Financial Literacy 101

Keys to Becoming Financially Literate

Taking out student loans is a common and important way to fund college, but make sure you understand what you are getting into. The short-term use of loans gives you money when you need it, but loans can also build your credit if you pay them off properly. Often, loans can be quite affordable with low interest and monthly payments that can adjust based on your income. To this end, knowledge of loan repayment, checking/savings, budgeting, and use of credit cards is also essential.

Loan Details

Loan Servicer

The loan servicer is the company that is in charge of overseeing your loan repayment. They collect payments, calculate amounts, and generally manage your account. Note, your loan servicer may not be the lender that gave you the loan.

Master Promissory Note (MPN)

MPN is the legally binding contract that sets the terms and conditions of your loan. It is also your signed acknowledgement that you will pay back the amount you have borrowed, plus any applicable interest. Even if you utilize the loan over multiple years, the MPN only needs to be signed ONCE during your undergraduate years.

Grace Period

A grace period generally begins after you graduate OR drop below half-time enrollment and before you are required to start repaying loans. Some grace periods are 6 or 9 months, other loans have no grace period. Typically loans stay subsidized or unsubsidized during the grace period. If you take a gap year or leave of absence, it’s possible that the grace period will expire and you will be required to begin making payments.

Subsidized Loans (0% due while in school and you maintain at least half-time status)

This term applies to the interest on your loan. If a loan is subsidized, then any interest that accrues while you are in school or in deferment is paid by the lender. This effectively means 0% of the loan is due while in school.

Unsubsidized Loans (means you will begin paying while you are in school and will pay MORE over time)

If a loan is unsubsidized, then the interest starts accruing IMMEDIATELY. Many unsubsidized loans give you the option of either paying the interest as it accrues, or adding it to the principal (original) loan amount. Adding loan interest to the principal is known as capitalizing the interest. Note: ALL loans taken out in GRADUATE SCHOOL are unsubsidized.

Federal Perkins and Direct PLUS (Parent) Loans

A Perkins loan is owed directly to your COLLEGE (up to $5,500 a year). Direct PLUS is a loan parents may take out at a higher interest rate. Perkins loans are subsidized and Direct PLUS loans are unsubsidized. If you do not qualify for Parent PLUS, it is possible to apply for other unsubsidized loans. More information on all federal loans can be found here: https://studentaid.ed.gov/sa/sites/default/files/federal-loan-programs.pdf

Be wary of private loans, as well as how you use credit cards

Federal student loans offer protections that private loans may not. Federal loans have flat interest rates, while private loan interest rates depend on the credit rating of your co-signer. Credit cards should be used sparingly. Routine purchases like groceries should not be made with a credit card, because credit cards can encourage overspending.

Repayment Details

Repayment Term

This is the maximum amount of time you have to pay back your loan. Ten years is the standard repayment term, but others can stretch to 25 years. By making prepayments or overpayments on your loan, you can shorten your repayment and lessen your overall costs.

Contact your Loan Servicer and Lender

If you are having trouble with your payments, contact your loan servicer and lender. Paying less than the minimum due or skipping payments can damage your credit. There are options to help, including:

Consolidation

If you have multiple federal student loans, you can consolidate them into a single Direct Consolidation Loan. This may simplify repayment if you are currently making separate loan payments to different loan servicers, but do your research.

Deferment (freeze on payments and interest on SUBSIDIZED loans)

If granted, deferment is a temporary pause in your payments. For subsidized loans you don’t accrue additional interest. The most common deferment is graduate school at half-time or more. Other reasons include serving in the armed forces, economic hardship, or illness/disability. Ask HOW LONG the deferment is, since some are yearly renewals.

Forbearance (freeze on payments, but NOT interest)

Forbearance is also a temporary pause on loan payments, but interest still accrues, even for subsidized loans. Forbearances are usually for economic hardship and should be used as a last resort because interest accrues for the entire time of the forbearance.

Default (should not occur)

Failure to repay a loan can result in default. Going into default will have a serious negative effect on your credit and credit score, so it is something to avoid. If you are experiencing financial hardships, contact your loan servicer immediately.

***Pay Your Interest Sooner or Pay More Later

If you take out $30,000 in unsubsidized loans at a 5% interest rate and you do not pay your interest, it keeps adding up while you are STILL in school. It INCREASES even more after your Grace Period because it is added to the principle/main $30,000 balance. After 10 years, if you do not pay your interest you’ll pay 30% more. Remember to pay your interest sooner than later!

Repayment Plan Options (contact your lender or servicer)

Payment lengths vary, but typically are 10, 20, or 25 year-terms. There are also lower payment plan options that vary can depending upon your annual income and will require approval. However, these lower payment plans will usually increase the cost of the loan. In general, the fastest repayment is the cheapest (i.e. less interest paid overall). For more information click here: https://studentaid.ed.gov/repay-loans.

How to Plan for Repayment? Checking and Savings Accounts and what about Credit?

** Some things to consider when choosing a bank:

ATMs: Are there ATMs easily available throughout the city? The country?

Fees: Many banks actually offer free checking for college students.

Online Services: Does the bank offer easily accessible and useful online features?

Customer service: If you need help, is it easy to call and get it?

Debit card service: Debit cards offer the convenience of credit cards, but the money comes from your checking account.

Savings Accounts: Once you have a checking account, consider also opening a savings account. Unlike a checking account or debit card, often, savings accounts require using an ATM or bank teller to withdraw money. Also, many savings accounts require that a minimum balance be maintained and going below the minimum can trigger a penalty. On the plus side, money in a savings account collects interest and the money you have put aside can help in emergencies.

Credit Cards: Many banks offer credit cards. While credit cards should always be used with caution, a bank credit card can simplify your life. If the card is issued by your bank, your balance can be viewed on the same online platform as your checking/savings account and you can schedule a transfers from your checking account to pay your credit card balances. Credit cards build your credit score, which is needed for things like car loans and income verification when you rent an apartment. Credit should be used sparingly (~5-7% of income), but is often needed. Good credit requires paying ON TIME, having a low debt to income ratio, and having credit card(s) open for a long time.

How to repay your loans? Work with a Budget

**Make a personal budget (based on NET income after taxes, not GROSS). Identify your expenses and include savings. Below is a monthly example:

Some Online Apps to Consider:

• Bill Guard

• Budget Bytes

• Clarity Money

• Mint

• You Need a Budget

Housing: 30-36%

Credit Cards: 5-7%

Food: 12-17%

Entertainment: 5-8%

Car or Transportation: 15-20% & Insurance: 3-7%

Clothes: 5-6%

Savings: 5-10%

Medical: 4-8%

Student Loans: 10-15%

Miscellaneous: 5-10%

Resources

1. https://www.mint.com/budgeting-3/college-budget-template-keep-track-of-your-school-expenses

References

*http://hvdcolladmis.prod.acquia-sites.com/financial-aid/financial-literacy/debt-management-guide/loan-terms-know

** https://college.harvard.edu/sites/default/files/ShoestringStrategies.pdf

***https://www.usnews.com/education/blogs/student-loan-ranger/articles/2016-05-25/reduce-student-loan-debt-by-paying-interest-early

Your Monthly Budget