Education & Training

Someone Took Out a Loan in Your Name. Now What?

Kat Tretina — Wed, 14 Apr 2021 20:33:27 +0000

Identity theft wears many different faces. From credit cards to student loans, thieves can open different forms of credit in your name and just like that, destroy your credit history and financial standing.

If this happens to you, getting the situation fixed can be difficult and time-consuming. But you can set things right.

If someone took out a loan in your name, it's important to take action right away to prevent further damage to your credit. Follow these steps to protect yourself and get rid of the fraudulent accounts.

1. File a police report

The first thing you should do is file a police report with your local police department. You might be able to do this online. In many cases, you will be required to submit a police report documenting the theft in order for lenders to remove the fraudulent loans from your account. (See also: 9 Signs Your Identity Was Stolen)

2. Contact the lender

If someone took out a loan or opened a credit card in your name, contact the lender or credit card company directly to notify them of the fraudulent account and to have it removed from your credit report. For credit cards and even personal loans, the problem can usually be resolved quickly.

When it comes to student loans, identity theft can have huge consequences for the victim. Failure to pay a student loan can result in wage garnishment, a suspended license, or the government seizing your tax refund — so it's critical that you cut any fraudulent activity off at the pass and get the loans discharged quickly.

In general, you'll need to contact the lender who issued the student loan and provide them with a police report. The lender will also ask you to complete an identity theft report. While your application for discharge is under review, you aren't held responsible for payments.

If you have private student loans, the process is similar. Each lender has their own process for handling student loan identity theft. However, you typically will be asked to submit a police report as proof, and the lender will do an investigation.

3. Notify the school, if necessary

If someone took out student loans in your name, contact the school the thief used to take out the loans. Call their financial aid or registrar's office and explain that a student there took out loans under your name. They can flag the account in their system and prevent someone from taking out any more loans with your information. (See also: How to Protect Your Child From Identity Theft)

4. Dispute the errors with the credit bureaus

When you find evidence of fraudulent activity, you need to dispute the errors with each of the three credit reporting agencies: Experian, Equifax, and TransUnion. You should contact each one and submit evidence, such as your police report or a letter from the lender acknowledging the occurrence of identity theft. Once the credit reporting bureau has that information, they can remove the accounts from your credit history.

If your credit score took a hit due to thieves defaulting on your loans, getting them removed can help improve your score. It can take weeks or even months for your score to fully recover, but it will eventually be restored to its previous level. (See also: Don't Panic: Do This If Your Identity Gets Stolen)

5. Place a fraud alert or freeze on your credit report

As soon as you find out you're the victim of a fraudulent loan, place a fraud alert on your credit report with one of the three credit reporting agencies. You can do so online:

When you place a fraud alert on your account, potential creditors or lenders will receive a notification when they run your credit. The alert prompts them to take additional steps to verify your identity before issuing a loan or form of credit in your name. (See also: How to Get a Free Fraud Alert on Your Credit Report)

In some cases, it might be a good idea to freeze your credit. With a credit freeze, creditors cannot view your credit report or issue you new credit unless you remove the freeze.

6. Check your credit report regularly

Finally, check your credit report regularly to ensure no new accounts are opened in your name. You can request a free report from each of the three credit reporting agencies once a year at AnnualCreditReport.com. You can stagger the reports so you take out one every four months, helping you keep a close eye on account activity throughout the year. (See also: How to Read a Credit Report)

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

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:

Should You Pay Your Kids For Good Grades?

Emily Guy Birken — Tue, 01 Sep 2020 08:00:06 +0000

In a recent attempt to get our kids to consume some vegetables, we offered them the bribe — I mean, incentive — of a brand-new toy if they each ate a carrot with dinner every night for several weeks. After the carrot challenge ended and the boys were delighted with their new toys, we faced the problem of both kids declaring that they would never eat another carrot again as long as they lived. So much for fostering an appreciation for carrots.

This is the central paradox of incentivizing good behavior. You may be able to get your children to do what you want them to for a short time, but will it ultimately result in changed habits?

Here's what you need to know about paying your kids for good grades, so you can decide the best way to encourage them to succeed.

Cash incentives may work

One of the most compelling arguments for paying kids for good grades is that it's how the world of work is structured. Most adults wouldn't go to work every day without getting paid, and they are incentivized to improve their performance by the promise of bonuses, raises, and other perks. So it does seem reasonable to offer kids compensation for their hard work at school.

In fact, research has found that this kind of incentive can actually work to improve student performance and test scores. According to Education Week, Roland Fryer, an economist at Harvard University, conducted a series of experiments in the mid-2000s in which he paid $6 million to over 18,000 low-income students in several U.S. cities to incentivize them to improve their test scores. However, the results indicated that when offering cash for school performance, the important thing to focus on is rewarding something students feel like they have control over.

