Editor’s note: On April 24, 2018, The Chronicle for Higher Education reported that “Drew Cloud,” a widely quoted “expert” on student loans, was in fact a fictitious character created by the owners of The Student Loan Report and
LendEDU.com, a student loan shopping site.
In the course of researching whether we had quoted “Drew Cloud” in any of our own stories, we discovered that, in late 2016 and early 2017, the Centre Daily Times published a series of articles purportedly authored by other Student Loan Report writers and published in connection with an advertising arrangement between the Centre Daily Times and LendEDU. LendEDU has informed us that all but one ofthe bylines was a fictitious name. While the Centre Daily Times was not aware of any questions as to the existence of these purported authors, these stories should not have been published without full disclosure of the advertising relationship between the Centre Daily Times and LendEDU.
We profoundly regret that we failed to fully disclose the advertising relationship between the Centre Daily Times and LendEDU.
We have replaced the text of each of these articles with an editor’s note similar to this one. We have collected the text from all of those articles here in the interest of complete transparency.
Thinking About Refinancing Student Debt? New Data Highlights Tough Approval Criteria
Thinking About Refinancing Student Debt? New Data Highlights Tough Approval Criteria
Are you thinking about refinancing your student loan debt? If so, you certainly would not be alone. Student debt has become a massive problem throughout the United States, and many borrowers are suffering under the weight of trying to pay back their student loans. Refinancing student loans offers the opportunity to obtain a lower interest rate, lower payments, and even possibly pay off loans faster. Before you rush to refinance your student loan debt, however, you should be aware that it might not be as easy as you might thinkyou should familiarize yourself with the financial requirements needed. New data shows that the approval guidelines for refinancing student loan debt can be tough. A study published by LendEDU found that 57 percent of applicants are approved their request to refinance their student loan debt.
The factors used to approve applicants for student loan refinancing can vary from one lender to lender. Among those factors is credit score. According to the report published by LendEDU, the average FICO credit score for approved borrowers is 750. Creditworthiness is not determined based solely on FICO score by most lenders, however. Numerous other factors may be evaluated as well, including cash flow. In some cases, lenders may be willing to accept a lower credit score, but in such instances, a co-signer may also be required. The LendEDU report found that more than 32 percent of loans refinanced have a co-signer.
For borrowers who are considering refinancing their student loans with a private lender, it’s important to take several factors into consideration when shopping among lenders. One of the most important factors to consider is the rate they can get. Available rates can vary among lenders. For instance, borrowers who have excellent credit may find they are able to obtain a more competitive interest rate by going with a lender who rewards creditworthiness. By comparison, borrowers with lower credit scores may find that their options are more restricted.
The biggest rate reductions usually come with the shortest loan terms, but it’s also important to keep in mind that this strategy will typically drive up your monthly payments. Unless you are certain that you can pay off your student loan debt within a short time period, this might not be the best strategy. On the other hand, if you have a fair degree of certainty that you will be able to pay off your loans over a short loan period, this approach could save you a significant amount of money in interest and help you to get out from under the burden of your student loan debt much faster. This could be a good strategy for individuals who have graduated with a large amount of debt but who also have a significant income potential. To be certain, it’s a gamble, but for many borrowers, it’s a risk they are willing to take to pay off their loans.
It’s also important to keep in mind that by refinancing your federal student loan debt, you could be giving up perks, including possible loan forgiveness programs. Opting to refinance student loans also eliminates the ability to participate in an income-driven repayment program, a perk that many borrowers need as they struggle to make their loan payments each month.
Certainly, the question of whether to refinance or not is one that is quite complex and may vary among borrowers based on their individual circumstances. Over the last few years, refinancing options in the private student loan consolidation sector have increased significantly.
For the moment, the student loan repayment and refinancing landscape remains complex. That well could change in the future, but for now, it’s important for borrowers to make sure they are aware of all options available to them. For many, refinancing student loans could be a viable option for saving a tremendous amount of money. Even so, with those advantages come eligibility requirements. For the moment, it seems that some borrowers may have a difficult time meeting those eligibility criteria.
How Much Money Can You Save By Prepaying Student Loans?
The average 2016 college graduate has a student loan debt of approximately $28,500. Depending on the type of loan repayment terms, they will have anywhere from 10 to 30 years to repay the balance plus any accrued interest. Nobody wants to be repaying their loans when they return for a class reunion 15 or 20 years down the road, so the best way to become debt-free is prepay student loans.
What Is Prepaying?Prepaying is when the borrower pays more than the minimum monthly payment for their student loan. Most lenders allow the borrower to prepay without penalty and credit the extra payment towards next month’s monthly payment. Although prepayment policies vary between lenders, the extra payment is usually applied to the principal. Prepaying a student loan principal reduces the amount of interest accrued each month. This means more money in your pocket every month you make a payment in excess of the minimum requirement!
Any type of prepayment, large or small, is a good idea. Prepayment might be a great option if your student loans have a high-interest rate and refinancing your student loans is not a good option for your circumstances. Even if you have already refinanced your student loans, chances are you can prepay your new loan without a penalty. If you are thinking about refinancing or are still a college student, be sure your prospective loan doesn’t penalize prepayment or early payoff dates. Also, try to make sure the lender will apply any extra payment to the principal of your loans. If you have multiple loans with a single lender, you should also be able to specify that any extra payment is directed to a single loan instead of being disbursed evenly between every loan.
How Much Money Can Be Saved?The amount of money that can be saved by prepaying student loans will differ from person to person. Depending on how soon you pay off your loans, it can be a savings of several thousand dollars. That extra money can be used to buy a new car, invest, or put towards the down payment for a house.
Let’s look at the examples below to see how much money can be saved if a 2016 graduate with a $37,000 principal at 6.8% interest with a 15-year repayment term makes prepayments.
# of Payment Years
Required Monthly Payment
Total Prepayment Each Year
Total Interest Paid
If the graduate only makes the minimum payment each month, the total loan will cost him $59,119.75 ($37,000 principal plus $22,119.75 in interest). Even paying off the loan one year early, there is a savings of $1,657.44. The savings only increase the sooner the student loans are paid in full. This example helps illustrate how the same college education can cost two people very different amounts. For reference, you can use this prepayment calculator to your exact savings.
