Posts Tagged ‘default’

7 Tips on Student Debt Refinancing

Saturday, January 17th, 2009

With so much of the focus recently on families that struggle to make ends meet, discussion on the personal finances of students has come up short. Yet the numbers are alarming: more students that ever before are leaning on risky variable-rate loans to finance their studies and the indebtedness of students has been on an upward trend long before the economic crisis of the last few months hit.

Reality

The truth for today’s students is that they carry significant debt burdens, during the college years and after graduation, when they start careers, delay the “real world”, — or take on even more debt – as graduate students. To cope with financial pressures, the refinancing of student debt is an option, especially if you need to lower your monthly payments in order to meet short or long-term basic expenses and career objectives. Here’s what needs to be known about it:

  • Private and federal loans need to be dealt with separately. The rates at which you refinance federal loans with be more attractive. Lender requirements vary and can depend on factors like “in-school” status, minimum outstanding debt balance, etc. Call your lender during normal business hours to find out the exact qualifications.
  • Lower monthly payments are the outcome of changing either the interest rate or the repayment period. Extending your repayment period is the lesser of the two options since your total outstanding debt balance does not go down. Be very careful since an extended period of repayment comes with the stringd attached of a higher interest rate and/or a longer repayment period.
  • Consolidation of all of your federal loans can be an excellent strategy, as the interest rates can be favorable. Consolidating federal loans should not negatively impact your credit score. Also, when consolidating federal loans, you have the added flexibility of frequently changing your repayment plan. For the purposes of refinancing, you will have an easier time evaluating different options when looking at just one lump sum loan instead of a basket of accounts all with different terms of repayment.
  • You typically gain a bonus interest rate reduction if you refinance while the loans are still in a grace period.
  • Before making a decision, be sure to consider the new interest rate offered in a refinancing scheme and weigh it against your fixed rate debt, as well as your percentage and totals of fixed rate vs. variable rate burdens.
  • Deferment and forebearance periods can be reset and thus start over after loan refinancing.
  • Loans to be refinanced cannot be in default – which means they have to be in a grace period, some type of deferment, or forebearance.

The ultimate goal of most ex-students is to decrease monthly payments and/or reduce the total outstanding debt burden. To these ends, don’t forget to look at options for student debt foregiveness, especially if you work in the public sector or are part of a nationwide program like the Peace Corps or military. Debt forgiveness can help alleviate some financial burden and ultimately shorten the time to clearing all of your educational debt.

Raj Patel writes for DebtGoal.com, a do-it-yourself system for getting out of debt and lowering your interest costs.  DebtGoal.com incorporates all of the techniques discussed in this post and can help users understand and get visibility to and manage their debt finances.

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5 Important Tips on Educational Debt Repayment

Tuesday, December 16th, 2008

It’s tough to get a comprehensive view of all of one’s outstanding educational debt. This is frustrating especially if you have a suite of different loan types and sources to fund your undergraduate and/or graduate years. But putting forth the effort to see the total picture will pay dividends in averted late fees, lost interest rate breaks, and other factors that can delay your arrival to “debt-free” status.

1. CREATE A PLAN AND GET ORGANIZED

Set aside a specific time during normal business hours to give your undivided attention to sorting out your outstanding debt sources, amounts, and repayment terms. To get clarity you may need to call the Federal Student Aid Information Center and/or private loan lenders, which are all more easily reached during the day.

2.  FEDERAL VERSUS PRIVATE LOANS

Know the differences between your private and federal student loans. Your educational debt may be comprised of only federal loans, only private loans, or a combination of the two.

FEDERAL LOANS

Most students in educational debt have federal loans, which are typically one of four types: Perkins, PLUS, Stafford Subsidized, and Stafford Unsubsidized. All of these can be consolidated into one federal loan at a fixed interest rate. There are several repayment term options, some of which depend on your total outstanding amount of educational debt. You can consolidate your federal loans from different lenders all into one lump loan. This is even true for federal loans that are issued by the same lenders as your private loans.

PRIVATE LOANS

Private loans are educational loans provided by nongovernmental lenders such as banks. There’s been a large jump in the percentage of students relying on private loans instead of federal loans to fund their studies, and this is problematic because they are harder to pay off. They cannot be consolidated with federal student loans. They typically have variable interest rates and in the current economic downturn, many lenders are not even allowing them to be consolidated with other private loans. For most, the best debt elimination strategy entails paying off private loans before the federal ones.

