student loans

How Cosigning On a Student Loan Could Impact Your Finances

Holly Johnson — Sat, 07 Nov 2020 22:44:52 +0000

While college students can get their own federal student loans without a cosigner in most cases, there are some situations where a cosigner is required. Federal Direct Parent PLUS loans, for example, can actually be taken out on behalf of dependents to help pay for higher education. Students can also apply for private student loans to pay for college. These loans tend to have high credit requirements that make it difficult for young people to qualify on their own.

But should you really cosign on student loans for your child? And should you cosign on any loans they can't qualify for on their own? You can certainly consider it, but it helps to enter the situation with eyes wide open and understand all the pros and cons.

The main advantage of cosigning is the fact that you're helping your child (or dependent) pay for higher education when they may not be able to otherwise. However, it can also be a huge risk. Here's everything you need to know before you sign on the dotted line.

You're obligated to repay the debt no matter what

Whether you take on a Parent PLUS loan or you cosign with your child for a private student loan, the first thing you have to understand is that, no matter what, you're obligated to pay that debt back. If your child stops making payments, you'll be required to make them. If your child flat-out refuses to get a job and completely defaults on their responsibilities, you will need to repay that loan.

Cosigning on a student loan is similar to buying a house with someone or cosigning on a car loan. You're both jointly responsible for repayment regardless of what the other person does. That can be a huge problem if your child doesn't take their bills very seriously, but it may not be an issue if they treat their credit with care and stay on top of their bills.

Student loans are almost never discharged in bankruptcy

Another detail to understand is the fact that student loans are rarely ever discharged in bankruptcy. For the most part, they'll stick around forever unless the borrower dies or you can prove you have some inescapable hardship.

As a parent, you're probably trying to save for retirement and reach other financial goals, so it's important to understand that the student loans you cosign for will never go away until you pay them off — once and for all.

There's no going back

When you cosign on a student loan, you can't just change your mind and back out of the deal. Your child may be able to refinance their student loans in their name, but only if their credit score is good enough to qualify for student loan refinancing on their own. And if that was the case, they wouldn't have needed a cosigner in the first place.

Your finances may be perfectly fine right now, but you should think through how they may be in five or 10 years. If you're nearing retirement, you may not want to put yourself in a situation where you'll be stuck paying off a child's student loans. Plus, you never know how your health will be or the status of your career several years from now. Cosigning for student loans leaves you on the hook no matter what, and it's hard to change that after the fact.

Cosigning on a loan could affect your credit score

When you cosign on a student loan, you have to remember that you're jointly accepting responsibility for the debt and any consequences that arise out of late payments or delinquency. So you should only cosign if you know your child or dependent is dedicated to paying their bills on time and avoiding default at all costs.

If you're not paying attention, you could easily take a huge hit to your credit score without even knowing. Since payment history makes up 35 percent of your FICO score, it's easy to see how even one late payment could cause major damage. Just think of what could happen if the student loans you cosigned for were paid late month after month. If you're not also receiving a bill in the mail, you may not find out until the damage is already done.

The bottom line

There are situations where it can make sense to cosign on a student loan, but this decision should never be taken lightly. You may be helping your child earn their degree, but you're taking a significant risk. (See also: Should You Co-Sign a Loan?)

You may want to assess the career field they plan to enter into and figure out how much they might earn upon graduation before you cosign. Some fields have plenty of promise right now, while others offer almost none, and you should know either way before you make any type of financial commitment. Maybe your college student could even spend time improving their credit score so they can qualify for student loans on their own.

Cosigning on student loans should be a last resort for parents, not an easy fix for students who don't take time to consider all their options.

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This article is from Holly Johnson of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

4 Money Moves Every College Freshman Should Master

Emily Guy Birken — Mon, 07 Oct 2019 08:00:06 +0000

Making the transition from high school to college can come with a number of growing pains, not to mention minor laundry catastrophes. (Mom really was right about washing your whites separately.) But one of the biggest challenges new college students face is figuring out how to manage their money.

Learning how to make good financial decisions in your first year at college will not only set you up for success in school, but also for the rest of your life. Here are four important money moves that you should master during your first year of college. (See also: Build Your First Budget in 5 Easy Steps)

Make friends with your financial aid office

It's common for college students to forget about their financial aid office, except when it's time to resubmit their FAFSA each year, and when they need to come in for the exit interview before graduation. However, getting to know your financial aid office can save you a great deal of heartache in the future.

To start, a financial aid counselor can help you to understand exactly what to expect from your student loans. They can provide you with information about what your repayment will look like post-graduation so you can make more concrete decisions about taking on your loans.

In addition, your financial aid office can help you determine if there are ways to mitigate your student loan debt. It's also through your financial aid office that you'll learn about work-study jobs that can help you earn a little money without committing to a traditional part-time job.

Making time for an appointment with your financial office once a year will help you feel more prepared for the costs of college and your post-college financial life.

Get the most from your meal plan

One of the perks of going to either a larger university or a school located in a major urban area is the meal plan. Many of these universities allow students to use their meal plan to purchase meals from fast food restaurants or buy items a la carte using a point system.

The downside to this perk is the fact that your off-campus meal purchases can add up quickly. You may find yourself using up all of your meal plan long before the end of the semester, leaving you with the unenviable task of trying to feed yourself for the rest of the year on the cheap.

It's better to learn early on exactly how far your meal plan will go, and decide ahead of time how many meals a week you can afford to treat yourself to from the local restaurants.

Save money

Saving can feel like an impossible task in college, since many college students already feel like they're living on a shoestring. If every penny you bring in is going toward your college expenses, how are you supposed to save money?

But it's never too early to get a jump on paying yourself first. And college students can take advantage of the fact that small amounts can add up quickly. Start by opening a student savings account at your bank. These accounts will often require no minimum balances and have no fees, which will make it easy for you to practice your savings habit even when you're broke.

Then start automatically transferring a small amount to your savings with every paycheck. Even automatic transfers as low as $5 to $20 can help you build a cushion that will help you weather an unexpected car repair bill or a higher-than-usual textbook cost. Then you can also start to add in any excess money you come across, like the cash you get for selling back textbooks or the tips you get at your restaurant job.

Plan for fun

College life offers a great deal of exciting things to do outside of studying, and that's why financially-savvy college students plan ahead for their fun.

If you don't decide ahead of time what you're willing to spend your time and money on, it's much more difficult to refuse the last-minute invitation to go out. Without a plan in place, you'll be much more vulnerable to both peer pressure and the stress of studying.

Instead, determine how much money and time you can spend on the non-scholarly part of college and stick to it. If your budget and study schedule can afford four nights out per month, then you can make sure you spend those nights doing something that actually gets you the best bang for your buck and enjoy your time away from the books.

Smart financial habits for life

Your first year of college is a great time to learn how to be an adult. Not only are you getting your first taste of being on your own, but the financial stakes are lower than they will be when you graduate. So you can set up your smart habits without feeling overwhelmed and get used to the kinds of decisions that will set you up for a life of healthy financial choices. (See also: 5 Steps to Successful Budgeting)

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This article is from Emily Guy Birken of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

6 Signs You Should Refinance Your Student Loans With a Private Lender

Holly Johnson — Mon, 16 Sep 2019 08:00:06 +0000

Student loan debt has become an absolute disaster for many Americans who chose higher education with the goal of improving their lives. In fact, over 43 million adults owe on their student loans today, with a cumulative debt that is well over $1.5 trillion.

Since it's nearly impossible to discharge student loan debt in bankruptcy, unlucky borrowers with crushing debt levels have few options when it comes to finding a way out. They can pay off their loans the hard way, and there are federal repayment programs that can help ease the burden for those with federal student loans.

Students can also choose a different repayment timeline with federal loans or apply for certain types of employment that can help them qualify for forgiveness programs like Public Service Loan Forgiveness (PSLF).

Some borrowers can also benefit from refinancing their student loans with a private lender, but there are some pitfalls with this strategy, too. You'll lose out on some federal protections when you refinance federal loans with a private lender, and there are steeper requirements to get approved.