How To Calculate Your Own Prepayment SavingsYou do not need to be a math whiz to figure out how much money you can save (and spend on other things) by prepaying your student loans. This page has a handy prepayment calculator that allows you to plug in your loan information and how soon you want to pay it off either by specifying the number of years or the monthly payment you plan to make. After computing the data, you will find out how much the monthly payment will need to increase to meet your payoff goal and how much money you will save!
Even if you can pay your loans off early by a year or several months, any type of prepayment is better than nothing at all. Using the calculator should help motivate you to prepay you loans as much as you can afford.
How To Prepay Student LoansPrepaying your student loans can be done at any time and any interval. The largest determining factor will be your budget. The best option for you is to contribute the extra amount recommended by the calculator to meet your payoff goal. Even if you can only partially meet the goal, contribute what you can afford. To pay off your loans in 10 years, you might have to pay an extra $100 each month but can only pay $50. Contribute what you can and keep the momentum going.
Another way to prepay is making special payments. If you receive a bonus or pay raise, put the extra money towards your student loans instead of buying something. Try to keep you lifestyle at your current income level, so that you can live below your means and put the extra money toward your loans. Even if all you can afford is a one-time prepayment, instead of recurring prepayments, anything will help save you money in the long-run.
LendEDU is a content partner of the Centre Daily Times providing personal finance news, expert commentary and coverage.
These Personal Loan Blunders Could Be Costly in 2016
Depending on your financial needs, a personal loan can be an attractive option. Unlike other forms of debt, personal loans offer you flexibility to use as you want. Whether you are looking to pay down credit card debt, pay for a dental treatment or replace a broken water heater, you can use the loan for whatever you need. That versatility can be very appealing. But a personal loan can be risky if you are not careful, with high interest rates, fees and penalties.
Before taking out a loan, make sure you understand what you are getting into and common mistakes people make. Below are six personal loan blunders that could cost you a lot of money:
Making an Impulse Decision: When you are in need of money, it can be tempting to leap for the first option that presents itself and a personal loan often seems like the easiest option. But depending on your situation, it might not be the right avenue for you. For example, if you are looking to pay off credit card debt, a zero percent balance transfer may be more cost effective and less risky than a personal loan. If you are disciplined and have a repayment plan, you can end up saving yourself a lot of money than if you had a personal loan with a higher interest rate. Consider all of your options before signing up for a personal loan; there may be other ways to handle your needs without taking on more debt.
Neglecting Your Credit Score: Your credit score plays a major role in getting a personal loan. The average interest rate for a personal loan is over 11 percent, but if you have excellent credit, you could qualify for a loan with an interest rate as low as five percent. That difference can save you hundreds, if not thousands, over the course of your loan. Be aware of your credit score so you know what options are available to you. If you have good credit, you can shop around with different lenders to get the best rate. If your credit is not great, work on improving your score to get better offers.
Taking the First Offer: There are many different financial services companies that offer personal loans, from traditional banks and credit unions to online companies and peer-to-peer lending firms. Shop around to get multiple offers; make sure you consider all of the factors, including origination fees, prepayment penalties and interest rates to ensure you’re comparing apples to apples and get the best offer. Start with a bank or credit union where you already do business, then compare with online lenders to see what is the most competitive option.
Embellishing Your Application: When you know a better interest rate is possible, you might feel compelled to boost your application by rounding up the numbers a little. But not only is that risky, but it is also illegal. While lenders may not find out right away, they can cancel your loan at any time if they discover that your application was incorrect. Additionally, the lender can put the loan into default, marking it as a misrepresentation and ruining your credit.
Forgetting Your Goals: When you take out a personal loan, you likely have good intentions about using it to pay down debt or pay for a necessary car repair. But once the money is in hand, it’s all too easy to forget about its original purpose when life gets in the way. If you do not adjust your spending habits and budget, a personal loan will only worsen your problem and add to your debt. Before taking on a loan, review your budget and identify areas where you can cut corners. Whether it’s eliminating eating out, going down to one car for the family or selling items you have in the house, come up with a concrete plan for paying back your debt. Otherwise, your debt can balloon, and a personal loan will just exacerbate the issue.
Thinking of a Loan As Easy Money: Because personal loans are unsecured, meaning they are not tied to your house or other property as collateral, you might think of a loan as easy, consequence-free money. But there are significant penalties that can occur if you miss your monthly bill. If you default on your payments, the lender can take action against you. They can charge high penalties and late fees, and if you still do not make payments, can send your debt to collections, which will destroy your credit history.
When you are trying to get your finances in order or are attempting to come up with the funds to handle an unexpected emergency, a personal loan can seem like the perfect option. But if you are not careful, taking out a personal loan can be a costly blunder.
Whether it’s not reviewing other financial options or not sticking to a budget, these six common mistakes can end up costing you hundreds or thousands of dollars. Before signing to take on a loan, understand all of your options, build a repayment plan and read the fine print to make sure you do not get stuck with a hefty loan balance and crushing interest rates. With due diligence, you can take out a personal loan and use it wisely to manage your debt.
3 Things You Need to Know About Refinancing Student Loans, Before You Apply
If you’ve graduated in the last ten years, it won’t come as a surprise to you that we have a big problem with student debt. Currently, students in the U.S. are graduating with an average of over $28,000 in loans with many graduates owing even more than that.
That’s a considerable number of borrowers who are struggling with their repayment. Other borrowers are also having difficulties repaying their loans or are paying too much in interest.
But many graduates could save a considerable amount of money on their student loan payments if they were to refinance their loan at a lower rate. In fact, a recent report estimated that over 8 million borrowers could qualify to refinance their debt if they applied.
