A growing number of employers offer direct deposit, in which your regular paycheck is electronically — and immediately — deposited into the bank account of your choice. It is certainly a convenient way of getting paid. But did you know that direct deposit might also save you money? The bottom line? If your company offers direct deposit, you should sign up for it. The Benefits What makes direct deposit so attractive? Your money will be immediately available to you on payday. You will not have to wait until the end of the workday to deposit a paper check yourself. This can be significant if, like many consumers, you pay some or all of your bills through automatic withdrawals from your checking account. If you rely on direct deposit, your money will always get to your checking account on time. This lowers the risk of accidental overdrafts. With direct deposit, your money will show up in your account even if you are sick on payday or on vacation when your human-resources department passes out your paycheck. With a paper check, you’d have to wait until you return to the office to deposit your money. With direct deposit, there is no delay; your money will be there for you. Savings The convenience factor is undeniable. However, direct deposit can also save you money throughout the year. That is because you will not have to drive to your bank with a paper paycheck every time you get paid. With the cost of a gallon of gas, these savings can add up. Additionally, banks and credit unions often provide their customers with financial incentives to sign up for direct deposit. This is because direct deposit requires them to expend less labor on getting your money into your bank account. How much can you save? According to a study done by Tinucci & Associates for NACHA, an electronic payment company, it can cost you an extra $5.88 to manually deposit your paycheck into your account versus through automated direct deposit. Now, if you get paid every two weeks, that $5.88 savings can turn into more than $70 worth of savings a year. This can add up over time. Splitting Accounts Direct deposit can also help you build up your savings. You can tell your employer to split your paycheck — in whatever manner you decide — between different accounts. You could, for example, automatically deposit 80 percent of your paycheck to your checking account and 20 percent to your savings account. Doing this allows you to build up your savings steadily without putting too much thought into it. That is key; it is easier to save money when it is automatically taken out of your check each pay period. If you have not yet signed up for direct deposit, now is the time to do so. Electronic deposits, after all, can save you both time and money, and that is a benefit worth taking.

