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Job Searching: Which Jobs to Apply For?

5 Apr

Searching for your first job out of college can be a daunting task. While it may seem like graduation is forever away, it’s actually right around the corner. Not only do you have to learn how to apply for your first real job, you have to figure out which jobs you even want to apply for. Between tweaking your resume and creating cover letters, you’ll quickly realize you can’t apply for every opening. With your limited time, you have to choose which jobs to apply for and what jobs end up being passed over. So here are five tips on figuring out which jobs you should be applying for.first job search post college advice.jpg

#1. Pick your priority

Figure out what your priority is when job searching. Many people won’t even consider job searching outside of the area in which they live, while others are looking for an escape. There are a lot of factors that go into figuring out which job you’ll want, and if you know what your #1 priority is, deciding whether or not to apply for a job makes it that much easier. Here are some different factors to help you find your priority:

  • Location – Many people are tied to one area due to family or their significant others. To them, relocating isn’t an option. Others would like nothing more than a change of scenery; therefore, relocating isn’t a problem.
  • Pay/ Salary – We all need money, but for some people the desire for high pay trumps all other potential priorities.
  • Opportunity for Advancement – Especially if it’s your first job, potential advancement opportunities can make a big difference, as you don’t have to switch employers for upward mobility.
  • Specific Job Field – This may seem like a given for your search, but if you found a job outside of your field that meet all your other requirements, would the field matter?
  • Benefits Package – Typically not the #1 priority, but flexibility, vacation time, healthcare, dental, daycare, or even student loan repayment vary greatly from one employer to the next.
  • Making a Difference – Not all jobs pay well monetarily, but instead rely more on the feeling of making a positive difference in the world.
  • Employer Size – Working at a major company has a lot of exciting benefits to some people. Or maybe you’d feel more comfortable in a smaller, more intimate type of setting?
  • Job Security – Getting that first job is no good if you are laid off right away. If this is your priority, you may be willing to compromise for a job with decent security.

#2 Remember, it’s your first job, not your dream job

If your first job happens to end up being your dream job, congratulations! For the rest of us who make an average of seven career changes in our working lives, the key to a successful first job is using it as a launching pad. Look for jobs that have advancement opportunities or marketable skills to help you propel yourself throughout your career.

You don’t want to end up in a job you hate, but it’s important to remember that this job can be a valuable experience to help land you your dream job down the road. This is especially true if you are leaving college without a lot of experience in your field.

Keep in mind that the salary will be entry-level, as well. Don’t be surprised if you’re not offered the median salary in your industry since you don’t have much, if any, field experience. If you do well, you can earn your advancement in pay or position by moving up within the company or with another employer.

#3 Know yourself

Before you accept a job, be sure that it’s a job you want and not one that parents, counselors, or friends want for you. Hopefully you have had enough life experience to know not only what your priorities are, but what equates to a deal-breaker for you. Does a typical 9-5 sound ideal or does working varied hours sound more appealing? Do you prefer to travel for work or would you prefer to be in the same location every day? Be sure it’s what you actually want or you could be back to job searching again before you know it. This job needs to fit your current lifestyle, not only the “what-if” scenarios you’ve considered for your future.

#4 It takes time (and it might be your job for a while)

Unemployment is not much fun after the first couple weeks, as concerns about being able to pay your bills—and eventually student loans—become reality. It takes time to fill out applications and tweak your resume for each job. Remember that until you find your full-time job, your job is to job search. It is exhausting applying for various jobs for eight hours a day, but it’s better than not being able to make your ends meet.

#5 Utilize your network

If you’re still in school, you’re going to want to take advantage of all those free lunches and other events put on to meet your professors and other staff. Not only do these people have connections outside of your college, they can also be great resources for the future. Talk to them and find out how they got their foot in the door! Don’t be shy about asking for an informational interview from these people. Many have a vested interest in seeing you succeed and will go out of their way to help you. Just be sure to make a good impression while you still can!

America Saves Week: Pay Off High Interest Debt

3 Mar

In 2012, 71 percent of students who graduated 4-year colleges took out student loans. Debt isn’t fun, but education is one of the better reasons to take on debt. While you may not enjoy paying back student loans there are some steps you can take to save yourself some money and make your payments hurt a little bit less.

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  1. Prioritize high-interest debt: While Federal Direct student loans are capped at 6.8%, private loans are not. Even worse interest rates? Credit cards. If you have credit card debt, prioritize paying it off before your student loans. 6.8% interest is no fun, but credit card interest rates 20% and higher can be crippling.
  2. Income based repayment: If you qualify for an income-based repayment (IBR) plan, do yourself a favor and apply for one. Generally if your debt is higher than your income you will probably qualify. Even if you are able to make your payments without much issue, an IBR can still save you money. How you may ask? If you keep paying the same amount you did before, you can target your payments toward either your highest interest or smallest loans depending on which repayment style fits you. Not to mention, if you are one of the approximately 50% of people who work in public service, you can qualify for loan forgiveness after 10 years.

Pick your payoff: There are two main methods for paying off debt when you have multiple balances to pay. The snowball and the avalanche method.

