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What Recent Graduates Need to Know About Student Loan Repayment

Student Loan Repayment

Guest Post: from Dollar Diligence
For most college graduates, student loans are a fact of life.

Because the cost of a college degree has skyrocketed in recent years, student loans are necessary for a large number of students who would not otherwise be able to afford to obtain a degree.

Recent college graduates are nearing the end of what is known as the “grace period.” This is the six-month period of time after graduating or leaving school where a borrower does not have to make a payment on his or her student loans. After the grace period ends, a borrower will have to start making payments on his or her student loans.

That means that Class of 2017 graduates who received a diploma in April, May, or June, will soon receive their first student loan bills. It is critically important for these grads to understand the fundamentals of student loan repayment so they can be successful.

Learning more about student loans, including strategies for how to best pay off your loans, is vital to making informed decisions about your student loans moving forward.

Read on to learn the basics about what student loans are, your repayment options, and how you can take charge of your repayment schedule to pay them off more quickly.

 

Types of Student Loans

There are two types of student loans: federal student loans and private student loans. Federal student loans are offered by the government through the Department of Education. Private student loans are offered by private banks and lenders.

Federal student loans include both Direct Loans and Perkins Loans. With Direct Loans, the Department of Education is the lender. With Perkins Loans, the school is the lender.

There are three types of Direct federal student loans.

 

Direct Subsidized Loans

These are available to undergraduate students with a demonstrated financial need to help them pay for the cost of a degree at a college or career school. With subsidized loans, the government covers the cost of interest while the student is enrolled at least half-time in school, in a grace period, or during a period of deferment or forbearance.

 

Direct Unsubsidized Loans

Direct Unsubsidized Loans are available to undergraduate, graduate or professional students. They are similar to subsidized loans, except that students do not have to demonstrate financial need to be eligible, and students are responsible for interest on the loan.

 

Direct PLUS Loans

Direct PLUS Loans are available to graduate and professional students and to parents of dependent undergraduate students. Though the interest rates do not vary on these loans, the government will check to ensure that you do not have any serious adverse credit history before giving out the loan (such as bankruptcy).

All federal student loans have fixed interest rates, which means that the interest rate is the same for the life of the loan. The interest rate is the percentage that a bank or other lender charges you to loan you money. The higher the interest rate, the more money you will pay over time.  

 

Private Student Loans

There are two primary options with private student loans: those with fixed interest rates and those with variable interest rates. Variable interest rate loans tend to start out lower but can go up over time. Fixed interest rates are usually higher, but are more predictable.

Private student loans typically have higher interest rates and eligibility is based on creditworthiness. If a student does not have good credit or has no credit history at all, they can elect to add a cosigner to the loan who shares the responsibility of repayment.

It is always smart to max out federal student loans before taking out any private loans as they typically have fewer benefits and few options in the case of financial hardship.

 

Repayment Options

There are a number of options for repaying your student loans based on the type of student loan that you have (federal or private) and your current financial situation.

As mentioned, federal student loans are generally considered to be more favorable because they offer more generous repayment options, particularly for those struggling to meet their minimum monthly payments.

 

Income-Driven Repayment Plans

For borrowers with federal student loans, income-driven repayment plans are a good repayment option for anyone who does not currently have a high salary. This plan will cap your monthly student loan payment at a percentage of your monthly discretionary income, from 10 to 20 percent.

However, the standard federal student loan repayment term of 10 years will usually be extended around 20 to 25 years. At the end of that period, the remaining balance will be forgiven.

The benefit of an income-driven repayment plan is that it will immediately decrease the amount of money that you pay each month. However, because it extends the loan term, you will pay more in interest. You will also owe taxes on the amount that is forgiven.

 

Forbearance and Deferment

If your financial problems are temporary — for example, if you have been laid off or are suffering an illness — then you may be eligible for a forbearance or deferment of your federal or private student loans. Each of these options will put your student loans on “pause” while you cannot make payments.

