Things you should know…

NOW!!Jana C. DavidsonAVMA GHLIT Director of Student ServicesMississippi State University CVMJanuary 30, 2009

Average Student Debt: 2007

$106,000 (12.5%)

Average Student Debt: 2008

$120,000 (20%)

Average Student Debt: 2009

$144,000+ ?

Reality is merely an illusion, albeit a very persistent one….

Albert Einstein

What will it be in…

2012?

Let’s talk about debt…

• Student loans : – a.k.a.- money matters I wish not to

think about– Compound/Capitalized interest - can

it be good for me?

• Credit Cards – friend or foe?• Repair my credit?

Importance of Borrowing Wisely!

Why be concerned?

Earning a professional degree will increase your possible income, but it may mean a few years of minimal excess revenue.

It is essential you evaluate expenses, reduce as much cost as possible, and budget, budget, budget!!

BUDGET WORKSHEET

Student Loans

Subsidized –borrower not

responsible for interest while enrolled

Unsubsidized - borrower

accumulates interest while enrolled and may be required to pay each month

Student Loans

Subsidized – Federal Stafford Loan– Federal Perkins Loan– Federal Grad Plus Loan– Specialized (military,

etc)– Some private

Unsubsidized – Typically private

industry or bank loan

Student Loans – Interest types

• Simple Interest – typically short term

• Compound Interest – longer term that accumulates interest daily, monthly or annually

• Capitalized Interest – adds accumulated interest at the time of repayment

Simple Interest

Simple interest = principle * rate * time

For example: Borrowing $100,000 for a rate of 6.8%, for 10 years :

$100,000*.068*10 =$ 6,800 interest + $100,000

Total of loan = $106,800

Compound InterestCompound interest = principle * rate * time

for each year and then added to the next as principle..

Example: Borrowing $100,000 for a rate of 6.8%, for 10 years :

$100,000 * .068 * 1 =$ 6,800.00 interest$106,800 * .068 * 1 =$ 7,262.40 interest$114,062 * .068 * 1 = etc…

+ $100,000 Total of loan = $193,068

$100,000 Borrowed?Simple interest :

Total loan $106,800Compound Interest :

Total loan = $193,068

Difference of 10 year loan value:

$86,268!!

Capitalized InterestTypical for education loans • can involve capitalized interest, which

increases the size of the loan. • can involve a variety of loan discounts and

loan fees • the interest is added to the principle

when repayment begins..

All of this combines to make it harder to appreciate just how much the loan will cost to repay……………..how do you know?

WHAT???

“But signing my name seemed so easy…”

USE THE TOOLS!• Encourage borrowers to calculate the actual

total interest paid over the lifetime of the loan, using calculators like:

FinAid's loan calculator www.finaid.org

• Seeing the actual cost of the loan, the total interest paid, and the monthly loan payment will help you make more realistic decisions concerning the amounts you borrow

General Resources

FinAid!www.finaid.org

America Assoc of University Women

www.aauw.org

Student Aid on the Web Scholarship

Wizardwww.studentaid2.ed.g

ov/getmoney

Federal Student Aid Gateway

www.studentaid.ed.gov

Credit Card – friend or foe?

What type of interest do they carry?– Revolving– Compounding (daily, monthly, annually)

Friend:Allows access to open credit when needed

Foe:If only interest (minimum) payment made, principle payoff perpetuates to never be paid down!!

An Example: Discovering the Benefit of Increasing Your Payments

Let's say John and Jane both have $2,000 debt on their credit cards, which require a minimum payment of 3%, or $10, whichever is higher.

Both are strapped for cash, but Jane manages to pay an extra $10 on top of her minimum monthly payments.

John pays only the minimum.

Each month John and Jane are charged a 20% annual interest on their cards' outstanding balances. So, when John and Jane make payments, part of those payments go to paying interest and part go to the principal.

Here is the breakdown of the numbers for the first month of John's credit card debt:

•Principal: $2,000

•Interest: $33.33 ($2,000 x (1+20%/12))

•Payment: $60 (3% of remaining balance)

•Principal Repayment: $26.67

•Remaining Balance: $1,973.33 ($2,000 - $26.67) ---------------------------------------------------------------------------------

John pays $4,240 in total over 15 years to absolve the $2,000 in credit card debt.

The interest that John pays over the 15 years totals $2,240, higher than the original credit card debt.

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Because Jane paid an extra $10 a month, she pays a total $3,276 over seven years to absolve the $2,000 in credit card debt. Jane pays a total $1,276 in interest.

$4,240 (John) - $3,276 (Jane) = Jane saved $ 964!

The extra $10 a month saves Jane almost $1,000 and cuts her repayment period by more than 7

years!

Every little bit counts!

•Paying twice your minimum or more, can drastically cut down the time it takes

to pay off the balance

•Lower balance leads to lower interest charges

The Lesson….

However…

It's wise to pay more than the minimum

It's best simply not to carry a balance at all.

WHY? - If you could invest that 20% with compounding interest, you can make more money than any stock broker would promise!

(Average yield of S&P 500 = 6-7% growth annually)

The Lesson….

Keeping or Repairing Credit

• Don’t make late payments• Pay off collections• Correct errors

(www.annualcreditreport.com)• Add your side of the story• Pay down loan (easier said than

done)• Check that negative info older than 7

years is reported

Credit Reporting Agencies

• www.transunion.com

• www.equifax.com

• www.experian.com

See the how to review / fix / report errors on: http://www.fdic.gov/consumers/consumer/ccc/reporting.html