So, what do you need to know about refinancing your loans? Here are 3 things to consider:
- How to Qualify
When you’re refinancing your student loans, you’re taking out a new private student loan that will be used to pay off either your federal loans, your private loans, or both. Just like other private student loans, you will need to apply to refinance your loans and the lenders will look at your credit and your income in order to decide if they are willing to lend to you and to determine the interest rate you qualify for. Depending on your credit score, you might a higher or lower interest rate.
If you cannot qualify to refinance your student loans because you don’t make enough or have a low credit score or if you would like to qualify for a lower rate, you can potentially ask a co-signer to help out. Since students were often required to have co-signers on their private student loans in the first place, your co-signer on your existing loans might be willing to help. If they are, look for a lender that has something called co-signer release. This will allow you to remove the co-signer from their obligation around your student loan if you make a certain number of on-time payments.
- Variable vs. Fixed Rates
When you refinance your student loans you might have an opportunity to choose either a variable or a fixed interest rate. Federal student loans currently all have fixed rates, but many private lenders offer both options. What’s the difference between the two?
A variable interest rate means that the interest rate you pay will vary over the course of your student loan. That means that it would start at 5% but could but up to 7% or down to 4% in the future. Variable rate loans set interest rates based on current rates and so change over time.
A fixed rate loan means that you will always pay the same interest rate. If you qualify and take out a loan at 4% interest, then you will always pay 4% interest over the life of your loan – even if interest rates go up or down.
Typically, variable rate loans have lower introductory interest rates, but they carry the risk that they could go up significantly in the future. Many people opt for fixed rate loans because of the guarantee of a low rate over the life of the loan.
- Loan Terms
Many student loans have 10 year repayment periods, but when you refinance your loans, you have a number of options when it comes to loan terms. Many lenders offer you the choice of 5, 10, 15, or 20 years. These options allow you more flexibility in deciding how much you want to pay each month.
For those who feel overwhelmed by their loan payments, it might make sense to choose a longer loan term. By doing so, your monthly payments will be lower. The drawback is that by choosing that longer term, you will end up paying more in interest over the life of your loan. However, so long as your loan servicer allows you to make additional payments on your loan without penalty, you could get a longer loan and pay it off faster.
If you choose a shorter loan term, you will be saving yourself interest by paying off your loan at a faster pace and that will mean that you’ll be out of debt faster too.
The Bottom Line
Refinancing your student loans is a great way to save money on interest and to potentially pay off your loans more quickly. But before you refinance your loans, take some time to consider whether you want a variable or fixed interest rate and how long of a loan term you would prefer. You should also be aware that refinancing federal loans will mean that you will lose many of the protections that they offer like the income based repayment program and the option to defer your loans. Some private lenders do offer great benefits and protections as well – so be sure to check to see what your lender offers.
MasterCard Infusing Artificial Intelligence into Credit Transactions
Fraudulent credit card transactions are a pressing concern among retailers, card issuers, and consumers alike. With a reported 31.8 million U.S. consumers experiencing credit card fraud in 2014 alone, sweeping changes have been put in place to thwart its devastating effects. Technology enhancements like EMV chip-enabled cards, fraud alerts from card issuers and banks, and dozens of no-cost credit monitoring services all work together to fight the ongoing issue of credit card fraud throughout the country. Despite good intentions, some consumers desire more from card issuers in accurately detecting – and halting – fraudulent activity on credit or debit cards.
The majority of consumers can share at least one awkward moment when a credit card purchase was declined in error. The cashier hands back the card with a pouty look, and in most cases, shares discretely that the transaction can’t be completed with the credit card provided. The account isn’t near its credit limit, was just used at the gas station down the road, or has ample funds available to cover the declined purchase amount, and still, individuals are forced to leave the store without their purchase in hand. All too often, the decline of a credit or debit card based on information received by the card issuer that triggers a potential fraudulent purchase isn’t accurate. Consumers are left with an incorrect, inconvenient stop placed on an account based on information that isn’t quite as intelligent as is should be.
Decision Intelligence from MasterCard
Although the technology behind artificial intelligence is hardly a new concept, it is now being used in different applications to benefit businesses and individual consumers on a higher level. MasterCard, one of the leading issuers of credit cards throughout the country, recently announced the development and implementation of an artificial intelligence tool, Decision Intelligence. The service, touted as a comprehensive decision and fraud detection program, utilizes artificial intelligence technology to allow financial institutions the ability to accurately process transactions and detect fraudulent purchases for customers. The intent of the program is to decrease the number of false positives that plague consumers when the detection of credit card fraud is less than accurate.
According to a recent study conducted by Javelin, nearly 15% of all consumers with an active credit or debit card experienced a false positive in fraud detection over the last year. While the experience is often equally embarrassing and frustrating to the buyer, the research highlights an even greater problem for consumers and credit card issuers. A number of purchases declines racked up to more than $118 billion in lost sales – but only $9 billion of those transactions were actually found to be linked to fraudulent activity. The extent to which false positives in identifying fraudulent credit and debit card activity poisons the retail system is costly from all perspectives.
To combat the issue of false positives, Decision Intelligence by Mastercard is meant to infuse the technology of artificial intelligence with already-established proprietary evaluations of credit use by card members. Through the use of sophisticated algorithms, Decision Intelligence works to provide credit card issuers a predictive score based on the consumer’s past behavior. Countless data points are used to develop analytic information about a transaction at the moment a card is swiped or tapped, and the score is generated and used to determine if a transaction is indeed fraudulent or not. Artificial intelligence technology allows MasterCard to build on previous transaction scores to help understand each individual card holder and ultimately reduce false positives.
How AI Differs from the Current Landscape
Most card issuers have a system in place to detect potentially fraudulent activity based on a card holder’s previous purchases. Not only is data used to collection information on purchase amounts, frequently visited retailers (both physical locations and online), and locations, but it is also used to analyze how credit card holders spend on a specific card over time. If a card holder makes an unusual purchase or attempts to buy an item in a store that is hundreds of miles away from home, a fraud alert may be placed on the card and the transaction is ultimately declined. The problem with this method is that card issuers are utilizing rules-based thresholds that have inherent restrictions. False positives are the all-too-common outcome.
