Presentation on theme: "Debt Management Personal & Student Loans February 14, 2012 Psychiatry Residents Nathan Straus, CFP ® Commonwealth Financial Group (843) 884-4545"— Presentation transcript:
Debt Management Personal & Student Loans February 14, 2012 Psychiatry Residents Nathan Straus, CFP ® Commonwealth Financial Group (843) 884-4545 Nathan.Straus@CommonwealthFG.com Securities and investment advisory services are offered through Securian Financial Services, Inc., member FINRA/SIPC. Commonwealth Financial Group is independently owned and operated. DOFU 02/07/12 454579
Objective To understand why we get into debt To learn ways to manage debt
Nearly all of us are seduced into overspending at some point Facts from the Us Federal Reserve: Americans owe 8.5 trillion in mortgage loans 1 trillion in student loans 789.6 billion in credit card debt
Fact from the US Dept of Education: One in Ten borrowers who started repaying student loans between 10/2008 and 9/2009 defaulted by 10/2012 This is the highest default rate in 14 years
Fact from Realtytract.com (aggregator of foreclosure data) 2.8million properties went into foreclosure in 2010 which was a 23% increase from 2008 Personal bankruptcy filings up by 9% in 2010 All of this damages our wallets, our health, and our relationships
How we got into this in the first place We are not great at visualizing $$$ that do not take up space in our wallets We are too optimistic…phenomenon called future discounting…we overstate our ability to earn large sums of $$$ or make substantial payments down the road We’re impulsive We forget about the little things We listen to “authority figures” experts used to say it is always better to buy than rent…gov’t enables us to borrow beyond our means
The Basics Cash Flow: The relationship between monthly income and expenses Manage Your Cash Flow: –Budget is not a bad word… Use it. –Create a positive cash flow by spending less than you earn –No monthly increases on current debt balances Credit Cards Personal Loans
Goal Setting and Budget Creation Start with a question: What do you want? Make a list of what’s important to you Create a Budget & Monitor Your Spending: –www.mint.com – free online budgeting program www.mint.com Sign up online Customize to your situation
Types of Debt Secured –Mortgage, Auto Loans Unsecured –Credit Cards, Medical Bills, Personal Loans Deductible –Mortgage Interest, Student Loan Interest* Non-Deductible –Credit Card Interest, Car Loan Interest
Deductions The maximum amount of student loan interest you can claim as a tax deduction is limited to $2,500. The deduction is also limited by your total income. If under $55,000 (or $115,000 for MFJ) then you can deduct up to $2500 in SL interest If your income is over $55,000 but under $70,000 ($115k - $145k for MFJ) then your deduction for SL interest will be prorated If your income is over $70,000 ($145k for MFJ) then your SL interest is not deductible at all Financial Advisors do not provide specific tax/legal advice and this information should not be considered as such. You should always consult your tax/legal advisor regarding your own specific tax/legal situation.
Student Loan Consolidation Federal Loan Consolidation –Combines all loans into 1 –Offers Fixed Rate Private Loan Consolidation –Combines all loans into 1 –Can lower overall interest rate, depending on your credit score
Advantages of Loan Consolidation Simplifies repayment (one versus several) Increases length of loan up to 30 years Lowers monthly payments Decreases the risk of default by establishing manageable payments
Disadvantages of Loan Consolidation Right now, it’s still messy. Due to current market conditions, private consolidation isn’t reducing your aggregate interest rate like we once saw. Lengthening repayment period increases overall interest paid & overall amount paid Consolidating with a spouse makes you jointly & severally liable for entire amount due
Dept. of Education Consolidation Opportunity You may be eligible (if you haven’t consolidated before) to participate in the Department of Education’s Special Direct Consolidation Loan opportunity. This is a short term initiative. The Dept. of Ed will accept applications through June 30 th, 2012. Benefits include: –.25% interest rate reduction on the loans you consolidate –An additional.25% interest rate reduction for signing up for automatic payments –Having only ONE loan servicer. –NOTE: reducing your interest rate by this.50% would save you $1,000 a year in interest on a $200,000 loan.
Loan Deferment Use deferment as the 1 st option as it could save you money! A deferment is a temporary suspension of loan payments for specific situations such as reenrollment in school, unemployment, or economic hardship. You can receive a deferment for certain defined periods (while still in school, for 6 months after, proven economic hardships, etc.) While in deferment, you do not accrue interest on your “subsidized” loans. You must apply for a deferment with your loan servicer (the organization that handles your loan). *Subsidized loans will not be available the beginning of 2012.
