Student Loan Facts Page

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Good Debt or Bad Debt?

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Many advisors—personal finance, college, and other—claim that student loan debt is “good debt”. In this case, good debt is defined as debt that is worth borrowing and carrying rather than avoiding it all together or paying it off quickly.

These advisors have valid points; the most important one is that student loan debt that leads to a degree is an investment in your financial security later in life. Of course, that point relies on you only borrowing what you need and making sure your degree costs don’t exceed earnings for your chosen career..

Debt consultants often caution you to leave student loans around until all other consumer debt is paid off. They argue that the interest rates are often the lowest, and that if something were to happen to your income, it is much easier to put your student loan into deferment than it is with other debt.

What these consultants don’t take into account is that bankruptcy doesn’t erase student loan debt, nor does the borrower’s death in every case. If your financial stability changes, you will still be required to pay off your student loans, regardless of bankruptcy. If you have a co-signer on your private student loans, and you die, your co-signer will still be required to pay off those loans. Student loans are an immortal scourge—not a very “good” sounding obligation.

When it comes to getting out of debt, student loans are no better than any other consumer debt—in fact, they might be worse. If you are faced with the choice of paying off a car loan with a lower interest rate than your student loans, pay off the student loans first. Your car loan, at least, is backed up by an asset (the car) and if something does happen, it is a lot easier to discharge the car loan that it will be to ease the burden of your student loans in the long run.

How to Spot Student Aid Scams

Car Jacking

Anything that is profitable is bound to be exploited by scam artists—student aid and loans are no exception to the rule. There are many services out there that promise to fill out all your aid forms, and help you or your child win scholarships and grants, for a fee of course. But in most cases you’ll end up hurting your chances at qualifying for aid because the forms will be filled out incorrectly—causing you to lose precious time to correct them and potentially missing deadlines.

The Motley Fool recently published a list of things to keep in mind about these “helpful” services:

  • The words “Foundation,” “Federal,” National,” or “Administration” in a company’s title or promotional material don’t mean that it’s on the level or endorsed by any lawful entity.
  • Legitimate scholarships do not require applicants to pay up-front fees.
  • Beware of anyone who asks for up-front “processing/handling,” “origination,” or “advance-fee” fees for a low-interest loan.
  • There is no secret vault with scholarship money, only accessible to the organization telling you about it. And you definitely don’t have to pay a membership fee to ensure that “only serious candidates apply” for access to these supposedly impossible-to-find scholarships.
  • Your child is indeed special. But that solicitation from some outfit saying that your child has been preapproved or specially selected for a scholarship-matching service is only telling you that because they know it’s what you want to hear.
  • It is against the law for a company to imply that you need to purchase a financial product (such as insurance or an annuity) to receive federal student aid.
  • There are no “guarantees” when it comes to getting scholarships—money-back or otherwise.

The advice really boils down to one thing: legitimate opportunities don’t require you to pay fees. The Free Application for Federal Student Aid (FAFSA) is, by definition, free. But, mistype “.com” instead of “.gov” when heading to their website and you’ll find a company willing to take your money to file it for you.

When filing for aid or loans, do your research about the organization. Do a few internet searches to see if the company might be a scam, such as “[organization name] scam”. If the company claims to be an Accredited Business with the Better Business Bureau, verify that directly with the BBB—don’t simply believe them.

When it comes to websites, be extremely wary of any business site that uses popup or popunder ads or any sort of alert box requesting that you not leave the page and instead talk with a “specialist.” Those shady techniques are rarely employed by legitimate businesses. The techniques are directly aimed at generating ad revenue and conversions for cheap services that are otherwise free.

Read the full article at The Motley Fool: 7 Signs of a Student Aid Scam

Establishing a Good Credit History

Old German Paper

This is a Personal Finance Thursdays post. It focuses on an area of personal finance, meaning it applies to more than just student loans. A healthy financial situation is vital to managing your student loans, or avoiding them all together.

When you’re fresh out of college, or possibly even while still taking classes, you find yourself in need of an apartment, utilities, possibly a car, and maybe even a job that requires a credit check. Here are a few tips for establishing a good history.

Check your history

You can get your credit report for free from each of the three major credit bureaus once a year at annualcreditreport.com. If you’ve never checked it before, now is the perfect time to start. Even if you have no loans or credit cards, it is good to make sure you aren’t a victim of identity theft.

Get a bank account

Simply having a checking and savings account can be a huge plus to establishing a good credit history. It will allow you to show lenders that you are responsible by managing your money effectively. Establishing a good relationship with your bank can also help you get better rates on credit cards, mortgages and other loans.

Of course, if you continuously bounce checks or overdraw, that can show on your report—especially if you don’t pay back the overdrawn funds.