That means using money (or other incentives) to motivate inputs, such as number of hours spent studying, rather than outputs, such as grades or test scores. Students may want to improve their performance, but not know how to budge the needle. Rewarding them for their effort will be much more effective in encouraging better outcomes than rewarding them for a specific grade. (See also: 5 Money Moves Every Single Parent Should Make)

Tread carefully with multiple kids

If parents do decide to offer financial incentives to their kids, another potential landmine can be knowing how to handle more than one child in the family. If one kid is a born scholar and another struggles with learning disabilities or behavioral issues, rewarding the first for what they're already good at and giving nothing to the second will not end well. The student you most want to motivate will learn to hate and resent school.

On the other hand, it can be tough to offer a sliding scale of payment for each kid. The high-achiever might resent that their struggling sibling gets the same money for worse grades or test scores. Making it clear that you're rewarding effort rather than results is the best way to make sure you don't discourage the very behavior you're trying to encourage.

Incentives can backfire

While paying kids to improve their grades can result in better studying habits and improved scores, it may not effectively encourage them to engage with school. Studies have shown that rewards incentivize students to do the minimum necessary to receive their prize, after which point they lose interest. This was the exact problem my family encountered with our carrot-eating challenge, as the incentive was the only reason the kids were eating their vegetables, and they were not interested in trying to find a way to like eating carrots.

This is unsurprising when you think of all the disengaged workers who only show up and do the bare minimum to keep from getting fired. Without the intrinsic engagement with the work, whether that's learning literature and history, or filing TPS reports, payment for this kind of work becomes the only thing the recipient cares about.

In addition, likening school to work by offering cash incentives can also backfire. That's because schools can't fire underperforming students the same way an employer can fire a lackluster worker. Nor do schools have access to any of the other negative consequences an employer can use to improve an employee's poor performance. With a carrot and no stick, students will both get a false sense of what work life will look like, and feel more comfortable simply opting out of incentives, since there are no negative consequences for bad grades that they haven't already felt.

Instilling a love of learning in disengaged students is not an easy task, as any teacher can tell you. But paying them is no way to create that enjoyment for school. A better way to help kids engage with their studies is to encourage their interests and show how school relates to the subjects they are most passionate about. This may take more effort than simply handing out the dollar bills come report card time, but it will have better outcomes for encouraging a love of learning. (See also: 7 Parenting Mistakes Everyone Makes But No One Talks About)

Should you pay for good grades?

Bribery as a parenting tactic is not going away anytime soon. It's effective in the short term, and sometimes Mom and Dad simply need to get their kids to do something. However, paying kids is not always the best way to encourage them to engage with their school work.

If you're considering paying your kids for their school work, make sure all of your kids understand what they can each do to earn their rewards, use the payments to incentivize behavior they have control over, and continue working to help them see the joys of learning.

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:

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 Recent Grads Should Prepare for Student Loan Payments

Emily Guy Birken — Mon, 22 Jul 2019 08:00:06 +0000

Morehouse College commencement speaker Robert F. Smith made headlines in May of this year when he announced he would completely wipe out the student loan debt for every single member of the class of 2019. Nearly 400 graduates from Morehouse now find themselves debt-free as they begin their post-college lives, thanks to Mr. Smith's generosity.

This can be a tough story to read if you're one of the millions of college students graduating with student loan debt. But even without a generous billionaire benefactor to erase your debt, you can feel in control of your student loans. Here's how you can start making your student loan payments, without feeling overwhelmed. (See also: 11 Unique Ways Millennials Are Dealing With Student Loan Debt)

Know your full balance

Typically, borrowers take out student loans on an annual basis rather than in one fell swoop. That means you may have a number of loans, possibly from various lenders. This also makes it easy to ignore your full balance, since it requires some effort on your part to calculate the total.

However, burying your head in the sand will only make repayment more difficult once your grace period ends. It's far better to be prepared when the bills start arriving. To calculate your full balance, make sure you track down each and every loan you took out. Start by checking your federal loan balances through the National Student Loan Data System.

If you have any private loans, that can make your search a little more difficult, since there is no central database of such loans. If you're not sure of your private loan information, contact your alma mater for the names of your private lenders. From there, you can contact each lender for your total, and find out how long your grace period is and what you will owe per month.

