not sound like much, but it can make a big difference in the long run.
If your job pays you in cash, then you may be stuck with a traditional bank. You can deposit a check with your smartphone (or a computer scanner) for Internet-only banks, but depositing cash with your smartphone…well, that’s not an app for that.
Read more here to learn about the steps of paying yourself first.
Build a strong credit score and report
Credit scores are part of your “real world report card.” The constant grading doesn’t stop once you’ve left school. Lenders determine if you’re a responsible borrower by viewing your credit scores and credit report. And it isn’t just credit card companies and loan officers checking them out.
Looking for an apartment? Your landlord will want to run a credit check. Applying for a new job? Your future employer could give your credit report a review.
It takes diligence, responsibility and the right tools to build a strong credit score, but first you have to establish credit history. Unfortunately, you do need a debt tool (ie: a loan or credit card) in order to begin establishing credit history. However, with a properly used credit card, you should never be in consumer debt.
Five factors determine your FICO score:
Payment history (35%): do you make payments on time? Missed payments can crush your credit score quickly.
Amounts owed (30%): the more debt you have, the lower your score. But even more important than the total amount you owe, is the amount you owe in relation to your total credit limit – which is called utilization. If you max out every card you have, you will get punished.
Length of credit history (15%): the longer you’ve had credit, the better. This is one reason to establish credit history in college instead of waiting until after graduation.
New credit (10%): this looks at how many new accounts you have opened, and many times you have applied for credit.
Types of credit used (10%): the more types of credit you have, the better. So, someone who has successfully managed a car loan, a mortgage and a credit card would score better than someone who just managed a credit card successfully.
If you’ve taken out a student loan, in your name, for school then you’ve already established one type of credit being used. Add a responsibly used credit card on top, and you’re easily improving your score.
Just remember: one missed payment can annihilate a great credit score.
Get a credit card
College students are in a unique position to use credit cards to their advantage.
Yes, credit cards can be used to accumulate debt, but the savvy student will use swiping plastic as an opportunity to establish a healthy credit history.
However, part of owning a credit card is being responsible. Not everyone is ready to handle the adult task of only charging what he or she can afford and paying the bill on time and in full each month.
Know yourself. If credit card bills would get lost in a haze of class projects, thesis papers, keggers and football games, then don’t apply for one.
Avoiding credit card debt in college is one key to financial success post-graduation.
A student who incurs $4,000 of credit card debt at a 21% interest rate (low for a student card) and pays only the minimum due, will take 26.5 years to pay off the debt. Even worse, he or she will spend $10,554 in interest alone!
Use our calculator to see how much credit card debt could cost you.
How to send money to your student without incurring overdrafts
Are you a parent sending your child off to college and being nice enough to send them money? The last thing you want is for that money to be eaten up by monthly fees and overdraft expenses.
There are some great, new options out there to send money to your children at school.
If your son or daughter opens an Internet account (like Ally Bank or Bank of Internet USA), then you can send funds to them via PopMoney. If you are more comfortable with Venmo, then Simple is a great online banking option.
All of these accounts have no fees, including no overdraft fees and unlimited free ATM withdrawals.
Another interesting option, if you are not comfortable using PopMoney or Venmo is Bluebird, by American Express. You can find the Bluebird cards at Wal-Mart and get two cards on one account: one for you and one for your child. You can then put money onto the card at any Wal-Mart. And the account has no minimum balance requirements, no fees and no overdraft fees. Your child will be able to use the card anywhere American Express is available. The only cost is for a withdrawal at an ATM, which is $2 (when you use a MoneyPass ATM). ATM withdrawals are free if you have a direct deposit onto the account, which you child should do if they have a job. Bluebird is like any other bank account (you can write checks, pay bills online, etc), just without the fees.
We often hear from parents who are frustrated by the overdraft fees (typically $35 each) and monthly fees (could be $10 or more per month) that eat into allowances and hard-earned money. The good news: with a bit of forward planning, you can virtually eliminate all of those fees.