MasterCard’s use of artificial intelligent in detecting and ultimately stopping fraudulent card activity is the first worldwide application of such technology. However, other card issuers have stepped up their game in terms of using advanced methods to deliver more accuracy in credit card fraud alerts in the past few years. Visa, for instance, has implemented its Advanced Authorization System to identify fraudulent activity on cardholder accounts. Large sets of data are evaluated systematically to determine what constitutes legitimate spending and questionable purchases from each of its card holders. Similarly, PayPal has embraced a level of artificial intelligence for its customers to detect fraud in recent years. Currently, though, MasterCard stands alone as the leader in artificial intelligence technology use for card holders on a grand scale.
One of the issues presented to smaller card issuers is the ability to fund more accurate techniques for identifying fraudulent transactions among card holders. The use of big data is critical to the process of using artificial intelligence in an accurate, meaningful way, but the widespread use of consumer data puts it just out of reach from a cost perspective for smaller companies. Businesses now use data to determine buyer preferences and tendencies both in-store and online, and they form that data into relevant marketing to pinpoint target segments of buyers. That equates to a high price tag, and less visible players in the credit card issuer marketplace have less access because of it, making it difficult to keep up with powerhouse companies with Visa, PayPal, and Mastercard.
The future of credit card practices is bright, especially from a retailer and card issuer perspective. However, taking away the annoyance of false positives when it comes to potentially fraudulent activity is a clear win for consumers, too. As more companies gain access to the data needed to run progressive artificial intelligence programs like Decision Intelligence, individual consumers, merchants, and the almighty card issuers will benefit immensely.
Student Debt Causing the Boomeranging of Young Adults?
It’s little secret that student debt is a topic of massive concern today. While there are many suggestions regarding what should be done to resolve the issue, it remains a problem that continues to impact much of the country. So much so, in fact, that it could be the reason behind so many young adults boomeranging and returning home to the nest.
According to data published by The Associated Press, there is definitely a link between the number of young adults who return to live with their parents and rising student debt. Many of the young adults clumped together in what is known as the boomerang generation have now been living back at home with their parents for years. Many of them graduated college just as the housing market and financial markets were imploding. At the same time, the new graduates were facing what has become the largest student debt burden in history. It’s not uncommon for many people in their early 20’s to have tens of thousands of dollars in student loan debt. Making the situation even worse is the fact that an alarming majority of college graduates are either unemployed or underemployed leading to default. Those who are employed continue to earn substandard wages in jobs that do not even require them to have a college degree at all. The situation has created a vicious cycle in which college grads are struggling to pay off the loans they took out to fund the education they cannot even put to use. As time goes on, boomerang adults discover it has become increasingly difficult to leave their parents’ home.
Employment is not the only obstacle many young adults must overcome. The housing market has also proven to be a detriment. Even those who are employed often discover they simply are not able to afford to move out of their childhood house. First-time homebuyers are facing the fact that home prices are often several times that of their income. With lower wages than they expected, massive amounts of student debt left to repay, and poor credit scores as a result, it’s not uncommon for many boomerangers to feel as though moving out of their parents’ homes is an unobtainable goal. The inability to move out on their own is also creating a ripple effect in other areas. For instance, many young people are also now postponing their plans to marry and form families of their own. In a few years’ time, this trend could well have an impact on society as a whole, including an entire generation of older adults who will one day find themselves faced with the prospect of raising young children because of their decision to delay family planning.
While some boomerang young adults and their parents view the trend as a practical and necessary move, others continue to struggle with the reality. To be certain, the boomerang generation is definitely having an impact on the financial security of their parents, a generation that is aging quickly and facing their own fair share of challenges. At a time when seniors should be enjoying their retirement, many have realized they simply cannot afford to do so when they still have adult children at home to support. It’s not just keeping a roof over their adult children, either. It’s now not uncommon for many people who should be nearing retirement age to be faced with the prospect of paying the parent loans they took out to fund their children’s educations.
While every situation is definitely unique, parents may find it necessary to set certain boundaries and even encourage their adult children to begin taking steps toward independence. This could include asking their boomerang children to contribute toward a share of the household expenses or even contributing in other ways, such as running errands or performing certain duties or chores around the house.
Ultimately, parents may need to determine whether they are helping or enabling an adult child who has returned home due to escalating student loan debt and an untenable employment situation. Regardless of each individual situation, one thing is certain. The generation of boomerang adults will certainly have a long-term impact on not just them but also their parents.
Parents: Help Your Children Graduate College Without Student Debt
According to a study published by Fidelity Investments, more than 70 percent of parents are putting away money to fund their kids’ college education. Despite that, almost the same percentage of students will graduate college carrying an average of $28,000 in student loan debt. Clearly, there is a gap that needs to be filled. Below, we present some strategies that can assist parents in helping their children graduate college without carrying a massive burden of student loan debt.
Maximize Your 529
Parents can choose from two types of 529 college savings plans, including prepaid plans and savings plans. Prepaid plans are designed based on the cost of attendance at in-state public colleges, while savings plans are typically managed by a financial adviser and function much like a 401(k). Both options are available as state-based 529 plans. However, in states where a tax deduction is offered, it’s usually better to opt for that particular plan. This is because the money that you save can be used for increasing contributions to your 529.
This means that when the time comes for your child to start college, he or she will have more money. While you could select a plan from another state, you should know that tax incentives may not apply if you do not live in that state. It’s always a good idea to carefully review the terms of a plan before making a commitment. Heavy administrative or management fees could reduce the amount that you are able to put away for your child’s education.
Make the Most of Federal Aid Eligibility
Many parents often assume that they would not qualify for federal aid. You might be surprised. Once you have completed and submitted the Free Application for Federal Student Aid or FAFSA, you will receive a student aid report. This report includes your family’s estimated family contribution, known as your EFC, or the amount that you are expected to contribute. The amount of federal aid for which your child is eligible is based on this number. Additionally, this number is used by many colleges for determining the amount of need-based aid that your child should be awarded.
