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Default Prevention & Debt Management

Techniques for Students & Borrowers

Financial Fitness Tools

• Personal finance tips and tools • Determine your financial fitness• Advice on using credit wisely• Tips on avoiding student loan default

Student Loan Calculator

• Estimate your student loan payments• What-if

– interest rate was higher or lower?– borrow more or less?

Budget Calculator

• Develop a budget• Control your finances by calculating income

and expenses

Debt/Salary Wizard

• Determining your borrowing limit based on expected future earnings

• Estimates future income you need to support debt

• Link to salary.com to explore starting salaries in your area

Loan Wizard

• Interactive decision tree/site map• You answer series of yes/no questions• Appropriate page opens on site

Locating Your Loans Page

• Locate your loan holder & guarantor– National Student Loan Data System (NSLDS)

• Requires PIN (links to PIN registration)• Student loans and Federal Pell Grant

– National Student Clearinghouse LoanLocator• No PIN required• Student loans only

Deferment Navigator

• Deferment: period of time during which your loan holder suspends your loan payments

• Application process• Deferment eligibility charts

– Includes easy-to-understand definition of deferment types

– Links to the deferment applications (PDFs)

• Understand roles of student loan players• Avoid consequences of default• Be in control of your finances• Balance your checkbook• Establish a budgetContinued . . .

10 Steps to Financial Fitness

10 Steps to Financial Fitness

• Pay yourself and invest• Use credit wisely• Know your credit report• Cleaning up credit• Surf the web for more info

Step 1:Learn about your role and the role of others

Roles

• Borrower• School• Lender/servicer/holder• Guaranty agency (guarantor)• U.S. Department of Education (USDE)

The Borrower (You!)

• Repay the loan• Keep in touch• Notify when things change• Ask questions• Ask for help

The School

• Information about the loans you borrowed for attendance

• The name of your lender or servicer • Guidance on the repayment process • Assistance in requesting a deferment

or forbearance

The Lender/Servicer

• Provide funds• Set up repayment terms• Answer questions• Collect the loan• Provide additional information/guidance

The Guarantor

• Insurance company• Assist in collection efforts• Debt counseling• Reinstate or rehabilitate defaulted loans

The USDE

• Oversees and administers student loan and other federal financial aid programs

• Establishes loan application, eligibility, disbursement, delivery, and repayment terms and conditions

• Reviews schools, lenders, and guaranty agencies to ensure that programs are being administered properly

The USDE

• Purchases defaulted loans from guaranty agencies and assumes the collection process

• Maintains the National Student Loan Data System (NSLDS), a database of student loan borrowers and current status

Step 2:Avoid the consequencesof default by finding the

appropriate solution

WHAT IS DEFAULT?

Default is a situation that is created when you fail to make timely payments

on your student loan

What is Default?

• Failure to honor your obligation will result in your loan being defaulted by your lender or servicer.

• Your loan will then be assigned to the guaranty agency that administers the Federal student loan program.

• Repayment of a defaulted student loan is due immediately.

How Will Default Impact You?

• The guaranty agency will continue to pursue collection activities on your loan.

• Collection costs will be added to the outstanding balance.

• Your credit rating may be impacted for seven years AFTER you pay the loan in full!

Impact of Default

• Student loans• Employment• Rental property• Mortgages• Credit cards• Automobile loans

How Will Default Impact You?

• Your ability to receive other federal student aid in the future is jeopardized.

• Your wages may be garnished.• Your federal and state income tax refunds

may be applied to the loan.• Additional legal action may be taken.• You will be responsible for legal fees.

Options

• Standard repayment– You pay equal monthly installments during the

repayment term. – The maximum repayment term is 10 years. – The payment amount may change annually due to

an interest rate change.– You repay principal from the start of repayment.

Options

• Income sensitive repayment – Sets monthly payment according to gross income.– Your monthly payments are adjusted every year;

as your income increases (or decreases), so do your payments.

– The repayment terms can be extended for up to five years if the repayment schedule results in the loan not being repaid within the maximum repayment period.