If you are considering refinancing your loans with a private lender to get out of debt faster or make repayment easier, here are some signs you may be on the right track.

1. You have an excellent credit score

While anyone can qualify for most federal student loans regardless of their credit score, most private student loans have stricter requirements. In fact, you typically need very good or excellent credit to qualify for the best private student loans, which typically means you'll need to have a FICO score of 740 or higher.

Not all private lenders list a specific credit score requirement, however. SoFi, for example, requires you to meet citizenship requirements, have a job, and have graduated from school with your degree. In terms of their credit requirements, they simply state that "loan eligibility depends on a number of additional factors, including your financial history, credit score, career experience, and monthly income vs. expenses."

In most cases, however, you'll need to have good credit to refinance with a private loan, or have access to a cosigner willing to be on the hook for repayment along with you. (See also: 3 Private Lenders That Can Really Save You Money on Your Student Loans)

2. You have no plans to take advantage of federal student loan benefits

One major downside that comes with refinancing federal student loans with a private lender is that you'll be effectively "giving up" federal loan benefits like deferment and forbearance. You'll also give up your shot at qualifying for income-driven repayment plans, which can help you secure a lower monthly payment for 20-25 years before leading to ultimate student loan forgiveness.

For that reason, refinancing with a private lender is usually best for borrowers who have no intention of using these benefits or needing to extend repayment by a decade or more to afford their loans. (See also: Should You Refinance Your Student Loan?)

3. You want to consolidate your loans

If you have multiple student loans, you may want to consider consolidating them into a single new loan with one monthly payment. You can accomplish this goal with a federal Direct Consolidation Loan, but you can also consolidate multiple student loans — including both federal and private loans — with a private lender.

The benefit of consolidating loans with a private lender is the fact that you may be able to qualify for a lower interest rate. (See also: What’s the Difference Between Student Loan Refinancing and Consolidation?)

4. Your interest rate is high

Speaking of interest rates, this is one area where private student lenders can really shine — particularly if you have good credit. Federal student loan rates tend to be on the low side, but private student lenders still offer the better deal. (See also: This Is How Student Loan Interest Works)

5. You need a lower monthly payment

Refinancing your student loans can help you accomplish several different goals. You can save money on interest by securing a lower interest rate, for example, but you may also be able to pay down your debt faster.

In some cases, it can also make sense to score a lower rate but extend your repayment timeline. The lower interest rate and lengthier repayment period can leave you with a lower monthly payment amount, which can help immensely if you are working toward earning a higher income or you need to save money to fund a goal like starting your own business. (See also: How to Manage Student Loans On a Low Income)

6. You have a stable income

You do need a stable income to qualify for private student loan refinancing, which is vastly different from federal student loans that don't require an income at all. Private student loan refinancing is only available to people who have graduated with their degree in most cases, have a job (or a job lined up), and have provable income they can use to repay their loans.

If you don't have a big income, you may want to wait until you're in a better, higher-paying job before you apply for private student loan refinancing. (See also: Which Student Loan Repayment Plan Saves You the Most?)

The bottom line

Private student loan refinancing isn't for everyone, but it can be a boon for your finances if you're the right type of candidate. If you want to pay off your student loans faster, have good credit and a high income, and you have a solid credit history, you may want to explore private lenders to see how they stack up.

Just make sure to consider all the pitfalls, including the fact you'll no longer qualify for federal student loan benefits. This trade-off can be well worth it, but only if you have a plan.

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This article is from Holly Johnson of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How to Talk to Your Teen About Student Loans

Ashley Eneriz — Mon, 28 Jan 2019 09:01:08 +0000

With college almost close enough to touch, your high schooler has probably been talking your ear off about which universities they want to visit and which majors they're considering. While this is a very exciting time for your teen, you also don't want them to go into massive debt chasing their dreams.

Student loan debt is running rampant today. Your teen might see student loans as an easy way to go to school without worrying about financial costs, but in reality, a heavy debt load can get in the way of their post-graduation dreams. Here's how to help your teen see the big financial picture.

Address scary student loan stats

According to a 2016 study by Citizens Bank, millennial graduates are spending almost one-fifth of their income (18 percent) on loan repayment. That means that graduates are well into their 40s before they even see the light at the end of the student loan debt tunnel.

Not only are graduates paying more money towards loans, but they're also having to delay life milestones like weddings and buying a house. Fifty-four percent of millennials have said they have limited their travel, and 40 percent have limited the amount they can spend on rent or mortgage payments.

Sit down with your teen and ask them about their future. Do they see themselves spending 20 years paying off debt, or would they rather spend that money on a new car, a wedding, or their first house? Also ask them if they want to be forced into taking a higher paying job that they hate just so they can pay back their student loans. When you saddle yourself with debt before graduation, you limit how much freedom you have when you enter the job field.

It is also good to remind your kid that debt does not go away. Even if they have no money to pay for it, they cannot declare bankruptcy and expect their student loan to miraculously disappear. (See also: How to Manage Student Loans On a Low Income)

Start with smart financial decisions

Once your teen understands how heavy student loan debt can be, they'll know they need to make other money moves in order to pay for college. They can apply for scholarships, and applying for FAFSA can make them eligible for financial aid and also school-sponsored scholarships. Encourage them to apply for scholarships regularly — as if it were their part-time job — because even a $1,000 scholarship will be highly beneficial.

Encourage them to also raise money through part-time jobs and saving birthday money. Every little bit helps, especially when they're repaying student loan debt while still in college. Attending community college first can also reduce the student loan burden by half.

If they don't need to take on maximum debt, then why should they? Along with going to community college first, they can test out of classes that they are already experts in, such as freshman English and math courses. This will save time and money.

There are also many jobs that offer tuition assistance that are available to college students. These jobs may only offer $500 reimbursement per semester, but it's still something.

Stick with federal loans

There's a huge difference between federal loans and private loans. Federal student loans have better repayment options, lower interest rates, and they're more forgiving when it comes to job loss and disability.

Even if your teen makes minimum wage after graduation, they can apply for income-driven repayment programs through federal loans and still be able to make payments. Federal loans can also come with forgiveness programs that forgive remaining debt after so many years of on-time payments, or that forgive debt for working in public service. (See also: 5 Sobering Facts About Student Loan Debt)

Clearly state how you'll be helping

You've been providing for your child since they were born, and they might expect you to provide for them while they're in college as well. Make sure they know exactly what you'll be paying for. If you're not going to be paying for their loans, or car, or insurance, let them know so they know how to budget correctly.

If you do want to help your child with student loan debt, consider paying off some of the payments while they're still in college. Even paying $50 a month towards their loan while they're in school will help significantly. (See also: 4 Things You Should Make Your Adult Child Pay For)

Don't use the whole loan amount

Your teen might be granted $40,000 worth of student loans for the year, but that doesn't mean they need to use every last dollar. If possible, they should live at home and live frugally. They don't need to buy a new laptop or make rent payments with this money. Remind them that every dollar borrowed is a dollar plus interest they have to repay after graduation.

Make payments in college

Even though your teen will have a grace period of up to six months after graduation to start paying back student loans, that doesn't mean you can't start making payments while they’re still in school. This is especially helpful if they have unsubsidized federal loans, since this type of loan accrues interest while the student is in school, during the grace period, and during any forbearance.

Remind them that any amount of repayment is too little while they're in school. Set regular minimum payments to occur each week, even if it's just $10 to $20. This might mean that your teen needs to eat out less or skip a movie, but it will be worth it once they graduate. (See also: 10 Tips from a Financially-Savvy Teen)

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This article is from Ashley Eneriz of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Should You Refinance Student Loans With a Balance Transfer Card?

Holly Johnson — Mon, 03 Dec 2018 09:00:14 +0000

As of early 2018, the average student loan debt for 2017 graduates was $39,400. That's a 6% bump from the year before, notes Student Loan Hero. Collective student loan debt nationwide is also up to $1.48 trillion across 44 million borrowers. With stats like these, it's no wonder students are struggling to repay their loans and defaulting at record pace. But what's a student to do?