The income and assets for the student, as well as the parents, are factored into the EFC for dependent students. It’s vital to be aware that various transactions can impact your EFC differently. If you withdraw money from your retirement account or sell an investment property, that transaction is counted as income. That means your Estimated Family Contribution will increase. The more money that your child has in his or her name, the less aid he or she may receive.
It’s also important to be aware that the FAFSA is currently based on tax information from the year before last. To make the most of federal aid eligibility, this means that if you wish to make adjustments to your finances, you should do it during the first half of your student’s junior year of high school. If you are not sure whether you may need to make adjustments to your finances, consider meeting with a financial advisor while your child is still a sophomore in high school. The advisor will determine what, if any changes may be needed to your finances.
Get Your Child Involved
While it’s certainly important for parents to save for their children’s college education, it’s also important for students to learn early on how to handle money. Far too often, college students take out massive student loans far above the amount of money that they actually need for college. As a result, they end up graduating college with a staggering amount of debt that they cannot realistically pay back based on their estimated future earnings.
To help your child understand the consequences of debt, consider giving him or her a small loan that must be repaid with interest. This is a life lesson that could prevent your child from falling into the trap of student loan debt later on.
Saving and paying for college is a fact of life, but with some planning, parents can help ease the burden somewhat without worrying that their children will graduate with a student loan debt burden the size of a mortgage.
Tell Your College Student About These Debit Card Dangers
For many students, college is their first taste of real independence, and that includes managing their finances on their own, as well. And while they may be getting an education to prepare them for their respective fields, most do not have an opportunity to learn how to handle their money effectively. In fact, college students are making more poor financial decisions than previous generations. According to a recent survey, fewer students are making budgets, tracking their spending or limiting credit card debt. The poor decisions they make in school can end up having serious ramifications after graduation in the form of poor credit and loads of debt.
One of the most dangerous behaviors students exhibit is their use of debit cards. Many young adults are sent off to school with a debit card, without having had one of their own before; instead, they just used their parents’ accounts. That issue can set them up for failure when it comes to managing their accounts on their own.
College and Debit Cards
On the surface, debit cards can seem like a safer option than credit cards. With a debit card, students cannot rack up thousands of dollars of debt; they are limited to the money they actually have in their account. Many millennials and young professionals switched to debit to rein in their spending and better manage their budgets.
However, debit cards carry unique risks compared to credit cards, such as the increased possibility of fraud and overspending.
Debit Cards and Fraud
People between the ages of 20 and 29 are more likely to be victims of fraud than any other age bracket, so college students are very vulnerable. Whether it is card skimmers at the gas station or having your card stolen during a night out, debit cards are easy targets for thieves. Especially on college campuses, where students make purchases on public Wifi or have unlocked dorm rooms, debit cards are commonly stolen with severe consequences.
If you use a credit card, and fraudulent purchases are made, it’s usually no big deal; once notified, the company deletes the purchases and issues a new card number, and you are no longer responsible for those charges. For debit cards, it can be much more complicated.
If your debit card has been stolen or unauthorized purchases made, you typically need to catch it and report it to your bank within two business days, or you may be liable for a certain percentage of the fraudulent purchases. If you do not report it within 60 days, you could end up losing out on the entire amount of money stolen. Since many college students are overwhelmed, they usually do not check their online statements daily, so unauthorized purchases can be missed and money lost. Because the debit card is linked to a checking account, a thief can completely drain the account before the student notices anything is wrong.
Debit Cards and Overspending
Debit cards are also linked to overspending by college students. Because of the ease and convenience of a debit card, it’s easy for people to forget that it’s linked to real money. A few trips to the bar or a restaurant and the entire account can be wiped out. And while credit card debt is never a good thing, debit cards compound overspending with overdraft fees and bounced check fines. College students are more likely to rack up fees for overages than any other age group, putting yet another financial burden in their paths.
Once the account is overdrawn, the student then faces issues like not being able to pay their rent, car insurance or buy essential supplies for class. Relying on a debit card can put them in a precarious financial position.
Debit Card Alternatives
Instead of a debit card, a secured credit card can be an excellent compromise. With a secured card, you put a certain amount of balance on the card, and that is your spending limit. For instance, if you deposit $500, you can only spend $500; if you go over that, your card will be denied until you make a payment. That feature can keep you from overspending and overdrawing on your checking account, while also giving you the added security of a credit card.
Additionally, because a secured credit card is not automatically linked to your bank account, if the card is stolen, the thief can only use the balance of the card, not your whole savings. While dealing with unauthorized purchases can still be a pain, a secured credit card can limit the damage.
The Final Word on Debit Cards
For college students, debit cards present unique risks and dangers when it comes to managing finances. If a credit card is not an option, it is important to take measures to protect your card and your identity. Only use the card on a secured internet connection, never share your PIN number and check your account online daily to look for fraudulent purchases or suspicious activity. If you notice anything that does not look right, report it immediately.
If it all possible, explore other options, like a credit card specifically designed for students or a secured credit card. These cards give you greater protection against fraud and can help you protect your bank account from thieves. When heading off to school, consider your options and take measures to protect yourself to keep your finances in good standing.
6 Questions You Need to Ask Before Getting a Rewards Credit Card in 2016
From airline miles to cash back, reward credit cards can be a valuable tool to manage your money and enjoy perks. Whether you love to travel or just enjoy getting cash back each month, there’s likely a credit card out there that matches your needs and interests. Just using your card for your everyday spending can earn you hundreds, or even thousands, in rewards. When used wisely, you can end up making money instead of racking up debt.
However, some credit cards can be more costly than they are worth due to annual fees and interest rates. Moreover, if you are not careful, juggling credit cards for their rewards can end up leading you into debt; credit cards with benefits are best for above-average spenders with excellent credit. To help you choose the best card for you and manage your finances, consider these six questions before you fill out a credit card application:
1. Will you use the rewards? So many people get sucked in by exciting sounding offers, like airline miles or travel rewards. However, if you are the type of person who loves hanging out in your own city, those rewards can go to waste. Instead of looking at the value of the offer itself, consider its value to you as an individual. If you do not travel often, you might be better off with a credit card that offers cash back on routine purchases.