The snowball method entails taking the extra money you have and paying off your smallest debts first while paying the minimum on the rest. Then once that is taken care of, you roll that payment into the next smallest and knock off your obligations one-by-one. This is best for those who like the reward of seeing their different loans disappear the quickest and can help you stay on track easier.

The avalanche method is similar to the snowball where you make minimum payments on all loans but one. The difference is that you target the highest interest rates first. While you may not experience the visual rewards of seeing the small debts disappear quicker, you will save the most amount of money in the long run this way.

One way to not repay is by spreading out the extra you pay to all debts and pay a little bit additional on everything each month. This provides neither of the advantages that the avalanche and snowball method have while still costing you the same amount. You get less savings than the avalanche, and less of the reward that the snowball offers.

America Saves Week: Student Savings at Tax Time

2 Mar

As you’re filling out your taxes, there are a couple of tax deductions that being a college student may have made you eligible for. If you have received either a form 1098-E from a student loan lender or a form 1098-T from your school, be sure to have these on hand when you complete your taxes before April 15th (or hopefully sooner).asw-taxes-txt

1098-E: Given to you by your educational loan borrower, this Student Loan Interest Statement shows how much interest you paid on your student loans in the prior year. If you have been making student loan payments and paid over $600 in interest, you can expect to receive a 1098-E. You will receive one from each different borrower that you have educational loans through allowing you to deduct up to $2,500!

1098-T: This form is a tuition statement supplied by your university for your taxes. It will show qualified tuition and related expenses, scholarships and grants you have received, whether you have been enrolled at least half time, and if you are a graduate student or not. Entering this information into your taxes can allow you to claim the American Opportunity Credit or the Lifetime Learning Credit. You may not receive a 1098-T if all of your tuition and expenses were paid for via scholarships. To find your Purdue 1098-T, log into your myPurdue account! Full instructions are available here.

Once you file your taxes, be sure to file your FAFSA before March 1st for the Purdue priority filing deadline!

America Saves Week: Thinking About Retirement in College

1 Mar

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If you’re in college your retirement might seem like a long way off. And it probably is, assuming you aren’t one of the very few people who become a wildly successful professional athlete and strike it rich early.

Unless you are currently swimming in cash as a college student and free of taking out educational loans, it probably isn’t realistic to be saving for retirement until you get your first post-college job. While now may not be the time to start investing into your retirement, here are three tips to remember as you’re setting up your career, and the rest of your life.

asw-retirement-txtMinimize Debt:Saving for retirement is a lot harder if you’re paying several hundred per month against debt. So think twice (or three times) before accepting the full amount for educational loans that are offered to you and ask yourself if you really need all of it. Once you start working, make a plan to pay down your debt as soon as possible.

An increasingly popular choice for graduates today is to head back to the parents’ nest for a year or two to save money for life on your own. Keep in mind that living with your parents only helps if you use it as a springboard to save, not as an opportunity to free up more spending money.

Career and Employer Choices: When you’re looking into employers and eventually weighing (hopefully) several employment offers, consider more factors than just the dollar signs on the salary. Once you’re off your parents’ healthcare plan on, or before, your 26th birthday you’ll need your own plan, which can be costly if your employer doesn’t offer one.

Additional non-salary factors to consider are moving expenses, cost of living, vacation, and retirement options. Retirement plans where your employer matches your contribution guarantees you a 100% return on investment, not an easy feat investing your money elsewhere. Also keep in mind if you are part of the nearly 50% of Americans who think that Social Security payments will be important in your retirement that they currently average about $14,000 per year.

Start Saving Early: Within your first month of getting paid you might find yourself wondering how anyone can spend this much money, and then within a few weeks wonder where it all went.

A great strategy to start saving early on is to have money automatically deposited into a savings account. It is much easier to adjust to having less right from the start than to save what you have left.

To emphasize the importance of saving consider this scenario of two employees at the same company.

Alice is 25 and starts contributing $100 every month ($1,200 per year) toward retirement. Alice plans to retire at 65 so she has 40 years to save. Sheila also contributes $100 every month, but she waits until she is 30 because life was just too hectic to start saving earlier. What’s the difference in retirement savings at 65? Alice will have saved $310,000 compared to Sheila’s $206,000 – or a difference in over $100,000. Why does this happen? The miracle of compound interest that you once learned about in math class.

Five years is the difference between surviving and thriving in retirement. Your youth is an investing advantage you will never get back.

Remember that it is important to save up for both retirement AND a regular savings. The savings account is there for you when you need money for big purchases, to handle emergencies, etc. without having to use credit cards and lose money on the interest.

It is important to avoid a mindset of “I’ll start saving when…” It will never be a better time to start. So take the America Saves Week Pledge and start today.

My Student Loan Journey Pt. 2: Climbing the Mountain of Debt

10 Feb

Casey Doten, Financial Aid Administrator – Purdue University

I knew going into college that I’d have to take out student loans to help finance my degree. While getting myself $48,600 into student loan debt was less than ideal for me, I was able to earn my degree. However thanks to the miracle of interest, my student loan debt had increased from the $48,600 that I had borrowed to $54,800 by the time that I began repayment.