Direct Deposit and Paycheck Allocations

View Resource Direct Deposit and Paycheck Allocations
Long gone are the days when most companies provided a pension plan for their employees. Today, employees are primarily responsible for saving their dollars for retirement. This is an important responsibility. Nothing can ruin a good retirement like not having enough money. Fortunately, employees can take advantage of the many types of retirement savings plans that employers offer today. These plans usually require that employees contribute a portion of their regular paychecks for their retirement. This percentage can vary, but many plans allow workers to contribute up to 15 percent of every paycheck to retirement savings. Companies then invest these dollars in a range of stocks, bonds and other investment vehicles. Most employees have the option of directing their dollars in specific directions, to help the dollars grow based on the employees need. Many employers will, at the end of the year, make a contribution, called a matching contribution, to the savings of their employees. This helps workers grow their retirement dollars at an even faster clip. Understanding how your employer’s retirement savings plan works is important. You need to do everything you can to make sure that you’ve saved enough money for your retirement years. An important step in this process? Studying your employer’s retirement savings plan and then using that information to maximize the money you can save each year. Defined benefits plans If your employer offers a defined benefits plan, better known as a pension, you are in luck. You will not have to make many investment decisions. When you retire, those pension plan dollars will be waiting for you. Under a defined benefits plan, your employer guarantees you a particular dollar amount during your retirement. Several factors impact the value, including your yearly compensation, the number of years that you’ve worked at the company and a fixed percentage rate calculated by your employer. That is the good news. The bad news? The odds are high that your employer does not offer this option. Pension plans have grown rare as more companies require their workers to take the lead in saving for their retirements. Annuities Your employer may also offer a retirement savings plan based on annuities. These programs come in several types. In general, annuities are defined benefit plans that provide fixed monthly payments that workers will start receiving once they retire. A traditional annuity plan is the joint and 50 percent type. Under this plan, the retiree receives his or her benefits for life. After death, the retiree’s spouse receives half the amount of the benefits until his or her death. There is also the joint and 66 percent. This plan works much the same way as does the joint and 50 percent plan. Retirees receive their benefits until they die, and then their spouses receive two-thirds of the benefit until their death. The joint and 100 percent plan, as you might have guessed, provides spouses with 100 percent of retirees’ benefits after these retirees die. The 10-year certain type of annuity is a bit more complicated. Under this plan, your benefits will be paid for life. However, if you die within the first ten years after retirement, your beneficiary collects the same dollar amount until that person reaches the 10th year of his or her retirement. At that time, all payments stop. If you die more than ten years after you retire, all payments stop after your death. A life-only annuity plan, as its name suggests, pays out benefits only until you die. A lump-sum plan provides you with a chunk of cash that you can then invest or spend as you see fit. Defined contribution plans Some employers today offer their employees one of many types of defined contribution plans. Under these plans, Your employer will make a regular contribution to your retirement savings based on your salary and participation in the plan. Usually, your employer will be able to make a contribution equal to a maximum of 15 percent of your salary or $40,000, whichever is less. Other companies offer a stock bonus plan. This plan operates similarly to the defined-contribution plan. However, instead of making monetary contributions to the plan, your employer will make a contribution in the form of company stock. Under a money purchase pension plan, your employer will make a contribution each year that is fixed and mandatory. This contribution can be no more than 25 percent of your salary or $40,000, whichever is less. Some companies will combine the profit-sharing and money purchase plans. Usually, companies that do this see earnings that vary widely from year to year. By going with a combined plan, they can make maximum contributions during years of strong revenue and lesser contributions during years in which revenue is down. Your company might also offer an employee stock ownership plan, also known as an ESOP. Under this plan, your employer contributes to your shares of their stock. You can participate in such a plan if you work at least 1,000 hours a year for your employer. 401(k) and related plans One of the more popular retirement savings plans today is the 401(k) plan. Under this type of plan, you’ll contribute a percentage of each of your paychecks to your employer’s retirement savings plan. This rate is usually left up to you, but in most cases you can contribute up to 15 percent of every paycheck to your retirement savings. The primary benefit of such plans is that the money you invest in them is tax-deferred. This means that you will not pay taxes on them until you withdraw these dollars. Another positive of a 401(k) plan? Your employer can elect to match all or a percentage of your contribution, something that can provide an extra boost to your retirement savings. If you work for a non-profit company, you might have a chance to participate in a 403(b) plan. This plan works just like a 401(k) plan though it is designed specifically to meet the needs of non-profit companies. All defined benefit plans and defined contribution plans offered by private companies are covered by the Employee Retirement Income Security Act (ERISA). ERISA is a federal law that sets minimum standards for most voluntarily established pension, retirement and health plans. Under ERISA, your employer is required to provide you with information about your plan. The act also gives you the right to sue your employer if you believe that it has breached its fiduciary duty in running its retirement savings plan. Preparing for retirement No matter what retirement plan your employer offers, the key for you is to participate in it and monitor its performance. Remember, the earlier you start saving for your retirement years, the better off you’ll be when you leave the workforce. Also, the more money you can stash away now, the more comfortably you’ll be able to live after retirement. That is why it is important to invest as much money as you can from each paycheck in your retirement savings plans. Secondly, don’t forget to keep an eye on the performance of your investments, especially as you get closer to retirement age. You are not guaranteed any return on your investments when you retire. It is important, then, to move your investments around if you are not happy with the returns that they are generating. If you have any questions or concerns about your company’s retirement savings plan, schedule an appointment with your human-resources department. The odds are that it is your responsibility to maintain your retirement savings plan. Don’t put it off.

