Financial Triage for Fiscal Health

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Financial Triage for Fiscal Health

• A Debt Management Overview for the
• University of Alabama School of Medicine

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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

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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

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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

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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!

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What to Consolidate

• All Federal education loans
• Ford Direct Loans (sub unsub)
• Stafford Loans (sub unsub)
• HPSL
• Perkins others
• www.nslds.ed.gov

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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.

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Direct vs. Stafford

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

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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.

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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.

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Shameless Plug

• Student Loan Xpress is currently the only lender
  offering
• a Federal Re-Consolidation Loan.
• RightRate program offers the benefit of todays
  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.

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Private (Alternative) Loans

• Loans outside of the Federal system.
• No interest rate cap.
• Rates vary quarterly.
• Some defer for residency, some dont.
• No Federal protection.

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Private Loan Consolidation

• Check interest rate formula deferment options.
• Most can include Federal loans - DONT DO IT.
• Most can combine spouses loans DONT DO IT.
• Only use these loans to consolidate private
  loans,
• institutional loans, residency loans, and other
• education debt.

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Credit Cards

• Free t-shirts arent free.
• Low rates wont stay low.
• Airline miles are paid for somehow.
• Cash saved is better than cash back.

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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

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But Worse Yet

• Fees have doubled.
• Income from over-limit charges,
• calendar manipulation and returned
• checks has far outpaced actual
• interest rates.

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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.

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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

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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

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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

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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 youve
  planned for, not the day to day
• Can be based upon good or bad debt

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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

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You Do The Math!

• Bobs 2.80 tall, double-shot, nonfat mocha from
  the coffee shop really jump starts his day. In
  four-and-a-half years when he cant 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

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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

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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

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All carefully tracked by

• Fair, Isaac Company
• (a.k.a. FICO)

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How is FICO Measured?

• FICO measures your financial responsibility
  based on your credit history calculated from 5
  categories

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A FICO Score

• Considers all 5 categories
• Looks at all information
• Considers positive and negative information
• May contain errors which are the individuals
  responsibility to know about and correct

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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

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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)

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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 dont need a credit repair company!

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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

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To Dispute Items

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

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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.

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FICO Scores and Todays Credit

• Mid-range scores require income
• verification higher scores may not.
• The theory If your score is high, you
• wont make foolish debt decisions, so
• youll usually get whatever you ask
• for.

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Hits Against Your FICO Score

• Late payments
• Uncollected debt
• High debt
• High potential debt
• Frequency of applications
• Frequency of inquiries

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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

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2 Ways to Opt-Out

• 1-888-567-8688
• www.optoutprescreen.com

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Debt Management Strategies

• Create a spreadsheet, showing the following
• type of credit balance mo pmt APR
• 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

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Debt Management Strategies

• Now sort by APR, highest to lowest
• type of credit balance mo pmt APR
• 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.

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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.

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Debt Management Strategies

• There are tax implications.
• Home mortgages, business loans,
• and student loans all have interest
• deductibility.
• There may be limits.

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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.

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Resources

• Financial Planners
• www.cfp.net
• www.fpanet.org
• www.napfa.org
• www.iaqfp.org

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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

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Resources

• Kevin McNamara
• Vice President, Graduate Health Professions
  Programs
• Student Loan Xpress, Inc.
• kevin.mcnamara_at_slxpress.com
• [phone]

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• Thank You!