The scary part? That $54,000 could have been even higher. Thankfully I had a couple of things going in my favor that helped to prevent that. A good portion of my federal loans are subsidized and did not accrue interest during school. I also had a loan which required me to make quarterly payments to help keep the interest from adding up (unfortunately these payments always hit me at the worst times in college). Had I not had either of those two factors, my loan debt would have been $59,900 when I finally started repayment.

So how have I gone about tackling this $54,800 debt? Being honest, it hasn’t been perfectly approached at all times but after a few initial mistakes I’ve come up with a plan and am paying it off as quickly as I can.

my student loan journey 2.jpgMaking mistakes early on

During my grace period of six months between graduation and my first payments becoming due, I had saved up a little money working two part-time jobs, but I never put anything toward my loans. As my grace period ended, I was able to get a full-time job along with working ten or so hours a week on the side.

So in November my repayment officially began. I had always heard people say “If you can afford to pay a little extra on your student loans, you should do it”. Getting rid of my student loans was a priority for me, so even though I wasn’t exactly swimming in money I paid extra on my loans. If my payment was $115 for a loan, I’d pay $150. The problem is that my approach of paying a little extra on every loan per month was one of the least efficient ways possible.

Pay more on loans with higher interest rates

What I should have been doing was approaching my repayment with a real plan rather than just tossing a few extra bucks at it.

I learned about the avalanche and snowball debt payment methods from some friends and after some research realized I could take my loans head-on with a plan. I started paying the minimum on every one of my loans except the one with the highest interest rate where I put all that extra money I had previously spread out between the other loans.

Using this avalanche method, I paid on the highest interest loan and then when that was finished up I took that money and started paying it to the next highest interest loan. This approach helps me pay the least amount of total interest possible.

Understand options & repayment plans

Despite the fact that I’ve been able to meet my monthly loan payments, I realized decided to enroll in an income based repayment plan. This brought my monthly payments on my federal loans down from over $300 to around $70 each month. Why did I choose an income based repayment plan when I wasn’t having troubles making my repayment? I found out that having a lower amount due each month could both help my repayment plan and allow me to be more flexible in my finances.

For my repayment, it allowed me to pay less on several of my loans and kept interest from my subsidized loans from accruing (the interest can be covered for up to three years). I took the $230 I wasn’t obligated to pay to all of my loans and rolled it into the extra I had already been putting toward my highest interest loan.

The other perk was that it gave me a lot more financial flexibility, so if unexpected events popped up I could just pay the minimum on my loans and use the money I would have paid to cover whatever emergency happened.

Luckily I never ended up needing this and I have been able to double down on my avalanche repayment and target my highest interest loan with the money I would have been paying otherwise been spreading out to my other loans.

Make payments right away… or make them automatic

Before I started making my loan payments, I felt like I was making just enough money to get by. I didn’t believe I could find $600 per month just for student loans, let alone money to pay ahead. The secret that I found was to make my student loan payments right away once I got paid. Rather than having to worry about what is left to make my loan payments, I prioritized them and made the extra payments part of my mandatory bill paying routine at the beginning of each month. I also found out that one of my private loans and my federal loans offered a small interest rate reduction for enrolling in automatic payments, which I promptly enrolled in to reduce the total interest I would pay over the loans’ lifetimes.

Roll over other debts

During my first year and a half of repayment, two things events had an effect on my debt: my college beater Jeep died on my commute to work forcing me to buy a different vehicle, and I got proposed to my then-girlfriend, now wife. This gave me another $450 per month in payments to make between the car and ring. This squeezed my personal budget to as thin as it could possibly get, but I still made sure to prioritize getting these payments in right away after getting paid. I realized I that I could make this new budget work, so after paying both off I took $350 of that and rolled it into my student loan payments helping me accelerate my impending pay-off even further.

Where I’m at Today

As of this moment, I still have $42,246.38 left to go. I’ve made great progress but I’m still paying over $200 every month on interest alone. It can be depressing to realize how much I’m losing every month to interest, but I know that my current life wouldn’t be possible without the degree I earned and the experiences I had. Rather than concentrating on how far I have to go, I prefer to reflect on how amazing it feels to know that I’ve paid my loans down more than $12,500 in student loan debt in 27 months in addition to over $9,000 between my car and wife’s engagement ring. The end might not be near but that doesn’t stop me from taking one step at a time toward being student debt free.

4 Loan Forgiveness Programs for Teachers

25 Jan

1. Public Service Loan Forgiveness (PSLF) Program Forgives the remaining balance on your Federal Direct Loans after 120 qualifying payments (10 years). View complete program details at StudentAid.gov/publicservice. Here are some highlights: This program has the broadest employment qualification requirements of the federal programs listed—it doesn’t require that you teach at a low-income a public…

via 4 Loan Forgiveness Programs for Teachers — ED.gov Blog

Phishing, other kinds of tax scams rank No. 1 — don’t fall victim 

19 Jan

Kirsten Gibson, technology writer, Information Technology at Purdue (ITaP)

If you receive an email, text or social media message from someone claiming to be affiliated with the IRS, it’s almost certainly a scam. Question phone callers claiming to be IRS representatives, too. If you remember only one thing this tax season, other than to file your return, it’s this: the IRS will not contact a taxpayer asking for personal information via email, text message or social media.