Types of Retirement Plans

View Resource Types of Retirement Plans
Buying a home is an important decision. In fact, it will probably rank as the biggest purchase you ever make. Because of this, you want to make sure that you buy the home that’s right for you and your family. There is no one formula for determining which home is right for you. However, if you spend the time to analyze your family’s situation, your finances and the type of neighborhood that you prefer, you’ll increase your odds of finding the home that fits best. Neighborhoods and schools Before beginning your search for a home, decide what kind of neighborhood you prefer. You might find the perfect home for you and your family. If it sits in a neighborhood however that doesn’t match your needs, then you will not be happy no matter how large the master bedroom is, or how modern the kitchen looks. Do you have young children? Then you probably want to live in a neighborhood blessed with parks, libraries and a good school system. Have your children left home? Maybe your children are older? Maybe you do not have children? Either way, you might better enjoy a neighborhood that boasts eclectic restaurants, high-end shopping districts and plenty of nightlife. Are you seeking a neighborhood in which you can walk to restaurants, shops and public transportation? Then a transit-oriented development — single-family homes or condominiums located within walking distance of shops, bus stops and train stations — might be the best choice for you. The good news is that it is easier than ever to research potential neighborhoods. The Internet allows you to uncover information about housing prices, schools, recreational offerings, restaurants and shopping districts. Be sure, though, to also visit potential neighborhoods at all times of the day to make sure they are a fit for you and your family. Matching your life and lifestyle Once you’ve isolated the neighborhoods that most interest you, it is time to start considering specific residences. To help narrow down home choices to those that are for you, take a long look at your lifestyle. Are you growing a family? Do you have young children? Then you might need a home that features a large backyard and plenty of extra space for playrooms and study areas. Are you an empty nester? Then you might prefer a smaller home with less of a backyard. That means less maintenance, giving you the freedom to spend your extra time however you’d like. Your health plays an important role in selecting the right home, too. If you struggle to walk upstairs, for instance, you’d probably be better off choosing a ranch home, first-floor condominium or some other property that doesn’t require you to stomp up staircases every day. Type of property You’ll have several types of properties from which to choose from when searching for a home. A traditional single-family home might be perfect if you are raising children that need plenty of room. However, if you have a smaller family, a townhouse or condo might fit. While single-family homes come with the advantage of space and land, condos and townhouses often require less maintenance. Choosing a home can be an overwhelming task. You can eliminate much of the uncertainty however by first determining what type of neighborhood, home and property type makes the most sense for you and your family.

Finding the Right Home

View Resource Finding the Right Home
As a savvy consumer, you should always be looking for ways to shave some money from your monthly budget. Even small adjustments can add up to significant savings over the course of a year, a decade, and a lifetime. For most households, your mortgage will be the largest bill you have each month. Therefore, it is one of the best places for you to look to save money. When you are planning to obtain a mortgage, either for a new home purchase or refinance, it pays to do your homework and get the mortgage that will cost you the least in the long run. You probably already know that you should get interest rate and closing cost quotes from multiple lenders and compare them to help you choose which lender to use. Another way you may be able to save money is by buying down your interest rate with points. How buying down the interest rate with points works Points, also known as discount points and loan origination fees, are a form of prepaid interest on a mortgage. One point costs you 1% of the loan balance, which you pay at the time of your settlement on the home. Each point buys down your interest rate by an amount determined by the lender, usually approximately 0.25%. For example, say you were planning to purchase a home with a 30-year, fixed-rate mortgage of $150,000 at 4.5% interest. Your lender might tell you that you could purchase one point for $1,500 and buy down your interest rate to 4.25%. You would pay that $1,500 at closing, and the lender would base your monthly payment on the mortgage amount of $150,000 and interest rate of 4.25%. You can purchase more than one point if you would like although the amount each point will buy down your interest rate may vary. Get a quote in writing from your lender as you are making your decision. If you cannot afford to pay the points out of pocket, you may want to consider writing an offer that includes the seller paying for one or more points. Motivated sellers are often willing to do this to help find a buyer for their home. When is it a good idea to buy points? Buying points can save you a lot of money, provided you keep the mortgage long enough. In the above example, your monthly mortgage payment would be $760 without buying any points, compared to $738 if you buy one point. This saves you $22 on your mortgage payment each month. However, remember that the point cost $1,500 upfront. Therefore, it would take 68 months or about five and a half years, to break even. If you plan to keep your mortgage at least that long, you will come out on top. If you plan to itemize your deductions on your income tax return, you can typically deduct the cost of the points in the tax year you pay them because they are considered to be mortgage interest. This can reduce your taxable income for the year of your purchase and, in effect, partially pay you back for the money you spent on the points. One interesting case in which buying points can help is if you are trying to buy a home that would require a mortgage slightly larger than the amount you qualify to borrow. Lenders limit your allowed monthly housing payment to 28 percent of your gross monthly income, and if your payment would be more, you may have a difficult time qualifying for a mortgage. However, if you have cash on hand to pay one or more points, you can buy down the interest rate to get your monthly payment within the necessary qualification limits. When might you not want to buy points? If you are not sure how long you will live in the house, or if you plan to move or refinance within the next five years, you should not buy points. In addition, if you are getting an adjustable-rate mortgage, you should not buy points because points do not affect the interest rate once it begins to adjust. Lastly, buying points is not a good idea if you do not have money to pay for them at closing and can’t get the seller to cover the cost.