This is also a good time to reach out to all of your lenders with your most current contact information. Making sure they know how to reach you is the best way to stay on top of your repayment schedule. (See also: How to Manage Student Loans On a Low Income)

Use your grace period wisely

Most borrowers will have a six-month grace period after they graduate before they're required to begin making payments. Whether you're lucky enough to step right into a job or you're figuring out how to make ends meet with multiple side hustles, this grace period gives you an opportunity to figure out how to handle your finances as a newly-minted adult.

Use this time to create and live within a budget. Consider setting aside the monthly amount of your student loan payment in a savings account. That will get you used to budgeting for your student loan payment and can give you a good start on an emergency fund.

Plan for your last student loan payment

Before you make your first payment, take a look at the payment schedule and calendar to see where you'll be as of your last payment. What do you hope to have accomplished by then? Where do you want to be in your career? In your life?

Doing this mental exercise can help motivate you to move up that last loan payment. Crunch the numbers to see what sending an additional $40 per month will do to your payoff date. Keep that last payment in mind when you receive windfalls or raises, since it can bring you closer to the finish line.

Explore your repayment options

The standard repayment plan typically equals monthly payments for 10 years. This option works for the majority of borrowers and makes budgeting relatively simple.

However, if you're graduating into tough job prospects or any other unusual circumstances, the 10-year repayment plan may not be your best option. If you have federal student loans, you can also choose a different repayment plan that may better fit with your current economic circumstances. Some of these options include:

Graduated repayment

With this plan, your payments are lower at first, and increase at regular intervals (usually every two years). This plan will still have you finish repayment within 10 years, but you'll pay more in interest over the life of the loan.

Extended repayment

If you owe more than $30,000, you can qualify for this fixed or graduated repayment plan which gives you up to 25 years to pay off your loans. As with the graduated repayment plan, you'll pay more in interest with an extended plan.

Pay As You Earn (PAYE)

The PAYE plan sets your monthly payment at 10 percent of your discretionary income, but caps your monthly payment at no more than you would have paid under the standard 10-year repayment. Your payments are recalculated each year, and you need to update your income and family size each year, even if they haven't changed. If you have an outstanding balance on your loan after 20 years of making on-time payments under this plan, the remaining balance will be forgiven.

Revised Pay As You Earn (REPAYE)

This plan is similar to the PAYE plan, except there is no cap to your monthly payment amount. That means if your income increases to the point where 10 percent of your discretionary income is greater than your monthly payment amount under standard repayment, then you'll have to pay the higher amount. In addition, your outstanding balance is forgiven after 20 years for loans taken for undergraduate education. The balance will be forgiven after 25 years for loans you took for graduate school.

Income-based repayment

If you have a high level of debt compared to your income, you may be eligible for income-based repayment, where your monthly payment amount is set at 10 or 15 percent of your discretionary income. Your payments are recalculated each year, and your outstanding balance will be forgiven after 20 years of on-time payments.

Income-contingent repayment

With this plan, your monthly amount will be the lesser of 20 percent of discretionary income or the amount you would pay under a 12-year fixed repayment plan. Your payments are recalculated each year, and any outstanding balance after 25 years will be forgiven.

Income-sensitive repayment

Low-income borrowers who have Federal Family Education Loan (FFEL) Program loans can qualify for this repayment plan. For this plan, your monthly payment is based on annual income, but your loan will be paid in full within 15 years.

While private student loans generally do not offer as many repayment options compared to federal student loans, it's worth checking with your lenders to see what they can do for you if standard repayment will be a financial burden.

Learn about your forbearance and deferment rights

Federal student loan borrowers have a couple of other benefits that can help make repayment more doable, even in tough economic situations.

Forbearance allows borrowers to pause their student loan payments for up to 12 months at a time. During that time, their interest accrues. You can either pay the interest as it accrues, or let it be added to your balance (which means it will compound during your forbearance). You are restricted to three instances (a cumulative limit of 36 months) of forbearance throughout the life of your loan.

Deferment also allows borrowers to pause payments, although deferment is offered in six-month increments. This program is tougher to qualify for, because you are generally not responsible for paying the accrued interest during a deferment.

Both of these options should be kept in your back pocket for real financial pickles, such as unemployment, illness or disability, or new parenthood.

Research consolidation and refinancing

You can also potentially reduce your monthly student loan payment through consolidation or refinancing. Though these terms are often used interchangeably, they are different beasts.

Federal student loan consolidation allows you to consolidate multiple federal student loans into a single loan with one repayment schedule. There is no option for consolidation with private loans, unfortunately. Consolidating your federal student loans can potentially lower your monthly payment (although that will often extend your payoff date). Most likely, you won't save money on interest, since you're charged the weighted average interest rate of the combined loans. And consolidation can help you switch from a variable to a fixed interest rate, which may lower your overall loan costs.