For federal student loans, a deferment allows you to not make payments for up to three years. Forbearance for private student loans is available for up to 12 months. However, for both private student loans and unsubsidized federal loans, interest will continue to grow on your loan balance, which means that making this choice can result in owing more money on your student loans.

 

Student Loan Refinancing

For borrowers with multiple student loans, refinancing might be an option to help save money and reduce your interest rate. Refinancing your student loans is essentially applying for a new loan to pay off your private student loans, and if you choose, your federal student loans.

Borrowers can often obtain a lower, fixed interest rate by refinancing, which can help them save thousands of dollars in interest and pay off their loans more quickly. However, you should be aware that if you refinance your federal student loans along with your private student loans, you will lose the protections of the federal student loans, such as income-driven repayment plan options.

Refinancing requires that the borrower have a history of making on-time payments, a solid income and a credit score of at least 660.

 

Strategies for Repaying Student Loans

Paying off your student loans should be a top priority for recent college graduates, but it can be difficult to accomplish, particularly if you have a low starting salary. But by taking certain steps and working towards paying down your loans, you can achieve this goal.

Whenever possible, borrowers should pay extra money towards their student loans. This could be as little as $25 each month, or as much as $1,000. Each little bit can help to pay down the total amount owed on your student loans.  

Next, borrowers should take steps to reduce their interest rate. This can be accomplished through refinancing (described above), or often by signing up for automatic payments, or by making a certain number of on-time payments. Check with your lender to determine if they offer any incentives to reduce your interest rate.

Finally, borrowers should try to make extra payments whenever they can. A single extra payment each year can significantly reduce the total amount owed, and help you pay off your loan more quickly.

 

About The Author

Aside from his full-time job as a high school teacher, you can find Jacob blogging about personal finance, reading books about history, and figuring out which kind of puppy to get next. Follow him on Twitter to keep up with him! Or visit http://www.dollardiligence.com

 

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401(k) – 5 Deadly Traps You Need To Avoid When You Love Your Money

Financial Ginger - 401(k) traps

By Guest Author: Stacy Miller

Financial experts keep talking about 401(k) and how it’s beneficial for us. But do you know what it actually is? Well, Investopedia defines a 401(k) account, “A 401(k) plan is a qualified employer-established plan to which eligible employees may make salary deferral (salary reduction) contributions on a post-tax and/or pretax basis. Employers offering a 401(k) plan may make matching or non-elective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings in a 401(k) plan accrue on a tax-deferred basis.”

If a 401(k) account is used properly, then you can save a lot of money for the golden years of your life. However, there are a few traps or pre-retirement blunders you need to avoid when you’re participating in a 401(k) plan.

Trap #1. Using a 401(k) account as your credit card: Please understand one thing that a 401(k) account is not your credit card. It is a tool that can help you boost your retirement savings. But if you take out a loan from your 401(k) account, then it will be a terrible mistake. Here are a few reasons:
a) The outstanding balance will be due within 2 months of separating from your employer.
b) You have to pay origination fees and maintenance fees. These are extra costs.
c) You have to pay penalties in the event of loan default. Plus, the loan will be considered as a taxable income. (You’re going to be paying taxes, on your own money twice)

Trap #2. Assuming that 401(k) and Roth 401(k) are same: Both are distinctly different from each other.

According to Bankrate, a Roth 401(k) account is, “An employer-sponsored retirement plan that lets employees have the option of setting aside money from their paychecks that’s taxed upfront and saving it in a retirement account where it can grow tax-free forever. Money can be withdrawn tax- and penalty-free as long as the participant is age 59½ and has held the account for at least five years.”.
The key differences are:

401(k) – Contributions aren’t taxable for the year you’re making contributions (dont pay taxes now, pay them when you withdraw at retirement)

Roth 401(k) – Contributions are taxable for the year you’re making contributions (pay taxes now and not later when you withdraw during retirement)

401(k) – This is subjected to RMD by the day you turn 70.5 years old.

Roth 401(k) – This isn’t subjected to RMD by the day you turn 70.5 years old.