Buying Down an Interest Rate with Points

View Resource Buying Down an Interest Rate with Points
You’ve paid down a significant amount of your mortgage. Since you have, you now have an equally significant amount of home equity. This is good news. Home equity provides you with a measure of financial freedom. You can borrow against this equity to help pay for your children’s college education, fund a major kitchen remodel or pay off your high-interest rate credit cards. It is possible, though, to mis-use your home equity. Remember, home equity loans, or lines of credit use your home as collateral. This means that if you miss payments on a home equity loan or home equity line of credit, your lender could take your home from you. Fortunately, using home equity wisely just takes a bit of good financial sense. Using your home equity You have two choices when you want to borrow against your home’s equity. You can either take out a home equity loan or a home equity line of credit. With a home equity loan, you receive a lump sum payment for whatever amount you borrow, based on the amount of equity you have available in your home. You then pay back the money you borrow, usually at a fixed interest rate, each month, much like you do with your first mortgage. A home equity line of credit works more like a credit card. Your existing home equity determines the size of the line of credit available to you. You can then borrow up to that maximum line of credit as often as you like. You do, though, have to pay back the amount of money you borrowed, with interest. If you have a home equity line of credit of $100,000, and you borrow $10,000 to pay for a bathroom renovation, you’ll have to pay back that $10,000 in monthly installments. You’ll still be able, though, to borrow up to $90,000 more before maxing out your credit. Being smart Of course, some uses of home equity are better than others. For instance, if you take out a home equity loan or home equity line of credit, it is usually smart to use the funds to pay for a major home improvement project. That is because if you improve your home, you’ll also be increasing its value. This, in turn, boosts the amount of equity you have in your residence. Be sure, though, to invest in a home-improvement project that boosts your home’s value. Kitchen updates, the addition of bathrooms and the addition of master bedrooms usually add to the value of a home. Certain cosmetic changes such as new carpeting or landscaping might not. It might also make good financial sense to use a home equity loan or line of credit to pay off your credit card debt. That is because the interest rates attached to home equity loans or lines or credit are usually far lower than are the ones that come with credit cards. It is better to pay back a $50,000 home equity loan with a rate of 6 percent than credit card debt with a rate of 17 percent, a figure not overly high for standard credit cards. Again, though, caution is in order: If you do use your home equity to pay off your credit card debt, don’t run up even more credit card debt in the future. You’ll need to change your spending habits to make this move truly pay off in the long run. It might also make sense to use your home equity to make an investment that will pay off for you in the long term. For instance, some homeowners might tap their home’s equity to invest in rental property that will both generate monthly rental income and, hopefully, grow in value over the years. Be careful There are potential drawbacks with borrowing against your home equity. The most serious is the threat of losing your home. If you miss your credit card payments, you’ll be saddled with an often excessive penalty and a hike in your interest rate. However, if you cannot make your payments on a home equity line of credit or loan, your lender could take your home. So only borrow against your home equity if you are certain that you’ll be able to pay back the loan on time.

