Wednesday, April 25, 2007

Federal Student Loan Consolidation

As the end of the semester nears, it seems timely to review the issue of student loan consolidation. This week I’ll address consolidation of federal loans and will address consolidation of private loans in a separate/future tip.

A reminder about recent legislative changes (7/1/06):
- In-school consolidation is no longer an option. You will need to be out of school to be eligible to consolidate.
- You are no longer required to have multiple lenders. You can consolidate with whomever you choose even if you only have one lender. Shop for the best deal for you!
- You are no longer able to consolidate your loans with your spouses’ loans. Not a smart idea anyway, but is no longer an option.

Important consolidation considerations:
- If you have specific loans (i.e., Perkins) that may be forgiven or repaid by your employer, state, etc. Find out if they will repay/forgive federal loans in general (ok to consolidate if that is the case) or if they will repay/forgive that specific loan (in which case you don’t want to consolidate it).
- If a potential lender offers to combine your federal loans with private loans, credit cards, or any other non-federal student loan debt, RUN!
- You can AND SHOULD reconsolidate even if you have already consolidated to lock in the low rates in prior years (4.7% last year; 2.77% prior year, 2.82% before that). It will be necessary in order to “move” the loans to a lender that will offer you the best borrower benefits. Since your rate is a calculated “weighted average,” doing so will not have a negative impact on your rate.
- Some people are afraid to consolidate because their repayment will be extended (obviously resulting in more interest paid over the life of the loan). Keep in mind that you can select a short repayment time when you consolidate – you can also choose to pay whatever monthly amount you want (NO LEGITIMATE PROGRAM will assess a penalty for you paying off the loan early).

With all of the offers I get, how do I decide where to consolidate?

The first point I want to make here is that a federal consolidation loan is a federal consolidation loan – in other words, your ability to defer your loans [or other governmentally ‘set’ terms of the loan] will be the same regardless of who your lender is. Many people consolidate with the government because they assume they will have more ‘benefits’ than other programs. The reality is that the benefits of the loan will be the same regardless of who the loan is through. What then is the difference? The financial benefits companies offer – ultimately, that is the “bottom line” and the only meaningful difference between consolidation programs.

My experience with student loan consolidation over the past several years has drawn me to one primary conclusion – the “financially smart” option is not going to be the same for each student. It is largely a factor of how you plan to repay your debt. Let me offer up some examples. An average consolidation program will offer interest rate reductions for automatic payment and for paying on time (typically for 3 or 4 years) – for most, these will total 1.25% (.25% for auto payments; 1% for 36-48 on-time payments). Interest rate reduction benefits are great if I’m in a situation (because of the low rate I’ve consolidated at and/or my financial goals, my starting salary, or other potential factors) where I am interested in extending the repayment of my debt (more than 8 years in the scenario I will illustrate below). My ability to extend my debt will be based upon the amount I borrow, but I can potentially extend the debt anywhere from 12 years to as many as 30. Obviously if I plan to pay the debt back in a couple years, this type of program isn’t very beneficial because the only benefit I will get is the .25% for auto pay. Thus, if this is my objective, I should seek out a company that instead of an interest rate incentive, their benefits are ‘principal balance’ credits. These are normally advertised as “consolidate with us and receive as much as $2,000 cash back!” I’ve seen more than one professional student where they would save over $100,000 in interest over the life of the loan repayment because of the interest rate reductions. This offer obviously wouldn’t make much sense for them to get excited to consolidate to receive a paltry $2,000 benefit …

Below, I have provided examples of the best borrower benefit programs I have currently seen for each different repayment scenario. There are some points, however that I want to emphasize as you evaluate personal considerations:
(1) These are general guidelines/rules of thumb – run the numbers to see what makes the most sense for you. Do your own homework – use these resources as guidelines as you try to find better options [which if you do, make sure to let me know].
(2) Read the applications for any caveats. For example, the Key Bank credit (quick repayment example below) is foregone if you defer or forebear the loans during the first 3 months of repayment. The Educational Loan Company programs require you to have a minimum loan amount ($30,000 in the extended repayment program; $15,000 in the intermediate program example). So read through the details to make sure the program will fit with your situation.
(3) Be smart. Take a few minutes to figure things out. There’s a lot of dollars on the table for most students. It’s worth your time to talk to someone about things. Consider all options – most states offer consolidation programs. I list North Carolina because it has the best benefits with limited restrictions (you can create a 'connection' to NC in about 5 minutes with $5 by opening a 529 account). Some states have more restrictions, some have none. If you went to school or lived somewhere else, take a look at their program to see what type of benefits their program offers.