The Importance of Paying Yourself First
Payday: one of the best days of the month. It’s a day to pay the bills, throw money towards any debt and likely splurge on a recent purchase you’ve been eyeing. But before you put money towards your bills or hit purchase on your recent Amazon buy, consider a classic piece of personal finance advice: pay yourself first.
No matter which personal finance expert you look up to, they all have one unified message: save your money.
We aren’t ones to argue with the entire personal finance community, except we prefer you look at saving in a unique way. Instead of just tucking away the money leftover at the end of the month, you need to make saving a priority. It should be the first thing that happens with your paycheck. Here’s how:
Step One: Run the numbers
We can sense you want to argue, “I don’t have any money to save.”
Before you reach for that tired excuse, we want you to run the numbers.
Sit down and write list of your monthly expenses. Consider costs like your cell phone, rent, utilities, tuition (or student loans), any debt payments, groceries, and your “fun fund” for eating out, going to the movies or bar hopping.
After adding up your expenses, subtract your expenses from your monthly income.
Our hypothetical college student Lizzy earns $1000 a month and her expenses total to around $850 a month.
She only has wiggle room of $150 after each paycheck.
Step Two: Set a percentage
Using Lizzy as an example, she could save 15 percent of each paycheck and still have enough money left for expenses.
Except that some months are more expensive than others, so she may need some of that remaining $150 (even though she has fun activities built into her budget).
Lizzy is comfortable with contributing seven percent ($70) of her monthly income to her savings account.
This may sound like a small number, but if Lizzy diligently saves $70 a month, she’ll have $840 tucked away by the end of the year. If she continued with this practice through four years of college, she’d have $3,360 from just contributing a small amount of each paycheck (not including interest). She might even get a raise during the four years of college and be able to contribute and save more!
Step Three: Set up a savings account
Once you’ve set your percentage, you need a place to stash your cash. Your checking account doesn’t provide much of a safe haven because you may be tempted to spend the money earmarked for your nest egg. Plus, checking accounts won’t help you earn money in interest (unless you count a penny a year big bucks).
Setting up a savings account is simple. You can look into doing one with your current bank, but we recommend using an Internet-only bank. If you’re already using an Internet-only bank, color us impressed.
Internet-only banks offer higher interest rates on savings accounts than traditional brick-and-mortar banks because they save immense costs by eliminating the local bank branch. They’re FDIC insured and just safe as using your local bank.
For example, Ally has no minimum deposit to open a savings account and offers an interest rate of 0.87%. That may not sound like much, but Bank of America requires a $25 minimum to open an account and only offers 0.01% APY (annual percentage yield).
If Lizzy deposited her $840 savings with Bank of America, she’d only receive eight cents in interest after a year. If she puts the money in an Ally savings account, she’ll earn $7.34, according to Ally’s APY calculator. That’s easy money to earn just by picking one savings account over another.
A savings account will give you a location to allow your money to earn a higher interest rate than a checking account. Plus, it’s gratifying to watch your fund grow and know exactly how much you have saved.
Step Four: Pay yourself first
Once you settle on a percentage, even if it’s .05%, start to diligently save each time you get a paycheck. Before you pay off bills or go on a spending spree, you need to put that money into savings.
Even if you can only afford $1.50 each month, you need to start getting into the habit now. The younger you begin saving, the happy your older self will be.
Don’t roll your eyes and say, “Ha, $1.50 a month. That can’t even buy me a latte. Why would I bother putting that in a savings account?”
In the beginning, it isn’t about amassing a fortune in your savings account today. This is about building a foundation for your financial future. It’s a practical way to start saving instead of randomly throwing money into a savings account when you occasionally have leftovers.
Step Five: Adjust your percentage as your budget and income change
Hypothetical Lizzy earned $1,000 a month in college and could only save $70. Once she graduates, Lizzy lands a job earning $2,500 a month, after taxes. She needs to run a new budget to account for any increases in expenses.
If Lizzy sticks with her commitment to pay herself first with seven percent of each paycheck, she’ll be increasing her savings from $70 to $175. A simple habit developed in college will result in her saving $2,100 a year (before interest).
