Student Loan Dodgers

One of the biggest financial mistakes students make is not setting aside money in savings. Saving money is not only a good habit to get into, it will also help stabilize your finances when unexpected expenses (or opportunities) arise.

The simplest approach to saving is to deposit cash into a savings account. Some people choose to save a certain percentage of their income each time they get paid. If you regularly save 5 to 10 percent of your paycheck, no matter how small the check might be, you’ll soon discover that you’ve accumulated a healthy sum.

Once you’ve established a nice balance in your savings account, you can move into other savings and investment vehicles. The safest savings options include savings bonds, treasury bills and certificates of deposit. You can buy savings bonds and treasury bills directly from the Federal government with no additional fees or charges. Treasury bills (also called “T-bills”) can mature quickly – in as little as 13 weeks for individual investors. Savings bonds take several years to mature. When you sell either of these securities, you will be liable for taxes on the gains. Savings bonds issued by the Federal government are exempt from state and local taxes, but you still have to pay Federal taxes on your earnings.

Certificates of deposit are available through a bank, and require depositors to leave their money invested for some fixed period of time, usually 6 or 12 months. Some CDs have longer maturity periods. Usually with CDs, you can’t withdraw your money early without incurring a penalty, so you’ll need to be sure that you can afford to tie up your savings for the designated period of time. CDs usually pay a higher interest rate than regular savings accounts do.

If you’re a college student, you need to become very good about handling money. That’s the unfortunate reality of college life. Most kids come to college unprepared to handle finances, and that usually spells trouble.

If you find yourself in this situation, learn as much as you can as fast as you can about managing money. Check with your Financial Aid office, groups on campus, banks, credit unions and even the local community colleges to see if they can recommend courses on personal financial planning. Also check online for resources that you can use free of charge.

Develop a long term plan for managing your money. Set some goals and create strategies that will help you accomplish your long-term plans. Part of your plan may be setting limits on how much you’ll borrow, devoting time to seeking out grants and scholarships, and researching student loans to make sure you’re getting the best deal possible. Your long-term plan might cover the next two years, or even the entire time you’re in college.

Develop a medium-term plan. Know what expenses you have to address in the next six to nine months and figure out how you’re going to cover those while still making progress on your long-term goals. Looking ahead will help you avoid being blind-sided by expenses you may have overlooked.

Develop a short-term plan. Know what expenses you have to address in the next three to six months. Develop a plan for covering those expenses, in light of your medium- and long-term spending plan.

Develop an immediate plan. Know what expenses you have immediately. Also keep your regular monthly expenses in mind. These can include rent, transportation, loan and credit card payments, food and utilities. Understand how much money you need to have each month to pay these regular expenses, and figure out how much additional you’ll need to have to reach your long-term goals.

If you plan in these stages, your needs and resources will become apparent, and you can avoid being surprised. You can also begin to apply some financial discipline to your spending, if you have a clear picture of how much your lifestyle really costs.

When does accelerating debt payments make sense? As it turns out, most of the time. If you have accumulated debt, you will pay interest on the debt as long as you hold it. When you shorten the time you hold the debt, you reduce the overall cost of the loan or debt.

Accelerating payments can help reduce the overall cost of an obligation. In most cases, your initial monthly payments are applied to the interest you owe on your principal sum. Very little of the money you borrowed is actually repaid. As you pay down your debt, more of your payment is applied to your principal sum, which in turn reduces your interest.

To accelerate a debt payment, pay the full monthly amount. Your monthly payment will be applied to your debt as usual. Make an additional payment of some amount - it doesn’t have to be a full payment – and the additional amount will be applied directly to your principal balance. Your extra payments will begin to reduce the principal sum on which interest can be charged. Regular extra payments could cut months or years off of your debt repayment.

Reducing your overall debt by making extra payments makes sense. If you owe multiple lenders, start applying extra payments to the debt whose interest rate is the highest. Once you’ve repaid the highest-rate debt, shift the full amount you were paying on the retired debt to the debt with the next highest interest rate. If you apply this same payment to your next debt, you can quickly reduce it to zero as well. Be sure to make the monthly payment on all of your debts while you’re reducing your balances due.

Using this method, you don’t spend any additional money to pay down your debts, but you concentrate it where it will provide the most benefit. Work your way through all of your debts, saving your lowest interest rate obligations for last.

Some people also choose to apply any raises or tax refunds they get toward debt reduction. This approach means that you maintain your standard of living, but you retire your debts faster than you would by making payments only according to the schedule.

When you leave college with a mountain of debt, it’s easy to consider filing for bankruptcy as a way to get out from under some of your obligations. Students may not realize, however, the impact that bankruptcy has on their credit.

Bankruptcy laws have changed in the United States and it is now more difficult for individuals to declare personal bankruptcy than it was in the past. Bankruptcy is a declaration that you do not have, nor do you expect to accumulate, sufficient assets to repay your obligations. People declare bankruptcies for many reasons. Unexpected health crises, divorce, death of a spouse, failure of a personal business, gambling losses, employment loss and unchecked spending are some of the more common reasons people choose to declare bankruptcy.

Certain types of debt are not normally dischargeable through bankruptcy. Adverse court judgments, delinquent taxes and student loan debt are examples of obligations that cannot be erased by a declaration of bankruptcy. Regardless of whether the student loan debt is federally subsidized, unsubsidized or entirely private, declaring bankruptcy will have no impact on your student loan debts. When everything is said and done, you’ll still owe just as much as you did before you declared bankruptcy.