You can stick with the program and make regular monthly payments on your current loans until they're gone, for starters. You can also sign up for an income-driven repayment plan that lets you pay a percentage of your "discretionary income" for 20-25 years before forgiving your loans. Or, you can sign up for an employment-related forgiveness program such as Teacher Loan Forgiveness and Public Service Loan Forgiveness (PSLF).

Refinance options for student loans

Some students even refinance their student loans — usually to secure a lower interest rate or lower monthly payment. There are notable disadvantages for doing so, however. For starters, you lose federal protections such as access to income-driven programs, and forbearance when you refinance federal student loans with a private lender.

Interest rates on federal loans tend to be fixed while private loans tend to be variable, and this could pose a problem in a rising interest rate environment. Finally, private student loans are never subsidized whereas certain federal loans allow the federal government to pay the interest on your loans while you are in school on at least a half-time basis.

If you want to stick with federal loans, you can refinance your federal student loans into a Direct Consolidation Loan. However, doing so won't save you any money. That's because this new loan will use the weighted average of your previous student loans as its new interest rate. (See also: How to Manage Student Loans On a Low Income)

Refinancing student loans with a balance transfer card

With few reasonable options to consider, some students may be lured into consolidating student loans with a balance transfer card. The reason is simple: Balance transfer cards come with 0% APR for anywhere from nine to 21 months, which means indebted borrowers could pay down their loans with no interest during that time.

According to Michael Lux, an attorney who has spent five years advocating for student loan borrowers at The Student Loan Sherpa, this is rarely a good idea, even though he could see it working out in "very limited circumstances."

Things to consider before consolidating student loans with a balance transfer card:

Your student loan lender may not allow you to make payments or transfer a balance to a credit card. However, several banks let you transfer a balance from student lenders. You'll have to check.
You lose federal protections. Like with refinancing federal student loans with a private lender, you lose federal protections like deferment, forbearance, and access to income-driven repayment when you refinance federal loans with a balance transfer card.
You may pay higher interest rates over the long-term. While balance transfer cards come with 0% introductory offers, these offers don't last forever. The average interest rate on all credit cards is over 17% right now, which is a lot higher than the ongoing fixed rate on federal loans.
There are fees involved. Some balance transfer cards charge a fee equal to 3% - 5% of your balance upfront. This works out to $300 to $500 for every $10,000 you transfer.
It's risky. Student Loan expert Ben Luthi of Student Loan Hero says pursuing a balance transfer offer to save money on interest could leave you worse off if you don't pay down your balance before the offer ends. "The chance of using a 0% APR promotion is enticing, but if something goes wrong, you could end up in a bad situation financially," he said. Also, missing a payment during your card's 0% introductory period could mean losing your 0% APR promotion.

When it makes sense to use a balance transfer card

While there's risk involved in transferring a student loan to a balance transfer card, it can make sense in very select circumstances. For example, it could make sense if you're down to your final $10,000 in student loan debt and fully committed to paying $555 per month to have it paid off within the 18 months you get 0% APR.

Another time transferring student loans to a balance transfer card can make sense is if someone is expecting a windfall and wants to save on interest in the meantime. "This move could work for someone who will be getting a large bonus at work in nine months," said Lux.

Another example is if a borrower has a CD or bond that will mature at a set date and a balance transfer card can be used to pay off the student loan while the student awaits their money.

Still, it's not so clear if you're paying a balance transfer fee, says Luthi. If your balance is small, say just a few thousand dollars, savings resulting from the 0% APR offer may not even outweigh the balance transfer fee. For this reason, you should run the math to see if transferring a balance will actually save you money before you pull the trigger.

Should you do it?

While there are certain situations where a balance transfer card can be used to save money or pay down student loans faster, this is usually a losing proposition. The fact remains that these cards offer 0% APR for a limited time, and after that, you'll pay the regular interest rate. Since federal student loans offer low fixed rates, paying student loans at a card's regular interest rate can cost you a lot more over time — even after accounting for money saved during the initial 0% period.

If you do decide to refinance your student loans, you're better off going with a private lender who can offer competitive interest rates and loan terms. (See also: How Joe Mihalic Paid Off $90K of Student Loans in 7 Months)

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This article is from Holly Johnson of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How Student Loan Debt Can Derail Your Future

Carrie Kirby — Wed, 25 Jul 2018 08:00:10 +0000

Mike Meru thought he was making a good investment when he borrowed $600,000 to train as an orthodontist. But at age 37, he now owes $1 million — and despite making regular payments, he owes more every single month. In 25 years, his debt will total $2 million.

While seven-figure student debts are still not something you see every day (in a story about Meru, The Wall Street Journal reported that about 100 people are in this boat nationwide), hefty loans are more and more common. Five percent of student loan borrowers now owe more than $100,000, and 170,000 students nationwide owe more than a quarter million in federal loans alone, according to The Brookings Institution.

Student loan consultant Travis Hornsby, whose average client owes $280,000, says he has worked with several grads with debts around the million-dollar mark — almost exclusively specialist doctors and dentists.

"They make a lot of money, but not enough to cover that level of debt service," Hornsby wrote in an article for Business Insider.

If you are contemplating borrowing heavily for college, keep in mind these cautionary tales of how student loan debt can totally derail your life. (See also: 6 Questions to Ask Before Taking Out Student Loans)

1. You may not have the freedom to follow your passion

After getting her bachelor's degree and spending a year teaching English abroad, Amber Williamson was applying to graduate schools. At 24, she hadn't yet decided on a career, but she knew her $60,000 in student loan debt limited her choices to only fields that could offer adequate income to make the payments.

"I'm doing everything right, but still being penalized for something I've been told to do," she told MarketWatch.

Williamson is not alone. American Student Assistance found that 53 percent of survey respondents named student loan debt as a top factor in their career choices. Borrowers are often left with little choice but to pursue careers they have no real interest in, purely in search of a paycheck that can help offset their student loan payments. (See also: 15 Ways to Pay Back Student Loans Faster)

2. You may have to move back in with your parents

More than one in three millennials live with Mom and Dad, a phenomenon that's increased markedly in recent years. The Federal Reserve found that 30 percent of that increase was due to the changing debt loads of young adults, including student loan debt. (See also: 6 Money Moves to Make When You Move Back Home With Your Parents)

3. If you hate your career, you might not be able to escape

Natalie Bacon and Liz Stapleton don't know each other, but they have one big thing in common: They borrowed buckets of money to get law degrees, only to find out that they hated practicing law. After graduation, Bacon was shocked to realize that interest accruing while she was in school had already ballooned her debt to $200,000.

"I was really irritated and frustrated with the amount of debt I had. I felt like someone should've told me what it really meant, or I should've had a class on it, or something," she wrote on her blog.

Stapleton found herself in a similar boat. According to her blog, Less Debt More Wine, Stapleton currently owes $258,000.

Both women took the bold step of quitting their law careers, managing, perhaps ironically, to build careers instead in financial advising and writing about managing their debt. But many other lawyers and doctors remain trapped by their debt in careers that they hate.

4. You will end up paying much more than what you borrowed

During her undergraduate and graduate studies, Becca of Surviving Student Loans knew she was going to have at least $90,000 in debt — but she didn't think through how the constantly accruing interest would affect that total. For the first three years after graduate school, she made her minimum payments every month. Now, she owes $124,000; about a quarter of that is interest.

"In my head, the debt I took out was going to be my total debt. Boy was I wrong," she wrote on her blog.

Looking back, Becca doesn't regret getting her degrees, but she does regret that she lost paid credits several times when she transferred schools. She also wishes she'd put some of the money she'd earned working part-time in school toward her debt, even though it wasn't required. She's currently budgeting aggressively and trying to earn money on the side so she can put as much of her $50,000 salary toward debt repayment as possible. (See also: This Is How Student Loan Interest Works)

5. You might not be able to buy a home

Federal Reserve researchers noticed that as homeownership in the United States declined during the financial crisis, young people were especially impacted.