Senior Woman Giving Credit Card Details On The Phone

Tax season is ripe for scamming. As taxpayers figure out how to file their taxes in accordance with federal student loan rules, President Barack Obama’s health care law and a myriad of other complications, scammers gear up to take advantage of a period of confusion. The Better Business Bureau consistently ranks tax scams as the top type of scam in the United States by a wide margin.

“Identity theft is always a huge concern,” says Greg Hedrick, Purdue’s chief information security officer. “Criminals who acquire enough of a person’s information, including a Social Security number, may attempt to use those details to fill out a false tax return and claim a refund under another person’s name. Of course, this could also lead to the rejection of a person’s real return.”

Should you find yourself engaging with someone who claims to be from the IRS, pause to assess the situation. The person writing the message or on the phone will probably be insistent that it’s an emergency and action must be taken immediately. They might also threaten you with arrest, deportation or loss of driver’s license.

The callers who commit this kind of fraud often:

  • Use common names (like Jones or Smith) and fake IRS badge numbers.
  • Know the last four digits of the victim’s Social Security number.
  • Make caller ID information appear as if the IRS is calling.
  • Send bogus IRS emails to support their scam.
  • Call a second time claiming to be the police or department of motor vehicles (and the spoofed caller ID again supports their claim).

If you get a call from someone claiming to be with the IRS asking for a payment, here’s what to do:

  • If you owe Federal taxes, or think you might owe taxes, hang up and call the IRS at 800-829-1040. IRS workers can help you with your payment questions.
  • If you don’t owe taxes, call and report the incident to Treasury Inspector General Tax Administration (TIGTA) at 800-366-4484.
  • You can also file a complaint with the Federal Trade Commission at www.FTC.gov. Add “IRS Telephone Scam” to the comments in your complaint.

According to TIGTA, since 2013 more than 1.8 million people reported calls from scammers and more than 9,600 victims paid the impostors a total of more than $50 million.

Individuals also might want to sign up for a credit freeze with each of the three credit reporting agencies – TransUnion, Experian and Equifax – to further guard against fraud this tax season. The freeze can be initiated for free within minutes online at the Indiana Attorney General’s website. Once a freeze is initiated, you can temporarily lift it anytime to apply for new credit or a loan.

Students, faculty and staff should contact the police if they think they have been a victim of identity theft.

 

3 details you should know while preparing for tax season 2017

12 Jan

Tax season can be an exciting time for savers. This year, more Americans are opting out of a tax time splurge and focusing on getting ahead with their tax refunds.

Early filers can still file as they normally would, but we’ve got a couple tips in mind for how your household can use this information to make the most of your tax time preparations:prep-for-tax-season

  1. File a tax return, even if you do not owe any tax or are not required to file.You can’t get the EITC unless you file a return. End of story. Since the IRS estimates that about 25 percent of taxpayers who are eligible for the EITC fail to claim it, this is a vital first step in determining your eligibility.Bonus? If this is the first year that you are claiming the credit, you can use the EITC Assistant to see if you qualify for tax years: 2015, 2014 and 2013. You can file any time during the year to claim the EITC. Something to know: A new tax law will delay refunds that claim the EITC or the Additional Child Tax Credit (ACTC) until February 15. Learn more here.
  2. Decide where and how you will file your taxes and know your free options.Unless you know your return is going to be complicated this year, paying someone to file a tax return should always be a last resort. Decide whether you’d rather file online or in person, and then check out these free filing options:
    • Use Free File on IRS.gov– This free software walks you through a Q&A format to help prepare your return and claim every credit and deduction for which you may be eligible.
    • Try the Free File Fillable Forms– If you’re comfortable preparing your own returns, this option is for you! It allows you to file electronically using online versions of IRS paper forms.
    • Visit a free tax preparation site– If your total household income is less than $54,000 a year, you can seek free tax prep at one of thousands of Volunteer Income Tax Assistance (VITA), Military Volunteer Income Tax Assistance (M-VITA), and Tax Counseling for the Elderly (TCE) sites. To locate the nearest site, you can search online or call the IRS at 800-906-9887.
  3. Make a plan for your tax refund that accounts for the EITC/ACTC delay.We know it can be hard to come up with alternative funds if you already had plans for your refund early in the year, but don’t be suckered by refund anticipation products provided by many commercial tax return preparers. The loan fees will have you seeing red.If you start your planning by dedicating your refund, or at least part of it, to savings, you can get ahead of your savings goals. Enter  the SaveYourRefund promotion with $35,000 in cash prizes and 101 chances to win simply for saving a portion of your refund. For more information and how to commit to saving prior to filing your return , visit saveyourrefund.com.

Tammy G. Bruzon works for America Saves, managed by the nonprofit Consumer Federation of America (CFA), which seeks to motivate, encourage, and support low- to moderate-income households to save money, reduce debt, and build wealth. Learn more at AmericaSaves.org.