Start small

Credit cards aren’t inherently bad, they simply require you to be responsible. Having a credit card that you use for small purchases and pay off completely every month is the best way to establish a healthy credit history. Get one as soon as possible, but make sure not to run up a balance. If you find yourself unable to use it responsibly, consider putting it somewhere that is not easily accessible—like inside a block of ice in the freezer. As long as it is open, it can help your history to some degree.

Work your way up to an installment loan

The best way to pay for anything is typically cash. Unfortunately, paying for everything in cash doesn’t help your credit history. Installment loans are the next step after revolving credit (credit cards). These are things like auto loans, personal loans and student loans.

If possible, take out a small loan—perhaps a couple of thousand dollars on a car that you could pay for completely in cash—and pay it off as quickly as possible. This will keep you from having to pay too much in interest, but still allows your history to show that you’ve had an installment loan that you paid off responsibly. Just make sure to read the fine print on the loan to be sure there is no prepayment penalty. If there is, look for a different lender before ever signing anything!

Keep it healthy

Keeping your credit history healthy is often as easy as keeping all of your bills paid on time. But, to really maximize your score, consider the following tips:

  • Keep a low revolving credit balance. Even if you pay off your card at the end of every month, the balance might be reported before the payment hits. Make sure to keep your credit/debt ratio (the amount charged out of the total maximum credit line) below 30%.
  • Don’t have too many inactive accounts. While having more than one account can help your score, too many—especially if they are all opened in a similar time frame—can look bad, even if they don’t carry a balance. Accounts you don’t regularly use are also easy prey for identity thieves.
  • Check your credit reports on an annual or semi-annual basis. Look for suspicious activity such as accounts you didn’t personally open or collections claims for debts you don’t owe.

What is the best healthy credit history advice you’ve received?

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Do Loans Die When You Die?

Cemetery Cross Gravestone

A family in Kansas is dealing with the loss of their daughter, who lost her battle with cancer just after graduating from the University of Kansas. On top of that, they’ve also had to battle the banks about whether her estate or they owe part of the $45,000 in student loans she borrowed to finance her two degrees.

“You don’t know they’ve taken $45,000 in loans because they’re an adult,” John Roark said. “And they have the Privacy Act you can’t; you don’t, you don’t know until you take over their estate and then you’re forced to deal with it.”

The Roarks said since they never co-signed a student loan for Jessica, and they shouldn’t be responsible for the balance. Two out of three loan companies agreed with them. But the third, Wells Fargo, wanted the $6,000 they sent Jessica for school.

Federal loans—including PLUS loans taken out for a student by parents—can be fully discharged upon the death of the student. However, private loans have no such guarantee. Banks make their own policies, and while some forgive the loan balance upon the death of the student, not all do.

Additionally, most co-signed loans aren’t forgiven: the banks have second borrower that is legally obligated to repay the loan—regardless of whether they benefited from the money. Think twice about taking out a student loan that requires a co-signer—not only are there disadvantages debt-wise, but it can also hurt relationships if you end up defaulting. And, it puts your co-signer on the hook if you die.

No one wants to think about their own death, but if you have any debt, it is important to do the following:

  • Keep a master list of all debts, bank accounts and financial obligations in a safe place that the executor of your will or your parents (if you don’t have a will) can access if you were to die—and let them know about it.
  • Be aware of which debts will have to be covered by your estate and which will be forgiven if you die. Discuss contingencies with any co-signers; consider getting a small term life insurance policy that will cover the debt, with the co-signer named as the beneficiary.
  • Work toward paying off debt as quickly as possible.

Will your estate leave your executors baffled—or worse, hounded by creditors?

Read the full article about the Roark’s situation at KCTV5: http://www.kctv5.com/news/26796636/detail.html

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5 Tips For The College Bound

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The folks over at Wise Bread posted an interesting list of tips that the author wishes they’d known before going to college.

  1. Don’t Get Down on Yourself
  2. Coursework Will Only Take You So Far
  3. Challenge Yourself During the Summer
  4. GPA Is Important
  5. Have Fun, but Don’t Be (Too) Stupid

The first two tips address the fact that it’s okay to not know what you want to do after college, and that you may find you don’t like your chosen path after taking a class or two. Once you realize this, make sure you work toward figuring out what you do like so that you don’t waste time and money on a degree you don’t want to—or ultimately won’t—use.

Perhaps the most valuable advice in the article is to do something during the summer. Be it internships or more coursework, spending your summers doing something related to your career will put you far ahead of other graduates when it comes time to look for a post-grad job. Internships are a great way to test out potential careers if you’re still not sure what you want to do. And summers aren’t the only time to get a feel for a career; you may be able to do part-time internships or jobs while taking classes—perhaps even for course credit. Talk with your advisor or career center about those types of opportunities.

