Friday 10 April 2015

Student loan | A New Way To Save On Your Student Loans - Money Under 30

Student loan | A New Way To Save On Your <b>Student Loans</b> - Money Under 30

A New Way To Save On Your <b>Student Loans</b> - Money Under 30

Posted: 08 Apr 2015 07:09 AM PDT

Earnest Student Loan Refinancing: A new way to save on your student loans.It's easy to look at the state of student debt in the United States and get thoroughly bummed out. In 2012, 71 percent of all students graduating from four-year colleges had student loan debt, with an average debt of $29,400, according to The Institute For College Access & Success.

That's a big chunk of student loan debt. To you, that debt may represent the years of work it will take to pay it off. But to entrepreneurs like Louis Beryl, it represents an enormous opportunity help graduates like you find a way to save on your student loans.

Beryl is the cofounder of Earnest, a student loan refinancing lender that hopes to reward financially responsible graduates with lower rates (auto pay rates start at 3.50 percent fixed or 1.90 percent variable) and more flexible terms.

A different approach to underwriting

In the past, it could be tricky to track down the banks that offered private student loans and student loan refinancing. And it was even more difficult to qualify.

Beryl found this out himself when he wanted to get a loan for business school. Even with savings, good credit and a track record of well-paying jobs, banks wouldn't give him a loan without a cosigner. So he swallowed his pride and asked his mom to cosign, but never stopped thinking that there could be a better way.

Earnest promises to look at "your full financial profile" in its underwriting process, not just the two key metrics – credit and debt to income — traditional underwriters use. One key factor Earnest looks at is your career. In fact, they require you to list a LinkedIn profile on your application.

Are you ambitiously climbing a corporate ladder? That's a check mark in your favor. Are you a first -year resident? Earnest may understand that you could be earning significantly more in a few years.

Your savings is another factor Earnest may take into account that – shockingly – most banks totally ignore when making credit decisions. Beryl says a big goal of Earnest is to reward financially responsible people with a better loan. If you have an emergency fund – or have been stashing away $500 a year in an IRA since you were 16, those are good signs you're the kind of borrower Earnest wants.

A more flexible loan

Earnest is novel in more ways than its underwriting process. For example, you can:

Set your monthly payment

With most loans, you decide about how much you can afford each month and then choose a term that gets you close to your budget. Earnest allows you to set the exact monthly payment you want. This might mean you pay your loan off in eight and a half years instead of an even 10.

Skip one payment a year

If necessary, Earnest allows you to skip one payment a year. You'll have to make it up over time, but this perk could be helpful to put extra cash in your pocket if you want to take a vacation or around the holidays.

Other features include:

  • The ability to swap between fixed and variable interest rates with no charge
  • A no-fee bi-weekly payment option to pay down your principal faster
  • Built-in unemployment protection if you lose your job

Is Earnest for you?

Refinancing is often the best way to save on your student loans, but it's a big decision.

Clearly, the larger your debt (and interest rates), the more you stand to save with a refi. If a borrower with more than $50K in loans at an average of 6 percent interest rate can refinance at 3.5 percent, it's a no-brainer.

The biggest risk is using a private loan to refinance federal student loans. Earnest lets you consolidate both federal and private loans into one refinance loan. But federal student loans come with certain features that you'll lose once you refinance, notably forbearance and income-based repayment plans and – if you would quality – certain forgiveness programs.

That risk aside, Earnest is best for a graduate who has a good career and wants to focus on paying down student debt as efficiently as possible.

Pay off <b>student loans</b> or invest more? - MintLife Blog

Posted: 10 Jul 2014 01:30 PM PDT

MintLife Blog | Personal Finance News & Advice | Pay off student loans or invest more?

Jul 10, 2014 / By

Pay off student loans or invest more? - 0714

Are you paying off student loans? If so, you've probably heard some version of this advice:

"The sooner you start investing, the more time your portfolio has to grow through the magic of compound interest. But if you wait to get started until your student loans have been totally paid off, you'll miss out on a lot of that precious time."

That's how a student loan consolidation firm, SoFi, puts it.

And the idea makes intuitive sense. If your student loans charge 3.86% interest (the current rate for federal undergraduate Stafford loans), why hurry to pay them off when you could earn 7%, 8%, even 10% in your investment portfolio?

The recent grad who puts all of her potential savings toward prepaying her student loan (after taking her 401(k) match, of course) might not get a real start on retirement savings until six or more years into her career.

That can't be a good move. Can it?

Lisa and her loans

Meet Lisa. She's a new grad with $30,000 in student loans—about average, according to the Project on Student Debt. Furthermore, we'll stipulate that all of her loans are at that 3.86% rate.

Lisa's minimum monthly payment, on the standard 10-year repayment plan, is $300. But she got a decent job at an accounting firm and could put up to $500 per month toward debt repayment and savings combined. Her 401(k) doesn't offer a match. Yes, Lisa is extraordinarily lucky to have a job and be able to pay extra on her loans.