Choosing a Federal Student Loan Repayment Plan

14 Dec

All information on repayment plans is from this article by David Evans, Ph.D.
Additional info added by Casey Doten, Purdue Financial Aid Administrator

There are two main types of repayment plans you can choose from: traditional and income-driven. For borrowers that will qualify for Public Service Loan Forgiveness (PSLF), income-driven plans may be the better option. Income-driven plans will require an annual verification of income. This fact sheet describes each of the repayment plans as well as pros and cons of each. For more information about each of the repayment plans visit the Federal Student Aid website.

Traditional Plansstudent-loan-repayment-plans

Standard Repayment Plan

The Standard Repayment plan consist of equal monthly payments over a 10-year period of time. This repayment plan is good for those who can handle making their monthly payments and make enough money to afford them. This payment plan is best for those who have minimal other debts and start working right out of school.

The Pros: You’ll pay off your loan faster compared to other plans, and pay less interest as a result.

The Cons: Your monthly payments will be higher than those made through other plans.

Graduated Repayment Plan

The Graduated and Extended Repayment plans could be an option for you if your income is low when you graduate but will increase quickly. Under a graduated plan, payments start out low and increase during the repayment period, usually every two years. This is a good plan if you can’t afford your current payments but know you will make more money in the years to come.

The Pros: Your loan is still paid off within 10 years.

The Cons: You’ll pay more interest over the lifetime of your loan compared to the Standard Plan.

Extended Repayment Plan

An Extended Repayment Plan is an option if your loan amount is more than $30,000 and you want to stretch your repayment to 25 years.

The Pros: Smaller monthly payments (since they’re spread out over as many as 25 years) and more time to pay off your loan.

The Cons: You’ll be saddled with payments for a longer period of time as well as pay more interest.

Income-Driven Plans

If you qualify for an Income-Driven plan, these are often the most attractive options if you’re willing to recertify your payment each year (it’s not very difficult). However, some of these are contingent on when you took out loans! If you’re interested in student loan forgiveness*, you’ll need to be enrolled in any one of these plans.

Income Based Repayment Plan

If you’re not making enough money to cover all of your monthly expenses the Income Based Repayment (IBR) Plan would be a good option. There are two separate calculations for IBR which are dependent upon when you took out your student loans.

The Pros: The IBR plan takes into account your annual income as well as your family size. Your payment will be 10% of your discretionary income** if you were a new borrower on or after July 1, 2014. Otherwise it will be 15%. Any outstanding balance on your loan will be forgiven after 20 (for undergraduate loans) or 25 (for graduate loans) years.

The Cons: You will have to pay income taxes on any forgiven debt unless you qualify for PSLF (this is true for all loan forgiveness).

Income Contingent Repayment Plan

If you have a federal Direct Loan (other than a PLUS loan), you could opt for the Income Contingent Repayment (ICR) Plan. Your payments could be as low $5 or even $0.

The Pros: Your monthly payment will be the lesser of 20% of your discretionary income or on a repayment plan with a fixed payment over 12 years. You can have your remaining loan balance forgiven after 25 years of regular payments.

The Cons: You’ll pay more over the lifetime of your loan than you would with a 10-year plan, your payment could be lower than the monthly accrued interest and your loan principal will grow. You will have to pay income taxes on any forgiven debt unless you qualify for PSLF.

Income Sensitive Repayment (ISR) Plan

The Income Sensitive Repayment (ISR) Plan is only available for those with Federal Family Education Loan (FFEL) Program. Payments are based on your annual income, family size, and total loan amount. You would pay the loan off in fifteen years.

The Pros: Each lender has their own calculation, but generally it is between 4% and 25% of your monthly gross income, although your payment must be greater than or equal to the interest that accrues.

The Cons: It’s only available for up to five years. After that time, you must switch to another repayment plan. You must reapply annually, and there’s no guarantee that you’ll have continued enrollment in the plan.

Pay as You Earn Repayment Plan

The Pay as You Earn Repayment (PAYE) Plan is another option for those not able to afford their current monthly payments.

The Pros: The PAYE plan takes into account your annual income as well as your family size. Your payment will be 10% of your discretionary income. Any outstanding balance on your loan will be forgiven after 20 years.

The Cons: PAYE is only eligible to those who were new borrowers on or after October 1, 2007 and must have received a disbursement of a Direct Loan on or after October 1, 2011. You will have to pay income taxes on any forgiven debt unless you qualify for PSLF.

Revised Pay as You Earn Repayment Plan

The Revised Pay as You Earn Repayment (REPAYE) Plan is very similar to PAYE. This plan was created to allow more borrowers the opportunity to have their payments lowered to 10% of discretionary income.

The Pros: Not dependent upon when you took out your student loan, the payment will be 10% of your discretionary income. Any outstanding balance on your loan will be forgiven after 20 (for undergraduate loans) or 25 (for graduate loans) years.

The Cons: If you are married, your spouse’s income will be considered whether taxes are filed jointly or separately. You will have to pay income taxes on any forgiven debt unless you qualify for PSLF.

Summary

Federal student loans offer various ways for repayment. If you are in a situation (like so many others who have taken out student loans) that is not ideal for standard repayment of your loan, consider these options. There is a lot to consider when you are trying to decide which repayment plan to choose. Using the Federal Student Loan Repayment Estimator can help you make your decision by showing you what your payments would be under each of the plans described above.