Tips four and five are give and take: you need to work for a high GPA, but you also need to experience things outside of the classroom. While “work hard, play hard” may not be the most sage advice, college is the time to get experience with managing organizations, being part of clubs, and actively working on life skills that aren’t necessarily taught by professors—things like time management, work/life balance and financial skills. By managing schoolwork, a part-time, career-oriented job, and extracurriculars successfully, you show potential employers that you know how to handle life and won’t flounder when pulled out of the university and into the “real world.”

If you’re a graduate, or even in the middle of your college career, what one tip do you wish you’d been given in high school?

Read the full article at Wise Bread: 5 Tips for My Career-Clueless College Self

How Tax Brackets Work

Adder tape, calculator

This is a Personal Finance Thursdays post. It focuses on an area of personal finance, meaning it applies to more than just student loans. A healthy financial situation is vital to managing your student loans, or avoiding them all together.

One common misconception with the US income tax system is that moving into a higher tax bracket can cause a decrease in your take-home pay. This is simply untrue. The US income tax system is a progressive tax, meaning that as pay increases, so does marginal tax rate. But, the system has an effective tax rate because each dollar of taxable income you earn is taxed according to the bracket it falls into.

The taxable income distinction is important. That is your Adjusted Gross Income (AGI), which is your income after any deductions and credits are applied. For a single person with no other deductions or qualified credits, the first $5,700 of income is tax free.

If you earn $10,000 in taxable income for the year, you aren’t taxed at 15% for the full $10,000. The first  $8,500 is only taxed at 10%, meaning you pay $1,075 ($850 [10% of $8,500] + $225 [15% of $1,500 ($10k - $8,500)]), or 10.75%.

If you earn $85,000 in a year, the marginal tax rate is 28%. But, doing the same calculation as above, your tax liability is $17,400, which is a 20.48% effective tax rate.

Here are the updated tax brackets for 2011:

Tax Bracket Married Filing Jointly Single
10% Bracket $0 – $17,000 $0 – $8,500
15% Bracket $17,001 – $69,000 $8,501 – $34,500
25% Bracket $69,001 – $139,350 $34,501 – $83,600
28% Bracket $139,351 – $212,300 $83,601 – $174,400
33% Bracket $212,301 – $379,150 $174,401 – $379,150
35% Bracket Over $379,150 Over $379,150

The Bonus Problem

One major exception is when you have a check with a bonus included. In most states, bonuses are automatically taxed at the highest tax rate. This means that when you receive a paycheck with a bonus included, you may see a tax rate of close to (or over) 40% after state and federal taxes are considered. That means that a bonus can effectively cause you to have a smaller paycheck than normal.

This doesn’t mean that you pay more taxes on all of your income throughout the year because of the bonus, however. You will end up receiving the difference between the maximum tax percentage and your actual tax percentage back when you file your return.

In some states, however, employers can withhold from bonuses based on your actual withholding history. Be careful, though. If you are pushed into a higher bracket due to the bonus, you could end up owing more taxes at the end of the year because historical withholding won’t cover the full taxes owed on the bonus.

What other tax system misconceptions have you heard?

5 Tips For Saving Money (and Going Green) in College

Dollar Bill

Whether you’re a student living on campus or commuting, college is costly. These five tips can help you save money and go green at the same time.

1. Use the internet for movie rental instead of buying DVDs

Movie rental fees add up quickly, not to mention the cost of gas to go rent them. Online streaming services allow you to rent movies without leaving your home, and put fewer plastic discs in circulation as well. Services like Netflix and Blockbuster Online allow you to rent actual discs by mail, meaning you don’t need to go out and buy DVDs—which take up space and cost money. You can also watch many popular TV shows through these services. Most big networks offer their recent shows for free online as well, so there’s no need to pay for cable, either.

2. Use a bike or public transit

If you live on or near campus, use a bike or take the bus instead of driving your car. Car costs—gas, maintenance and insurance—add up quickly. If you can ditch the car, you’ll have much more money for tuition. On top of that, it’s greener. If you’re commuting by bike, it’ll help keep you healthy, too!

3. Rent textbooks or buy used

Textbooks don’t come cheap and printing isn’t exactly green. Some companies are now offering textbook rentals, allowing you to save money on the cost of your books for the semester. For fields where new editions are commonly released, you can rent the book without worrying whether it will be obsolete (and unsellable) in the future. If you don’t want to deal with renting, buy used and sell yours when the semester ends. That way, you save money on the sticker price, and manage to recoup some of the cost. If you must buy new, look into digital textbooks, which allow you to get the same information without using a paper product.