If Lizzy runs her numbers and determines she can save more, let’s say 15 percent, she can be saving $375 a month or $4500 a year (before interest).
It’s up to you
Like any habit that’s good for you (exercise, eating the right foods, not binge watching Netflix every night), it can take time to be dedicated to saving a portion of each paycheck.
It’s okay to screw up, but the sooner you start forming the habit, the faster you can accumulate wealth.
College Grads Can Get an A+ Credit Score
Hello Graduate –
The next few months will be both exhilarating and painful. You’ll miss your friends, the ease of living in a college bubble and eventually look back nostalgically on some of those all-nighters. But instead of staying in a phase of arrested development, you’ll be able to become truly independent, establish a career, perhaps move to a new city and build a foundation for the rest of your life. Part of the foundation of life revolves around handling your finances.
Post-graduation you’ll be entering what is obnoxiously referred to as “the real world,” assuming you don’t seek protection in your parents’ basement. Finding the basic necessity of shelter will be high on your priority list. It doesn’t matter if you plan to rent or buy, your credit history and score will dictate your future.
If you spent college being financially responsible with behaviors like using a credit card and always paying off the balance or perhaps you even starting to pay off your student loans, then your credit score will probably be good (680 – 749) to excellent (750+).
Quick credit score recap
Credit scores help lenders assess your “risk factor” – like evaluating the consequences of going out drinking the night before a final. The lower your credit score, the more likely they are to think you’ll default on a loan, make late payments or jet off to a foreign country and assume a new identity. A high score (or one above 680) indicates trustworthiness.
Fair Issac and Company (or FICO) – who owns the definition and scores credit – use five factors to create your credit score:
Payment history (35%): do you make payments on time? Missed payments can crush your credit score quickly
Amounts owed (30%): the more debt you have, the lower your score. But even more important than the total amount you owe, is the amount you owe in relation to your total credit limit – which is called utilization. If you max out every card you have, you will get punished
Length of credit history (15%): the longer you’ve had credit, the better
New credit (10%): this looks at how many new accounts you have opened, and many times you have applied for credit.
Types of credit used (10%): the more types of credit you have, the better. So, someone who has successfully managed a car loan, a mortgage and a credit card would score better than someone who just managed a credit card successfully.
Why a strong credit score is important
When you want to rent your first place, your future landlord will most likely run your credit report and score. If you’re looking to buy, then your report and score will absolutely be run to determine your mortgage. The credit report shows your financial history including loans and credit cards as well as if you ever defaulted, missed or made a late payment. The credit score helps the landlord easily determine if you would be a good tenant. They’re probably looking for a 680 or higher.
The same goes for anyone who might be giving you a loan, like a car salesman. The higher your score the more negotiating power you bring to the table. If you’re resting in the high 700s then you’ll be able to get lower (aka better) interest rates than your peers in the low 600s or below.
Build your credit score
If you’re starting out with a low or non-existent credit score, don’t worry. We have resources to help you establish and/or build your credit score. We’ve outlined six simple steps below
- Get a line of credit – opening a credit card is the simplest way to begin establishing credit history.
- Keep your utilization rate low – utilization is the amount of your credit limit you spend each month. Aim to keep your utilization below 30 percent.
- Pay in full, and on time, each month – the easiest way to prove you’re responsible is to only charge what you can afford.
- Avoid credit card debt – by only charging what you can pay off, you’ll easily avoid the debt trap of a credit card.
- Your score will improve and better card options will come – once your score gets above 680, you’ll start getting offers from top-tier credit card companies.
- Protect your score – check your credit reports at least once a year for accuracy and signs of fraud.
For more details, visit our building your credit section.
Have questions about handling your financial life after college? Ask us in the comment section or email us at email@example.com. You can always get social with us on Twitter, Facebook and Google+.
Use College to Rock Your Financial Life
Dear College Student –
I envy you. Not for the football games, the keg stands nor the ability to arrange your schedule for constant three-day weekends. Okay, I miss that last one. But I primarily envy you because you have a simple advantage when it comes to finances.