Refinancing is similar to consolidation in that it puts all of your loans in a single basket. But with refinancing, you're applying for a single private loan that will pay off your various loans, and you will adhere to the requirements of your new loan from that point forward.

The benefit of refinancing is that you can put both federal and private loans under your new loan, and you may be able to improve your interest rate or other terms. The downside is that if you refinance a federal loan, you lose access to all the federal benefits, including the various repayment options and access to deferment and forbearance.

The debt-payoff marathon

While the 2019 graduates of Morehouse College may have received a head start, all student loan borrowers can reach the day when their debt is in the rear-view mirror.

For those of us without a fairy god-billionaire, eliminating student debt is a matter of knowing your loans, your rights, your options, and your budget. A little preparation now will save you a lot of wasted energy and stress during your debt-payoff marathon.

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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:

Ask the Readers: Do You Plan to Go Back to School?

Ashley Jacobs — Tue, 14 May 2019 08:30:09 +0000

Going back to school as an adult may not have appealed when you in school, but there are many good reasons to do it. Maybe you want to advance in your career, or maybe you want to change your career — or maybe you just want to learn something new in a classroom setting.

Do you plan to go back to school? Why do you want to go back to school? What do you want to study?

Tell us if you have plans to go back to school and we'll enter you in a drawing to win a $20 Amazon Gift Card!

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6 Smart Things to Do With Your Extra Student Loan Money

Mikey Rox — Fri, 15 Mar 2019 09:00:10 +0000

When you're a college student, extra cash is hard to come by. But when an influx of cash is the result of unused student loan money, you've got to make an informed decision on how to spend it — especially since you'll eventually have to pay it back with interest. Do right by yourself and your wallet with these tips on how create the least amount of financial liability if this windfall comes your way.

1. Set it aside for pop-up expenses

You shouldn't have many expenses as a college student, but occasionally you may have to foot the bill for something unexpected, like a car repair or co-pay for a medical appointment. Use your extra student loan money to cover these costs.

"If anything comes up during the semester, you'll have the funds to cover it," says personal finance expert Jeff Proctor, founder of money-saving resource DollarSprout. "If you're able to hang on to this money year after year, you could graduate with a nice emergency fund set up before heading into the workforce. This will come in handy with moving expenses after college, and it will also free up your income for other things, like paying off debt or building your professional wardrobe."

If you choose to stash the money away for emergencies, allocate it for that and nothing else. This isn't free money that you should be spending at the bar or on dinners with friends. As tempting as that may be, you will pay for that frivolousness many times over since interest will continue to accrue on the borrowed funds until you pay them back.

2. Pay down your credit card debt

I wish I told the credit card vultures to keep their plastic when they came calling as soon as I turned 18 so I didn't max them out within months. And without the money to pay the bills until about five years later, this was a mistake that damaged my credit well into my late 20s.

If you have extra student loan money and credit card debt, choose the highest interest card and pay that bill down (this strategy is known as the Debt Avalanche method). You'll save yourself a lot of stress, nonstop phone calls from collection agencies, and rejections from financial institutions. It is not worth it, no matter how much you want those new shoes or a quick getaway. Take my word for it. (See also: Are You Paying Off Credit Card Debt the Wrong Way?)

3. Earn alternative college credit

"About 60 percent of college students take six years to earn their degree instead of earning it in four years," says Adrian Ridner, CEO and co-founder of Study.com. "Earning affordable college credit through online courses or College Level Examination Program (CLEP) exams can help you not only stay on track to make graduating on time more realistic, but it may even give you the opportunity to graduate early, which will cut down on your educational costs even more."

The faster you graduate college, the less you'll need in loan money, and the less you'll pay overall for your education.

4. Pay the loan back

While you shouldn't borrow more than you need in the first place, if you do end up with extra money after all your college expenses are paid for the year, use the surplus to pay back the loans with higher interest rates to decrease the amount of money that will be owed in the future. This also lowers your average student loan interest rate, which saves money in the long run. (See also: How Joe Mihalic Paid Off $90K of Student Loans in 7 Months)

5. Hand the money over to your parents

If you're not paying for your own college education, that extra student loan money isn't yours. So if you receive a check because there's overflow, you ought to hand it over to your parents, grandparents, or whoever's footing the bill so they can reduce their own financial liability. You're not entitled to it, and you shouldn't have it without their permission.

6. Return the money to the Department of Education

You could also return the check for federal student loans to the Department of Education, and the amount will get taken off your loan balance.