"... Increases in student loan debt might be a key factor pushing homeownership rates down in recent years through effects on borrowers' ability to qualify for a mortgage and their desire to take on more debt. Corroborating this claim, recent surveys have found that many young individuals view student loan debt as a major impediment to home buying," the researchers wrote.

They crunched the numbers and found that there is something to this: Every 10 percent increase in student loan debt is correlated with a 1 to 2 percentage point drop in homeownership in the first five years after school.

A joint study by American Student Assistance and the National Association of Realtors found that 83 percent of millennials who don't own homes blame student debt for their inability to buy. These millennials expected their debt to delay their first home purchase by an average of seven years.

6. It could prevent you from getting married or starting a family

One in five former students puts off marriage due to student loan debt, and nearly one in three postpones starting a family for that reason, American Student Assistance reports.

Some who go ahead and marry a person with a huge student debt load later admit regretting it. One respondent to a BuzzFeed query complained that his wife's student loan debt was ruining their lives. (See also: How a New Marriage Can Survive Student Loan Debt)

7. It might delay your retirement

Another American Student Assistance survey found that 62 percent of respondents put off saving for retirement due to student loan debt. Worse, the same report says that the number of people over age 65 who have student debt — some for their children's education, but mostly for their own — increased by a whopping 977 percent between 2005 and 2015.

One scary thing about owing student loan debt in retirement years: It can lead you to lose your Social Security check. According to the ASA report, more than 173,000 Social Security recipients had their Social Security payments garnished in 2015 for this reason. (See also: How to Keep Student Loans From Wrecking Your Retirement)

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This article is from Carrie Kirby of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

The 5 Worst Money Mistakes New Grads Make

Alicia Rose Hudnett — Wed, 27 Jun 2018 08:00:11 +0000

It's no secret that personal finance education is lacking at every level throughout our school system. And this is nowhere more evident than when you graduate from college and are thrown into a new reality you've spent little to no time preparing for. In fact, you've probably spent years taking classes on just about everything but how to manage your money.

Now, you're tasked with making decisions that can affect the rest of your life. How do you know what to avoid? Here are a few of the most common financial mistakes new grads make, and how they can steer clear of them.

1. Ignoring your personal finances altogether

Your life is dictated by your financial situation. The sooner you realize that, the better. The first step is recognizing that you need to take an active role in learning about money management. You need to begin building a financial plan. Understanding financial concepts and forming strong financial habits now will have lifelong benefits.

Your financial plan is flexible and can change often, especially early on in your career and life. But now is the time to begin thinking about short-term, medium-term, and long-term financial obligations and goals. Take time to learn about important financial building blocks, like starting an emergency fund, beginning retirement contributions, and paying back student loans.

Make personal finance part of your everyday life now, and do one thing every month to increase your financial knowledge. (See also: The Financial Basics Every New Grad Should Know)

2. Overspending on your current lifestyle

Most likely, you'll be earning more money at your first post-college job than you ever have before. And it's OK to adjust your lifestyle from college student status to adult. But be realistic about the lifestyle you can really afford.

When you get your first paycheck, look it over to understand exactly what taxes you're paying and how much you have deducted for benefits like health insurance and retirement savings. Next, build a budget to cover your essential monthly expenses, savings, and debt repayment. Consider how much you have left in your budget to allocate toward your lifestyle expenses. If you'd like more money in this area, either cut back on your living expenses, perhaps by looking for a cheaper place to live, or find a way to bring in more income.

As you'll soon learn, every year you get older, your financial priorities will increase — often significantly. Time is one component of your financial plan that you can't get more of, so take advantage of these early years to focus on saving as much as you can. (See also: 4 Smart Things You Should Do With Your First Real Paycheck)

3. Delaying saving for your retirement

Besides paying for your current lifestyle, the number-one priority of your working years is saving for a time when you'll no longer be working. You are never too young to start saving for retirement — but at some point, you may be too old. Oddly, we're never taught in school about what retirement means or about how to save for it.

The biggest determinant of retirement security is your personal savings. Whether you contribute to a workplace retirement plan like a 401(k), your own IRA, or both, make a contribution count for every single year beginning with your first job. (See also: 5 Retirement Accounts You Don't Need a Ton of Money to Open)

When you first start out, it's OK to set small savings goals and work on them throughout your career. For example, use every increase in salary as a time to increase your saving rate by at least half of your salary raise. And every time you change jobs, never decrease your saving rate — either stay at the same rate or take the opportunity to increase it. It's not unrealistic to think that you may spend 30 years or more in retirement — and it can take you just as long to save up for that goal. (See also: 5 Biggest Ways Millennials Risk Their Retirements)

4. Neglecting your student loans

If you're a recent college graduate, there's a good chance your loans make up part of the $1.5 trillion student loan debt owed in this country. While you may be tempted to ignore your loans until repayment is set to begin, or because you're overwhelmed by how much you owe, you need to take an active role in understanding everything you can about your loans.

First, determine what type of loans you have: federal or private. Next, if your payments haven't already begun, find out when you will need to start repaying. You'll also want to know the total amount owed and the interest rate on each of your loans. Then, begin researching different payment and consolidation options. (See also: What's the Difference Between Student Loan Refinancing and Consolidation?)

Finally, build your loan payment into your budget early on and take strides to pay it off as quickly as you can, perhaps even using bonuses and tax refunds to pay down your principal balance. Gone are the days of thinking of your student loans as "good debt" and letting them hang over your head for your entire career. Many people are now finding out what a burden they are in retirement. (See also: How to Keep Student Loans From Wrecking Your Retirement)

5. Taking on credit card debt

A good credit history is an important part of your overall financial health. And credit card use is a viable way to establish that history and demonstrate your credit worthiness to lenders. But responsible credit use is charging only what you know you can pay off at the end of every month — not buying items that you can't afford in the first place and financing them at very high interest rates over several years. (See also: The Millennials Guide to Avoiding Credit Card Debt)

Entering the world of adult finances is tricky. Between learning about your budget and cash flow, building your emergency savings and retirement accounts, and figuring out how to manage your loans and debt, consider the above advice Personal Finance 101 — a mandatory course for everyone.

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This article is from Alicia Rose Hudnett of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How New Grads Can Protect Their Credit

Dan Rafter — Wed, 30 May 2018 08:00:24 +0000

The years right after graduating from college can be stressful ones. It's time to find a job. You might be looking for a new place to live. You're starting the transition from college student to adult. It can be easy to get overwhelmed, and it can be just as easy to make serious financial mistakes that damage your credit.

What things can you do to protect your credit after graduating from college? Here are some of the big ones.

Never pay a bill late

It can be easy to miss a bill payment, especially when you're not used to having a lot of bills to pay. Mail can pile up while you're adjusting to a whole new way of life. Prioritize getting organized with your bills. Sign up for autopay or set up reminder alerts. Put your bills in a place where you can see them so they don't get buried under other junk or unread mail. Not only will late payments eat into your new budget with fees, but your credit will take a big hit. (See also: 5 Simple Ways to Never Make a Late Credit Card Payment)

Not all late payments are reported to the credit bureaus, and some late payments don't impact your credit score. The big ones, however — credit cards, mortgage, auto loans, personal loans, and student loans — are reported. A single late payment of one of these major bills could cause your score to tumble by 100 points or more. That late payment will also stay in your credit reports for up to seven years. (See also: How Late Payments Affect Your Credit)

You should know the official definition of a late payment. A payment is only reported as late to the credit bureaus if you are 30 days or more past the due date. So even if your payment is two weeks late, you can avoid a hit to your credit by immediately making a payment. (See also: Pay These 6 Bills First When Money Is Tight)

Don't ignore the bills that don't get reported

There's a big caveat to the payments that don't get reported to the credit bureaus. If you're late with a doctor's bill, utility payment, rent payment, or cellphone bill, the three credit bureaus won't know about it unless those payments are sent to a collections agency in effort to get you to pay what you owe. When that happens, your credit score can again plummet by 100 points or more.

