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MEDIA CENTER

The Money Minute - October 2014

In this Issue


Senior Finances

Student Loans Are Not Just For Millennials

When you hear the term student loans, I’ll bet you normally think of Americans in their twenties and thirties. While most of the student loan debt held in the U.S. is owed by the people under 40, that is beginning to change significantly. Whether by financing the loans of their children and grandchildren, or by refinancing their own degrees due to a midlife career change, older Americans increasingly find themselves mired in student debt as they face retirement.

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Holiday_Cash.jpg

Are You Looking For Temporary Employment This Holiday Season?

Every year, Americans of all kinds turn to seasonal jobs to help make ends meet, pay for their holiday spending, or put money into their savings accounts. 2014 will not be an exception as job openings for temporary holiday work are expected to top 786,000 jobs. So, who is hiring?

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 Grads.jpg

Student Loans: Consolidate Them or Not?

If you or one of your children has student loans, you have probably heard that you can consolidate multiple student loans into a single loan with a single monthly payment. Invariably, the conversation revolves around some pretty simple questions. Should I consolidate my student loans? What are the rules and what is the process? What kind of loans can be consolidated? In this article, we’ll try to answer many of those questions for you.

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Student Loans Are Not Just for Millennials

When you hear the term student loans, I’ll bet you normally think of Americans in their twenties and thirties. While most of the student loan debt held in the U.S. is owed by the people under 40, that is beginning to change significantly. Whether by financing the loans of their children and grandchildren, or by refinancing their own degrees due to a midlife career change, older Americans increasingly find themselves mired in student debt as they face retirement.

According to a report released by the Government Accountability Office in September, approximately 706,000 households headed by those 65 or older now have student debt. Compared to the 22 million households under the age of 65 with student debt, the seniors may represent a small (4%) sliver of our population, the number is 4 times that of households 65 and older that held student debt in 2009.

The reason that seniors now have student debt may surprise you. At 82%, most of the student loan debt for seniors was accumulated to finance their own education. Only 18% of senior student loan debt is due to financing the education of their children and grandchildren.

For seniors with outstanding student loans, the impact on their finances can be significant. 29% of those same households still have a mortgage payment and 27% still carry credit card debt. As a result, families over 65 with student loans are more than twice as likely to default on their student loans (27% VS. 12%) than those under age 65. They are more than four times as likely to default if they are older than 74 (50% VS. 12%). To compound the difficulty, student loans are nearly impossible to discharge in bankruptcy, unlike most other debts. Additionally, your Social Security payments can be garnished as a result of defaulted student loans.

Are you in your mid-thirties or older and contemplating taking on student loan debt to finance a mid-career education? You might want to take a good look at your expected income after you complete your education when compared to the salary you will earn. You will want to ensure you will be able to pay off those loans before you retire. As a rule of thumb, student loans should not exceed 8% of your net income.

Want to help your children or grandchildren pay for their college education? The same thinking needs to apply. At a time that you are facing a fixed retirement income, you don’t want to be burdened by student loan debt for your kids, when they have multiple means of paying for their education, including working part time, scholarships, grants, and student loans of their own. Most experts will tell you to look after your own retirement before helping others out with their student debt. 

 

Type of debt

 

18-64 Years Old

 

65+ Years Old

Mortgage

 

50%

 

29%

Credit Card

 

43%

 

27%

Student Loan

 

24%

 

4%

Vehicle

 

34%

 

16%

Other Debt

 

31%

 

18%

Any Debt

 

81%

 

52%

 

With more than a trillion dollars in outstanding student loan debt, Americans are turning to student loans when faced with the escalating cost of their college educations. Studies show that even with student loan debt, people with a college education are more likely to prosper and are less likely to be laid off or lose their jobs over their lifetime. However, when you are contemplating student loans, look hard at your ability to pay the debt back. You don’t want to enter retirement with the burden of student loans on your back. 

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Are You Looking for Temporary Employment This Holiday Season?

Every year, Americans of all kinds turn to seasonal jobs to help make ends meet, pay for their holiday spending, or put money into their savings accounts. 2014 will not be an exception as job openings for temporary holiday work are expected to top 786,000 jobs. So, who is hiring? JCPenney, Target, GameStop, Toys "R" Us, Walmart, UPS, FedEx, and virtually any large retailer will be hiring this year. This means that there should be plenty of opportunity in your area for seasonal work. Now, all you need to do is go out there and get hired.

