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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

Making a Budget for College

2 Dec

Karla Lant is a life insurance contributor on The Simple Dollar, helping everyday people understand and master life insurance issues and questions. Lant has dealt with related regulatory issues in her work as an attorney and has researched and published on life insurance and estate planning. She has also taught subjects related to life insurance as an adjunct professor – she is currently an adjunct at Northern Arizona University. Karla Lant on LinkedIn

College Student's Letter to Santa

Semester Wish List

There’s no better place to realize you are all on your own, and in need of a real budget, than college. You’re in charge of everything from paying your tuition to paying for dinner. Getting behind on your spending can trigger a spiral into serious debt, which in turn can stop you from graduating. In order to stay on top of things, you need to build yourself a budget. Even if you’ve never made one before and don’t have much money to spare, there’s no need to be discouraged! Keep it simple. These little tips will get you that much closer to mastering the art of the budget – without eating into your scholastic success.

  • Set out exactly how much you want to spend week by week, and stick to it no matter what.

    There are many things that can bump you up and over your weekly budget in sneaky ways, as this article points out. This can mean buying too many “treats,” like expensive coffees, fancy dinner and designer clothes. When in college, it’s easy to get excited about the potential to spend freely for the first time. But in reality, you aren’t getting away with anything. You are simply putting that all-important budget at a major disadvantage. Oh and there’s another major expense that soaks up money: alcohol. I know I sound a bit like your mother, but you already know excess spending on alcohol not only hits the wallet, it hurts your waistband, your grades and even your outlook post-school. Anyway, if you withdraw only what you need each week in cash and spend just that, you’ll be right where you need to be at the end of the year.

  • Think twice before overspending on extras like technology you want but don’t need.

    This infographic shows that college students spend far more than is necessary on these kinds of items, contributing to their debt when they leave school. Consider spending only a small amount every once in awhile on technology and accessories, like video games and movies. If you are in the market for something techy, you should consider shopping used (also selling things you own but no longer want or need) – the same goes for clothes. Make sure you get well acquainted with the thrift stores surrounding the university.

  • College students often spend a great deal of money on entertainment.

    Instead of breaking the bank on fun, get involved with free outdoor activities in your area. Look for seasonal events

    Music Festival

    Photo by: Eva Rinaldi

    and coupons to help you get in for less. Bring your own food and drinks to events when you can, and always carry cash instead of a credit card so you limit how much you spend from the start.

If you make a simple yet firm budget, you can make it through college with significantly less debt than your peers, and great habits that will last you a lifetime. Give it a shot!

Savvy Spender: Best Local Bargains

28 Oct

Macklemore on stage in black and white

Photo by: thecomeupshow

Feeling a bit strapped for cash these days? No worries, you’re not alone. Measly budgets are all part of the college experience, but that doesn’t mean you have to sacrifice style, fun, comfort…or your credit score!

You can save big money in just about every area of your life if you know how to shop. Fortunately, we have lots of insider tips to get you started.

Clothes

Thrift Store clothes rackThank you, Macklemore, for making thrift shopping not only acceptable but actually trendy. If you’re not already poppin’ tags, you’re missing out.

Lafayette is chock full of thrift shops. Tip: More upscale areas tend to offer a more stylish selection of clothes and accessories. Don’t be surprised if you see name-brand, barely used stuff for pennies on the dollar.

Next time you’re in Indianapolis, make some time to hit up the thrift shops. You can score a lot more than clothing: many shops carry dishes, décor, and other home furnishings.

Bonus: The “vintage” look has never been more in style. Why pay a department store to create that look for you when you can wear authentic vintage clothing for a fraction of the price?

Furniture

Headed for a department or big box store to trick out your dorm or apartment with furniture?

Not so fast. You can score quality furniture for much less if you do so by secondhand. Check out Craigslist for local listings. (Make sure to make safe arrangements, meet in public if possible, and

Photo by: Theif12 Permission by: Creative Commons

Photo by: Theif12
Permission by: Creative Commons

always bring a friend!) You might even find FREE stuff.

You can also use Craigslist or YardSaleSearch to look for yard sales. Also, the beginning and end of each semester are both great times to look around the neighborhood for furniture placed on the curb by people moving out.

Entertainment

Embrace the library — and not just Purdue’s library; scope out the local library as well. You can find really good movies on DVD, as well as music, magazines, newspapers and, of course, books. It’s all free!

Some libraries even offer free downloads of electronic books for your Kindle or iPad.