It isn't just collections you should be worried about if you fail to make rent payments, either. If your landlord evicts you, that won't show up on your credit reports. But if your landlord sues you for breaking your lease, and that ends in a civil judgment against you, your credit will take another hit. Civil judgments are reported to the credit bureaus and stay on your reports for up to seven years. (See also: 10 Surprising Ways to Negatively Affect Your Credit Score)

Those monthly payments can be overwhelming, but it's important that you pay them, and do so on time. You might have to cut down on your discretionary spending, move back home, or take other steps to make sure that you are keeping current with your bills.

Seek help for student loans if you can't afford the payment

The average 2017 graduate left college with $39,400 in student loan debt, according to Student Loan Hero. That's a staggering amount of debt for anyone, let alone a young adult who is just getting their footing in the world. When your student loan payment comes due, it's important that it gets paid. Otherwise, you risk defaulting on that loan, which will issue a blow to your credit. (See also: What Really Happens When You Don't Pay Your Student Loans)

If you are struggling to come up with your monthly student loan payment, be proactive in finding ways to alleviate the financial burden. You may have the option to consolidate multiple loans, defer the payments, or speak directly with your lender about how to make your repayment plan work better for you. You will likely have more options with federal student loans than private ones, but you should still do your research. (See also: 8 Surprising Ways to Pay Off Your Student Loans)

Don't run up your credit card debt

It can be easy to rely heavily on credit cards when money is tight. When you're young and your paychecks are small, this can be an even bigger temptation. This, though, can also wreck your credit.

Racking up too much credit card debt will lower your credit score and leave you with a financial burden that's difficult to overcome. The high interest will pile on until you're struggling to keep up with payments. Lenders view consumers with too much credit card debt as a high risk for missed payments, and often deny them other forms of financing. It's a dangerous cycle that many young adults can easily fall into.

Resist the temptation to use your credit card to purchase restaurant meals, movie tickets, electronics, or concert tickets. If you can't afford these goodies in cash, you can't afford them with credit. (See also: The Millennials Guide to Avoiding Credit Card Debt)

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How a New Marriage Can Survive Student Loan Debt

Matt Bell — Tue, 29 May 2018 08:30:47 +0000

It's a very common scenario. Girl meets boy, they fall in love, and decide to get married. They're excited about starting their new life together, but they're also weighed down by student loan debt — a lot of student loan debt. As they drag that heavy ball and chain into the future, what steps can they take to tilt the odds of marital and financial success in their favor? If that's your situation, read on.

1. Understand the details

Good communication is essential to the success of any relationship, and while money can be a tough topic, you'll get your marriage off to a great start by getting accustomed to talking about your finances. You might as well dive right in and start with your debt.

No matter which one of you is bringing debt into the marriage, both of you should know exactly how much debt. You should also be clear about the interest rate, the monthly payment amount, and how long those payments will continue.

That will help you to both manage your expectations about when you might be able to buy a house, how much you can spend on vacations, and all the rest. (See also: The 7 Worst Money Mistakes Married People Make)

2. Be one in debt

Marriage is about oneness, unity, and teamwork. You're not becoming roommates; you're becoming husband and wife. So, if one of you was wealthy and the other was not before getting married, after you get married, both of you will be wealthy. By the same token, before marriage, if one of you had debt and the other did not, once you're married, both of you will have debt.

When my friends Scott and Karen Coy got married, Karen had more than $50,000 of nonmortgage debt. Scott jokingly referred to it as "a reverse dowry." After getting married, Karen often expressed how bad she felt about "my debt." But from day one, Scott would correct her, saying it was "our debt."

It took them six-and-a-half years to become debt-free. All that time, they rented even though they would have preferred to buy a house. It took great patience and perseverance.

Karen says she will always remember the day they made their last payment. It was as if a huge weight had been lifted from their shoulders. And looking back, she says the way they navigated the journey — together — created an inseparable bond in their marriage.

3. Consider being two in taxes

If you were using an income-based repayment plan before getting married, how you file your taxes after you get married will matter greatly. If you file jointly, your payment amount may go up. That's because income-based repayment plans require you to "recertify" each year by submitting your income tax returns to your loan servicer, who will now make decisions based on your joint income. So, you may want to consider filing separately, in which case most student loan plans will use just the borrower's income as the basis for recertification.

However, filing separately may make you ineligible for certain tax credits, so proceed with caution. It would be best to consult with an accountant or run some what-if scenarios with tax-planning software.

4. Figure out the implications for your budget

Before deciding where you'll live after you get married, create a post-marriage cash flow plan. What works best is to fill in your financial commitments first. How much of your joint income will you save and invest? How much will you give to charity? And how much will you need to devote to debt repayment?

Then you can see how much you can afford for rent or a mortgage. I usually recommend committing no more than 25 percent of monthly gross income to the combination of your mortgage, property taxes, and homeowners' insurance. If you rent, devote no more than 25 percent to your rent and renters' insurance.

A student loan payment, however, changes the math. I recommend that the combination of your housing and your student loans together make up no more than 25 percent of your monthly gross income. So, you should figure out what percentage of your monthly gross income your loan payment amounts to and subtract that from 25 percent. The answer is the percentage of gross income you could devote to housing while you have student loans.

If your student loans amount to an especially large percentage of your gross income, that may end up being overly restrictive. So, you'll have to adjust other spending categories downward, such as entertainment, clothing, or vacations. (See also: 3 Simple Ways to Split Bills With Your Spouse)

5. Prioritize early payoff

The early years of your marriage present a great opportunity to speed up the process of getting out of debt. If you want to have kids one day, your pre-kid days will be the most financially flexible time you may ever experience. Make the most of it by making extra payments on your loans.

Debt can be a roadblock in the pursuit of financial goals such as buying a home, and it can be a hindrance to a happy marriage. So, consider building your lifestyle on just one income and putting most of the other paycheck toward your student loans. By living an especially frugal life in the early years of your marriage, you'll be setting yourselves up for long-term success. (See also: 7 Ways Paying Off Student Loans Early Can Boost Your Finances)

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This article is from Matt Bell of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

9 Smart Financial Gifts to Give New Grads Besides Cash

Mikey Rox — Tue, 22 May 2018 08:30:42 +0000

Do new grads want cash? Yes — all day long. But you and I both know what new grads will do with it. Instead of setting them up for failure by handing over a hot wad of Benjis that'll burn holes in their pockets, steer them toward success with these financially valuable, money-inspired gifts.

1. Skill-based classes

I knew the basics of cooking and cleaning when I graduated college (I could scrub a toilet and do my own laundry, at least), but there were plenty of skills I lacked — like home improvements, vehicle maintenance, and, yes, money management. And while I had people around to help with many of those inconveniences, I was still kind of a disaster for the first few — OK, six — years on my own.

If someone had gifted me a help-yourself class or two, however, not only would I have been better prepared to enter the "real world" more confidently, but I could have capitalized on those skills to earn side income (because that's the real thing I'm great at). That would have come in handy when I was eating pizza bagels for every meal.

2. Starter emergency fund

New grads won't have the kind of emergencies that older adults do, but even the smallest crisis can turn into a major financial burden for someone just starting out. Lend a helping hand by setting up an emergency fund in their name at your bank (not theirs) so they're unlikely to drain it for early-20s nonsense.

Put aside $500 to $1,000 to start and add money as you see fit, or let the grad know that they can transfer money into the account when they have a little extra to spare. Their own contributions will provide even more padding when the going gets tough. (See also: 7 Easy Ways to Build an Emergency Fund From $0)

3. Website domain

Most college grads — heck, even high-schoolers — are tech savvy, but they may not have thought to secure their name as an internet domain for future use. I love this idea because while it's not a tangible gift, it is a gift that can spark inspiration. If someone handed me a website domain and told me to run with it, I'd at least ponder the possibilities, and that's all some people need to go full steam ahead. (See also: 8 Surprising Ways a Personal Website Can Improve Your Life)

4. Loyalty points

If you've racked up loyalty points and want to save money on grad gifts, look into gifting these transferable rewards.