Start early: Now is the time to reach out to potential employers and let them know that you are interested in seasonal work. Give them an idea of the weeks and times that you will be available. Many prospective employers have convenient web pages to take your application, so don’t forget to use the internet as a tool for finding seasonal work.

Let people know you are looking: Word of mouth can often make the difference between having a seasonal job or not. Let your friends and family know that you are looking for seasonal work as well as the kind of job you would like to have.

Apply for as many jobs as possible: Don’t place all of your eggs in one basket. You may really want to work for a specific company, but the person in line in front of you might have just gotten the last opening. By applying at more than one company, you have better odds of landing a job.

Smile: Sounds silly, but for jobs that will interact with the public, employers are looking for enthusiastic and friendly employees.

Think long term: But, aren’t seasonal jobs temporary? Yes they are and the overwhelming majority of seasonal workers will be let go after the holiday season is behind us. However, a handful of workers may have the opportunity to transition to a permanent position. You can improve your odds by showing good work habits and a stand out attitude.

  • Show up to work on time every time and work hard while you are there. Employers love employees with a great work ethic.
  • Be as flexible as you can possibly be with your scheduling. Be willing to cover other shifts for no-shows. You will put more money in your pocket while getting a good reputation with your managers.
  • Always have a good attitude. Follow instructions and be cheerful while you work.

Seasonal jobs are a great way to pad your pockets this holiday season. Start early in your job hunt and put your best foot forward to improve the odds of landing the job you want.

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    Student Loans: Consolidate Them or Not?

    If you or one of your children has student loans, you have probably heard that you can consolidate multiple student loans into a single loan with a single monthly payment. Invariably, the conversation revolves around some pretty simple questions. Should I consolidate my student loans? What are the rules and what is the process? What kind of loans can be consolidated? In this article, we’ll try to answer many of those questions for you.

What kind of student loans can be consolidated?
Any federal loans can be consolidated. However, federal and private student loans can’t be consolidated with each other through the federal government. If you have multiple private loans, you would need to give your private loan provider a call and see what options you have. You might find that your private lender may be more than happy to consolidate your federal loans into your private loans. However, experts will tell you that this is not a good idea at all. This is because you will lose many of your rights when you consolidate your federal loans through a private lender.

Additionally, PLUS loans that parents took out on their child’s behalf can’t be consolidated with any loans that their child took out on their own.

Is it a good idea to consolidate your student loans?
First you should consider if you will lose any good rights or benefits when you consolidate your loans. You might lose loan cancellation benefits, discounted interest rates, or principal rebates. All of these could have a financial impact on the total cost of your student loans. Now let’s assume that we've studied our loan agreements and still want to move forward with loan consolidation. Working at a non-profit credit counseling agency, I like to look at the math and find what’s best for consumers. So, let’s get out the calculator and experiment with some numbers.

Don't Panic! I am going to crunch a lot of numbers and show them to you. However, you can find a very easy to use online Repayment Estimator to run the numbers for you.

For our experiment, we took out four federal student loans to get our undergraduate degree. This is a simplification to make our discussion easier to understand. In reality you could have a student loan for every semester or quarter of your education, resulting in dozens of loans if you were to pursue an advanced degree. In our experiment, we will borrow the current maximum amount allowed each year for federal student loans.

Loan

Loan Amount

Interest Rate

1

$5,500

4.50%

2

$6,500

3.40%

3

$7,500

3.86%

4

$7,500

4.66%

Total

$27,000


Let’s see what it would cost us to pay off the individual loans over a ten year period. We will also include the figures after consolidating the four individual loans into a single loan at a weighted average interest rate that is rounded up to the nearest 1/8 of 1% (Seems overly complicated, but I don’t write the rules for consolidating federal student loans).