Key Bank

* .25% interest rate reduction for auto pay
* 5% principal balance credit

* .25% interest rate reduction for auto pay
* 4.5% principal balance credit

Educational Loan Co.

* .25% reduction for auto pay
* 2.25% reduction after 48 on-time payments

The Loanster
* .25% reduction for auto pay
* 2% reduction after 36 on-time payments

North Carolina
* .25% reduction for auto pay
* 2% reduction after 48 on-time payments

Educational Loan Co.

* .50% reduction for auto pay
* 1.25% reduction after 48 on-time payments

* FYI – The Department of Ed (Direct Loan consolidation program) offers a .25% reduction for auto pay. The MOHELA consolidation program offers similar benefits (.25%).
While at a conference last month in Illinois, I ran across a great resource for evaluating consolidation offers that I’d like to share. It provides an unbiased way to compare consolidation options from any lender. All you need to do is enter your federal student loan information, then compare and sort the options that are customized for you. If the program you’re considering isn’t listed, you can enter the details of the program and it will help you evaluate it. You can sort by such items as monthly payment, total loan cost, loan term, APR. You can then conduct side-by-side comparisons with the companies that you narrow your decision down to … pretty nifty [and free].

I’m currently working with Simple Tuition to get a Mizzou-tailored resource – it’s currently in a demo stage, but I’ve requested that they provide information about North Carolina, Educational Loan, and other companies that provide better benefits than others but [currently] aren’t available on their main site. The demo site is: As it is a work in progress, I would be interested in your feedback about the site, usability, other consolidation programs that should be included, etc.

Consolidation Resources.
The OFS website offers numerous consolidation resources. Calculating your weighted rate average [if you have consolidated in the past or have loans (i.e., Perkins) with various rates]; calculating your loan payment; consolidation strategies; repayment options; information about state consolidation programs, etc. Simply click on the ‘student issues’ button.

Thursday, April 19, 2007

Moving? Relocation Resources ...

With the end of the semester nearing, we are now approaching the 'moving season' – graduation, new jobs, disgruntled roommates – all necessitate a change in scenery. Moving ranks as one of the most stressful events in a person’s life; planning ahead can help reduce some of this stress. Regardless of the reason for your move, there are many valuable resources to assist you every step of the way [all free].

- Moving Checklist
- Relocation Guide

The most comprehensive relocation resource is HOMEFAIR. Free resources include:

* City Reports (Demographics, Cost of Living, and other quality of life info)
* Community Calculator (What cities share factors similar to your community …)
* Crime Statistics (How does your potential city compare with where you live now?)
* Find a Storage Facility (Storage unit quotes)
* Mortgage Qualification (How much of a house can you afford in your new city?)
* Moving Calculator (Estimate what the costs of the move will be)
* Rent vs. Buy Calculator (Given our situation, what makes more $ sense?)
* Salary Calculator (How would a salary of $X compare in cities A and B?)
* School Reports(Information on schools as well as personnel contacts)

Thursday, April 12, 2007

Be a Smarter Investor

Greed and fear – commonly characterized as the most prevalent factors that drive investment activities … I recently read material published by the FPA (Financial Planning Association) offering 20 keys/steps to rein in greed and ease investing fears. It is not offered to turn you into an investment pro, or enable you to accurately predict the future of the stock market. It will provide information to help you use time-tested principles and techniques [helping you learn from the failures as well as successes of the past] so that despite the inevitable ups and downs of the markets, you can realistically achieve your financial goals.