"Loyalty points are a great money gift to give new grads instead of cash," says U.S. Travel Association spokesperson Laura Holmberg. "Loyalty points allow them to cash in for unique travel experiences at the time and destination of their choice — maybe for a post-grad getaway, or to put toward that first vacation once they're in the 'real world.'"

5. Big-idea books

New grads might not want to crack open a book right away, but gifting self-help books that lie in waiting until they're ready will be worth every penny once they pick them up and implement the actionable advice.

Some of my favorites include author-entrepreneur David Pike's The New Startup and The Startup Playbook by Rajat Bhargava and Will Herman (both are perfect for grads trying to figure out what they want to do with their work life), as well as David Carlson's Hustle Away Debt (because there will be a lot of debt to hustle away). (See also: The 8 Classic Personal Finance Books You Must Read)

6. Gift cards for life's necessities

Gift cards are a safe and popular gift to give, but when buying for new grads, think practical instead of frivolous. They might not appreciate $50 to a supermarket in the moment, but there will come a time they'll recognize that gift card as perhaps the most thoughtful and useful of the bunch. Other sensible gift card ideas include cards for gas, a new interview suit, work supplies, and home essentials.

7. Student loan payment

Many college grads start life with student debt looming over their heads, and you can help alleviate that burden somewhat by providing a few initial payments as a gift.

"Sit down with them and go through the process of helping them make a payment toward their student loans or contribute installments to their budget to help them on a monthly basis for a few months after they graduate," suggests Alayna Pehrson, financial blogger for BestCompany.com. "Overall, student loans can feel like a major weight to many fresh college graduates, so this gift could really go a long way for your grad." (See also: 15 Ways to Pay Back Student Loans Faster)

8. Investment starter capital

Broke college graduates don't think much about making investments right out of school when they're peering down a dark tunnel of 10 to 20 years of student loan payments. As such, this is a great opportunity for you to take the lead where investing is concerned.

"You can do this by giving them money to invest and starting them out with a well-known investing app like Acorns," Pehrson says. "Again, going through it with them step-by-step can ensure that they actually invest that money."

Take some time to explain how investing works, too. It's scary for a lot of people, but knowing what to do, why, and when will help new grads wrap their head around why it's important to keep this option open as a lifelong financial tactic.

9. Roth IRA

Retirement is the farthest thing from a new grad's mind, but you and I both know the earlier you start saving for that glorious day, the better. And in terms of the ROI, a Roth IRA is near the top of the list of best grad gifts.

Consider this: A max contribution of $5,500 in the starter account you set up for the grad at age 21 will mature to a staggering $71,000 by age 65, assuming 6 percent interest — and that's with no further contributions. Given that 13 percent of Americans have $0 saved for retirement, according to a 2018 GOBankingRates survey, your generous gift puts them well ahead of the curve before life even begins. (See also: 6 Reasons Every Millennial Needs a Roth IRA)

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This article is from Mikey Rox of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

8 Questions to Ask on a College Tour

Emily Guy Birken — Tue, 22 May 2018 08:30:41 +0000

For three years as an undergraduate, I worked as a campus tour guide for prospective students interested in attending my college. It was one of my favorite jobs during my college career because it gave me a chance to show off what I loved about my school and field questions about the school itself and the college experience in general.

However, it often seemed as if prospective college students and their parents didn't know what questions to ask. They would ask about what they could expect from financial aid or the possibility of landing a job post-graduation — but they often missed out on truly understanding how the school would fit with their college and career plans because they didn't think to ask follow-up questions.

When you go on a campus visit, make sure you follow up on the typical questions with further ones that really dig deep into what costs, value, and experiences you can expect from any particular school.

The typical question: What is the employment rate post-graduation?

This common question is certainly a reasonable metric. You want to know if the school and its programs prepare a student for the working world after college. But this question assumes that everyone is going to school just to get a job.

What if you are interested in majoring in music, or philosophy, or fine arts, or history, or — horror of horrors — English? Asking about the employment rate post-graduation for these sorts of programs is never going to sound as promising as the rates for nursing, engineering, and accounting programs.

The follow up: What is the student loan default rate?

The answer to this question can be far more illuminating than the employment rate question, because it can help you to see if the school is truly preparing you for a life of economic security. For instance, the Maryland Institute College of Art (MICA) boasts an incredibly low 2.2 percent default rate for undergraduates — whereas the national average default rate for student loan borrowers is 11.3 percent.

There's a good reason why MICA brags about this rate. It tells prospective students that though they will be studying fine arts — which is a major that's not known for its high employment rates — they will learn plenty of applicable skills that will help them to land a job, even if it's in a different field.

Many liberal arts schools like to say that they are teaching their students how to think critically, research, and write, which will be useful in any field post-graduation. Asking about the default rate can give you a better sense of whether or not the school in question really follows through on those promises. (See also: What Really Happens When You Don't Pay Your Student Loans)

The typical question: How many students receive financial aid?

Prospective students want to know that there may be aid available to them if they choose a particular school. Many schools will tout just how large a percentage of students receive financial aid, which can help to alleviate fears that a particular school might be economically out of reach.

But not all financial aid is created equal, and knowing that 70 percent of students at a particular school receive aid does not tell you everything you need to know.

The follow up: What is the ratio of outright aid to loans?

When you ask how many students receive financial aid, the school representative will tell you a number that includes any students who are taking loans from the school. What students and parents really need to know is how much financial aid is made up of scholarships and grants as compared to loans.

If the ratio is tilted toward loans over outright aid, that can help you make a better financial comparison of the costs of different schools. The answer to this question can also help you to know which schools are truly committed to (and put money behind) the idea of helping students afford their education. (See also: How to Pay for College When You Didn't Get a Scholarship)

The typical question: What is the average student loan debt of graduating students?

After hearing all of the horror stories of graduates with six-figure student loans, it's natural that prospective students would want to learn the average debt load of graduates from each school. This figure can help you to determine if the school appears to be within your financial reach. However, it doesn't necessarily tell the whole story.

The follow up: What kinds of financial literacy support are available to alumni?

Some schools have an unofficial, "Here's your diploma, now get outta here" vibe when it comes to helping their young alumni get on their feet. At these schools, all you can really expect in terms of financial literacy support is the federally-mandated student loan exit interview.

However, many schools offer a great deal of support for recent graduates — particularly schools that know they are a little more expensive and do not have the endowment necessary to offer more outright aid.

If the school you have your heart set on has a high average student loan debt amount, it is possible that the alumni office works extra hard to help new grads learn how to navigate their finances. Even if the school does not have a high average debt burden, it's worth asking about what kinds of financial literacy support a graduate can expect from the alumni office. It's important to remember that your relationship with the school does not end when you walk across the stage. (See also: The Financial Basics Every New Grad Should Know)

The typical question: Do I make too much to receive financial aid?

A common concern among families is the possibility that their income will disqualify their prospective student from need-based financial aid. It's a reasonable concern, and asking this question can help you to better understand the income requirements for financial aid eligibility — since income is the largest factor in receiving financial aid. However, income is not the only consideration for financial aid eligibility, and just asking this question might not give you all the answers you need.

The follow up: What other factors do you consider for financial aid eligibility?

It's important to remember that schools also consider a number of other factors, in addition to income, when determining who is eligible for need-based financial aid. These factors can include family size, whether or not other members of the family are also in school, number of assets, and even the parents' ages. Asking this question can help you figure out if there may be some financial aid available, even if your family income is relatively high. (See also: 12 Surprising Ways to Get More College Financial Aid)

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This article is from Emily Guy Birken of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

This Is the Difference Between a Loan and a Line of Credit

Dan Rafter — Mon, 14 May 2018 08:31:14 +0000

Maybe you need some money to fund the renovation of your home's 1970s-era kitchen. Or maybe you need a quick chunk of cash to pay down high-interest credit card debt or help pay for your kid's college tuition. Should you get that cash from a loan or a line of credit?

You may wonder what difference it makes, but there actually is a difference. And both forms of borrowing come with positives and negatives.

Before you take out either a line of credit or a loan, it's important to understand the key differences between the two.