What about Forbearance? No loan payment is due, but interest accrues on subsidized and unsubsidized loans. Contact each of your student loan providers to confirm forbearance during residency and provide any documentation they need. Will occur on all loans after 3 year deferment period
Student Loan Repayment Options Standard: payments are fixed for a term of 10 years…highest initial monthly payment, but results in the least interest being paid. Graduated: Payments start out low and increase every two years. The length of your repayment period will be up to ten years. If you expect your income to increase steadily over time, this plan may be right for you. Extended: provides a fixed or graduated annual repayment amount paid over a term up to 25 years. This is a good plan if you will need to make smaller monthly payments. However, you will pay more in interest because you're taking longer to repay the loans. Remember that the longer your loans are in repayment, the more interest you will pay Income Based: eligibility for this plan can be found at www.ibrinfo.org. If you qualify in its entirety, the government will pay off your remaining loan balance after 25 years of repayment. www.ibrinfo.org Income Sensitive: payments are adjusted annually based on expected total monthly gross income from all sources.
Impact of your Decision Making Assuming $175,000 in total student loans with an average interest rate of 6.8% upon entering residency… –This would be a monthly payment of: $1,214.63 ($222.96 principle; $991.67 interest in the first year). HOWEVER, if you went 4 years of residency without paying anything… –Monthly payment would become: $1,534.19 ($281.62 principle; $1,252.57 interest in first year) DIFFERENCE OF: $46,042 in principle & $49,870.12 in interest ($95,870.12 ) over a 25 year repayment period. We know that you likely CANNOT pay the $1,214.63 while in residency, but hopefully this illustrates the impact that paying even a little bit towards your loans through residency can make. This is a hypothetical example for illustrative purposes only.
Loan Forgiveness Programs Programs are offered to eliminate some or all of your student loans in return for choosing certain careers, military service, and even volunteer work. Backed by the Federal government and cover loans issued through Federal programs such as Stafford and Perkins Loans. StaffordPerkins LoansStaffordPerkins Loans As we know Medical and legal professionals can end up with six-figure student loan debt. Fortunately for these Ph.D. holders, there are several student loan forgiveness programs that can reduce their student loan burden. –The National Institutes of Health forgives some student loan debt for medical students who complete certain types of medical research including clinical, medical disparities, and contraception research. National Institutes of HealthNational Institutes of Health –Certain health professionals can receive up to $50,000 of student loans forgiven through the National Health Service Corps Loan Repayment Program in exchange for two years of volunteer service at a clinic that has a shortage of health professionals. You may be able to receive additional forgiveness for additional service. National Health Service Corps Loan Repayment ProgramNational Health Service Corps Loan Repayment Program –An extensive list of medical student loan forgiveness programs is available at the Association of American Medical Colleges' website. Association of American Medical Colleges'Association of American Medical Colleges'
How to Lose Federal Borrower Freebies Missing the grace period for payments One late payment over the life of the loan Insufficient Funds for an automatic draft …may lose ability to ever auto draft again So… Set up automatic draft Maintain sufficient funds to cover monthly draft
National Student Loan Data System In today’s environment, with all the different lenders and loan servicers that you may have, it can be difficult just to FIND all your loans. The National Student Loan Database will show you all your federal student loans –http://www.nslds.ed.gov/nslds_SA/ http://www.nslds.ed.gov/nslds_SA/ There's no one place that can show you all of your private student loans - except maybe if you get a copy of your credit report.
Tips to Manage Student Loans Post-Residency: Weigh the Opportunity Cost of Repayment –Investing vs. Paying Down Debt Set up automatic payment and don’t miss
Introduction to Credit What is credit? Why do I need credit? What is a credit report? Why is it important to establish a good credit history? How do I establish a good credit history?
Credit Card Benefits Access to Emergency Credit Line Earn Rewards Points/Frequent Flyer Miles Build Credit –Payment History –Credit/Debt Ratio Ideal Use: –Use each month –Pay off balance in full –Enjoy the rewards
The “$10 Extra Credit Card Example” A $3000 balance at 19% interest with a min monthly pmt of $50 - it will take 16 years to pay off & cost $6300 extra in interest. Using the example above - if you paid $60/month it would take 8 years to pay off and cost $2947 in interest charges.
Tips to take with you Manage your consumer debt (credit card) like you are running a business –Consider a debt snowball If you must, go “old school” and pay cash Research 3 options when financing major purchases Know your credit score –www.freecreditreport.com or www.annualcreditreport.com www.freecreditreport.com www.annualcreditreport.comwww.freecreditreport.com www.annualcreditreport.com Protect Your Credit –Sign up for a credit monitoring service through your bank –Identity Theft Protection (LifeLock, Identity Guard) Take ownership in your personal financial success