*A note about loan forgiveness: There are two different kinds of loan forgiveness, Public Service Loan Forgiveness (PSLF) and loan forgiveness from your income-driven repayment plan ending. While both plans require you to be enrolled in an income-driven plan to reap the benefits there are some key differences:
-PSLF requires being employed at a qualifying employer in public service (non-profits, government, etc.) for 10 years/ 120 qualifying payments before forgiveness takes place. Standard forgiveness is after 20 or 25 years depending on your repayment plan.

-Any loan amounts forgiven under PSLF are tax-free, but not under standard forgiveness! So if you still have a balance on your loans after 20 (or 25) years, you will owe taxes on it as if it is income. While it’s still better than paying the amount back, it’s important to know it will have ramifications.

**Discretionary income = Your income – 150% of the poverty level in your state for your family size

Becoming Credit-Wise: What Students (and You!) Should Know

5 Dec

Note: The following article was written for Financial Aid administrators, but has information that is useful to anyone looking to learn about credit.

By Jeff Hanson, Director of Borrower Education Services, Access Group Published by the National Association of Student Financial Aid Administrators (NASFAA)

becoming credit wise.jpg
As a financial aid administrator, you know your students need to understand their student loans and manage their spending well. Understanding how credit works is an essential part of that, especially for students who must supplement their federal loans with private, credit-based loans.But do your students— and you—really know enough to be truly “credit-wise”? Students may know the basics, such as having the highest credit score possible will help them get credit at an affordable price. But do they know what it takes to get a high credit score (say 800 or more)? And that most students probably score far below this number? Do they know that their credit score can impact the cost of credit, their ability to obtain other financial products such as auto insurance, or their employability? And what happens when they miss a payment or start accumulating credit card debt—how much can this lower their score? Students should never underestimate the value of good credit. Those who need private education loans, as increasing numbers of students do, will find that their credit history is likely to affect their ability to obtain the needed funds, and can even affect the cost of their loans. The better the student’s credit, the greater the probability that he or she will get the loan, and the lower the cost of that loan. Good credit does count! Building up a good credit history comes from understanding how credit reporting and credit scoring work, and from practicing sound financial habits.

Credit Reports

A credit report is a summary of the information contained in an individual’s credit history, which creditors use to evaluate the likelihood that the individual will repay future loans. A credit history is generated from credit account information and payment records that creditors have reported to authorized credit reporting agencies, so anyone who has at least one credit card, a consumer loan (such as a car loan), student loans, or any other form of personal credit should have a credit history with an authorized credit reporting agency (see the list at the end of the article). In essence, credit reports provide a sense of an individual’s willingness to repay a loan, based on his or her past credit performance. Students can think of their credit report as their “credit transcript.” Whether students think they have credit problems or not, it’s a good practice for them to review their credit reports from each of the three national credit reporting agencies at least once a year to be certain that all reported information is accurate. In fact, the Fair and Accurate Credit Transactions Act of 2003, Pub. L. 108-159, 117 Stat. 1952 (FACT Act) entitles all consumers to obtain a free copy of their credit report upon request from each of the three agencies once every 12 months. More information about obtaining these free reports is available from the Annual Credit Report Request Service at www.annualcreditreport.com or by calling 887-322-8228.

Credit Scores

If the credit report is the credit transcript, the credit score is the “credit GPA,” and just as with grades, the higher the better. The credit score is a numerical value based on credit account information in a person’s credit report that focuses on individual borrower behavior. Unlike the credit history, which consists of raw data, credit scores are measures of future credit risk based on an assessment of that raw data. Credit scoring is a quick, accurate, consistent, and objective method that helps lenders’ quantify how well individuals have managed their credit. The higher the credit score, the greater the statistical likelihood that an individual will repay a future loan on time. Credit scoring was first developed by Fair Isaac Corporation, which created the credit scores used most widely by the credit industry and are often referred to as FICO® scores. Credit scores are calculated using a statistically derived mathematical formula that provides a numeric prediction of credit risk. The formula itself, which is proprietary, was developed by examining the credit reports of millions of people at two points in time (typically 24 months apart).

Factors Affecting Credit Scores

Paying your credit card bills on time each month has the greatest affect on your credit score. However, contrary to popular belief, a flawless payment history is not sufficient for good credit. A number of factors impact your credit score, including:

  • promptness in paying bills;
  • total debt;
  • amount owed on all credit card accounts;
  • age of credit accounts;
  • number of credit card accounts including number of credit inquiries;
  • the proportion of credit card balances to total available credit card limit;
  • number of credit card accounts opened in past 12 months;
  • number of finance accounts; and
  • occurrence of negative factors such as serious delinquency, derogatory public records, past due accounts that have been turned over to collection agencies, bankruptcies, student loan defaults, and foreclosures.

FICO® scores assess all such negative factors in three ways by evaluating:

  • how recently they occurred,
  • their severity, and
  • their frequency.