2. What are the fees? While reward credit cards usually sound great at first, many of them come with annual fees; some can be as high as $100 a year. If you do not use your card often or get many rewards, the cost of the card can be more than its worth. Similarly, some credit cards with generous promotional offers have very high interest rates, reaching as high as 20% to 30%. If you pay off your bill in full every month, the interest rate might not matter to you, but if you carry a balance, you can end up paying a lot more for your purchases.
3. How easy is it to redeem rewards? Evaluate each card’s process to redeem rewards. Some are very simple; your cash-back balance is available to use immediately, regardless of the amount. Others only allow you to use the balance once it is hit a certain minimum, like $50; that can take a while to build up. For cards that offer airline miles, many have blackout dates which can inhibit your vacation plans. Understand the card’s limitations so that you can make the most informed decision possible.
4. Do you have any debt? If you carry debt already, adding a credit card just for the rewards may not be a good idea. Especially if your debt load is high, your credit score may be low, will make it difficult for you to qualify for a card with a low interest rate. You may only be able to be eligible for a limited rewards card, such as a store card, which has low credit lines and very high interest rates. Additionally, reward cards can tempt you into spending more than you intended. You may use the card more, justifying it by telling yourself you are earning benefits. Unless you have established strong discipline and repayment habits, reward credit cards can worsen your financial situation.
5. How often will you use credit? If you are the type of person who budgets your money better using cash, a rewards credit card likely does not make any sense; you will not use it enough to justify the annual fees. These credit cards work best for people who are above average spenders and can afford to pay off their balances each month. By using them for everyday expenditures, including utilities, eating out and entertainment, they can rack up the rewards without spending any additional money. If you are an average spender, opting for a card with a low annual fee and cash back rewards, rather than airline miles, may be the best course of action.
6. Do you have a rewards goal? Many people sign up for new credit cards on an impulse, such as at the store cash register or walking through the airport. However, by being strategic about what your goals are, you can maximize your rewards. For instance, one smart way many people use cash-back cards is to save for Christmas or holiday spending. They use their credit cards for everyday purchases and use the cash-back balance at the end of the year for gifts and decorations. That is a way to use a card wisely and enjoy the holidays without spending any of your own money. Whether you want to save for a big purchase or are planning a dream vacation to Paris, make sure you have a clear goal and that your selected credit card has rewards that can help get you there.
If you are considering opening up a new credit card, you may be overwhelmed with the different options available to you. From travel incentives to cash back promotions, there are reward credit cards available to match your spending habits and financial goals. Consider your financial situation carefully to see if your budget and spending habits warrant signing up for a credit card. No matter which card you choose, maximize your rewards by paying the balance in full and staying within your budget.
Banks Relax Student Loan Default Rules
The Consumer Financial Protection Bureau (CFPB) was legislated into existence in order to protect consumers from unfair treatment due to shady practices by banks, credit card companies and a whole slew of other businesses. One of the more egregious examples involves private student loan providers that contractually obligate borrowers to repay their loans immediately if a loan co-signer dies or goes into bankruptcy.
In a victory for consumers, the President of the Consumers Bank Association, Richard Hunt, recently sent a letter to the CFPB Director, Richard Cordray, announcing that 10 banks were modifying their co-signer rules for private student loans. The roster of banks includes Discover, Sallie Mae, PNC Financial, and Wells Fargo, all pledging to forego the triggering of defaults when co-signers die. Most also agree not to push for defaults should co-signers file for bankruptcy. New contract language will reflect this change, and existing contracts will be subject to the policy change as well.
Nice GuyIn his letter to the CFPB, Mr. Hunt stated the banks’ commitments to responsible, fair and clear terms when offering private education loans to American families. He professed solidarity with the borrowers’ ultimate goal to pay back their loans, even during tough times when a loved one dies (and that loved one is a co-signer).
This largesse by the head of the Consumers Bank Association was not completely altruistic, in that it comes as a response to a letter from the CFPB warning that auto-defaults might be illegal when the borrowers are up-to-date on their obligations. Banks and other financial firms routinely trigger defaults automatically when a co-signer dies, even though the private student loan borrower is up to date.
The effects of an auto-default can be devastating to borrowers, who must somehow immediately come up with the total private student debt due. Failure to repay can ruin the borrowers’ credit status, which will make it difficult later on for these folks to borrow for a home or car.
For his part, the CFPB’s Mr. Cordray took the opportunity at a recent consumer advisory board meeting to praise the banks who agreed to the new auto-default procedures. He commented that this was a significant change that makes new private student loans safer, although he promised to monitor the practice with regard to existing loan contracts.
A Long EffortThe new policy comes after two years of hectoring by the CFPB to have the auto-default clause removed. Bureau examiners have identified student-loan contracts with ambiguous auto-default language that might violate law if it was found to be deceptive and unfair. Until recently, banks resisted the Bureau’s recommendation while claiming they normally don’t invoke the clause. Nonetheless, failure to remove the clause leaves consumers vulnerable should, say, the student loan be sold and packaged with others into an asset-based security. The new owners of the loans may not share the banks’ reticence to auto-default when co-signers die.
Securitization investors often favor co-signed debt, because it is viewed as less risky, and therefore less expensive to buy. The risk is reduced because the co-signer is legally obligated to make repayments should the primary borrower fail to do so. The contracts on these securities often makes it difficult not to auto-default on the loans. By removing the auto-default clause, parents and other co-signers have one less worry to contend with, even if the loans are subsequently sold and securitized.
Banks Come AroundThe CFPB first raised the auto-default controversy in an April 2014 report. It found that about 90 percent of private student loans required a co-signature, often from a parent or grandparent. When a co-signer dies, court and probate records are scanned by financial institutions and then matched to the institution’s consumer database. This could cause the bank to automatically invoke a default, even if the borrower is completely up to date on the loan. Similar problems occur when a co-signer enters bankruptcy, leading to auto-defaults, credit damage and harassment from debt collectors.