Here is how your weighted average is calculated:

    (Amount of individual loan/Total of all loans) x interest rate of individual loan

    Here is the math for our example:

    Loan


    Interest Rate

    1

    ($5,500/$27,000) x 4.50%

    =

    0.92%

    2

    ($6,500/$27,000) x 3.40%

    =

    0.82%

    3

    ($7,500/$27,000) x 3.68%

    =

    1.02%

    4

    ($7,500/$27,000) x 4.66%

    =

    1.29%


    Weighted Average:

    4.05%


    Rounded Average:

    4.125%

Adding up all of the individual parts, we get 4.05%. However the federal rules state that the weighted average must be rounded up to the nearest 1/8 of 1% which would be 4.125%.

Now, let's see how much those loans are going to cost us in the long run.

    Loan

    Amount

    Payment

    Interest Paid

    Total Paid

    1

    $5,500

    $57.00

    $1,340

    $6,840

    2

    $6,500

    $63.97

    $1,176

    $7,676

    3

    $7,500

    $74.80

    $1,476

    $8,976

    4

    $7,500

    $78.31

    $1,897

    $9,397

    Unconsolidated Total

    $27,000

    $274.08

    $5,889

    $32,889

    Consolidated Total

    $27,000

    $274.97

    $5,996

    $32,996

So what are the results of our experiment? Over 10 years of payments, the consolidated loans would cost us $107 more to pay off than the individual loans. Not a big difference, but why was it more expensive? The culprit is that weighted average interest rate. It’s higher than some of the interest rates used in our original individual loans.

Clearly, in our experiment, loan consolidation will cost us a little more. However, that will not always be the case and you should do the math for your situation before you make a decision to consolidate your debt.

If there is no significant difference after consolidation, why would you want to consolidate your student loans?

One of the most common reasons for consolidating student loans is to extend the length of time you have to payoff the loan. On one hand, this will lower your monthly payment. On the other hand, by extending the life of the loan, you will end up paying more interest and the total cost of the loan will be much higher.

Let's look at our previous experiment and extend the life of the loan from 10 years to 20 years and see what happens to our monthly payment and the total cost of the loan.

    Loan

    Amount

    Payment

    Interest Paid

    Total Paid

    10 Year Unconsolidated

    $27,000

    $274.08

    $5,889

    $32,889

    10 Year Consolidated

    $27,000

    $274.97

    $5,996

    $32,996

    30 Year Consolidated

    $27,000

    $165.40

    $12,696

    $39,696

As we can see from the results of our second experiment, we can significantly reduce our payment to $165.40 per month. However, there is a trade off because we will pay interest over an extra ten years and the total cost of our loans will increase by $6,807. You will need to look at your monthly budget and determine if you really need the lower monthly payment. If not, stick with the shorter loan and you will save a lot of money over the length of the loan.

Some people might save money if they have older variable rate student loans that were taken on prior to 2006. Consolidating them into a current fixed rate loan could reduce their interest rate and in turn reduce their payments as well as the cost of the loan.

Another reason is to make your life easier. This may not be needed as much as in the past. However by consolidating your loans, you will write only one check every month instead of one for each of your individual unconsolidated loans. For many people, the simplicity of managing a single consolidated loan helps to ensure they make their full monthly payment on time. Imagine writing dozens of checks each month with varying due dates. You have to weigh the cost verses the convenience and simplicity.

One last argument for consolidating your federal student loans is that you may gain access to additional repayment options like the Income-Based Repayment Plan, Pay As You Earn Repayment Plan, or the Income-Contingent Repayment Plan.

How do you go about consolidating your student loans?
Right off the bat, I want to say that you should not use one of the debt consolidation companies that advertise all over the internet. They just want you to pay them to consolidate your loans when you can do it yourself for free.

Federal student loans can be conveniently consolidated online at: www.studentloans.gov. The federal Direct Loan Consolidation Program allows your to consolidate virtually any federal student loan including subsidized and unsubsidized Stafford loans, PLUS loans, Direct loans, Perkins loans, and many more.

If you have private student loans, reach out to your private loan provider and ask them about their loan consolidation programs.

Can you reverse your student loan consolidation if you don’t like the results?
No, you can't. After the loan consolidation process is complete, the original loans no longer exist. It’s as though they never were. The timing of your loan consolidation can be crucial because you only have one opportunity to refinance most federal student loans.

Wrapping things up:
We may not have answered all of your questions about student loans. For more information, you should visit: https://studentaid.ed.gov/repay-loans/consolidation. There, you will find all of the detailed answers to your questions.


     

     

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