The more recent the occurrence, the farther the score will drop. The larger the balance affected (severity), the farther the score will drop. And the more frequently such negatives appear on one’s credit history, the farther the score will drop. Two factors that warrant further review are credit inquiries and student loan debt:

Credit Inquiries

Requests for your credit record can also affect your credit score. Only “hard” inquiries made during the past 12 months, however, have a potential negative affect on your score. Hard inquiries are those made by creditors when you apply for a loan or a new credit card. In such cases, you must give permission for your report to be “pulled” (provided to the creditor). All other credit inquiries are “soft” inquiries and are not a factor in scoring. Soft inquiries include:

  • Self inquiries—your requests for a copy of your own credit report or credit score;
  • Promotional inquiries—those made by companies wanting to offer you an opportunity to apply for credit;
  • Administrative inquiries — inquiries made by your current creditors who want to monitor your credit activities, as well as inquiries from the credit-reporting agency that’s maintaining your credit history (this typically occurs when you have disputed an item that’s contained on your credit report); and
  • Inquiries from prospective employers— although they have the right to obtain your credit report with your permission, these inquiries are not for the purpose of obtaining new credit and so do not impact your score.

Student Loan Debt

Student loan debt affects credit scores, but it does not necessarily result in a low credit score unless the borrower has a “thin” credit file. A “thin” file is one that contains three or fewer “trade lines” (credit cards, car loans, etc.). These files are more susceptible to lower scores because they contain less positive information to offset any negative impact of increases in student loan debt. (Note that the majority of Access Group private loan borrowers have more than three trade lines.) As installment debt, student loans typically are viewed more favorably than revolving debt (credit card debt) in credit scoring. However, although increasing installment balances (for example, because of additional student loans) can have a negative impact on credit score, as students advance from year to year in their program of study, payment delinquencies and increasing credit card debt appear to have the greatest negative impact.

Weighing the Factors

The factors affecting credit scores are not equally weighted in the scoring process. As Fair Isaac reports at www.myFICO.com, payment history has more impact—about 35% of the score—than the other factors. Thus, making payments by the due date is very important. Missed payments, one or more delinquent accounts, and serious derogatory items such as student loan defaults, bankruptcy, charge-offs of accounts, etc., can have a significant negative impact on the score. The amount of debt, especially credit card debt, is the next most significant factor, typically accounting for about 30% of the score. Total debt is important, particularly the percentage of revolving credit (credit cards) being used. Utilization is the amount of credit card debt you have as a percentage of your total available credit card limit. The smaller a person’s credit utilization rate, the less likely it is to have a negative affect on the person’s FICO® score. Thus, it is important to keep credit card balances low, since lower is better. But this does not mean credit cards should not be used once in a while. In fact, some minimal use of credit cards can be beneficial to establish a positive payment history. This does not require the accumulation of credit card debt, however. Rather, simply using a credit card occasionally each month for small purchases and paying the credit card bill in full each time will achieve this goal. The other three factors—length of history as measured by the age of your oldest credit account, new credit as measured by the number of new accounts opened and the number of “hard” inquiries made within the past 12 months, and account mix (relative proportion of installment accounts, revolving accounts, finance accounts, etc.) generally have a lesser impact on scoring, but cannot be ignored when managing your credit.

What’s the Score?

Although there are no well-established statistics regarding the average credit scores of college students, 60% of all consumers with established credit histories have FICO® scores above 700 (using a scale of 300 to 850) according to Fair Isaac. Scores above 700 generally are considered to be “good,” and scores above 775 are viewed as “very good” to “excellent” by most lenders. It is possible to estimate what the credit score might be for a typical student. Fair Isaac Corporation and www.Bankrate.com have joined forces to offer an online FICO® Score Estimator, which provides a credit score range, rather than a specific score, at no cost to consumers at www.bankrate.com/finance/credit/what-is-a-fico-score.aspx. Using the basic Fair Isaac methodology, it provides an estimate based on the answers to a brief series of questions about credit use and payment behavior. We used the FICO® Score Estimator to predict likely credit scores for a typical third-year undergraduate, who has both education loans and credit cards, using four scenarios. For the first scenario, this hypothetical student’s credit characteristics are as shown in the table at left.

  1. “No payments missed” scenario. The estimated FICO® credit score range for this individual is 715-765. Lenders would probably consider this person to have a “good” history, and although they might not offer their best interest rate, they are unlikely to deny credit based solely on this credit score. Of course, before extending credit, the lender might also require the borrower to meet a minimum income threshold or provide loan collateral.
  2. “Missed payments” scenario. What happens if the hypothetical student’s credit characteristics change? In this second scenario, suppose the student suddenly becomes delinquent on an account and is 30 days late in making the payment. Assuming this is the only change, the estimated score range drops to 620-670. This would represent an average drop of 90 points, and the borrower’s credit would now be considered only “fair.” The individual would be more likely to have trouble getting some forms of credit, such as a private student loan, on his or her own signature. If credit were granted, it probably would be at a higher interest rate and have other restrictions and/or costs.
  3. Higher credit use scenario. By contrast, suppose the record showed greater utilization of credit cards. Starting from the original “no-payments- missed” scenario, suppose in this third scenario that the amount of credit card debt was at 50% of the available credit limit. The estimated score range drops to 645-695—a “fair” credit rating. This is better than the missed payment scenario, but would still cause an average drop of 70 points in the score from the original scenario. If credit card utilization increases to 90% (credit cards are nearly “maxed out”), the estimated score range drops to 620-670—the same impact as a 30-day delinquency.
  4. Both 30-day delinquency and 90% utilization scenario. If this hypothetical student had both a 30-day delinquency and was at 90% utilization of credit cards, the estimated score range falls to 565-615. This would create serious credit issues for the student and would make it very difficult to obtain most kinds of credit. Thus, two simple missteps— missing a payment and maxing out credit cards—could take our hypothetical student from having good credit to a situation where credit (particularly private education loans) might be very difficult to obtain and much more expensive.