Another problem found by the CFPB involved the release of co-signers, an advertised benefit of many loans but one that was difficult to execute. The lenders advertised that co-signers would be released if the primary borrower made consistent on-time payments. Many consumers complained about confusing procedures and unobtainable forms when attempting to remove co-signers. Lenders would often throw up roadblocks, such as requiring transcripts, proof of graduation, credit checks, proof of employment, etc.
The CFPB responded by publishing a form letter consumers could use to request the release of co-signers from their privately-issued education loans. The Bureau also recommended that the lenders give borrowers the opportunity to find a new co-signer should the original one die or go bankrupt.
Granted that private lenders hold but 7.5 percent of outstanding student loan debt, the issue is nonetheless an important one to the 1.4 million annual borrowers of that debt, which amounts to about $102 billion. For many years, private student loans were criticized as having weak consumer protection and inflexible repayment terms compared to federal student loans. But competition from the federal government has encouraged financial firms to improve the terms of their student loan contracts.
Private student loan borrowers who are having trouble making payments might be able to renegotiate their loans at a lower interest rate. This depends on the lender, but in the past Wells Fargo and Discover Financial Services have put loan modifications programs into operation. These offers may have time limits or borrowing caps, so it’s a good idea to shop the different private lenders if you can’t obtain a federal student loan.
Consumers Are Missing More Credit Card Payments. Here is the data.
According to a recent report compiled from data on consumer trends collected by TransUnion, one of the three major credit bureaus, the number of individuals missing credit card payments is on the rise. The information shared by the credit bureau shows that nearly 3% of revolving balances on newly issued credit cards is 90 days or more past due, compared to the 2.2% reported for 2014 and 1.5% for 2013. When missed payments for newer credit cards are added into the nationwide mix of revolving account balances, the average delinquency rate rises to 1.53%, representing the highest percentage in the last four years.
While there are a number of factors that contribute to missing a credit card payment or two, the recent data from TransUnion shows a clear correlation between the rise in delinquencies and a trend among a number of credit card issuers. Subprime lending – the practice of offering revolving credit accounts to less than well-qualified borrowers – is partly to blame.
The Subprime Debacle
It is hard to forget the consistent headlines throughout 2008 and 2009 connecting the dramatic downturn of the economy with common but dangerous practices of lenders throughout the country. The subprime market, including borrowers without verifiable income, with poor credit history or score, or no credit whatsoever, was booming up until the recession began, with lenders across nearly all verticals handing out new loans, credit cards, and mortgages to the masses. As the recession started its stark decline, subprime lending took a backseat to fixing a broken system.
However, in 2014 as the broad market showed signs of steady growth, a surge in credit card offers to subprime consumers took place. According to the Wall Street Journal, more than 20 million credit cards were issued to subprime borrowers in 2015 alone. This represented a 20% increase from 2014 and a 56% increase from 2013. The reason? The subprime market is a profitable endeavor.
Although not all subprime borrowers are destined to mismanage their credit accounts, there is a higher propensity that late or missed payments will take place compared to prime or super-prime accountholders. Credit card issuers understand the risk of offering credit to an individual with a spotted credit history, but they also realize there is an opportunity for additional revenue. This is because subprime credit cards often carry a variety of fees (hint: you should look for credit cards without fees), including charges for the following:
- Late payments
- Increasing the credit limit
- Maintenance fees (either monthly or annually)
- Over the limit fees
- Processing fees
Some card issuers tack on one or more of these fees at the time a new credit card is approved, meaning a subprime borrower is already in behind by the time the card arrives in the mail. Because individuals with less than perfect credit are often issued a low-limit credit card to start, the potential to go beyond their limit is high when these fees are present. The subprime consumer with a brand new credit card meant to help build a better history of financial responsibility is instead digging himself out of a hole within the first few months after account opening. The increase in missed credit card payments is inevitable with this system of subprime lending in full force.
In addition to subprime lending practices, the Wall Street Journal reported that ancillary factors play a role in the rise of missed credit card payments. According to data reported earlier in 2016, unemployment rates in specific business sectors, such as energy and oil, have been on the rise in certain states, including Texas, Oklahoma, and Wyoming. Without a steady income, it is nearly impossible for borrowers to maintain on-time payments for outstanding debt balances, especially revolving accounts like credit cards.
To add to the difficulty, most credit card issuers aren’t prone to allowing payments to be deferred or skipped altogether, unlike lenders that provide personal loans, mortgages, or auto loans. The increase in the unemployment rate and the combination of stringent repayment terms, then, can be linked to more missed payments among consumers residing in states with substantial energy and oil sector jobs markets.
There is widespread concern that subprime lending will continue well into the future, without many changes taking place to better protect consumers. Part of this prediction is based on the fact that individuals with lackluster credit histories have a pressing need to correct the problem; employers, utility companies, lenders, and other direct and indirect creditors all take a close look at a person’s credit profile to determine his or her degree of financial responsibility. Without strong credit, securing a new home, vehicle, or job is a true challenge.
The unfortunate truth is that new credit is a necessary component of repairing poor credit history, but accounts have to show prospective creditors a strong track record of on-time payments and responsible use. The fees associated with subprime credit cards create a vicious cycle of debt which ultimately results in more missed payments, additional black marks on a credit report, and less opportunity for new credit down the line. If delinquencies on credit cards are going to move in the opposite direction in coming years, creditors need to release their tight grip on the subprime market and consumers need to have a better understanding of how missed payments have a lasting effect on their financial lives.
Fed Raises Interest Rates. What This Means for Variable Rate Student Loans
On December 14, the Federal Reserve raised the federal funds rate by a quarter percentage point, to 0.75 percent. This will affect existing variable rate student loans as well as all future loans, fixed or variable. The 1/4-point rise isn’t all that significant on its own, but it might gain importance if it is followed by several more rate hikes.