Over the course of your college career, you’ll make a lot of decisions that will impact the course of your life. Some of them will be academic, a few will be social, but plenty will be financial.
Before you even entered the hallowed halls of your university, you may have signed a dotted line that put your young financial life into the red. Student loans are major issue for college students – more so than actually picking a major – but we’re here to help to minimize all other debt and maximize your financial health. School may be preparing you for getting a job, but here at MagnifyMoney we want to educate you on what comes after.
Step One: Build Credit History
Grades don’t stop after you hand in your final exam, in fact you’re going to be graded your entire life. A credit score is how a lender will determine how risky you are. If you’re looking to buy a car, rent an apartment or apply for will a mortgage (lucky you), then your credit score will be pulled. A high score can help you edge out other applicants for an apartment or give you bargaining power for a lower interest-rate on a loan. The lower your score, the risker you’re going to appear.
Even your employer could end up pulling a credit report to assess your responsibility. A credit report doesn’t contain your score, but will show if you’ve been late making payments, defaulted on a loan or even filed bankruptcy.
Fortunately, you have four years of college to be building your credit history so you graduate summa cum laude – with a high credit score and impeccable credit report. If you’ve taken out student loans in your name, then you’ve already started the process of establishing credit history. However, we still recommend that you consider getting a credit card. Part of your credit score is determined by the types of credit you have as well as payment history.
A credit card is a simple way to establish credit history, but you must be using it responsibly.
Pay off your balance in full each month – carrying a balance just costs you more money
Keep your utilization rate low – only use 30% of your available credit. So, if you have $500 a month, then don’t spend more than $150 per month. If you really want an A+ in credit card use, try just spending $5 a month and have an insanely low utilization, which translates to a high credit score.
We have a list of college credit cards on our Cash Back Rewards page. You can also consider applying for a secured card, which helps you establish credit history by putting down a deposit of your own money to prove your responsibility.
Read more about building your credit history here
Step Two: Avoid Credit Card Debt
Opening up a credit card can be like walking into a frat party when you’re trying to avoid drinking. It opens the door to a whole lot of temptation, which is why it’s incredibly important that you use the credit card to only purchase items within your budget. Using it as a tool to buy expensive clothes, get the latest gadgets and open up a tab at the bar for all your friends will land you in a lot of financial pain.
Credit card companies may try to entice you to spend more by offering sign-on bonuses or cash back rewards. Don’t let this fool you into spending more than you can afford. If you get into debt, then you’ll be paying a lot more than you made from the sign-on bonus or cash back rewards. Plus, the interest rates on college credit cards are usually insanely high and that means debt at a high interest rate.
The simplest way to avoid consumer debt is to pay your balance off, in full, each month. Carrying a balance doesn’t help your credit score; it simply incurs interest you have to pay off.
Step Three: Consider an Internet Bank
You’re part of a generation reared on the rise of technology. You already know “there’s an app for that” – so why waste your time and money by banking at a traditional brick-and-mortar bank branch?
Putting your money into a savings and/or checking account is essentially giving the bank a loan. They are able to lend your money to someone else at a high interest rate while paying you less than 1%. Then they have the audacity to charge you heinous amounts of money if you go overdraft (the act of making a transaction without enough money in your account).
Now, Internet banking can help you save more money and there are, of course, apps for that.
Internet banks offer:
Higher interest rates on your savings accounts
Lower fees on your checking account
Overdraft fee protection and reimburse you for ATM fees
The ability to cash checks with your smartphone (or a scanner)
Internet banks are FDIC Insured just your brick-and-mortar bank, so they’re entirely safe.
Read more about Internet Banking here
Graduate with a Degree and Financial Competence
The next four years of your life are about so much more than good grades, parties and your cute study partner. They’re an opportunity to do the incredibly simple work that builds a foundation to pass a life-long exam. Taking the time to understand your financial situation in college will pay huge dividends once you graduate. Unless you do actually just want to live in Mom and Dad’s basement because you can’t afford anything and no landlord will take you without a decent credit score.
Got questions about setting up your financial life? Email us at firstname.lastname@example.org or tweet @MagnifyMoney