Archive | April, 2013

Which Private Alternative Loan is Right for You?

29 Apr

Leo Hertling, Associate Direct Financial Aid Services and Operations – Purdue University
www.purdue.edu/mymoney

As we progress through the semester, some students are getting a bill asking for the next payment on tuition or for a payment in full.  This financial headache on top of living expenses, cell phone bills, etc.  When there isn’t enough in your checking or savings account to pay off everyone that you owe, how will you make it through the semester without working a full-time job and going to school full-time?  Oh and you have to maintain at least a 2.0 cumulative grade point all at the same time.Migraine

Before you begin looking at private loans, you should consider exhausting all of your federal eligibility for grants and loans. If you have not exhausted your federal eligibility or do not know what your federal eligibility is, you may want to contact your institution’s Department of Financial Aid. If you have fully maximized your ability for aid with the Federal and state assistance programs, and still have a sizeable balance due, then you may need to consider the use of a private alternative loan.  But which one is right for you?

If you search the internet for Private Alternative Loan, you will get about 4.5 million hits on Google in a little under ½ second.  I don’t know about you, but I don’t have the time to look at all those pages to see what is out there.  Not to mention that I have no idea who is reputable and who is not.  So how can you tell what lender to choose to satisfy your needs?

Let’s go back to basics:  Who does your family bank with?  What lenders do you know and trust?  Are there lenders that you don’t trust?

If none of the banks your family works with have a private student loan program, you may want to take a look at some of the online resources for lists of student loan lenders.  Purdue offers a list of lenders that our students have used in the past.  You can also receive a list of national private student loan lenders from finaid.org.

Why choose a private loan?

pockets inside outPrivate loans may be a financial alternative after all other sources of aid have been explored and found to be lacking.  If you find yourself in a situation where you are unable to cover the rest of tuition, living expenses, are unable purchase educational supplies, and borrowing is not possible through a Parent or Graduate PLUS loan, then a private student loan may be right for you. There are times when a private loan may have a lower interest rate than the current Parent or Graduate PLUS loan options.  Usually these loans have variable interest rates.  Be sure to review the borrowing conditions of the loan to determine the amount of variability in interest rates over time.  With variable interest a loan can start low and affordable, but the interest rate could increase significantly making payments unaffordable in the future.  A loan of this sort could adversely affect your future and wreak havoc on your finances.

A private loan may be the proper route for you to follow if you have been denied federal assistance due to a lack of progress toward your degree.  Many private lenders will funds to you regardless of how well you are currently doing in school.

Things to look at before choosing:

A private loan is in your name (and your co-signers name) solely and does not have a guarantor backing the loan; this is different from your Federal student loans.   In most cases, lenders tend to be conservative business men and women who like the idea of being paid back the money they loaned you.  If you default on the note, the lender will be left holding the note, with no recourse but to try to collect the money from you or your estate. Unlike other loans, educational loans cannot be dismissed in bankruptcy litigation. As a result, most lenders require a student with limited credit history to obtain a co-signer before they are considered for a private loan.  Your co-signer should be someone with a good credit history; this way, if something happens to you, they have someone to go to when trying to collect on the promissory note.   Even if you have very good or well established credit, you may want to consider using a co-signer for you loan.  Often lenders will give a lower interest rate or better terms simply because you applied with a co-signer.  Be sure to discuss lending options with your cosigner, they should have an equal say as to whom the loan is borrowed through since, in essence, they are borrowing the loan too.

Processing time from the start of the loan application to the disbursement of the loan also needs to be considered when investigating private loans.  The borrower needs to stay on top of communication between themselves, the lender, the co-borrower, and the institution they are attending.  It may take as long as 5 weeks to get the private loan in place at your institution.  By immediately responding to any queries sent to you by your lender, you may be able to cut this down to 2 weeks, but it will still not be faster than borrowing through the federal loan program. If you know you will need a private loan, the best practice is to apply early, finish all required steps by your lender, and keep the institution you are attending informed of where you are in the private loan process.