Zami student housingHousing

Purdue doesn’t require students to live on campus. Make sure you shop around, comparing rates for dormitories and meal plans to rates for apartments in town. Once again, Craigslist is your friend here!

Living with roommates saves money, and the willingness to live a block or two outside the “hot” areas can save big bucks as well.

The Bottom Line

College is a great time to master thrifty tricks. Why pay full price when you can manage the style, entertainment, and lifestyle you want for a fraction of the cost?

BIO:

Ellen Hunter Gans, M.A., MSc. is a writer, editor and communications strategist who contributes to The Simple Dollar’s credit card portal. The Minnesota native has been writing about finance (among other things) for over four years. Find her on LinkedIn.

Is It Worth It to Own a Car In College?

9 Sep

car in college

Having a car in college can lead to some really fun times. Cross country road trips in the summer, getaway weekends and nights out on the town are all easier for students who bring a car to campus. However, maintaining a car as a student probably costs more than you think. So, when is it worth it?

The Privilege of Car Ownership

There are many advantages to owning a vehicle as a college student. First and foremost is the flexibility and freedom a car affords. You’ll no longer be dependent on other drivers when you’re making plans – simply by having a car you have more say in what it you can do and what you want to do.  And, of course, your commute to campus is likely to be a bit shorter; so hitting the snooze button a few times won’t ruin your morning.

Owning a car in college can help you make and save money, too. Since you can commute a little further, you’ll be able to consider a wider selection of off-campus jobs. And with all that carrying capacity, you can tackle a week’s worth of grocery shopping in a single day. If your kitchen is stocked, you’ll cook more and eat out less (and all without hauling groceries on foot or by bus).

Car ownership in college also has benefits beyond daily usage. When you really want to get out of town, having a car will make it happen. This is especially true given how difficult it can be for college students to rent cars at affordable rates.

Important Auto Considerations

gas prices are expensive

Despite all the benefits, however, there are some important financial factors you should consider before you decide to own a car while in college.

Gas is expensive, and it’s going to stay that way. The average car in the U.S. consumes around $1,000 worth of gas each year. If you drive your car regularly, you can probably expect to fill your tank once a week. Before you commit to bringing a car to college you need to determine how much it costs on average to fill the tank and how often you expect you’ll fill it up. If possible, you’ll of course want to bring a car with good gas mileage.

Car insurance is another major cost you’ll need to factor into your budget if you drive during college. Premiums are higher for anyone under the age of 25, whether or not they are enrolled in college. The good news is that, on average, Indiana auto insurance premiums are among the lowest in the country.

You’ll also want to consider the cost of campus parking before bringing your car to school. Here are the Purdue rates for parking permits. You should also make certain you are eligible; this is determined by the distance between your home and the campus.

Finally, when deciding whether or not it’s worthwhile to bring a car to college, you have to budget for damages and repairs. The average car needs just over $400 a year in repairs, not including oil changes. You can save some money changing your own oil and rotating your own tires, assuming you know how to do so safely.

Cost-Effective Alternatives

So what are the alternatives to keeping a car at college? There are a number of great ways to get around in West Lafayette:

  • Public transportation: The bus system in West Lafayette is very interconnected with Purdue. The university is central to the area, meaning the bus system can get you to the campus Lafayette CitBusfrom almost anywhere.
  • Bicycles, skateboards and so on: Bicycling is a great alternative in West Lafayette, and many people make it their main mode of transportation. Skateboarding, rollerblading and walking are also options, especially if you live on or close to campus.
  • Zipcar: The local branch of this car sharing service is available to anyone over 18 and caters to Purdue students, faculty and staff.

The Bottom Line

Because car ownership is such a complex financial commitment, you’ll need to do extensive research before you know whether or not it’s a sensible investment. In a nine-month academic year, AAA reports that the average small car costs more than $3,000, including gas, insurance and maintenance; this doesn’t factor in parking costs and non-standard repairs. As a college student, you can’t afford to gloss over such a pricy and impactful decision.

Karla Lant is a life insurance writer for The Simple Dollar. She helps everyday people understand and master life insurance issues and questions. Lant has dealt with related regulatory issues in her work as an attorney and has researched and published on life insurance and estate planning. She has also taught subjects related to life insurance as an adjunct professor – she is currently an adjunct at Northern Arizona University. Here is her Facebook page

Should You Get School-Sponsored Health Insurance?

3 Sep

superhero might mouse

College students tend to feel somewhat invincible when it comes to serious injuries and diseases. You’re young and in good shape, so why do you need health insurance?