"You won't have to pay any interest, and it will be like you never borrowed the money in the first place," says personal finance expert Rebecca Saffer. "You typically have between 30 and 120 days to return the money from the date it was disbursed." (See also: 11 Unique Ways Millennials Are Dealing With Student Loan Debt)

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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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Everything New Parents Need to Know About College Savings

Tim Lemke — Tue, 26 Jun 2018 12:40:58 +0000

You've just ushered a new baby into the world, and are working to get your brain around all that you need to pay for. Diapers. Food. Child care. College.

College?

It may be nearly two decades away, but thinking about your child's college education now can help you save lots of money for when it's finally time to foot the higher education bill.

Saving for college will require a lot of discipline and patience, but you can make it happen with the right tools and knowledge. Let's take a look at some key things you need to know to send junior off to college without going broke.

Understand the cost of college

Let's start with an understanding that college is costly. The College Board says the budget for a moderately priced public college now is over $25,000 annually, and more than $50,000 for a private college. Prices have nearly doubled in the past decade and costs are expected to continue to rise. It's obviously impossible to know what college will cost in 18 years, but you can make reasonable projections based on current costs and the rate of inflation. Estimating the cost of college is obviously the one piece of information you need when determining how much to save.

Understand value vs. cost

You may have dreams of sending your child to whatever school they wish to attend, regardless of cost. That's fine, but you should also educate yourself on the schools with great reputations at a reasonable cost. The bottom line is that the most expensive schools aren't automatically the best. There are many ways for a student to get an excellent education without going into debt or wiping out your savings. (See also: Why Saving Too Much Money for a College Fund Is a Bad Idea)

Explore community colleges

Some people dismiss community college, but that's a mistake. Community colleges are perhaps the most underrated components of the academic system. There are thousands of these great colleges that offer solid education experiences for a fraction of the price of four-year institutions. They are excellent for students who aren't quite sure what they want to study or are perhaps wary of going away to school.

At community colleges, a student can often take care of many of the core requirements of a major, then transfer to a four-year institution where they can get the rest of the key coursework they need. This can ultimately save families tens of thousands of dollars. Consider community colleges when exploring future education options for your young one.

Open a 529 plan

Most states offer special savings plans that allow you to invest money for the purpose of saving for educational expenses. In most cases, you can withdraw the money tax-free when it's time to pay for college or qualified educational expenses. In a sense, they work like a Roth IRA, only for education.

Some plans also let you deduct contributions from your taxable income. These savings plans can be powerful because you can sign up for them as soon as your child is born. And if you save aggressively over the course of 18 years, you can end up with a sizable fund, perhaps even enough to cover the cost of tuition entirely.

If your child ends up getting a scholarship, you can use the funds for other educational expenses, such as a computer or other similar needs. If they don't attend college, funds can be used for vocational schools as well. You can also assign the benefits to someone else, such as a sibling or even a nephew, and there is no time limit on when you need to spend 529 funds, so you could even hold onto them and pay for your grandkids. (See also: The 9 Best State 529 College Savings Plans)

As a last resort, you can just keep the money for yourself — but you will have to pay taxes on gains as well as a 10 percent penalty. You won't pay the penalty if the beneficiary passes away, gets a scholarship, becomes disabled, or attends a U.S. Military Academy. If a child is disabled and can't attend college, it's also possible to roll 529 funds over to a 529 ABLE plan, which is designed to help disabled people with living expenses and other needs. (See also: Here's What You Need to Know About 529 ABLE Accounts)

Consider a prepaid tuition option

Depending on where you live, you may be able to take advantage of a type of 529 plan that allows you to lock in rates of college tuition now, potentially saving you tens of thousands of dollars. This can be especially powerful given that tuition continues to rise. Note that there may be some restrictions on what colleges the student can ultimately attend. (See also: Should You Save for College Using a 529 Prepaid Tuition Plan?)

Don't cheat your own retirement

You may wish to selflessly pump as much money as you can into your child's college savings account, choosing to worry about your retirement savings at a later time. But this is a dangerous strategy. If you choose to postpone retirement saving, you run the risk of not having enough saved to make ends meet when you stop working. And unlike college, you can't borrow money to pay for your retirement.

With smart planning and frugal living, you may be able to aggressively save for both college and retirement — but if you have to choose which to put money into, pick the retirement fund. If it helps, remind yourself that it's a way to ensure that your children don't have to help you financially in your later years. (See also: How to Keep Student Loans From Wrecking Your Retirement)

Let family members know how they can help

Your child's grandparents may be eager to help with future college costs, and you may have other relatives willing to pitch in as well. You can help guide them as to the smartest way to help.

In many cases, relatives may also receive immediate tax breaks by contributing to college savings plans, and they may even be able to gift money for college as a way to avoid future estate taxes.