Using the Equity in Your Home Wisely

View Resource Using the Equity in Your Home Wisely
One of the great benefits of owning a home is that as you pay off your mortgage loan you build up equity. What exactly is home equity? Simply put, home equity is the amount of your home you own. In other words, it is the difference between how much your home is currently worth and how much you owe on your mortgage loan. It is important to know your equity, because you can use your home’s equity as a financial tool. You can take out home equity loans or home equity lines of credit to help pay for your children’s college education, fund the addition of a new master bedroom or pay down high-interest-rate credit card debt. However, until you understand exactly how much equity you have, you will not be able to use this financial tool effectively. Determining your home equity It is relatively easy to determine how much equity you have in your home. Though to get an accurate figure, you’ll need to enlist the services of a real estate appraiser. This professional will study your home, and surrounding homes, to determine what your residence is worth in the current market. This is not free. Depending on the size of your home, you can expect to pay an appraiser about $400 to come up with a market value. Once you have this market value — you can also estimate your home’s current market value yourself by analyzing recent home sales in your neighborhood — you can calculate the amount of equity you have in your residence. Say you owe $200,000 on your mortgage and your home is now worth $300,000. That is an easy one: Your home equity is $100,000. If housing prices fall, it is possible to have negative equity, or to be ‘upside down’ on your mortgage. Say you owe $200,000 on your mortgage but because of falling home prices in your community your house is only worth $150,000. You now have a negative equity of $50,000. Types of home equity debt If you have positive equity, you can turn it into cash through a home equity loan or home equity line of credit. If you take out a home equity loan, you’ll receive a one-time lump sum of cash that you then pay back over a set amount of time, usually 10 or 15 years. This loan will come with a fixed interest rate, meaning that you’ll make the same payment each month. A home equity line of credit works more like a credit card. With a line of credit, you can borrow up to a certain amount of money for the term of the loan, a term set up by your lender. If you have a $50,000 home equity line of credit, you can borrow $10,000 to pay for a kitchen renovation. You’ll then owe the $10,000 that you’ve borrowed. However, you’ll still have $40,000 left on your line of credit. This means that you can borrow as much as $40,000 to pay for other expenses. Keep in mind, though, that, like a credit card, you will not be able to borrow anything if you’ve maxed out your line of credit. Until you repay that $10,000 you borrowed, you’ll only have access to $40,000. Home equity debt is a useful financial tool. However, you do have to be careful. The collateral for home equity lines of credit or home equity loans is your home. If you miss payments or can’t pay back the money you’ve borrowed, you could lose your home.

Understanding Home Equity

View Resource Understanding Home Equity
What’s the top benefit of owning a home? Many would point to the equity you gain as you steadily pay down your mortgage. For instance, if you owe $100,000 on a home worth $150,000, you have $50,000 worth of equity. You can tap into that equity to help pay for your children’s college tuition, fund the cost of a master bedroom addition or pay down your high-interest-rate credit card debt. The best news? You have several choices for how to access your home equity. Two of the most common are home equity loans and cash-out refinances. Which of these two options is best for you? As always, it depends on your personal financial situation and your goals. Home Equity Loans A home equity loan is a second mortgage. Say you have $50,000 worth of equity in your home. Your mortgage lender might approve you for a home equity loan of $40,000. Once you take out this loan, you’ll receive a lump-sum check for the $40,000, money that you can spend however you’d like. You do, of course, have to pay that money back. You’ll do this in the same way you’ve been paying your first mortgage: You’ll make regular monthly payments. Your home equity loan will come with a set interest rate and a set payment each month. You’ll make these payments until you pay off your home equity loan in full. Cash-Out Refinance A cash-out refinance is significantly different from a home equity loan. While a home equity loan is a second mortgage, a cash-out refinance replaces your existing home loan. In a cash-out refinance, you refinance your existing mortgage into one with a lower interest rate. However, you refinance your mortgage for more than what you currently owe. For example, say you owe $100,000 on your mortgage. If you refinance for a total of $150,000, you receive $50,000 in cash — that you can spend on whatever you want. You then pay back your new mortgage of $150,000. Pros and Cons Both cash-out refinances and home equity loans come with pros and cons. On the plus side, you’ll usually receive a lower interest rate when you apply for a cash-out refinance. That can result in lower monthly payments. On the negative side, refinancing is not free. In fact, the Federal Reserve Board says that homeowners can expect to pay 3 percent to 6 percent of their outstanding mortgage balance in closing and settlement fees when financing. The interest rate on your existing mortgage, then, becomes a key factor whether a cash-out refinance is a better option than a home equity loan. If your current interest rate is high enough so that refinancing to a lower one will lower your monthly payment by $100 or more a month, then a cash-out refinance probably makes sense. That is because you’ll be able to save enough in a short enough period to cover your refinance costs. Once your monthly savings cover those costs, you can begin to benefit financially from your lower monthly mortgage payment. If refinancing will only save $30 or $50 a month, then it is unlikely that you’ll save enough each month to recover your refinancing costs quickly enough to reap the financial benefits. In such a situation, a home equity loan is probably your better financial choice. A home equity loan might make sense, too, when you’ve already held your home loan for a significant number of years. For instance, if you’ve been making payments on your 30-year fixed-rate mortgage for 20 years, you are at the point where more of your monthly mortgage payment goes toward principal and less toward interest. If you are in such a situation, it might make more sense to consider a home equity loan than a cash-out refinance. Your best option, though, when considering the many ways to tap into your home equity is to meet with a skilled financial planner. This professional can take a look at your existing mortgage and your household finances to determine which method of accessing your home equity makes the most financial sense for you and your family.