Let me define RMD for those who don’t have any idea about what a Required Minimum Distribution is: “A required minimum distribution (RMD) is the amount that traditional, SEP
or SIMPLE IRA owners and qualified plan participants must begin distributing from their retirement accounts by April 1 following the year they reach age 70.5.”

It is important to know the rules and do all the calculations correctly. Otherwise, you’ll be in a mess.

Problem #3. Not reviewing/updating your contribution percentage annually: You have to select a percentage that will be taken away from your wage and put into your 401(k) retirement savings plan. It has been observed that plan holders often forget about this contribution percentage, which is a big mistake.

Your financial health changes when your life scenario changes. For instance, you get married, you have your first baby or you get a big salary hike. If you analyze carefully, you may find that your contribution amount is either too big or too small. Though it isn’t investment advice and FinancialGinger cannot be responsible for the actions of readers based on its opinion, FinancialGinger generally recommends to at a minimum contribute the maximum match offered through your companies 401(k) program.

Problem #4. Not taking advantage of maximum employer match: You’ll lose a hefty amount if you miss out on maximum employer match. In a survey of 360 employers, it has been observed that 42% of them matched employee contribution. 56% of these employees only required workers to contribute 6% from their wage to qualify for the maximum employer match. It is said that the average missed employer contribution amount is $1336 every year.

Huge Issue #5. Not adjusting your portfolio at regular intervals: You need to rebalance your portfolio at the time of choosing index funds. It might be the case that you’re holding 90% in a low-cost index fund and 10% in government bonds. However, as the market condition changes, you need to adjust your portfolio allocation (What % of your money is in each asset class) as well.

If the S&P 500 has a huge rally (quick jump upward), it will be risky to hold 95% of your 401(k) in the index fund.

Action Items

1. Never take out a loan from your 401(k) account unless you have no other option. Analyze all your loan options and compare them with your 401(k) account. Know about the tax and penalties.

2. Review your percentage contribution whenever you experience major life events (marriage, a new job, or a pay increase). It is best to review it at least every year since your financial situation doesn’t remain the same all the time. Always opt for an annual increase option if your company has one. Annual increase options automatically keep your percentage match the same even if you get a pay increase.

3 (The most important action item). Once you’re eligible for maximum employer match, make sure you take full advantage of it. Make the required contribution to maximize your employer match.

4. There is no need to roll over your money from 401(k) account into an IRA at the time of switching jobs or retirement. It isn’t compulsory. If you’re satisfied with your current plan, then keep your money there. Also, many companies allow you to roll your 401(k) account from a previous job to the new job. Be aware of your options.

Comment from FinancialGinger: My Dad kept old 401(k) accounts from jobs worked 20 years ago. That may be good, or may be bad in your situation. Ask a Professional for guidance in investing. (Or wait until I pass my exams in Spring of 2018 and I can be your professional guidance!)

5. Several 401(k) plans have automatic annual rebalancing feature. Read the terms and conditions of this feature minutely to determine if it’s good for you. In case your plan doesn’t have an automatic rebalancing feature, you can select a date to adjust your portfolio every year. Many financial companies and ETF’s will rebalance at least once a quarter, this may not be best for you, but at a minimum, most professionals recommend at least annual rebalancing.

Conclusion
Depending on the rules, you may qualify to enroll in the 401(k) plan within 1-12 months. If you’re eligible to contribute from December, then don’t wait till the next year to establish your retirement account since (a) you can lower your taxable income for the current financial year by contributing your pretax dollars (b) your employer can contribute next year but make it count for the existing year. When you start a new job, try to set up your 401(k) account by December 31st if by all possible.

 

About the Author: Stacy B Miller is the content editor at Oak View Law Group. Her articles revolve around topics related to debt, credit, laws, money, personal finance, etc. You can connect with her on Twitter

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Guest Writer: The Envelope Budget And Running Away

From guest writer: Flia

Running away taught me a lot. It taught me a lot about trust. It taught me a lot about making my own decisions. It taught me a lot about budgeting my money. It taught me that what might seem like a terrible decision could be the best thing that I’ve ever done for myself.

WAIT! WHAT?