Obtaining Your Credit Score

The easiest way to obtain your FICO® credit score is to go to the Fair Isaac consumer Web site at www.myFICO.com. From this site you can request your FICO® credit scores calculated by the three national credit reporting agencies—Equifax, Experian, and TransUnion—and can purchase your FICO® credit score from one, two, or all three of these agencies.

You will receive an explanation of the score, a copy of the credit report that was used to generate that score, and an explanation of the positive and negative factors that are affecting your score. Be aware that your credit score may vary from agency to agency, because the information on your credit report at each agency may differ. More information about credit scores and the scoring process can be found at www.myFICO.com. In addition, the Federal Trade Commission provides consumer information about credit scoring at www.ftc.gov.

Good Credit Really Counts!

To sum up, to get the credit needed, when it’s needed, at an affordable cost, it is essential to understand credit reporting and credit scoring. But knowledge alone is not enough. Being creditwise also requires practicing good habits. The credit tips listed below provide a framework for practicing those good habits and can help students avoid the types of pitfalls illustrated in the hypothetical credit score scenarios presented here. This will help them avoid the frustrations, anxieties, and fears associated with credit problems.

Tips for Maintaining Good Credit

You can use the following tips to help students develop and maintain a strong credit record; one that should allow them to borrow the funds they will need to fulfill their educational dreams and successfully achieve their other long-term goals. In fact, many of these tips probably are good ideas for everyone, not just for students.

  1. Develop and follow an affordable monthly budget.
    Live below your means while you’re a student; learn to stretch your dollars; be thrifty.
  2. Pay all your bills on time.
    Just one late or missed payment can have a noticeable negative impact on your credit score.
  3. Notify your creditors immediately whenever your address changes.
    Typically you can provide information updates by phone or via the creditor’s Web site. But remember, it’s your responsibility to keep them informed.
  4. Minimize your credit card debt.
    Keep credit card balances as low as possible. Do not exceed 30% of your available credit limit.
  5. Avoid charging more on your credit cards than you can afford to repay in full each month.
    Get in the habit of using cash, not credit cards, whenever possible. Credit card debt that carries over from month to month can be very costly and may lower your credit score.
  6. Record every credit card purchase you charge just as you record every check you write.
    Tracking your charges is important so that you always know exactly how much you must repay.
  7. Limit the number of credit card accounts you maintain.
    You probably don’t need more than three major credit card accounts. Avoid opening new department/retail store charge accounts; they typically can only be used at the store that issued the card and they tend to have the highest interest rates of any credit cards.
  8. Be careful about opening new credit card accounts and closing older ones.
    It’s beneficial to have the longest possible credit history to show that you’ve maintained your credit accounts responsibly over time.
  9. Maintain accurate records of your credit accounts. 
    Keep copies of all documents relating to your credit accounts. These documents should include the application, promissory note, account terms and conditions, disbursement and disclosure statements (if applicable), and lender correspondence.
  10. Obtain a copy of your credit report from each of the three national credit-reporting agencies at least once a year and review it for accuracy.

Promptly notify the reporting agency of any errors; it can take several months to correct those errors.

Credit Resources

Credit Reporting Agencies
For more information on credit reporting or to obtain a copy of your credit report, you can contact a credit reporting agency. The three national credit reporting agencies are:

Annual Credit Report Request Service
This service was established by the three national credit reporting agencies in response to the requirements of the Fair and Accurate Credit Transactions (FACT) Act of 2003, which provides consumers with the right to obtain a free copy of their credit report from each of the three national credit reporting agencies once every 12 months. Visit www.annualcreditreport.com for more information.

Bankrate.com
For information on all aspects of credit and personal finance, visit www.bankrate.com.

Fair Isaac Corporation
For more information on credit scoring or to purchase your credit score and report, visit Fair Isaac’s consumer Web site at www.myfico.com.

Federal Trade Commission (FTC)
For help with credit reporting problems, call 877-382-4357, or visit www.ftc.gov for information and free publications about credit.

Consumer Credit Counseling Service (CCCS)
For help managing your budget or your debt, call 800-388-2227 for the CCCS office nearest you or visit the national Web site at www.nfcc.org.

Note: Contact information for the above resources is provided for information purposes only. This does not constitute an endorsement, by the author, Access Group, or NASFAA, of these entities or the information and services they provide.

Jeffrey E. Hanson is director of borrower education services for Access Group, Inc., in Wilmington, Delaware. Transcript wishes to thank Craig Watts, public affairs manager for Fair Isaac, for his assistance with this article.

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