1. Understand the difference between saving and investing. Saving is for short-term goals/needs (family vacation, emergencies, car, etc.); investing is for goals that are 5+ years away. Savings can be met with CDs, high yield savings accounts, etc. Although investing carries more risk (losing your principal, not earning as much as you’d planned, etc.), wise investing will also provide a greater opportunity for earning significantly higher returns in the long run [relative to savings vehicles].
2. Put the rest of your financial house in order first. Before investing, you may want to tackle other financial issues: creating a budget to enable you to invest more on a regular basis, developing an emergency fund, make sure you have adequate insurance in place, and paying off high interest rate debt to name a few.
3. Clarify your goals. Invest with a specific purpose. Doing so will make it easier for you to stick to your plan. Goals should be realistic, specific, and provide a timeline for accomplishing them.
4. Don’t just grab for the highest return. With reasonable, specific goals, you can make informed, realistic investment decisions to accomplish your financial goals without taking unnecessary risk. The tortoise wins the race every time I read the book.
5. Understand your own tolerance risk. Risk tolerance is a function of several factors – your investment goals, how much time you have to invest, other resources you have, and your “personal fear factor.” Investments that keep you up at night [although they may make the most sense ‘financially’ may not be right for you]. Gauging that can be tricky – people obviously tend to feel more risk tolerant when the market is doing well …
6. Educate yourself about investments and investing. Even if you work with a financial planner or advisor, you should understand how investments work, their risks, and how they fit into your financial plan. Many people understand the risks associated with stocks or real estate, but fail to realize that bonds and other investments also carry risk.
7. Hold realistic market expectations. One downfall of the market boom of the late ‘90s was the belief that high double digit returns for stocks were normal. Historical information reveals otherwise. I have a chart on my wall (Ibbotson chart) that shows that between 1926 and 2001, small company stocks returned an average of 12.5% per year; large company stocks 10.7%; and long-term government bonds 5.3%. These historical returns don’t guarantee anything (I can earn more or less than that any given year), but they allow me a benchmark/ perspective for comparison when things are going very well [or very poorly].
8. Follow a detailed written plan. Use this like a road map to keep you focused and on-track; it is easy to lose focus when things don’t go as planned. Obviously, this plan should change as “life happens” – marriage, job/career changes, family, as well as changes in objectives.
9. Allocate investments according to goals and needs. The shorter the timeline, the more conservative your allocation should be. Will you have other resources at retirement? Depending on your circumstances, you may feel more [or less] comfortable with an aggressive portfolio.
10. Diversify your investments. Spread your dollars across several investment classes (stocks, bonds, large/small companies, international, etc.). Research has shown that diversification will reduce risk while at the same time maintaining [or even improving] portfolio performance.
11. Don’t overload on company stock. Financial planners typically recommend limiting company stock to no more than 10-15% of the account value. One word speaks volumes … Enron!
12. Don’t chase ‘hot’ performance. Today’s hot investments are often tomorrow’s cold turkeys. Technology stocks, represented by the Nasdaq 100 Index returned an amazing 85.6% in 1999, but fell nearly 40% the next year and another 21% the next …
13. Don’t ignore ‘cool’ performance. The opposite of chasing ‘hot’ performance. The easiest way to avoid these two problems is to stay diversified and stick to the game plan that you spelled out in your investment plan.
14. Stay in the market. Don’t try to “time” when to get in and get out of the market. Nervous investors often want to wait on the sideline until a downturn in the market is over … a study by SEI Investments reviewed 12 bear markets (market downturns) since World War II. Those who stayed in the market saw the S&P 500 gain an average of 32.5% (not counting dividends) during the first year of the market recovery. Those who missed the first week of that recovery earned 24.3%; those who waited three months to get in gained only 14.8%.
15. Start investing early. The most powerful weapon on your side is time. The earlier start, the more financial leverage you gain.
16. Invest regularly and automatically. Those issues of greed and fear tempt us to try to time the market. Financial professionals commonly recommend instead investing on a regular basis regardless of what the market is doing. This will help you keep your eyes on your long-term objectives. Funding investments not only makes this easier to do, but in many instances will allow you to start without having a large initial investment.
17. Pay attention to investment expenses. You can’t control the market – you can control your expenses. Investing with an eye toward lowering your investment costs can significantly improve your returns over many years.
18. Don’t let taxes dictate. Yes, it is smart to invest with an eye on tax-saving strategies. Taxes shouldn’t be the ultimate deciding factor, however. If it makes sense for you to sell an investment, you should sell the investment.
19. Rebalance your portfolio. It is inevitable that over time the asset mix you originally assign to your portfolio will become unbalanced over time as different asset classes perform differently. If, for example, the stock market does very well this year, the stock portion of your allocation will become ‘heavier’ than your desired allocation. This means that you will now have more risk in your portfolio because you have a heavier weighting in stocks. How often you rebalance is a personal question – many suggest doing it about once a year.
20. Monitor and revise your investment plan. As with any financial plan, you’ll want to review your investment plan at least once a year to make sure you’re still on target, that it is still accommodating your needs, etc. Whether you turn your investments over to a professional or manage them yourselves, ultimately, it is you that is responsible for the results!