Understand how financial aid works

It's important to learn how your income and savings can impact the type of financial assistance that your child may receive to pay for college. To qualify for grants or federal loans when it's time for your child to attend college, you will have to fill out a Free Application for Student Aid (FAFSA) form.

Not all families receive financial aid automatically. A student's eligibility is determined by a formula that takes into account the total cost of college and the expected family contribution, or EFC. The EFC is somewhat complicated, because it takes into account family income, assets, and household size, among other factors. (See also: The 10 Most Common Financial Aid Mistakes — And How To Avoid Them)

Learn about loans and their impact

It may be your plan to save for college and avoid loans entirely, but there's no guarantee you won't need them, especially if costs continue to rise. Navigating the ins and outs and pros and cons of both federal and private student loans will require some research and patience. You should seek to understand the typical interest rates on college loans, and how quickly loans must be paid back. Know that student loans can't be discharged in bankruptcy and that defaulting on loans can hurt a graduate's credit score.

It's also important to understand how student loan debt may impact a graduating student. Many recent graduates are struggling with student loan payments — the average 2017 graduate has more than $39,000 in debt — and that has an impact on everything from the jobs a graduate can afford to take, the city they can afford to live in, and the amount of other debt they end up accumulating. (See also: What to Do When You Can't Afford Your Child's College Education)

Live within your means

This may seem like such a basic piece of advice it's not worth mentioning, but it's crucial when you are trying to save for your own future as well as the college costs of a child. In an ideal world, you can save aggressively for both a child's college tuition and your own retirement, but that requires a hefty sum of cash. To achieve both goals, you must be laser-focused on keeping your spending levels low, avoiding debt, and managing budgets smartly. It may require sacrifices.

For many people, those sacrifices are worthwhile, but just be sure you know what they entail as you embark on this journey. Being prepared mentally and emotionally will help you stay on course.

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

How These 6 Assets Might Affect Student Financial Aid Eligibility

Emily Guy Birken — Thu, 14 Jun 2018 08:30:36 +0000

Once your child reaches high school, figuring out how to pay for college starts to loom large in your mind. An important step in getting ready for the costs of college is filling out the FAFSA (Free Application for Federal Student Aid). This paperwork helps determine how much need-based financial aid your student qualifies for. And before you assume that you make too much money to get any such assistance, remember that families earning as much as $180,000 per year can qualify for some form of financial aid.

Whether you have been diligently saving money in a 529 account since your (now 6-foot tall) baby was born, or you have only just now started thinking about college costs, you do need to understand exactly how your various assets might affect your student's financial aid eligibility. (See also: 5 Reasons Why Every Student Should Fill Out the FAFSA)

Here's what you need to know about the asset and income calculations for need-based financial aid.

Understanding the expected family contribution (EFC)

To determine your student's financial aid package, the college financial aid office starts by determining the cost of attendance and the expected family contribution, or EFC. The EFC amount is calculated based upon the information you provide on the FAFSA.

In general, assets and income held by the dependent college student count for more in the EFC formula, while parents' assets and income count for less — and some parental assets are not included in the calculation whatsoever.

The formula for calculating EFC specifically counts the following assets and resources:

20 percent of the student's assets, which includes savings, investments, business interests, and real estate.
2.6 to 5.64 percent of the parents' same types of assets (based on a sliding income scale).
50 percent of student income above $6,570.
22 to 47 percent of parent income above $25,040 (also based on the sliding scale).

The more money that is included in the EFC calculation, the lower the need-based financial aid offer will be. (See also: The 10 Most Common Financial Aid Mistakes — And How To Avoid Them)

How your assets are counted

Depending on what kind of assets you have, you may or may not have that money included in your student's EFC calculation. The following assets can affect financial aid offers:

1. Income

As of 2017, the FAFSA began requesting the prior-prior year's tax return from filers. This is called the "base year."

Before the change, families had to provide the prior year's tax return (that is, the immediate previous year) as their base year information. For instance, for the 2011–2012 school year, FAFSA filers had to provide their 2010 tax return, but filers filling out the FAFSA for the 2018–2019 school year will provide their 2016 tax return.

There are a couple of reasons why this is an important change. First, it means that families are less crunched to complete their previous year's taxes and a FAFSA form in the same year. Secondly, it also means that families who are actively trying to make income-related plans to lower their EFC need to do such things no later than their child's freshman spring/sophomore fall year.

What kinds of income-related plans? For instance, you might max out your retirement savings in the years leading up to the base year, because you are not asked to declare the value of tax-deferred retirement accounts (such as 401(k), 403(b), or IRA accounts) on the FAFSA. However, money that you contribute to your retirement account during the base year is still considered part of your income for the EFC calculation, even though it is pretax income that you have invested.