Back up a little bit!

It taught me about budgeting? Believe it or not, yes it did.

And that’s just what I’m here to explain.

I realize that most of you reading this do not know me and so a little background is necessary. Shortly after my 19th birthday, I ran away from home. I am not going to go into details as to why, because that’s not what I’m writing about.

Three days beforehand, I bought a train ticket from Indiana to Utah. That same day, I started cashing out my bank account. My specific bank would only let me withdraw $300 a day. Although you could get around this rule by also using an ATM that was not associated with a bank (such as an ATM at a Wal-Mart).

By the time I got on the train and left Indiana, I had about $1,500 in cash, my backpack, and my duffel bag. And I had a 48 hour train ride to figure out what to do next.

IMG_7481
Forty-Eight hours on a train

About six hours into the trip I was really bored and hanging out in the snack cart where I knew I would be left alone. Because of how bored I was, I was starting to become delusional. That was the point that I decided to budget my money.

It’s not that I’d never done any budgeting before, but all of my previous budgeting had been done on electronic day planners and such. I didn’t have any of that with me so I had to do a little creative thinking.

The first thing I did was brainstorm and write down a list of everything that I would need money for. My list ended up something like this:

  • Travel & Gas (for whoever would be picking me up at the train station)
  • Food (on the train)
  • Food (elsewhere)
  • Lodging (hotel or staying with a friend)
  • Non-Food Necessities (toiletries/clothes/medication)
  • Emergency/Extra

After I had categorized everything, I began to determine about how much (or what percentage) of my money needed to go towards what. Things such as gas money for the friend that picked me up at the station was relatively easy. I looked up the number of miles between his place and the station and back. Then I determined the average miles per gallon on the specific type of truck that he had, and figured in the average price of gas in the area. After I knew how much gas the trip would have taken him, I could effectively reimburse him. All of that math was probably not necessary, but like I said, I was delusional.

Every other category followed similarly.  Food on the train is ridiculously expensive, even the prepackaged snacks. I found the cheapest food with the most nutrients (which was kind of a joke by the way-it is a snack cart-it’s all garbage) and rationed that extremely carefully. Also, because I had spent a majority of my time in the snack cart, I ended up befriending the guy that ran it. He’s a pretty neat guy. And I ended up getting some free snacks out of it too. That was a bonus!

After I had figured out each of the categories and how much money I would allot to each one, I had to figure out how to separate the money physically. It would be much easier to spend responsibly when I could actually have a visual.

NOTE CARDS!

budget20-20istock_000041295790_largeI had a package of note cards in my purse! I never leave home without them. Each budget got one note card. I folded it in half, lined side inward, and on the outside wrote which category it was. The lined inside would serve as a ledger. Every time I spent money from that card, I would subtract the amount that I spent and write in the new total.

And I am not quite sure why I just explained that because you really should already know how to use a ledger.

Any leftover money that did not get spent would go into my Emergency/Extra fund. This money was kept in an entirely separate compartment of my wallet.

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Out of Sight, Out of Mind

Out of sight, out of mind. It would be used in case of emergency, depleted funds, of on something necessary that I would inevitably forget about. For instance, I had no cell phone. I ended up shelling out a little less than $25 for a burn phone and some minutes.

Although I was not out in Utah very long before continuing on to my next place, I still use this method of budgeting. I get paid through a paycard (a bank less debit card) and cash out 85% of my earnings every payday. Savings go into a tin under my bed (out of sight, out of mind) and everything else is separated into neat little note cards in my wallet.

So yeah, I guess you could say that running away taught me about budgeting.

Thanks to Flia for the guest post! The envelope is a basic budget that really gets stuff done. What do you do to keep track of your money? What is your story?

I always love to hear your money ideas, so email me at [email protected]

Flia is a college student studying forensic biochemistry. She is an avid artist and is currently working on multiple commissioned pieces. Although she is now residing in Kansas, she has lived a little bit of everywhere and isn’t overly attached to one particular place. In her spare time, Flia likes to read, practice new art techniques, and baby-sit for family-friends.