Thoughts, Ideas, and Concepts by Sandra Parks

Posts tagged ‘Bank’

Will your student loans be forgiven??? That is the Question!!!!

If you’ve got a diploma hanging on your wall, chances are it didn’t come cheap. About two-thirds of the 3 million or so college seniors who donned a cap and gown this year took on an average debt of $22,500 for the privilege of earning that diploma. The debt graduate and professional students incur is often tens of thousands more.

As graduates struggle to find jobs during the worst economic crisis of their lifetime, an adviser to the secretary of education expects a rise in the default rate on student loans, which cannot be easily renegotiated or discharged in bankruptcy.

But a provision of the College Cost Reduction and Access Act of 2007 that reduces monthly payments for hundreds of thousands of borrowers who qualify for the new Income-Based Repayment plan took effect July 1.

Borrowers who work in certain public service jobs could also have the balance of their loan erased after making qualifying payments for 10 years. (Supposedly, this costs the government nothing, since it will now change the way it subsidizes student-loan lenders.)

So, will your student loan be bailed out? In a word: maybe.

At the very least, the IBR program will lower the monthly payments of people who accumulated significant federal student loan debt but don’t have the income to make the payments on the standard 10-year repayment plan. This relief may reach as many as 1 million people, according to the Project on Student Debt. And despite lower payments, the former students won’t be paying off their loans indefinitely — any remaining balance will be forgiven after payments are made for 25 years.

Basing loan payments on income isn’t a new concept. For years, graduates with federal student loans had options to reduce or eliminate their payments, depending on how much money they made. But IBR is intended to be more generous.

IBR caps monthly payments at 15% of earnings above 150% of the poverty line, or $10,830 for a single-person household. Online calculators at the free public service site FinAid.org can help you compare what your income-based payments, income-contingent payments and income-sensitive payments would be.

There are situations in which an IBR payment would be zero. If your payment is so low it doesn’t cover the interest accruing on your loan, the government will pay the interest for three years on subsidized Stafford loans, which are government-backed loans given to financially needy students that do not accrue interest while the borrower is in school.

After that period, and for all of the other kinds of unsubsidized federal loans, unpaid interest will accrue but will not compound. In other words, you won’t be charged interest on top of interest.

Borrowers who think they could benefit from IBR should contact their lender and ask for an application that will authorize the release of their adjusted gross income from the Internal Revenue Service each year.

The news is even more promising for people working in public service jobs: government employees, teachers in public schools and universities, workers at public hospitals and anyone working for a 501(c)(3) nonprofit would qualify. Anyone working in a qualifying job who borrowed from the Direct Loan Program is eligible for loan forgiveness after 10 years, down from 25.

To qualify for forgiveness, borrowers who work in a public-interest position must either have an existing Direct Loan or consolidate a federal loan with a private lender into the Direct Loan Program and make 120 payments after Oct. 1, 2007. The payments do not have to be consecutive, can be made while at different eligible positions and must be made on the income-based or standard repayment plans. (See “Ask for student loan forgiveness.”)

At this point, the burden is on borrowers to document where they were working during their repayment period. The Department of Education is planning to develop a more definitive system to confirm eligibility, but right now borrowers should keep pay stubs and tax documents that verify their work history.

IBR and public-loan forgiveness won’t be the best options for every borrower. Some borrowers — those able to make higher monthly payments — would be better served by sticking with a traditional payment plan to avoid accruing years of additional interest. Graduates who financed their education with private loans are ineligible entirely.

But for an MBA grad who borrowed $150,000 planning to be an investment banker but ended up in government service, IBR will result in payments that are affordable on a civil servant salary.

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CREDIT SCORE!!!

Did you know that there is more to your credit score than how you pay your bills, any derogatory information, and how much you owe?

The credit bureaus have very complicated methods of scoring which they do not fully disclose, but these complicated formulas account for the reasons why, for example, your missing one payment on a credit card bill might affect your score more than your friend’s or neighbor’s score.

In addition to all the well known, and previously disclosed information you think you might know, Bankrate.com recently released an article about Secret score cards the credit bureaus use to compare you to your peers.

Credit bureaus group people into peer groups with similar credit histories. For instance, if you have had a prior bankruptcy, you will be grouped with others with a prior bankruptcy for scoring purposes. If you have a very short credit history, you will be grouped with others with similar credit histories. These groups of people compose what is known as “score cards.” This actually makes a lot of sense when you think about it.

One of the things that is strangest of all about “score card” groupings, is that as some of your credit history becomes aged, and drops off your report (for instance a bankruptcy that is finally old enough to drop off your report), you will automatically move into a new score card group. Ironically, this could work to your disadvantage, rather than your advantage. Yes, the bankruptcy, which was costing you points, is gone, but your new peer group could have a tougher scoring model, so those balances you carry on your credit cards might count more against you than they did before, and your scores might actually drop, rather than improve once that bankruptcy record disappears!

You are never told when you are moved from one “score card” to another, and the differences in your scoring might be so subtle that you don’t even notice. Currently FICO scoring has 12 score cards. They recently added two new score cards to the 10 that were in use prior to the economic meltdown. They will not disclose what all the score card categories are, but have disclosed the following:

  • Bankruptcy
  • “Thin credit files” – for those with relatively new credit histories and little information
  • Aging of credit histories

I would guess new score cards might include foreclosures, short sales, but this is just a guess.

Here’s another interesting bit of information: not all score cards have the same score range. It is commonly believed that the scoring range is from 350 – 850. However, if you are on a bankruptcy score card, there is no way you qualify for an 850 score, nor does anyone else on your score card, so your scoring has a different range.

And of course, there are 3 credit bureaus, each with their own scoring methods, which explains why your 3 credit scores are almost never the same.

Are you thoroughly confused? The credit bureaus will not disclose all their formulas for obvious reasons. Your best defense to keep your scores high is to:

  • Pay your bills on time
  • Keep your credit balances LOW (as in pay off bills monthly if possible, or under 10% of your credit limit).
  • If you have to carry a substantial amount of outstanding debt, spread it around among several credit cards, rather than carrying it all on one card.
  • Pay more than the minimum amount due, and if possible, pay on bills more than once in a month, even if that second payment is very minimal.
  • Don’t open new sources of credit frequently; use existing credit instead
  • Use more than one type of credit (examples are revolving credit (such as credit cards), installment credit (such as car loans, or gym memberships), and of course, mortgages, if you own property.
  • Do NOT close credit cards you are not using.  Your score is based, among other factors, on the amount of credit you are using, versus the amount of credit you have available.  When you close a $10,000 line of credit, you are reducing the amount of credit you have available.  Closing just one such line of credit, could drop your score!

Below is a chart showing how the FICO scoring model weighs information on your report:

Click here for more information on your credit reports, how to keep your scores high, and how to correct errors.

I hope this clears up some of the mystery surrounding your credit scores.  As someone in the business of reviewing redit reports as part of my job, it certainly answered some questions for me.

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I can’t remember where I got this information from but it is very useful!!!

Sandra Parks, MBA 972.569.7938

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