3. GRACE PERIOD

If you’ve finished school and cannot generate income to start payment on your educational debt, there are alternatives to incurring penalties and fees for missing payments. One is the grace period: a period between the completion of a degree or falling below half-time enrollment and the need to start normal repayment. The grace period varies by loan type, but falls in the range of several months. Grace periods vary by loan, so if you choose to go into a grace period for a particular loan, make sure to find out how long it will last. Choose this option instead of defaulting, because just one missed scheduled payment can permanently disqualify you for bonus interest rate reductions. 

4. LOAN DEFERMENT, LOAN FORGIVENESS

You make be able to qualify for either a deferment or loan forgiveness. Loan deferment involves delaying payment on outstanding educational debt. You can almost always defer repayment on outstanding educational loans if you are enrolled at least half-time in a school. The deferment programs are numerous and a solid list is on the Federal Student Aid website. For the unemployed, popular deferment programs include the Economic Hardship Deferment and the temporary forbearance option.

Partial loan forgiveness is available from a number of federal, state, and educational institutions. They range from Peace Corps volunteering to teaching to the military and public sector positions as trained doctors and lawyers. A good list of the options is available at FinAid’s website.

5. AVOID DEFAULT

Most critically, avoid defaulting on the debt. The Project on Student Debt contains other valuable tips, but the single most important factor in effectively eliminating debt is to get organized and make a plan, no matter how far or near deadlines loom.

Stay tuned for more quick tips on debt.

Raj Patel writes for DebtGoal.com, a do-it-yourself system for getting out of debt and lowering your interest costs.  DebtGoal.com incorporates all of the techniques discussed in this post and can help users understand and get visibility to and manage their debt finances.

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Your Issuer Can Impact Your Credit Score by Closing Your Unused Cards

Wednesday, December 3rd, 2008

With the credit crisis worsening, card issuers, worried about exposure to the risk of credit card defaults, have begun to ramp down lending by issuing fewer cards, lowering credit limits, and closing dormant accounts.  This begs the obvious question: should you as a card holder be concerned?  The answer (as always) is that it depends on your situation and your goals.

If you view your financial situation as secure and are concerned with paying off debt, then this may not be a concern as having your credit limit reduced or your card closed simply represents fewer opportunities to charge up balances.

However, if you are concerned with preserving financial flexibility in a tough economic environment and feel that you might have to rely on credit cards should you suffer an economic setback, then you may wish to keep all of your cards open.  Similarly, if you are concerned with your credit score in the short term, you may also be concerned about having your limits reduced or your cards closed.  Why?  Simply put, even if it’s your bank who lowers your limits or closes your accounts, this can reduce your score.  To understand why, you need to know about the following factors that determine your score:

  1. Payment history (35% of your score). This includes information on missed payments, late payments, bankruptcy filings, and any referrals to collection agencies.
  2. Outstanding debt (30% of your score). This represents a snapshot of one’s credit line utilization, the amount of outstanding debt versus one’s total credit limit. The higher the utilization, the lower the score will be.
  3. Credit history (15% of your score). Having a long credit history, including keeping cards open, improves the score.

Since a closed account or a lowered credit limit will increase your credit line utilization (you will have the same balance as before, but a lower total combined credit limit), this can reduce your score.  Similarly, closed accounts will reduce the length of your credit history if you have had these cards for a significant amount of time.

So how can you keep these dormant accounts from being closed?  The answer is fairly simple–just use your card.   If your issuer has lowered your credit line, you can often have it reinstated by simply calling your issuer to ask that it be restored.

However, all of this raises the obvious question of whether keeping access to credit is ultimately a good idea.  Again, the answer depends on your ability to manage your credit.  For many, open credit cards are a temptation to swipe. This If you have had trouble managing spending or do not have a process in place to track your debt, open cards can lead to mysteriously blooming credit balances.  In this light, make sure that if you do put a charge on your card, make sure that it’s minimal (e.g. a pack of gum per month) or make sure that your spending is part of your regular budget.

If you feel that you have the self control to manage your credit and a system in place that gives you visibility to your total debt balances each month, keeping your cards open can protect your credit score and give you added flexibility.   However, if you feel that your economic position is secure or that you can’t manage to keep spending under control, you are better off letting your issuer reduce your limits or close your accounts.


Scott Crawford is CEO of DebtGoal.com, a do-it-yourself system for lowering your interest costs and getting out of debt.  DebtGoal.com incorporates all of the techniques discussed in this post and can help users understand and get visibility to and manage their debt finances.

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