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Financial Triage for Fiscal Health

Financial Triage for Fiscal Health

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Financial Triage for Fiscal Health

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  1. Financial Triage for Fiscal Health A Debt Management Overview for the University of Alabama School of Medicine

  2. Scenario 1 – Highest Rates Average Indebtedness: $87,000 DL Interest Rate Cap: 8.25% 10 Years to Repay: = $1067/month = $41,049 interest paid = $1642/month gross income = $197,040 gross over 10 years

  3. Scenario 2 – Average Rate Average Indebtedness: $87,000 Interest Rate: 6.25% 10 Years to Repay: = $977/month = $30,220 interest paid = $1503/month gross income = $180,360 gross over 10 years

  4. Scenario 3 - Consolidation Average Indebtedness: $87,000 Interest Rate: 3.375% 30 Years to Repay: = $385/month = $51,465 interest paid = $592/month gross income = $213,120 gross over 30 years

  5. Why Consolidate Consolidation locks in the interest rate for the life of the loan. After July 1, 2005, all new consolidation loans will have higher interest rates. After July 1, 2005, all new consolidation loans may have variable rates, changing annually. Only Direct Loan borrowers can consolidate while still in-school!

  6. What to Consolidate All Federal education loans Ford Direct Loans (sub & unsub) Stafford Loans (sub & unsub) HPSL Perkins + others www.nslds.ed.gov

  7. The $8640 Benefit Consolidating Federal Direct Loans while in-school can lower your interest rate lock to 2.875%, saving you $8640 over a 30 year extended repayment.

  8. Direct vs. Stafford Direct Loan rates set by Congress. Stafford rates also set by Congress, with competitive flexibility once in repayment status.

  9. Direct vs. Stafford Stafford repayment incentives can allow interest rate drops or principal reduction savings to reward timely repayment. Only between 11-16% of borrowers will qualify.

  10. Can I Re-Consolidate? Yes. New DLs can be bundled with old DL Consolidation. Check the interest rate effect before doing so. Old DL Consolidation (prior to 6/01) may be rolled into FFELP Re-Consolidation. Rate becomes variable.

  11. Shameless Plug Student Loan Xpress is currently the only lender offering a Federal Re-Consolidation Loan. RightRate program offers the benefit of today’s lower variable rates, and caps the interest rate at whatever the previous locked rate was instead of 8.25% Mostly for ’98-’01 graduates. Only beneficial to a few current students.

  12. Private (Alternative) Loans Loans outside of the Federal system. No interest rate cap. Rates vary quarterly. Some defer for residency, some don’t. No Federal protection.

  13. Private Loan Consolidation Check interest rate formula & deferment options. Most can include Federal loans - DON’T DO IT. Most can combine spouse’s loans – DON’T DO IT. Only use these loans to consolidate private loans, institutional loans, residency loans, and other education debt.

  14. Credit Cards Free t-shirts aren’t free. Low rates won’t stay low. Airline miles are paid for somehow. Cash saved is better than cash back.

  15. How Bad Can It Be? Top Credit Card Interest Rate 35.20% Average Credit Card Debt $8,000 2003 Profits by Credit Card Companies 1.5 trillion globally 60 billion nationally

  16. But Worse Yet… Fees have doubled. Income from over-limit charges, calendar manipulation and returned checks has far outpaced actual interest rates.

  17. As for Interest Rates One late payment can eliminate all low teaser rates, raising interest from 3.9% to over 20%. Cash advance interest rates may capitalize daily, not monthly. Annual fees, points program fees, authorized user fees all add up.

  18. The Lure of the Minimum Payment $2,500 At an “early consumer” interest rate of 24%, making only the minimum payment: • 304 payments over 25 years (to 2030) • Interest payments of $7,625.48 • Increase the cost to $10,125.48

  19. 1970s Industry Deregulation There are no regulations which prevent credit card companies from changing your rate at any time for any reason • Failing to make a timely payment to another creditor • Account balances deemed too high

  20. What if I pay on time, and more than my minimum due? • On a low balance, a very good practice • On a high balance, timely payments alert the credit companies to increase your maximum, extending you more credit and lending you more money • More potential credit can work against your ability to borrow

  21. Ultimately, credit . . . • Results in more spending, more debt and more credit costs • Should be used to buy what you can pay 100% for at the end of the month • Should be reserved for large purchases you’ve planned for, not the day to day • Can be based upon “good” or “bad” debt

  22. Why Not the Day-to-Day? • Snacks at coffee shop ($5 x 4) $ 20.00 • Gum or candy ($1.20 x 4) $ 4.80 • Soda or bottled water ($1.25 x 4) $ 5.00 • Movie & snacks ($12.00) $ 12.00 • Occasional magazine ($4.50) $ 4.50 • Gas $ 25.00 • A couple of CDs $ 15.00 The costs of the “little things” $ 86.30 Total over 35 weeks? $ 3,020.50