Well, for starters, if you live and study on-campus, you’re constantly in close quarters with hundreds (if not thousands) of other young people — you probably haven’t been encountering this many germs since you were licking toy trucks in kindergarten. Unfortunately, in college, missing school because you’re sick can be much more problematic than it was when you were five.

sick pig with ice pack

Photo by: Ollie Crafoord

Sickness aside, college students are also one of the more accident-prone groups . So whether you’re skiing at Swiss Valley or just riding your bike across campus, it’s good to remember that you’re not actually invincible. This reality check might be hard to accept, but whether you like it or not, it’s critical that you secure health insurance. No one wants to empty their life savings or take out an additional loan just because that late-night sledding expedition went awry.

Most colleges and universities, Purdue included, offer a health insurance plan to all currently enrolled students. This type of coverage is a great option to consider, but it’s not for everyone. Here’s what you need to know about what this plan will cover and what it won’t:

Overview of the Purdue Student Health Plan

As a general rule, if you’re a registered student at Purdue’s main campus in West Lafayette and taking six or more credit hours (or are a co-op student seeking a degree), you’re eligible for the student insurance plan. But be sure to read the fine print. Here are the key points of the plan:

Your deductible: Your annual deductible will not exceed $200 if you receive medical treatment from preferred providers within the Purdue network; if you use out-of-network providers, your annual deductible will double to $400. 

Your maximum benefit: $500,000 per year

Coinsurance: When you visit preferred medical providers, your plan covers 90% of the costs; when you consult out-of-network providers, the insurance covers 70% of the costs.

Out-of-pocket maximum: If you seek treatment from preferred providers, then your out-of-pocket maximum is $1,500 per year; this amount is doubled if you use out-of-network providers.

Coverage: Here is a non-exhaustive list of services you’re covered for (costs are subject to the coinsurance and out-of-pocket maximum terms listed above):Female Doctor

  • Inpatient room and board expenses at a hospital
  • Surgeon’s fees
  • Anesthetist
  • Physician’s visits
  • Physiotherapy
  • Outpatient diagnostic X-rays
  • Outpatient radiation
  • Outpatient chemotherapy
  • Outpatient lab services
  • Ambulance services
  • Dental treatment (made necessary by injury to sound, natural teeth only)
  • Mental illness treatment
  • Substance use disorder treatment
  • Maternity
  • Smoking cessation
  • Preventive care services (covered at 100% of preferred allowance)
Cartoon Doctor

Photo by: Angelus

Pharmacy and prescription drug benefits: If you go to the Purdue Pharmacy for your prescriptions, you’re covered at 100% beyond the following copays. Generic prescriptions cost $10, while brand name prescriptions cost $20.

Maternity testing: You’re not covered for all routine, preventive, or screening examinations and testing. If certain conditions are met, you may be able to get coverage for some maternity-related tests, including:

Mandatory benefits: You may be eligible to receive benefit treatments for the following special scenarios:

  • Pervasive developmental disorder (e.g. Asperger syndrome and autism)
  • Diabetes
  • Reconstructive surgery and prosthetic device
  • Breast cancer screening
  • Cancer clinical trials

As with every insurance policy, there are a number of exclusions and limitations. Make sure to review the plan details. The exclusions and limitations start on page 19.

Please also note that coverage may differ for certain students. International students, for instance, are required to enroll in the insurance plan; they receive the same maximum benefit, deductibles, and out-of-pocket maximums as domestic students.

Advantages of the Purdue Plan

  • Preventive care: As the saying goes, an ounce of prevention is worth a pound of cure. The 100% coverage rate for preventive care is incredibly valuable.
  • Low deductible: If you stay in-network for treatment, you only have a $200 deductible. This is low when compared to many individual plans.
  • Low out-of-pocket maximum: If you stay in-network for treatment, your out-of-pocket maximum will be $1,500 for a year. That may sound like a lot, but it’s nothing compared to an uninsured hospital bill for a broken leg or emergency surgery!
nebulizer

Photo by: Trainer2a

Drawbacks of the Purdue Plan

  • Limited coverage: This isn’t intended to be a fully comprehensive plan. For example, it doesn’t cover vision, hearing, or dental (with the exception of “dental injuries” as specified in the plan).
  • Pharmacy restrictions: If you have your heart set on a pharmacy other than Purdue’s pharmacy, you’ll pay quite a bit extra for prescriptions.
  • Does not cover certain medical equipment: If you require a wheelchair, nebulizer, or other piece of ‘durable medical equipment,’ you’re out of luck (wheelchairs, nebulizers, etc.).