Cash-Out Refinancing or a Home Equity Loan?

View Resource Cash-Out Refinancing or a Home Equity Loan?
Your son has picked his college. Your daughter has chosen her major. Your children have even picked out their mini-fridges and microwave ovens for their dorm rooms. However, what about the biggest challenge? Do you know how you and your children are going to finance their college education? It is no secret that college tuition, even at in-state public universities, continues to rise at a rate far outpacing inflation. Paying for college, then, has become an ever more challenging task. Fortunately, students and their families can ease the pain of paying for college by applying for a wide range of student loans. Like all loans, student loans will have to be paid back. However, these loans come with favorable terms, most notably low interest rates. Typically, students do not have to start paying back their student loans until several months after they’ve graduated. Many times, those students who have not found a solid job after graduation or are otherwise financially struggling can often put off repaying these loans. Before your sons or daughters head off to college, make sure that you understand the basics of student loans. The odds are high, after all that your children will need to take on at least some student-loan debt to make it through college. Types of Student Loans There are two main types of student loans: federal and private. Federal student loans — including the common Stafford loan — are a better option. That is because they tend to come with lower interest rates. Students do not have to repay these loans until after they graduate. In fact, federal student loans account for nearly 70 percent of all the student aid received by graduate and undergraduate students. Federal student loans are handed out on a needs basis. In other words, students are more likely to receive federal student loans if they can demonstrate that they need financial assistance to afford the costs of college tuition and fees. The main challenge with federal student loans is that they are limited. There is only so much assistance that students will get in the form of these loans. Again, this limit is based on students’ financial needs. A popular type of federal student loan, the Stafford loan, comes in two main types, subsidized and non-subsidized. With subsidized Stafford loans, the federal government pays the interest for students who attend classes at least on a half-time basis. This loan is given out on a needs basis. With non-subsidized Stafford loans, students have to repay the interest. This loan is not given out according to financial need. Private loans are as the name suggests, provided by private institutions such as banks. These loans are not as attractive as federal ones because they tend to come with higher interest rates. Some private loans also require that students begin repaying them before they graduate, something that can prove challenging. There are some benefits to private student loans, however. For one thing, they can fill in the gaps left by federal student loans. They also often come with higher lending limits, meaning that students and their parents can borrow a larger amount of money to cover the costs of their college years. Parent Loans Parents can also take out federal student loans to help cover the costs of their children’s college education. One popular vehicle for parents is the Federal Direct Parent PLUS Loan. With these loans, parents can cover up to the total cost of their dependent children’s college education minus whatever additional financial aid they or their children have already received. As an example, if the annual cost of attendance is $25,000, and the student receives $5,000 in student financial aid, the Parent PLUS Loan program can provide parents up to $20,000 in loans. Parents, of course, can also take out private student loans to cover their children’s education costs. Again, these loans might come with higher lending limits, but they also usually come with higher interest rates, too. Paying it Back Students often think little about the debt that they are acquiring during their college years. However, parents should remind their children that this debt requires repayment and that doing so could be a financial burden. That is why it is important for students to do whatever they can to rack up as little student loan debt as possible. If this means seeking out obscure scholarships, attending community college for two years or choosing an in-state school versus a private institution, then strong consideration should be given to those options. The best plan? Students and their parents need to research financial aid opportunities carefully. That is the best way to minimize student-loan debt.