  23. You Do The Math! Bob’s $2.80 tall, double-shot, nonfat mocha from the coffee shop really jump starts his day. In four-and-a-half years when he can’t make his first student loan payment or pay his rent, how much could he have stashed away in a shoe box under his bed? $1,960

  24. Your Credit Is Seen By • apartment managers • employers • car dealers • retail creditors • banks • income • length of employment • length of tenancy or homeownership • the kind of credit requested

  25. What Do Potential Creditors See? For up to 10 years: • Late payments • Paid charge-offs • Paid collection accounts Indefinitely: • Unpaid collection accounts • Charged-off accounts

  26. All carefully tracked by Fair, Isaac & Company (a.k.a. FICO)

  27. How is FICO Measured? FICO measures your financial responsibility based on your credit history calculated from 5 categories:

  28. A FICO Score • Considers all 5 categories • Looks at all information • Considers positive and negative information • May contain errors which are the individual’s responsibility to know about and correct

  29. FICO Scores • 75% of Americans have a recorded credit history (225M) • Median credit score – “good” – is 720 • Highest score is 850 • The riskiest population – those who will most likely charge off debt or file bankruptcy – is below 600

  30. The 3 Credit Bureaus Equifax 800-685-1111 (www.equifax.com) Experian 888-397-3742 (www.experian.com) TransUnion 800-888-4213 (www.transunion.com)

  31. www.annualcreditreport.com Beginning June 1, 2005, all Alabama residents may receive one credit report from each bureau annually. Follow instructions to dispute any errors. Ask creditors to reduce unnecessarily high limits to more reasonable amounts. Close unused accounts. You don’t need a “credit repair” company!

  32. Checking Your Reports • Review all information carefully • Every detail is important – from the SS# to the individual account numbers • Review reports every year, preferably more than once

  33. To Dispute Items • Read the denial letter carefully (which potential creditors must send by law) • Accept the fault • Send written dispute letters • Retain copies!

  34. Letter Example Your name, address and phone number Date Credit Agency name & Address RE: Dispute and Investigation Requests Dear Sir or Madam: Please accept this letter as a written request to dispute account information which appears on my credit report. To prevent any confusion, I have listed the items and account numbers separately. Account 1 #XXXXXX- (example) I have settled this account to the satisfaction of the creditor (copy of store letter enclosed). You may verify this with the creditor by calling them at (XXX) XXX-XXXX. Account 2 #XXXXXX- (example) This account appears under a Social Security Number which is not mine (my SS# is XXX-XX-XXXX). Thank you very much.

  35. FICO Scores and Today’s Credit Mid-range scores require income verification; higher scores may not. The theory: If your score is high, you won’t make foolish debt decisions, so you’ll usually get whatever you ask for.

  36. Hits Against Your FICO Score Late payments Uncollected debt High debt High potential debt Frequency of applications Frequency of inquiries

  37. Always Opt-Out Opting Out can prevent possible telemarketing fraud www.donotcall.gov or 1-888-382-1222 Opting Out can prevent much of your personal information and financial habits from being sold to marketing companies • In July 2002 all 3 major credit bureaus in the U.S. received permission from Congress to sell your information

  38. 2 Ways to Opt-Out 1-888-567-8688 www.optoutprescreen.com

  39. Debt Management Strategies Create a spreadsheet, showing the following: type of creditbalancemo pmtAPR student loan $87,000 $ 361 2.9 car loan $14,000 $ 350 8.9 Visa $ 7,200 $ 144 15.9 Mastercard $ 2,400 $ 48 18.9 mortgage $95,000 $ 750 6.3 TOTALS 292,000 $1653

  40. Debt Management Strategies Now sort by APR, highest to lowest: type of creditbalancemo pmtAPR Mastercard $ 2,400 $ 48. 18.9 Visa $ 7,200 $ 144. 15.9 car loan $14,000 $ 350. 8.9 mortgage $95,000 $ 750. 6.3 student loan $87,000 $ 361. 2.9 TOTALS 292,000 $1653.

  41. Debt Management Strategies Pay all extra money each month towards the debt with the highest APR. Once that debt is eliminated, roll that budgeted monthly payment amount into the second highest APR. This is a good rule-of-thumb -- not an absolute.

  42. Debt Management Strategies There are tax implications. Home mortgages, business loans, and student loans all have interest deductibility. There may be limits.

  43. Your Graduation To-Do List Consider consolidating latest education debts, weighing how consolidation terms may have changed. Request deferments while in grace period. Enroll in auto-pay for all possible debts. Enroll in overdraft protection. Find a good accountant. Find a good financial planner.

  44. Resources Financial Planners www.cfp.net www.fpanet.org www.napfa.org www.iaqfp.org

  45. Resources Student Loan Xpress www.slxpress.com Information on Federal and private consolidation loans, residency relocation loans, practice acquisition and expansion loans. (866) SLX-PRES

  46. Resources Kevin McNamara Vice President, Graduate & Health Professions Programs Student Loan Xpress, Inc. kevin.mcnamara@slxpress.com (866) 311-8135

  47. Thank You!