Loans give you a single lump-sum payment

The main difference between a loan and a line of credit is in how the money is dispersed with each option. In a loan, you'll receive a single lump-sum payment. You pay back the money you've borrowed, with interest, each month over a period of years.

Taking out a mortgage to finance the purchase of a home is a good example. Your lender provides you with a single payment that you use to buy your home. You then send a check to your lender each month, paying back the principal balance of that loan along with interest.

Other common types of loans include auto loans, student loans, and personal loans. In all of these products, you're given a big chunk of cash that you steadily pay back with regular payments.

Lines of credit act more like credit cards

With a line of credit, a lender approves you for a maximum amount of dollars that you can borrow. But you don't have to borrow up to the maximum. You can instead borrow whatever you need to pay for home improvements, paying off other forms of debt, helping your children with their college tuition, or whatever other expense you need the money for. With a line of credit, you only pay back what you borrow.

A home equity line of credit, better known as a HELOC, is a good example. Your lender will approve you for a maximum amount that you can borrow based on the equity you've built up in your home. Say you have $100,000 of equity in your home. Your lender might approve you for a line of credit up to $80,000.

If you want to borrow $20,000 to remodel your bathrooms, you borrow that amount, leaving $60,000 still available for future projects. Once you borrow that $20,000, you have to begin paying it back in monthly installments, with interest. (See also: 5 Questions to Ask Before Applying for a HELOC)

With loans, your payments are (mostly) fixed

With a typical loan, you usually know what your payment will be each month. If you borrow $20,000 to buy a new car, you'll make the same payment each month — a payment in which your dollars will go toward paying down your principal balance and paying off interest — until you've repaid the loan.

With a line of credit, your monthly payment will vary depending on what you've actually borrowed. If you've only borrowed $10,000, your monthly payment will be smaller than if you've borrowed $50,000.

The exception with loans, though, can come with a mortgage. Even if you take out a fixed-rate mortgage in which your interest rate remains the same over its life span, your monthly payment could fluctuate. That's because lenders usually require borrowers to also include payments for homeowners' insurance and property taxes with their mortgage checks. If your taxes or insurance costs rise or fall, your monthly payment might fluctuate.

Your mortgage payment could also change if you take out an adjustable-rate mortgage. With these loans, also known as ARMs, your interest rate will change during the repayment period, causing your monthly payment to rise or fall accordingly.

Interest rates are higher on lines of credit

Loans tend to come with lower interest rates than lines of credit. As an example, Freddie Mac, in its primary mortgage market survey, said that the average interest rate on a 30-year, fixed-rate mortgage as of the week ending April 26 stood at 4.58 percent. For a 15-year fixed rate mortgage, the average rate was 4.02 percent.

At the same time, home equity lines of credit are currently averaging interest rates of over 5 percent.

Closing costs are higher with loans

You'll usually spend more upfront to take out a loan than you will to originate a line of credit.

Loans typically come with higher closing costs — fees that lenders and third-party providers charge to create your loan. A good example is with mortgage loans: You can expect to pay about 3 percent of your total loan amount in closing costs and fees. (See also: Here's What's Included in a Home's Closing Costs)

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8 Money Mistakes at 20 That Will Land You in Debt by 30

Kentin Waits — Mon, 14 May 2018 08:01:14 +0000

Few mistakes are more difficult to erase than money mistakes. The errors of youth have a way of haunting us long after we've changed our ways and become models of responsible personal finance. If you're in your 20s, look ahead and make life easier for your 30-something self. Here are eight money mistakes at 20 that will land you in debt by 30.

1. Amassing huge student loans

According to Student Loan Hero, today's average student loan borrower will graduate owing $37,172. What makes student loan debt particularly dangerous? First, most loans have variable interest rates. When rates increase, so do your payments (try budgeting around that). Second, student loan debt can't be discharged in bankruptcy. If you default, the government can garnish your wages, take your tax refund, and even dip into your Social Security payments in retirement. (See also: What Really Happens When You Don't Pay Your Student Loans)

2. Carrying credit card debt

With high interest rates, late payment penalties, and other fees, a modest credit card balance can quickly become a major problem. People who overspend in their 20s can easily rack up huge debt loads by their 30s — a situation that forces many to delay homeownership, toil away at jobs they dislike, and live with constant financial stress. Avoid the drama of consumer debt. Adopt a strict policy of paying off your credit balances in full each month. (See also: The Fastest Method to Eliminate Credit Card Debt)

3. Ignoring your credit score

Your FICO score is your GPA of adulthood. That magic number affects everything from loan eligibility and interest rates to employment opportunities. Since rebuilding a low credit score can take years, you can't afford to ignore it. Just imagine getting stuck with a higher mortgage rate at 35 because you were late with a few car payments at 27. Not good. (See also: How to Rebuild Your Credit in 8 Simple Steps)

4. Splurging on a new car

Countless 20-somethings are tempted to buy a new car as soon as they land their first real job. But with steep prices, rapid depreciation, and higher insurance premiums, buying new is seldom a smart financial move. This single bad investment can strain your budget for years and leave little money to establish an emergency fund or aggressively pay down student debt. (See also: 3 Reasons Why You Should Never Buy a New Car)

5. Not talking finances with your significant other

Ready for an important love lesson? Talking about money won't kill your romance, but the stress of overwhelming debt just might. Before you commit, share your full financial picture (warts and all). Talk about income, debt, bad money habits you're trying to overcome, and your personal financial goals. It'll not only bring you closer as a couple, it'll empower you to work as a team. (See also: 5 Money Conversations Every Couple Should Have)

6. Overspending for your wedding

According to a study conducted by The Knot, the average cost of a wedding in the United States hit a whopping $35,329 in 2016. And while new unions are always a cause for celebration, the price tag for these elaborate events often forces young couples to assume more debt at a time when paying off student loans, saving for a home, and funding retirement accounts should be top priorities. With interest, wedding bills can easily become money monsters that devour budgets for years. (See also: 3 Reasons Taking a Loan For Your Wedding Is a Bad Idea)

7. Not building an emergency fund

Ah, the optimism of youth! Twenty-somethings often don't realize that a layoff, uninsured medical expense, or unexpected home repair can spell financial disaster. Without an emergency fund to cover at least six months' worth of living expenses, they risk being forced into high-interest credit card debt — a decision that can launch a long-term cycle of debt. (See also: 7 Easy Ways to Build an Emergency Fund From $0)

8. Going without health insurance

We all feel invincible when we're in our 20s, but accidents and unexpected health issues can throw our lives off course at any moment. Without insurance, medical bills can quickly reach staggering amounts (in fact, medical expenses are the most common cause of personal bankruptcy in the United States). Protect your most important asset — yourself. (See also: The One Question You Need to Answer to Choose the Best Health Care Plan)

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This article is from Kentin Waits of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

This Is How Student Loan Interest Works

Dr Penny Pincher — Wed, 09 May 2018 08:30:19 +0000

Student loans are a heavy financial burden for most borrowers, but the loan balance isn't the only major financial blow; the interest that accumulates is also difficult to stay on top of.

Interest on a student loan is a major contributor to how big your monthly payment will be and how much your loan will really cost by the time you pay it off. Let's look at how student loan interest works and what you can do to get your loans paid off faster and for less money.

Factors that determine interest on your student loan

There are a few factors that determine how much you will pay in interest on your student loan: the interest rate, the amount you borrow, the loan term, and your payment plan.

Interest rate

When you take out a student loan, you'll need to pay back the amount you borrow, plus interest on the loan. Interest is charged as a percentage of the amount you owe. For example, a $10,000 loan at a 10 percent annual interest rate (compounded daily) will cost you $1,049 after a year. So after one year, you would need to pay back the $10,000 that you borrowed, plus $1,049 for interest.

Amount borrowed

We have seen that a $10,000 loan at a 10 percent annual interest rate costs $1,049 in interest after a year. Of course, most student loans are much bigger than $10,000 — what if you borrow more? If you borrow $20,000, the interest cost to carry this loan for a year would be $2,097. If you borrow $50,000, the interest after a year would be $5,243. The more you borrow, the more interest the loan carries.

