Things you should know… NOW !! Jana C. Davidson AVMA GHLIT Director of Student Services Mississippi State University CVM January 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 Interest Compound 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, interest $106,800 *.068 * 1 =$ 7, interest $114,062 *.068 * 1 = etc… + $100,000 Total of loan = $193,068

$100,000 Borrowed? Simple interest : Total loan $106,800 Compound Interest : Total loan = $193,068 Difference of 10 year loan value: $86,268!!

Capitalized Interest Typical 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 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! America Assoc of University Women Student Aid on the Web Scholarship Wizard getmoney Federal Student Aid Gateway

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.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, ($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 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 ( 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 See the how to review / fix / report errors on: reporting.html