Variable Rate Student LoansOnly private insurers issue variable rate student loans – all federal student loans are fixed-rate. According to MeasureOne, only 7.5 percent of the $1.4 trillion in U.S. student loan debt is private. That’s about $102 billion in private student loans, split between fixed and variable rates. Nearly all the variable rate loans are tied to LIBOR or the U.S. prime rate, and both of these closely follow the fed funds rate. Therefore, we can expect a quarter-point jump in variable rate student loans almost immediately.
Variable rates for private student loans are calculated at a margin above the target rate, such as 1-month LIBOR plus 3.75 percent. At the time of writing, this rate stood at 0.70 percent, so the interest rate on the student loan would be 4.45 percent. On a 10-year, $50,000 student loan, that works out to monthly payments of $516.99, according to LendEDU. A quarter-point rise would bring the monthly payment to $522.03, not much of a change. A full one-point rise would boost the payment to $541.39/month, an additional $296.40 a year. So unless rates skyrocket or your loan balance is very high, higher variable rates won’t cramp your lifestyle that much.
On the other hand, a booming economy could push interest rates up considerably. If the example variable rate rose to 10 percent, monthly payments would be $660.75, an annual increase of $1,723.92. Ouch! At some point, you might want to refinance to a fixed-rate loan.
Fixed Rate Student LoansAll federal student loans and many private ones are originated with a fixed rate. Existing loans won’t change, but eventually new loans will be more expensive. According to the Wall Street Journal, federal student loans, which are tied to the 10-year Treasury note, won’t be affected right away, because the rate is locked in from one July to the next. Private lenders can change their rates as they wish.
Refinancing a Variable Rate Student LoanVariable rate student loans made sense when interest rates were rock bottom and/or the borrower planned to pay off the loan relatively quickly. As loan rates rise, borrowers will be tempted to refinance their variable-rate loans into fixed-rate ones. While this will cost more up front, the betting is that the refinanced fixed rate will be lower than variable rate after a few years.
According to CNBC, if you refinance a long-term student loan into a shorter-term one, you are likely to reduce your rate by about 1.7 percent. That’s good if you are concerned about the total amount of interest you will pay, but it comes at the cost of larger monthly payments. If you cut the term in half, you can expect your monthly payments to increase but not to double, since your interest rate will be lower.
The Economy’s FutureDonald Trump has promised to enact a massive tax cut that he thinks will raise GNP growth to 4.5 percent or more. Such a drastic increase in growth will send interest rates soaring, so variable-rate borrowers who believe Mr. Trump will succeed will be highly motivated to refinance into fixed-rate loans. On the other hand, if you feel Mr. Trump’s plan is unlikely to succeed, you may want to keep your variable-rate student loan. Unfortunately, predictions are unreliable and the future is cloudy. Time will tell whether now was a good time to refinance your variable-rate student loan.
Fed Raises Interest Rates. Savers Can Expect to See Saving Account Rates Rise
On December 14, 2016, the Federal Reserve raised the federal funds rate by 0.25 percentage point, to 0.75 percent. This is only the second rate hike by the Fed in the last 10 years, and by itself will not have a profound effect on interest rates. However, many forecasts point to several more rate hikes in 2017, which taken together can eventually mean happier days for savers. For credit cards users, not so much.
The Washington Post reports that the Fed is expected to raise rates thrice in 2017, with the fed funds rate finishing the year at 1.4 percent. But if the economy heats up, perhaps as a result of a massive tax cut promised by Mr. Trump, the pace of Fed rate hikes could accelerate dramatically.
It’s StickyMany consumers have witnessed this phenomenon in the past: Fed rate hikes seem to almost immediately raise the interest rates on mortgages, loans and credit cards. On the other hand, savings accounts and CDs have “sticky” interest rates that rise slowly and, it seems, reluctantly. Savers who purchase Treasury debt will see the effect sooner in newly issued bonds, notes and bills. Their existing T-Bonds will suffer a price drop, but that is only a concern to those who sell their bonds before maturity. The worst-hit, in terms of lower prices, will be zero-coupon bonds, which pay all their interest at maturity.
Savers Rejoice, or at Least Grumble LessThe last eight years have been tough on savers, with interest rates so low that you need a microscope to see them. Many money market mutual funds paid well under 1 percent interest. If interest rates continue to rise, however, savers will begin to reap benefits:
- Interest on savings account, certificates of deposit, bonds and money market accounts will rise, creating more income for savers. In fact, a study has shown that the rates on six-month CDs have anticipated fed fund rate hikes – they are the reverse of sticky.
- Employee retirement plans that include a savings component will provide higher returns, which over the long run can make retirement a little nicer.
- New annuities will pay better returns as rates rise. Folks interested in buying fixed annuities will be best served by waiting until interest rates rise substantially rather than locking in today’s puny rates.
- Pension funds will earn more interest income, relieving some of the pressure caused by low returns over the last eight years. Pensioners might see their benefits remain steady rather than suffer further cuts.
- Long-term care insurance premiums may moderate. The insurance companies have been raising these premiums because of punk interest rates, so higher rates mean less expensive LTC insurance. The same benefit will accrue to life insurance policies.
- Internet banks typically offer the best CD and savings account rates. Make sure you stick to banks that are FDIC insured and that require no minimum balance. Credit unions are also excellent sources of high-interest, insured CDs.
- Investors can reduce their risk profiles. Many people dependent on investment income have forsaken safe investments like T-Bonds and CDs in favor of junk bonds and stocks, which are considerably riskier but can provide higher returns. However, investors will want to stay away from long-term debt while interest rates are on the rise and stick to shorter term instruments, such as T-Bills and one year CDs. The reasons are that short term bonds suffer less price loss when interest rates rise, and those who lock up their money right now in long-term CDs will miss out, until their CDs mature, on the coming higher interest rates. A CD ladder of short- and intermediate-term CDs allows you reinvest your maturing CDs at higher rates without waiting too long.
- Higher interest rates help insulate savers from some of the damage caused by inflation. The additional income can help compensate for cheaper money. Furthermore, increases in certain benefits, such as Social Security, are tied to the inflation rate, which usually moves in tandem with interest rates.