Thursday, April 5, 2007

Credit Scoring

When you apply for credit, lenders want to understand the risks associated with loaning money to you. Credit scores are what most lenders use to determine your credit risk. The most commonly used credit scoring model was created by Fair Isaac Corp. (the FICO Score). Credit bureaus often use different names, such as the Beacon Score or Empirica Score. Each, however, uses the same underlining methods as Fair Isaac. Consumers have three credit scores – one for each of the three credit bureaus (TransUnion, Experian, Equifax). Each is based upon the information that particular agency keeps on file about you. Your score will determine loan terms (interest rates, fees, etc.) as well as how much a lender will offer you. The higher the consumer’s credit score, the less risk for a lender (FICO Scores range from 300 to 850). It is possible to have no credit … Many individuals don’t realize that many of the monthly bills paid (i.e., rent, phone, gas, utilities, insurance, etc.) are not reported to credit reporting agencies [unless you miss payments of course!]. Payment history for mortgages, student loans, credit cards, store cards, auto, and other loan and revolving credit accounts are typically reported to credit bureaus on a monthly basis. For a FICO score to be calculated, your credit report must contain at least one of these types of accounts [which has been open for at least six months; also must contain at least one account that has been updated in the past six months]. This ensures there is enough information [and recent information] on which to base a score.

How is the score calculated?
The FICO score is calculated from a lot of data contained in your credit report. The data is most commonly grouped into five categories: payment history (35%), amount owed (30%), length of credit history (15%), new credit (10%), and types of credit used (10%). The percentages indicate the relative weighting of each area to the overall score. The following site will allow you to see what specific items constitute each of the five areas.

While most lenders use credit scoring to make credit granting decisions, each lender is likely to use a ‘personalized’ strategy to determine how they are going to define a “creditworthy” customer or what an acceptable level of risk is for a given product. There is no universally defined “cut off” where if you’re below a certain point you will be denied credit regardless of where you go. The following MyFICO resource nicely illustrates the financial benefits of having a strong credit score. In addition, more and more people are using credit scoring as a way of evaluating risk in other areas of life – employers, landlords, insurers, utility companies – and the list is growing rapidly.

* It is important to understand that a credit score is a measure of how well you manage debt. Many people are debt-averse [or haven’t relied on debt to date] – there is nothing wrong with this; I would never suggest going into debt merely to have a credit score. You will want to ensure that when applying for insurance, a future mortgage, etc. that your lender uses manual underwriting if you have 'no credit.'

Getting your score
I mentioned last week that the legislation (FACTA) that provides consumers the opportunity to receive a free annual credit report does not provide a free credit score. You have some choices – a simple score estimator; also, the e-loan resource I mentioned last week. If you’re interested in purchasing your score [I also have included some other types of scores to give you an idea of the types of information available], you can go to the following sites – current prices (as of 4/4/07) are listed. Read through the information provided – all of the sites offer additional products beyond credit scores (monthly credit monitoring, other ‘packaged’ services to go with the credit score, etc.)…

- FICO Score (you choose report score is based on) - $15.95
- Equifax FICO Score and Equifax Credit Report - $15.95
- Experian VantageScore - $5.95
- TransUnion Insurance Score - $9.95

Additional Credit Resources.
- Credit issues
- Credit myths
- Credit scores by state
- Credit statistics
- Improving your score
- Ordering free credit report(s)
- Specialty credit reports
- Vantage Scoring
- What is not in your score?

Wednesday, April 4, 2007

Personal Finance Course Offerings (Fall 2007)

Have you considered taking a Personal Finance course this fall? A one-credit course through the Personal Financial Planning Department may be just what you're looking for ...

FINPLN 1183 (Financial Survival).
A one-credit course geared to underclassmen; class focus is on "student-specific" financial issues: credit cards, student loans, debt management, avoiding common financial pitfalls, credit issues, etc. Offered pass/fail.

* Reference #79997
* Fridays -- 2:00-2:50
* Meets once/week for full semester
* Instructor - Dr. Mark Oleson

FINPLN 4483 (Financial Success).
A one-credit course geared to upperclassmen [nearing graduation]; class focuses on common post-graduation financial issues: Investing (stocks, mutual funds, bonds, etc.), Retirement Planning (401(k)s, IRAs), Managing loan and other debt after graduation, Insurance, Purchasing a home, etc. Offered pass/fail.

* Reference #97665
* Thursdays -- 3:00-3:50
* Meets once/week for full semester
* Instructor - Dr. Mark Oleson