Understanding Student Loans

View Resource Understanding Student Loans
You’ve graduated from college. For many graduates, now becomes the time you’ll have to pay for that high-level education. All those student loans you took out while studying economics, philosophy, and engineering, are soon to come due. Those payments will not wait. Moreover, you have to repay your loans regardless of whether you’ve nabbed a high-paying job after graduation or can only find a position filling coffee cups at the nearest coffee shop. You, of course, can help ease the sting of loan payments by learning about your repayment options. A bit of research can help keep your budget healthy as you begin paying back your student loan debt. The burden The first step? You need to understand how much money you’ll owe once you graduate. You’ll need to do this before you graduate. Fortunately, you can find out by logging onto the National Student Loan Data System. This database lists all the federal student loans you’ve taken out. It also lists how much debt you owe, including interest. These figures might come as a shock to you, but it is better to know the debt burden you are facing. This way, your student loan debt will not be as much of a surprise when those first bills start arriving. Who to pay? Next, you need to determine whom you’ll pay when your student loans are due. For federal student loans, this will be a loan servicer. The U.S. Department of Education assigns a loan servicer to graduating students after their entire loan amount has been paid out. You can find information — including contact numbers and mailing addresses — for your loan servicers at the National Student Loan Data System online database. You will need your Federal Student Aid PIN to gain access to this important loan information. Don’t forget that you are responsible for making your loan payments on time, even if you do not receive a bill. If you do not make your payments on time, you’ll face late fees and a hit to your credit scores. Repayment options Once you know how much you owe and whom you’ll pay, you’ll need to choose a repayment plan. This is a big decision, and you might want to spend some time researching it. Your decision should hinge on your current employment and income. Most graduates choose a standard 10-year repayment plan, meaning that they pay off their student loans by making ten years’ worth of monthly payments. However, this is far from the only option. Some graduates might instead sign up for the Income-Based Repayment or Income-Contingent Repayment plans. These plans are better suited for those students who have not yet found a steady, well-paying job. Instead of requiring the same payment each month, their minimum monthly payment rises or falls depending on the graduates’ ability to make their payments. Such programs provide flexibility for graduates still trying to find that right job. Budgeting Once you graduate from college, it is time to learn the important skill of budgeting. This is especially important for students who are repaying student loan debt. You need to learn that you do not have unlimited financial resources. Moreover, you have to learn how to allocate your money properly. If you are earning barely more than minimum wage, you’ll struggle to pay your student loan bills on time if you are spending all your extra cash on Thai food and movie rentals. Sit down after you graduate and spend the time to create a realistic budget. Make sure that you set aside money for fixed expenses such as monthly rent, car loan payments and, of course, your student loan bills. Make sure you also craft realistic line items for costs that can change from month to month, such as entertainment, groceries and transportation. Budgeting is a crucial skill, especially for recent graduates who have not yet had the time to build up a financial cushion. If you can master this skill, you’ll be developing the tools you need to forget a sound financial future. Facing those student loan bills after four years of college life is never an easy task. However, you can ease more smoothly into the real world of bills and financial responsibilities if you do the research on how these loans work. The key is to spend the time to educate yourself on your new responsibilities.