Loan term

The loan term is how long it will take you to pay back the loan. For example, you could borrow $50,000 and pay it back over 10 years. In this case, the term of the loan is 10 years. You can reduce your monthly payments by choosing a longer loan term, but you will end up paying more in interest.

If you borrow $50,000 at a 10 percent annual interest rate, you would pay $660.75 per month and your total cost for interest over the life of the loan would be $29,290.44. Now, let's say you want lower monthly payments, so you go with a 20-year term instead of 10 years. Your monthly payment would be $482.51, but over the life of the loan you would pay a whopping $65,802.60 in interest — about $35,000 more!

Payment plan

Student loans have more flexibility in their payment schedules than other installment loans. The simplest plan is to make the same monthly payments over the entire term of the loan. However, since new college grads typically have a lower income just after graduation and earn a higher salary over time, you can select repayment plans that start off with smaller monthly payments that increase as your income increases.

Variable repayment plans do make it easier to make payments on student loans, but the price to be paid for this flexibility is interest. Any payment plan that has smaller payments in the early years will cost more in interest over all. (See also: 6 Questions to Ask Before Taking Out Student Loans)

How much of your student loan payment goes to interest?

When you make your monthly student loan payment, at first, most of your payment will go toward paying interest. Only a small amount will go toward paying down the principal. Over time, eventually more of your payment will chip away at the principal until your loan is paid off in full.

Here's an example of how a payment of $660.75 per month on a $50,000 student loan at 10 percent interest would be applied to interest and principal during a 10-year term.

At first, you can see how the majority of the payment goes toward interest. But over time, as you continue to make payments, the balance of the loan decreases, thereby reducing the interest that accumulates and allowing more of your monthly payment to go to paying down the principal of the loan.

Most student loans give you the option to apply extra payments toward the principal. If you can pay a little extra each month, you'll bring your balance down faster and save money on interest payments over the life of your loan. For example, if you could pay $40 more per month, your loan would be paid off in nine years instead of 10, and your total interest cost would be about $3,000 less. (See also: What Really Happens When You Don't Pay Your Student Loans)

How to reduce your student loan interest

Once you understand how student loan interest works, you can put that knowledge to work. There are a few ways you can reduce the overall cost of your student loans.

Paying your loan off faster will reduce the cost of interest. Choose the shortest term you can afford, and make extra payments if possible.
Borrowing more will increase your interest cost. Try to minimize living expenses while in school to keep your student loan balance as low as possible.

Select the student loan option with the lowest interest rate available. If your rate is still higher than you'd like, consider refinancing your student loan later to a lower interest rate. (See also: 15 Ways to Pay Back Student Loans Faster)

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This article is from Dr Penny Pincher of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

My Kid Got Accepted to an Expensive Private College — Now What?

Dr Penny Pincher — Tue, 24 Apr 2018 08:30:10 +0000

My son recently got accepted into a college program that would cost about $45,000 per year for tuition, room, and board. This is exciting news — but also potentially expensive news. At what point does the cost of college outweigh the likely economic benefits?

Of course, the value of college goes far beyond simply allowing someone to prepare for a higher paying job. College can help you discover your path in life, develop your mind, and open doors to experiences that are not available to most people. But how much is too much to pay for college, from a purely financial perspective?

College's cost in dollars and opportunity

The main costs of college are tuition, room, and board. The average total cost of attending an in-state public university is over $20,000 per year, and the average cost of private college is over $40,000 per year, according to the College Board.

Opportunity cost is another cost of college that is easily overlooked. If you spend four years attending college full-time, you miss out on four years of full-time income that you could have earned instead. You also potentially delay starting to build investments and reaching financial independence.

The most insidious cost of going to college is probably lifestyle inflation. Almost everyone tends to spend more as they make more. Even though college graduates will likely make more money than those who don't go to college, college grads will probably also spend a lot more on a more expensive lifestyle. Just because you make more money doesn't mean you'll end up having more money in your bank account or a higher net worth. (See also: What to Do When You Can't Afford Your Child's College Education)

College will boost future earnings by a lot

Even though the costs of attending college can be prohibitive, the benefits in terms of increased salary can easily add up to millions of dollars over a career. Let's say you are 18 years old and decide to start working full-time at an entry-level job that pays $20,000 per year. Your earnings over your career until age 65, with a 3 percent raise every year, would be $2,007,930.

Now let's say instead of starting to work full-time at age 18, you attend college for four years. You start working full-time at age 22 with a starting salary of $45,000 per year, which is a reasonable expectation for a wide range of college majors. If you work until age 65, assuming a 3 percent raise each year, the earnings over your career would be $3,846,775.

Taking into consideration that you delayed starting your career for five years to attend college, you would still earn over $1.8 million more over the course of your career from the benefit of your college education.

Of course, expected starting salaries vary with college major. According to the National Association of Colleges and Employers, engineering majors are at the top of the pay scale and can expect to start at an average salary of around $65,000. Education majors have average starting salaries of around $35,000, and almost all other majors are somewhere between $35K and $65K. But no matter what you major in, your salary earnings potential over your career will likely get a big boost by going to college. (See also: 5 Jobs That Pay Over $50K and Don't Require a Bachelor's Degree)

How much should you pay to go to college?

The return on investment of going to college can be quite favorable in terms of increased lifetime salary potential. As we saw in the example above, earning over $1.5 million more from a higher salary after going to college is a realistic expectation.

The limit on how much you should pay for college is not constrained by the value of your higher salary with a college degree, since your increased earnings would probably far exceed the cost of going to college. Instead, the limit on college cost for most people is driven by how big of a student loan they can afford to pay back after graduating.

Even though a college degree could boost your income by millions of dollars over your career, you'll need to start making student loan payments shortly after graduating. By estimating how much income you expect to earn after you graduate, you can figure out a ballpark figure for the maximum size student loan you can afford. (See also: 6 Questions to Ask Before Taking Out Student Loans)

Here's how to calculate your maximum affordable student loan balance.

Estimate your starting salary based on your major. For example, $45,000.
Divide your anticipated starting salary by 12 to get monthly pretax income. For example, $45,000 / 12 = $3,750.

As a rule of thumb, use 10 percent of your pretax monthly income as your maximum affordable student loan payment. For example, $3,750 x 0.10 = $375 per month.

Calculate the loan amount that a payment of $375 would support. For example, using the loan balance calculator from CalcXML, $375 per month would support a 10-year loan of $32,586 with 6.8 percent interest.
Divide the loan amount by the number of years of college. For example, $32,586 / 4 = $8,146.50 per year.

The second to last step gives you an idea of the biggest student loan balance that you could afford to make payments on. The very last step gives you the biggest student loan amount that you should take each year.

If you want a quicker way to estimate the maximum affordable student loan balance, take 75 percent of your anticipated starting salary. Using the same salary as in the previous example, $45,000 x 0.75 = $33,750. That would be your maximum affordable student loan balance.

But what if the numbers don't add up?

I started off by saying that my son was accepted into a program that costs $45,000 per year. Over four years, this would add up to $180,000. This greatly exceeds the maximum affordable student loan amount for a new college graduate. For an expected starting salary of $45,000, we calculated that the maximum affordable student loan balance is around $33,000. This wouldn't even cover one year of my son's program.

Fortunately, there are some ways to reduce college expenses and bring the cost into an affordable range. My son was offered a big scholarship, which makes the sticker price a lot lower. Here are some other possibilities your child can pursue to help keep college costs affordable. (See also: How to Pay for College When You Didn't Get a Scholarship)

Choose an in-state public university instead of more expensive private schools.
Consider starting at community college for two years and transferring credits to a four-year institution later.
Work summers or part-time to help pay some college expenses and reduce the burden of student loan debt.
Consider going into a major that pays well to be able to afford a more expensive college program.
Consider financing student loans for a longer repayment period to reduce the monthly payments. (You will be in debt longer, but could still come out ahead in the long run.)
Consider military service before college, or an ROTC program at college. Benefits can cover college expenses.

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