When choosing a lender, you will want to look at the terms and conditions of the loan.  The terms and conditions spell out the basics of a loan such as:  interest rates, origination fees, and repayment terms. Find multiple trusted lenders that offer private loans and compare the terms and conditions of each lender. Many lenders have multiple private student loans; find the one that best fits your need. percentage

Most loans will have a variable interest rate but there are a few with a fixed rate.  If you choose to take a loan with a fixed rate, you may have a rate that is much higher than if you had selected a loan with a variable rate.  On the other hand, if you select a variable rate loan, your interest rate may be lower than the fixed rate, either at first or for the entire repayment period depending on the economy.  The interest of a variable rate loan will be based upon a set variable like the current Prime (WSJ Prime 3.25%) or LIBOR (.78%) rate plus a margin.  The margin will vary from +0% to as high as the lender feels is necessary to adequately cover its risk exposure.   The better the credit of you and your co-signer, the lower the margin will tend to be.   The margin will remain in place for the life of the loan while base variable will go up and down as interest rates go up and down in the economy.  Review the terms and conditions of the loan you are considering to review the variables you may be facing.  Also look to see how often the interest rate will be recalculated and if there is an interest rate cap of any sort.

Origination fees:

Origination fees are fees that are assessed; you pay them, but never see the money.  A front end origination fee is where the lender takes a portion of the loan, a set percentage as defined in your terms and conditions, off the top.  A lender with a 2% origination would take $2 for every $100 borrowed.   The problem is that if you need $100 you need to borrow $103.  Some lenders will offer you a lower interest rate in return for paying an origination fee.

Term of the loan: 

The term of the loan is the period over which you will pay the loan back.  When does it begin?  Are you expected to make payments while you are in school?  Some lenders expect you to repay the interest on the loan even while you are in school or at least make a monthly token payment to assist in covering the interest that is accruing.   Other lenders would not require you to make any payment until you enter repayment.  Federal government student loans will normally be amortized over 10 years.  This will not be the case for your private loans.  Many of them have a repayment period of 15 to as much as 25 years.  While this sounds great remember the longer the period the greater the amount of interest.  It may make it easier on your monthly pocketbook to take a longer repayment but you may wind up paying 2 -3 times as much over the life of the loan.  You will also want to review the terms of the loan to see if there is an early repayment clause.  You can forecast the cost of your debt by using PayBackSmarter’s online calculator.

Borrower benefits

Does the lender give you an interest rate discount because you have an account with them?   Do they offer a benefit if you sign up for auto-debit where the loan will be automatically drafted from your bank account on the same day every month?   Some lenders will offer a discount if you let them do this.

Ultimately, it comes down to choosing the loan that makes the most sense to you and your co-signer given your projected income and possible income growth.

Have additional questions about whether borrowing a private / alternative loan or whether it is the right option for you?  Please feel free to contact the MyMoney at Purdue team at mymoney@purdue.edu or (765)494-5050 for more help. mymoney-alt.jpg

Using Your Credit Report to Dispute Old Debt

15 Apr

credit report cartoon

reviewing credit report

Your credit report is supposed to tell a lot about your financial background, but it may be saying too much.

Most negative financial information should not remain on your credit report indefinitely. The Fair Credit Reporting Act requires credit bureaus to remove most instances of debt after seven years.

If you are unsure of what your credit report looks like, you can go to annualcreditreport.com to get a free copy from each credit agency (Equifax, Experian and TransUnion). If you find that debt from over seven years ago is still present on any of your credit reports, disputing the obsolete debt with one of the credit agencies may help to remove the information and should help your credit score.

When looking over your credit reports, you may also find incorrect information like debt that isn’t even yours; this, too, can be disputed and corrected.

Steps to Remove Old Debt from Your Credit Report

  1. Obtain All Three of Your Credit Reports. Request a copy of your credit report from each of the three credit reporting agencies to confirm all information is correct and consistent. Old debt may show up on one of your credit reports and not the others.
  2. Confirm that it Has Been Over Seven Years. Calculate the time between the date the account was charged off (as uncollectible) and the current date. Keep in mind that an account is not charged off until you have failed to make a payment for 180 days. This means that a debt must be 7 years and 180 days old before you can dispute it and consider it obsolete.
  3. Contact the Credit Bureau. After you find your three credit reports, one or more of them will contain the credit bureau that listed your debt. Your credit report will include contact information for the credit bureau. There are also dispute forms available online that will help quicken the process. When you dispute an old debt, the credit bureau will ask the creditor reporting it to verify. If it can’t, the debt will be removed from your credit report.
  4. Contact the Reporting Creditor. It doesn’t hurt to send the same information that you sent to the credit bureau to the reporting creditor directly. This may help speed up the process.
  5. Follow Up. To keep your file on the top of the pile, call to follow-up a few weeks after you send your first form of communication.