Now That You’ve Graduated: Repaying Your Student Loans

View Resource Now That You’ve Graduated: Repaying Your Student Loans
You’ve graduated from college with a new degree and lots — a whole lot — of student-loan debt. The good news is that depending on the type of loans you have outstanding, you’ll have several ways to repay them. You might choose to set up a standard repayment plan, paying off your student loans over a set period. Alternatively, maybe you’ll set up a plan that allows you to vary your payments — hiking them or shrinking them — depending on your gross monthly income levels. Before you enter the real world of jobs, rents and household budgets, you’ll need to determine exactly how you’ll repay your student loans. It is one of the most important decisions you can make for your financial health. Loan types Before you start to repay their loans, you need to know exactly what kind of loans you have. Federal loans come with the most flexible repayment options. Private loans, made by private companies, come with the fewest. In fact, private student loans are like any other kind of loans, such as a car loan or mortgage. Students will have to pay them back by making a specific payment each month for a set number of years. These loans usually don’t offer any payment flexibility for students who are struggling with their finances or who have not found stable, well-paying jobs. Loans provided by the federal government, though, do take into account outside factors. There are two main types of federal loans. Federal Direct loans are made directly by the federal government. Federal Family Education Loans are made by private lenders on behalf of the federal government. If you default on these loans, the federal government will cover any losses that private lenders would suffer. You might also have taken out federal loans issued directly by the college that you attended. These loans, too, often come with flexible repayment plans. Students, though, will have to check with their individual schools to determine their repayment options. Plans So, what repayment plan ranks as the best choice for you? This depends on your financial and job situation. The payment plan that makes the most financial sense is the standard repayment plan. Under such a plan, graduates make payments for as many as ten years, paying off their student loan debt gradually. Under such a plan, graduates might face higher monthly payments. However, in the long run, you’ll be paying less. That is because graduates who pay their loans back under standard repayment plans pay far less interest. This, then, is the cheapest way to pay off student loan debt. However, what if you do not have much money now? This is not unusual. Many students graduate college with a solid degree but can only find entry level work, even in their chosen field. During these early years after graduation, their gross monthly income is low. However, as these graduates rise through the ranks in their field, their income steadily grows. What was once a pittance becomes solid and, sometimes even great pay. Suddenly, these graduates are no longer struggling financially. The best loan repayment option for such students might be the graduated repayment plan. Under this plan, monthly payments start out low. They then rise after a certain period, often every two years. Again, this is a good option for graduates who are certain that their incomes will steadily rise. However, because payments start out lower, graduates will be paying more interest over the life of the loan. You might also consider an extended repayment plan. This plan gives students a longer time to repay their loans, often for as long as 25 years. It is an option for those graduates whose income is simply too low for a larger payment. There is a limit on this type of plan, though: Graduates are only eligible for it if they owe more than $30,000 on their student loans. Graduates who are financially struggling might qualify for one of the several available hardship repayment plans. The Income Contingent Repayment Plan, for instance, allows graduates to make lower payments — maybe even no payment — if their incomes are especially low. After 25 years, the government will cancel the amount the graduate still owes. There are some downsides, however. First, the IRS will consider any canceled student loan debt as taxable income. Secondly, graduates who make payments that are lower than their monthly accrued interest will see their loan’s principal balance grow over time. The Income Sensitive Repayment Plan allows graduates to make payments based on their annual income, the size of their families and their total loan amounts. The main difference from Income Contingent Repayment Plans? Graduates must send in a payment large enough to at least cover their loans’ accruing interest. Graduates must also pay off their loans in 10 years. Loan Consolidation Those graduates who are in default on their student loans might find relief through the federal government’s Direct Consolidation Loans program. This program allows graduates to consolidate their federal student loans into one larger loan. The new loan will come with several repayment options, including those based on a graduates’ income, family size and ability to pay. A loan consolidation, though, does come with some drawbacks. First, the interest rate on graduates’ student loan debt might rise. Secondly, you might end up paying off your student loan debt over a longer period. This might cause you to pay more interest during the life of the loan than you would have paid if you had not gone through loan consolidation. Before you make any decision on loan consolidation, you should talk with a financial planner or counselor. This professional will help you make the right decision and make sure that you do not fall for any consolidation scams. Paying back student loans is not the easiest of tasks, especially not as college tuition continues to rise, and the country’s unemployment rate remains stubbornly high. Those graduates, though, who know all their options are the ones who are most likely to make the right choice when it comes to repayment plans.

Student Loan Repayment Options

View Resource Student Loan Repayment Options