You may be tempted to declare bankruptcy early in your career, using the rationalization that you’ll recover more quickly from your past financial misdeeds if you start with a clean slate. This isn’t true. A declaration of bankruptcy will damage your ability to get car loans, mortgages and in some cases, a good job for as many as 10 years after you file. Never enter into a declaration of bankruptcy lightly. Ordinary adverse information (and good information, too) stays on your credit report for seven years. You’ll recover more quickly if you take your lumps and repay your debts than you will if you declare bankruptcy. In the process, you’ll rebuild your damaged credit rating, too.

As a side note, debt repayment is really the only way to repair a damaged credit rating. Regardless of what someone promises you, there’s no easy way to “fix” bad credit, except by repaying your debts and developing financially responsible spending habits. Do not give in to the temptation of paying someone to fix your credit rating for you. The only person who can fix your bad credit is you!

Making a budget is easy. Sticking to a budget is hard. If you’re new to budgeting, one of the most common ways you can get knocked off track is by underestimating how much money you’ll need for your expenses.

Unplanned and under-planned expenses can wreak havoc with your spending plan. If you find that your budget just isn’t working, and you have some savings to play with, track where your money is going. If you’ve budgeted $15 per week for entertainment, but consistently spend $30, you’ll either need to revise your definition of “entertainment” or you’ll need to increase your entertainment budget to $30 per week.

Most students have a limited amount of money to spend each month, so increasing the budget for one thing means taking money away from another spending priority. For the most part, budgeting is about making choices, so figure out what’s most important to you and budget accordingly.

If you still can’t make ends meet after you’ve cut or reduced your expenditures, your only other option is to increase your income. You may need to take a part-time job, pick up extra hours at work, or find ways to cover your expenses. Locating grants to help pay for your books, for example, may free up money in your budget for other things and prevent your from having to resort to student loans.

No one gets the hang of budgeting right away, and most people overspend themselves when they’re first starting out. Keep receipts, study your expenditures and avoid your temptations as much as possible while you’re attempting to establish a workable spending plan. Refine your budget as often as you need to while you learn to balance your income and expenses.

There are several college savings programs parents and others can use to help fund a child’s college education. Most programs rely on the gift of time to make contributions grow, so if you’re short on time, these options won’t be of much help. On the other hand, if you have several years to save before a child starts college, 529 accounts can be of great value.

The so-called “529 plans” are state-sponsored after-tax college savings programs. Most states have given the gains on these plans special tax treatment, so most or all of the money earned in these vehicles can be used to defray the high cost of a college education. The “529″ refers to the section of the tax code that describes the program and its limitations.

Most states have taken advantage of the Federal tax code and have created savings plans for their residents. There’s no requirement that you participate in the 529 plan associated with your state, but you may receive additional favorable tax benefits if you choose your state’s plan. Favorable treatment could come in the form of additional tax deductions, or tax-free gains on the principal.

A 529 plan can be opened by anyone for the benefit of anyone else, regardless of relationship. The money that’s invested can be withdrawn at any time by the giver with no tax liabilities because the principal investments are all “after-tax” dollars.

The tax code imposes limits on the maximum investment that can be placed in the account, and limits how the untaxed proceeds can be spent. Gains cannot be withdrawn for non-qualified expenses without incurring a penalty. Generally, if the proceeds are used for qualified higher education expenses, there is no penalty on the withdrawal of fund proceeds.

Once you begin to spend the proceeds of a 529 account, you’ll need to keep careful records of your expenses. This includes not only your tuition, but also your room and board costs, books, fees, equipment and other qualified college expenses. You’ll need to account for these expenditures at tax time.

If you leave college with student loans, you’re not alone. Approximately two-thirds of all college financial aid packages include student loans in one form or another. The sharp increases in the cost of college education mean that many students need to take student loans or borrow more than they planned in order to finish college.

The double-digit increases in the year-to-year costs of college tuition means that as students borrow more to cover their educational expenses, the risk of student loan defaults increase. The default rate among FFELP lenders is relatively low – less than six percent. The rate of default among borrowers in the FDLP is higher, at points exceeding 20 percent.

Typically, lenders receive money from collections on defaulted student loans. Lenders want to help students avoid default, but they needed a mechanism to shift their revenues from defaulted loans to default avoidance in order to make that happen. Several years ago, Congress allowed the US Department of Education to experiment with Voluntary Flexible Agreements (VFA), which allow the D.O.E. and a few test lenders to modify their existing loan agreements and provide revenue for lenders that implement successful default avoidance strategies.

One of the strategies being employed by the lenders is a change in the communication between the lender and borrower during the six-month deferment period. Typically, lenders don’t communicate with borrowers in this period, waiting instead until the student loan has become delinquent to contact the borrower. By working with borrowers in the deferment period before any payments are due, the VFA lenders have been able to reduce delinquency and default rates on their student loans by nearly 50 percent, and the lenders have been able to shift some of their revenue from collections to default avoidance.

Most federally backed lenders don’t have VFAs. The best strategy to avoid defaulting on your student loans is to understand your loan terms and talk with your lender if you think you will not be able to begin loan payments as agreed. Your lender may have some flexibility in extending your deferment or may be able to help formulate a plan to avoid default on your student loan obligations.