Options

• Graduated repayment– Your payments are scheduled to change over the

repayment term. – No single installment can be more than three

times greater than any other installment. In the beginning, you may see little or no reduction in principal.

– Your payments will be smaller in the beginning of your career; your payments increase as your income increases--when you can afford the higher monthly payment.

Options

• Extended repayment– Borrowers with a high indebtedness can repay

their loans over a period of up to 25 years.– Payments amounts can be fixed or graduated. – Schedule allows you to extend the repayment

term, resulting in a lower monthly payment.

Options

• Consolidation– If you have more than one student loan, you may

consolidate all your eligible loans into one loan. – Consolidation allows you to obtain a new

promissory note with an extended repayment term and lower monthly payments.

– The maximum repayment term is 30 years, and is determined by the principal balance owed.

Options

• Deferment– A deferment is a period of time during which your

loan holder suspends your regular loan payments.– Deferments are granted for specific situations and

have certain time limitations and conditions for eligibility.

Options

• Forbearance– Period of time during which your loan holder may

reduce or suspend your regular loan payments or lengthen your repayment period because you have a financial hardship but do not qualify for a deferment.

– You are responsible for paying the interest that accrues on your loan during the forbearance period.

– In most cases, forbearance is granted at the loan holder's discretion.

Options if You Default

• Pay the loan in full – By paying off the federal student loan, the loan will

no longer be in default. You are now eligible to receive additional federal student aid.

• Enter into a loan rehabilitation program– This option helps you bring your federal student

loan out of default and clears up any negative credit reporting regarding the federal student loan.

• Apply for federal loan consolidation– This option gives you the ability to bring your

federal student loans out of default and combine all of your federal loans into a single loan.

Step 3:Establish yourself

financially

Establish Yourself

• Set up a realistic budget and stick to it. • Open up checking and savings accounts. • After shopping around for the best terms and

conditions, apply for a major credit card. • Use gas and retail cards responsibly and sparingly. • Protect yourself from credit card fraud. Sign your card

right away. Don't leave your card laying around. Don't let friends use it.

Establish Yourself

• Make your monthly loan payments on time each month. Pay at least the minimum...more if you can. Never skip a payment.

• Promptly pay for monthly services, like your phone bill.

• Review your credit report once a year to make sure it is accurate.

• If things are getting out of control, contact your creditors, seek help from a reputable credit counseling service, or look into debt consolidation.

Step 4Balance your checkbook

Checkbook

• Review your statement. • Compare your statement with your daily account

register by checking off all items on your register that appear on your statement.

• Add to your register any deposits or additions including interest payments and ATM or electronic deposits listed on the statement that are not already entered.

• Subtract from your register any account deductions including fees and ATM or electronic deductions that are not already entered.

• Update your statement information.

Step 5Establish a budget

Values and Goals

• Make a list of your values.• Goals are mini-steps that help you maintain

your values. What are your goals? • When you take the time to establish short

and long term goals and commit them in writing, it is easier to accomplish those goals.

• Make separate lists of your goals for the next three months, the next year, and the next three years. Your list for each time period does not have to be the same.

Determine Your Net Income

• Figure your available income based on the dollars you actually take home

• Don’t include overtime pay (can’t be relied on as regular income)

Determine Your Fixed Expenses

• Housing• Utilities• Child care/support• Transportation

Determine Your Flexible Expenses

• Food• Clothing• Miscellaneous• Luxuries

– vacation – cell phone– entertainment– internet

Create a spending plan

• Design a spending plan that meets your "wants" as well as your "needs."

• Your total expenses should be less than or equal to your total income.

• If your income is not enough to cover your expenses, adjust your spending plan by deciding which expenses can be changed.

Pay Yourself First

• Invest for the future– Certificates of deposit– Stocks– U.S. Savings bonds– Money market accounts– IRA’s– 401 K

Be Careful with Credit Cards

• Sacrifice and regular monthly savings are the preferred way to make discretionary purchases. However, if you must have a credit card, you need to incorporate monthly payments into your budget.

• Large credit card balances, high interest rates, and frequent credit purchases are budget-busters!