Ultimately, Purdue’s plan is comparable to most school student insurance plans. If you have a chronic condition that won’t be covered under the Purdue policy (for example, something related to your vision or hearing), you might consider alternative or supplemental insurance. You’ll find that most schools (not just Purdue) won’t offer full-scale, comprehensive coverage.

If you’re a student, it’s critical to maintain health insurance protection. Whether or not the Purdue plan is right for you depends on your individual circumstances. Take some time to thoroughly research your school’s plan to ensure it provides coverage for your unique needs including any pre-existing conditions, lifestyle.

Ellen Hunter Gans, M.A., MSc. is a writer, editor and communications strategist who contributes to The Simple Dollar’s credit card portal. The Minnesota native has been writing about finance (among other things) for over four years. Find her on LinkedIn.

Avoiding the Freshman $$15

19 Aug

Federal Reserve Bank Vault

Federal Reserve Bank of New York

College is expensive, and it’s not easy managing your finances on your own for the first time. From your freshman year to graduation, your savings account will be your first line of defense against consumer debt and financial misery. By building up a healthy ‘savings buffer’ and stretching your college dollar, you’ll graduate with your financial house in order and, most importantly, peace of mind. Here are some key lessons for developing “money smarts” to go along with your book smarts.

Start Saving

One of the biggest problems for underclassmen is overspending. Fortunately, putting a little cash aside can be a great way to cut spending. Here are some ideas:

  • Calculate your monthly income from all sources, and use that to create a savings plan and budget. Don’t spend more than you make!
  • Avoid credit cards, unless you’re planning on sticking to a strict budget and recording all of your purchases. Credit cards give you a false impression of having more money than you actually do. Don’t assume you’ll be able to make up for a shopping splurge next month. With so many temptations and high interest rates, odds are you won’t.
  • Get a part-time job and deposit a percentage of each paycheck directly into your savings account. These small amounts will add up over time and having less cash on hand will force you to forgo frivolous spending. You’ll be forcing yourself to save rather than fighting temptation each time you enter a convenience store. Plus, a sizable chunk in savings will end up being far more satisfying than your gourmet latte routine.

Staying Frugal in a College Town

Aerial photos of Purdue University

photo by: Purdue Marketing and Media,Dave Umberge

College is a critical learning period for adopting adult habits, like living within your means. Here are some ideas for living a frugal life that is both happier and richer:

  • Avoid luxuries like cable TV or a fat phone plan. You are still a student, not a middle-class consumer, so act like it. Plus, college is no time to be sitting at home watching TV — you’ll get several more decades of that after graduation.
  • Buy or rent used textbooks, or borrow them from the school or public library. With the average cost for new textbooks over $1,000 a year, this is an obvious – and easy – place to find some savings.
  • Never buy new! You’re not working full-time, so why act like it by buying brand new things? Thrift shops are a fraction of the price, environmentally friendly, and the consensus in cool nowadays.
  • Make your own coffee instead of blowing money at an expensive café. A few bucks may not seem like much, but it adds up fast. It’s easy to heat water and use a French press. Give it a try.
  • Bike if you can. You’ll be killing two birds with one stone: exercise and transportation. Plus you’ll save on public transit or, heaven forbid, gas and parking.
  • Host dinner parties and other fun in-house events instead of going out to restaurants and bars. Again, you’ve got plenty of time after college to enjoy bars, restaurants, and pricey events.
  • Make the most of on-campus resources like laundry services, the gym, and the library
  1. Most college libraries have excellent movie rental selections, so why are you dishing out for Netflix or Redbox?
  2. More time spent in the gym or library is time spent getting smarter and fitter and not time spent out on the town spending money.
graduated

GIF by: , MarcelKirsteinLE

Financially Preparing for Graduation

You may be thinking: college is supposed to be the best time of my life, so why am I wasting it pinching pennies? Well there are a couple problems with this line of thinking. First, if you spend four years racking up debt, barely passing your classes, and living large, then college is going to be the best time of your life…because you’ll spend the rest of your life struggling to pay it back. Second, college can be just as fun without splurging. The fun comes from the camaraderie, adventure, and self-discovery — not from the shopping.

The College Board estimated average miscellaneous expenses to be $2,527 for private colleges and $3,201 for public universities for the 2012/13 school year. Four years of frugal living could save you a few thousand dollars, rather than sticking you a few thousand into credit card debt. Trust me, it’ll come to make a big difference.

Karla Lant is a contributor on The Simple Dollar’s life insurance center.  She is currently an adjunct at Northern Arizona University; find Karla Lant on LinkedIn or Google+.

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