4. Carry a reusable water bottle

Buying bottled water is costly and bad for the environment. Keep a reusable water bottle with you so that you don’t have to purchase bottled water. You can fill it up from the tap, from a Brita pitcher or water coolers. You’ll save money and help reduce bottle consumption.

5. Use a netbook or small laptop in class and while studying

Netbooks and small laptops are cheap, use less energy and are more portable than full-size laptops and desktops. Their portability makes it convenient to bring them to class to take notes on, or read online notes and digital textbooks. You save money in both energy consumption (charge in class and at the library and you may not need to ever plugin at home) and the cost of paper notebooks and printouts.

All of these tips can help keep more money in your pockets—or at least save more money toward college costs. What do you do to save money and go green in school?

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Smart College Spending—Save 529s for Last

Toddler College Saving

In the past few years, 529 plans, which are tax-free education saving vehicles, have been growing in popularity. As the time comes to fill out the FAFSA for both incoming freshmen and returning students, it pays to know a little more about how these plans work with asset calculation for need-based aid eligibility. Ultimately, parents should plan to exhaust other education-targeted savings—especially those in the student’s name—before working on 529s owned by the parents.

According to the Kansas City Star,

The accounts are treated more favorably than most other savings vehicles when it comes to financial aid eligibility.

For example, before the advent of the 529 plan, people often used accounts through the Uniform Transfer to Minors Act (UTMA) to save for college. Now, if your child has her own UTMA account, even though you are the custodian, that account is treated as your child’s asset, which counts more heavily against her eligibility than your assets. However, 529 accounts owned by either you or your child are treated as your assets.

The important thing to know about how need-based aid eligibility is calculated is that the student’s assets are most heavily weighed. This means that students with large accounts in their name are going to be eligible for far less aid than if those accounts are in their parents’ names.

Students will benefit in later years if they use up assets in their own name as soon as possible.

Additionally, 529 plans that are owned by grandparents or other family members besides the parents do not count as assets on the FAFSA. If you or your child have those available, plan to use them only after your own assets have been used. That way, you may qualify for more aid later on.

What is your spending strategy for college?

Update: Just after we published this, fivecentnickel.com released an article that goes in depth about 529 plans. Read Looking into 529 Plans for College Savings if you want to learn more about this type of college savings account.

Read the full article at Kansas City Star: Money Matters: Does a 529 plan help or hurt when it comes to financial aid?

How To File Your Taxes For Free

Tax Return Cropped for Post

This is a Personal Finance Thursdays post. It focuses on an area of personal finance, meaning it applies to more than just student loans. A healthy financial situation is vital to managing your student loans, or avoiding them all together.

It’s that time of year again: tax time. To both the novice and experienced filer, it can be a confusing, troublesome process. It can also get expensive if you pay someone else to file your taxes for you.

But, filing your taxes doesn’t have to be expensive. In fact, if your Adjusted Gross Income (AGI)—your total income minus any deductions, pre-tax expenses and credits you are eligible for—is less than $58,000, you can likely file both your federal and state (if applicable) income returns for free.

The first step is to head over to the IRS Free File Portal and see if you qualify. The portal can help guide you to choosing an online tax preparer that suits your needs—and lets you file for free.

Watch out for “free” filing advertisements

Many of the big-name tax preparers are currently advertising free filing through their programs. While these do provide free filing, it is generally greatly limited and is federal only—no state returns.

Some, including the common TurboTax Federal Free edition, also limit you to specific forms such as the 1040 EZ, which may not allow you to claim certain tax credits and deductions for students and student loan borrowers. However, TurboTax does offer the Freedom Edition, which is part of the Free File Alliance, meaning you can file a more complex form for free as long as your AGI is less than $31,000. Active duty military and persons qualifying for the Earned Income Credit qualify if their AGI is under $58,000.

Things to keep in mind while filing

If you’re a current student or are repaying student loans, make sure you claim all of the deductions available to you. The American Opportunity Tax Credit allows you to claim interest you pay on student loans, meaning you can get more money back if your loans are in repayment—even if you don’t itemize your deductions.

If you’re a full-time student, talk with your parents about whether they are claiming you as a dependent or not. If they are supporting you and paying for tuition, they will likely benefit from claiming you, however if you’re paying your own way, your tax liability (the amount you’re required to pay) will be much lower if you are not a dependent. If you are though, your parents can also claim some of the deductions—especially if they’re footing the bill.

Filing your taxes is the first step in preparing to fill out the FAFSA, which is required to qualify for financial aid at all colleges. Get it done as early as possible—ideally the first week of February, which will allow time for all the tax documents from your employer, school and bank to reach you.

What is your favorite free tax filing resource?

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