• Try to make more than the minimum monthly payment.

Keep Track of Your Expenses

• Keep a record of all your expenses. • Save all receipts. • Shop around for personal finance computer

software programs with a budgeting feature.

Evaluate Your Spending Plan

• Is the plan still helping you meet your needs and achieve your goals? If not, adjust budget categories that are not satisfactory.

• If necessary, create a new plan.

Step 6:Pay yourself first!

Emergency Fund

• Establish an emergency fund– On paydays, make a check out to yourself and

deposit it in a savings account specifically set up for this purpose

– 10 to 15 percent of net income until enough to cover three to six months expenses

– Do NOT use this money unless it is an emergency

Savings

• After you have an emergency fund, monthly savings can be set aside for vacations, a new care and other important but expensive goals.

• If you lack the discipline to do this, find out if direct deposit is available through your employer. A specified dollar amount is deducted from your paycheck and credited to your savings account at a bank, credit union, or other savings institution.

• Once you get started on a regular savings program, you'll be surprised to see how quickly your account balance grows!

Step 7Use your credit

cards wisely!

Use Your Credit Card Wisely

• You are borrowing money when you use a credit card

• You may pay a finance charge even if you pay your balance in full each month

• Shop around for the credit card that suits your budget and repayment habits

• Protect yourself from credit card fraud. Sign your card right away. Don't leave your card laying around. Don't let friends use it. Keep your receipts in a safe place.

What to Look for When Selecting

• A low annual percentage interest rate• The interest calculation method• Low or no annual fees• All other charges: late fees, transaction fees,

over the limit fees• A grace period• Credit limit: start off small• Wide acceptance• Service and features

The bottom line: Don't spend more than you can afford to

pay on a monthly basis. Wise use of your credit cards will help you establish a solid

credit rating and avoid financial problems.

Step 8:Know your

credit report

Access to Your Report

• Creditors (banks, finance companies, credit card companies, etc)

• Landlords• Employers• Government licensing agencies

What Your Report Says

• How promptly you pay your bills• How many credit cards you own• What is the total amount of credit extended• How much you actually owe on all your

accounts

Items on Credit Report

• Personal identifying information• Credit account information• Public record information• Inquiries• Negative information stays on your credit

report for seven to 10 years, positive information indefinitely, and inquires six months to 12 years

Request Your Report

• Call, write, or request online• Review once a year• If you find an error, contact the credit

reporting company immediately

Step 9Clean up your credit

and avoid Bankruptcy

Tips to Clean up your Credit

• Bring past due accounts up-to-date and keep them that way!

• Pay off your accounts.• Wait until the bad ratings are removed from

your credit report before applying for more credit.

• Write a brief explanation for your poor credit rating to be included on future credit reports.

What to do if financial difficulty

• Contact your creditors• Find a debt counseling service• Loan consolidation• Bankruptcy as a last resort• There are no quick fixes to fix damaged

credit, it takes TIME, SACRIFICE, AND GOOD MONEY MANAGEMENT

BANKRUPTCY: Is it the answer?

• You are asking a federal court to declare that you are unable to pay your debts

• Your debts will be reduced or eliminated• Collection activities such as foreclosure,

repossession, phone calls and letters from creditors, wage garnishment or disconnection of utilities will stop

The Cons of Bankruptcy

• Remains on your credit for up to 10 years• Can affect your ability to obtain credit in the

future• May affect your ability to get a job• Cause feeling of guilt and embarrassment • STUDENT LOANS GENERALLY ARE NOT

DISCHARGED THROUGH BANKRUPTCY

Personal Bankruptcy

• Chapter 7: No steady income and few assets, debts are cancelled, assets are converted to cash and used to repay part of your debts

• Chapter 13: You have a steady income, are placed under a court approved repayment plan where they pay some or all of your debts in three to five years, and assets are not sold to pay creditors

Step 10Know where to lookfor more informationon financial fitness

More Information

• Financial aid office• Career guidance / job search• Creditors• Credit Counseling Services• Government agencies• Sites with information on financial fitness

Default Prevention & Debt Management

Techniques for Students & Borrowers