Another important thing to remember about income is how your child's income is counted on the FAFSA. Fifty percent of the dependent student's income over $6,570 is counted in the EFC calculation, and financial gifts are also considered income. For example, if Grandma and Grandpa give your child $10,000 toward college in 2018, 50 percent of the amount over the threshold ($3,430) would have to be counted as income on the FAFSA filed for the 2020–2021 school year, and it could increase the EFC amount (and reduce the aid) by about $1,715.

2. 529 accounts and Coverdell ESAs

The good news about these accounts is that whether they are in your name or your child's, they are considered parental assets. That means no more than 5.64 percent of the assets in a 529 account or Coverdell ESA will be included in the EFC calculation. So if you have saved $25,000 in your daughter's 529 account, her aid would only be reduced by roughly $1,400.

If other relatives — such as grandparents — have been saving money for your child in a 529 or Coverdell account under their own names, their gift can come with some expensive (and unanticipated) strings attached. That's because such assets are not counted at all on the FAFSA form, but when the money is withdrawn to pay for educational expenses, you must claim the amount withdrawn as untaxed income to the student. Since 50 percent of student income is counted in the EFC calculations, this situation can reduce aid by half the amount of the withdrawal. (See also: 5 Smart Places to Stash Your Kid's College Savings)

3. Retirement accounts

As mentioned above, the value of parental retirement accounts are not included in EFC calculations. However, the money that you contribute to your retirement account during years you fill out the FAFSA is included as parental income, even though you don't actually get to bring that money home with you. Some parents front load their retirement contributions in the years leading up to their child's base year just in case they need to reduce their retirement savings during the college years.

In addition, parents need to know that withdrawals from Roth IRA accounts are penalty-free if they are used for qualified college expenses. However, this distribution will count as parental income on the FAFSA for the year of the distribution and potentially reduce financial aid by as much as 47 percent of the amount withdrawn.

One way to circumvent this problem is to wait to take a Roth IRA distribution until your child has reached at least the spring semester of his or her sophomore year, since it will be after the final year of income you will need to report on a FAFSA. (Remember, since the FAFSA is based upon the prior-prior year's tax returns, you will not need to provide income information for the last two years of your child's four years in college.)

4. Home equity

The FAFSA does not consider the amount of equity in your home when calculating the EFC — although the CSS PROFILE, which is the form required by many private colleges and universities for determining financial aid eligibility, does request this information. This means that federal financial aid does not need to know how much equity you have in your home, but many private institutions will consider it when evaluating your financial aid needs.

Since home equity is not part of the EFC calculation, some families with large non-retirement savings may consider paying down (or paying off) their mortgage in the years before the base year. This will reduce your expected family contribution, but it could hurt you if Junior or Sis decide to go to a private college or university instead of InState U.

5. UGMA or UTMA accounts

These sorts of custodial accounts are in your child's name, which means that 20 percent of any assets in these accounts are counted toward the EFC. In addition, any interest, dividends, or capital gains earned from these types of accounts (or any accounts in your child's name) are counted as income for your child — which means that 50 percent of that money is counted toward the EFC.

Parents who opened a UGMA (Uniform Gift to Minors Act) or UTMA (Uniform Transfer to Minors Act) account for their child's education would probably be better served by rolling the assets over into a 529 account so that less of the money will be considered part of the EFC.

6. Taxable investment accounts

If you have additional investments on top of your tax-advantaged retirement accounts, these will also need to be claimed on the FAFSA form. These accounts are counted as assets, meaning up to 5.64 percent of their value will be counted in the EFC calculation. However, any dividends and capital gains earned are counted as income, and any distributions you take from these sorts of accounts are also counted as income.

If you need to take distributions from taxable investment accounts to help pay for your child's education, you will also want to wait to do this until at least the spring semester of his or her sophomore year, to keep the distribution from dinging you on the FAFSA.

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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 Ways New College Grads Can Build Credit

Lindsay VanSomeren — Thu, 31 May 2018 08:30:22 +0000

Your credit might be the last thing on your mind after you graduate. After all, there's so much excitement going on with finding a new job and a new place to live, and launching yourself into the full-fledged adult world.

With all of this going on, it's no wonder that 46 percent of soon-to-be college graduates have never even seen their credit report, according to a 2016 Experian survey. But if you can take a second to plan ahead, you can help unlock your future financial goals more easily by building your credit now.