Disputing Debts that Aren’t Yours

 call center

It can be frustrating to receive a phone call from a collection agency trying to collect a debt that is not yours, but worse, it can damage your credit. If this has happened to you, these steps can help:

  1. Check Your Credit Report. If you find incorrect information, follow the dispute process detailed on your credit report.
  2. Talk to the Debt Collector. No one can correct the mistake if the mistake has not been pointed out, and the faster you point out the mistake, the faster it can be resolved.
  3. Write a Letter to the Debt Collector. It is best to send your dispute in writing even after speaking over the telephone, for documentation. In the letter, note the date, time and person you spoke with on the phone and what was said, and explain your dispute in as much detail as possible.
  4. Know Your Rights. According to the Federal Trade Commission, a debt collector cannot keep contacting you after you’ve sent a letter disputing the debt. If you keep receiving phone calls and think you are being harassed, you can file a complaint at http://www.ftc.gov/.
  5. Never Pay a Debt that is Not Yours. Once you make a payment, you are assuming responsibility for the debt, and no matter how large the debt is, it will still count against you.

The best way to make sure your credit report isn’t selling you out is to stay up to date with your credit history. Take advantage of the free annual credit reports, and stay informed. If you spot an error, work to get it fixed immediately.

Bio: This is article was provided by debt.org, America’s debt help organization. Debt.org educates students and parents on how to get out of debt.

Should I file my own taxes?

8 Apr

Kimberli Youngblood, Report Writer, Data Support Specialist and Purdue Alumni
www.purdue.edu/mymoney

cartoon man with briefcase flowing of money

cartoon man with briefcase flowing of money

This is a question all taxpayers have faced at one time or another.  The dreary thought of the men in black suits showing up at your door to collect taxes drives people to complete their taxes.  I imagine most have heard their elders say that there were two sure things in life: taxes and death.  Regardless though, we still are left each year with the question of whether we should file our own taxes or use a professional tax preparation service.

Over twenty years ago, an option to purchase your own software that would be updated on the new federal tax laws did not exist.  When you completed your taxes, you paid a hefty price to a tax preparer.  This was unless you knew how to decipher the tax laws, prepare your own 1040 by pencil on paper forms, and then write it all again in ink for the final form.  Times sure have changed.

Individuals are no longer limited to a professional tax preparer or reading the fine print on all the new tax laws while filling out the paper form(s).  Today, the majority of people who want to file their taxes look for the ability to electronically file at the most reasonable cost.

One place I have found helpful in retrieving information on how to file your taxes is the IRS website.  The IRS website contains vital information on the file format your e-file should be in whether you file it yourself or have a professional tax preparer complete your taxes for you.  This information is available free of charge, at your fingertips, and at the click of a button.  If you do not have internet available at home, you can access this information at your local library.

There are many choices on federal tax preparation.  The sites listed below offer information and links to the IRS website to assist in choosing a method to electronically file your taxes in the right file format.  If you stand in a store having difficulties determining which e-file provider or software to use, visit the IRS website to see what information is available.

For free federal tax filing, if you are at or below an adjusted gross income of $57,000 per year, you can use most of the software links listed at their websites for free.

The IRS has a website that allows all taxpayers to use the e-file option for free.

For Indiana residents, you can free e-file  for state taxes as well, information links for those residents who qualify to file their state taxes.  Check with your state website to see what may be available for filing your state taxes to at a reduced cost or for free.

filling out tax forms

paper tax form

It is important to determine which option best fits your situation; filing your own taxes or using a professional tax preparer.  It is important to decide how much you wish to spend for completing your yearly federal and state tax preparation out of those same wages to justify the cost.

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