Starting early is important because a good credit record takes some time to build. You'll want good credit when you go to apply for a credit card, car loan, or mortgage later on. And these days, it's not just lenders who look at your credit record, but also landlords, car insurance companies, and even some employers. (See also: 6 Ways Life Is Better With Good Credit)

Luckily, building your credit isn't as hard as it sounds. Here are the six best things you can do now to start.

1. Apply for a credit card

This might sound counterintuitive, but using credit cards wisely is the fastest way to start building credit. FICO, the credit scoring model that most lenders use, weighs revolving credit such as credit cards heavier than installment loans such as your student loans.

Perhaps you already have a student credit card that you've handled responsibly — if so, you're off to a good start. But if you have no credit history, you may need to become an authorized user on a parent's credit card. As long as your parent pays their bill on time and keeps their balances low, you'll benefit from their good habits. At the same time, you won't be contractually responsible for the debt on the credit card (your parent may have other ideas, though).

Another option is to apply for a secured credit card. A secured card charges you an upfront deposit, which is often about the same amount as your credit limit. That makes the card very low risk to lenders, and therefore fairly easy for credit newbies to qualify for. Keep your balances low and pay every bill on time, and you should be able to upgrade to a regular credit card in about six months.

2. Never miss a bill payment

Your payment history makes up a whopping 35 percent of your credit score. It's the single biggest factor that makes up your score. Even one late payment can drop your credit score, and once it's on your report, it takes a full seven years to fall off. A late payment on your credit card made when you're 23 can haunt you until you're 30.

That's why it's so important to not miss payments. One of the best ways to combat this is by putting all of your bills and credit cards on autopay. Once you do that, you don't even have to think about paying them. (See also: The 5 Things With the Biggest Impact on Your Credit Score)

3. Pay down your student loans

The average college student graduated with over $39,000 of student loan debt in 2017. That's a tough pill to swallow, especially since you may not even have a job yet, and if you do, you may not be earning very much.

But once you start earning money, paying down your student loans can boost your credit score. The more you pay off, the more of a benefit you'll see.

Bonus: If you pay extra on your student loans, you'll pay less interest overall and be free of the debt sooner. Then you can start funneling that student loan payment money to other things.

4. Avoid racking up credit card debt

Credit cards are useful tools for building credit — with one big caveat: Do not rack up a large amount of credit card debt if you can help it. Doing so can hurt your credit score. Your credit utilization ratio — the amount you owe versus the amount of available credit you have — makes up 30 percent of your FICO score. It's the second-most important factor in your score.

This can be especially difficult, because again, you're facing a lot of demands on your money after you leave college and you may be earning the least amount you'll make during your entire career.

One trick that can help is, before you make a purchase, ask yourself: "Do I really need this thing?" If you're tempted too often by your credit card, another solution is to freeze it in an ice block in your freezer. That way you still have access to it if you really need it, but it'll take time (during which you can think) to unthaw the card to use. (See also: 7 Effortless Ways to Prevent Budget-Busting Impulse Buys)

When you do use your credit card, aim to pay your credit card bill in full every month if you can. You'll avoid paying any interest that way, and it will keep your credit utilization ratio low. But that raises the question: If you already have the money to pay off all your purchases, why use a credit card at all?

As stated above, using a credit card builds credit. In addition, credit cards give you protections that debit cards don't provide. What's more, by using a rewards credit card — and paying it off promptly — you can also earn cash back or travel rewards.

5. Check your credit report for mistakes

The Federal Trade Commission in 2012 released a study that said 25 percent of people identified errors on their credit report that might affect their credit scores. Today, with the never-ending wave of data breaches, it's especially important to stay on top of checking your credit report.

To make matters a little more confusing, you actually have three credit reports — one from each of the three credit bureaus: Equifax, Experian, and TransUnion.

You can get a free copy of your credit report from each of the three agencies by visiting AnnualCreditReport.com. You can only check each agency for free once per year, so one way to approach the task is check one agency every four months.

6. Avoid closing any student credit cards you may have

Once you leave your school, you might think it's time to cancel your student credit card if you have one. After all, you're not a student anymore, right?

Surprisingly, it might be a better idea to hang onto the student credit card, or speak with your credit card company about having it converted into a non-student version. That way, you can keep your credit history open and growing with this particular card.

The length of your credit history makes up 15 percent of your credit score. It's also one of the most difficult factors to change because all you can do is sit and wait while the average history on all of your accounts grows with each passing year.

That's why it's a good idea to keep your student credit card open if possible. It'll give you a leap forward in growing this part of your credit profile.

You can do this

Building up your credit can seem like an intimidating topic at first. But trust us: If you've gone through college, you have the skills needed to learn how building your credit works. Now all you have to do is put these factors into practice and you'll be well on your way toward a healthy credit score.

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