Lisa asks her financial advisor, "Should I pay down these loans ASAP or pay the minimum and invest the rest?"

Her financial advisor, Barbara, makes a spreadsheet. Barbara assumes a 7% return on Lisa's balanced investment portfolio. To keep the scenario simple, Barbara doesn't includes taxes or raises in the model, and assumes Lisa will retire in 40 years.

By paying $500/month on her loan, Lisa will get rid of her debt in 5 years, 7 months. At the end of 40 years, if she continues to save $500/month, she'll have a balance of $266,338 (adjusted for 3% inflation).

Say Lisa pays the $300/month minimum on her loan and puts the rest into her portfolio. Now, at the end of 40 years her portfolio is worth $274,385.

Those five lost years of investing cost Lisa a whopping $8000.

The trouble with loans

I'm sharing my spreadsheet with you so you can play with other scenarios: what if Lisa expects to earn more on her portfolio? What if she can save more money per month?

It never makes a huge difference in the end, unless Lisa can somehow keep her loans around for more than ten years and consistently save every month, which is unlikely. But in every scenario, it's true: Lisa ends up with more money in the end by paying off her loan slowly and investing early.

So everyone must be right: hang onto your low-interest debt while you build your nest egg.

Not so fast. There's a huge flaw in this reasoning, and it has to do with risk.

When one investment earns more than another, we can usually conclude that it's riskier. Why do stocks tend to earn more than bonds? Because stocks are riskier than bonds, and investors demand higher returns to compensate for the risk.

"Risk" here means something very specific: it means that we don't know what the final portfolio value will be. If I buy a 5-year bank CD paying 2% interest, I know exactly how much it'll be worth when it matures (except for inflation). If I buy a stock market mutual fund, how much will it be worth in five years? I can make an educated guess, but the actual result will be somewhere within a wide range of outcomes.

In the "invest now, pay off the loans later" scenario, Lisa makes more money because she's taking more risk. She's taking more risk by investing on leverage. "Leverage" is when you borrow money to invest.

I know it doesn't look like Lisa is borrowing money to invest. She has this student loan from her college days, and she's investing. It seems unrelated.

But imagine a world where, to encourage higher education and retirement saving, the government offered a line of credit to college grads. Borrow up to $30,000 at about 4%, and use the money to kickstart your retirement portfolio.

It's not necessarily a bad idea, but it's easy to see that anyone taking advantage of the program would be taking more investment risk: your portfolio might drop to $28,000, but you still owe the full $30,000.

But it's less risky than what Lisa is doing if she chooses to invest instead of paying down her loan, because she already spent the money on college.

Pay it down

Lisa is also taking other kinds of risk by keeping her student loans around. She might lose her job and be unable to pay her loans, which would then go into default, rack up scads of penalties, and demolish her credit score. Some of her loans might have a variable interest rate that could go up.

Yes, there are hardship provisions for student loans, but they're far from perfect—and yes, Lisa should maintain an emergency fund in case she loses her job.

Lisa should also put some value on how good it feels—emotionally and physically—to get out of debt. A growing body of evidence suggests that debt is bad for your health—not just severe debt, but manageable day-to-day debt, too.

Given all this, it makes very little sense for Lisa, or anyone else, to work on saving for retirement before she pays off her student loans. Her financial priorities should look like this:

1. Get the 401(k) match (if available)
2. Save a modest emergency fund
3. Pay off student loans
4. Save for retirement

Finally, while we're inventing hypothetical people, let's recognize that in terms of savings, Lisa is far worse off than a recent grad who minimized their student debt by attending an affordable college.

Matthew Amster-Burton is a personal finance columnist at Mint.com and author, most recently, of Child Octopus: Edible Adventures in Hong Kong. Find him on Twitter @Mint_Mamster.

Intuit

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MintLife Blog | Personal Finance News & Advice | Pay off student loans or invest more?

Jul 10, 2014 / By

Pay off student loans or invest more? - 0714

Are you paying off student loans? If so, you've probably heard some version of this advice:

"The sooner you start investing, the more time your portfolio has to grow through the magic of compound interest. But if you wait to get started until your student loans have been totally paid off, you'll miss out on a lot of that precious time."

That's how a student loan consolidation firm, SoFi, puts it.

And the idea makes intuitive sense. If your student loans charge 3.86% interest (the current rate for federal undergraduate Stafford loans), why hurry to pay them off when you could earn 7%, 8%, even 10% in your investment portfolio?

The recent grad who puts all of her potential savings toward prepaying her student loan (after taking her 401(k) match, of course) might not get a real start on retirement savings until six or more years into her career.

That can't be a good move. Can it?

Lisa and her loans

Meet Lisa. She's a new grad with $30,000 in student loans—about average, according to the Project on Student Debt. Furthermore, we'll stipulate that all of her loans are at that 3.86% rate.

Lisa's minimum monthly payment, on the standard 10-year repayment plan, is $300. But she got a decent job at an accounting firm and could put up to $500 per month toward debt repayment and savings combined. Her 401(k) doesn't offer a match. Yes, Lisa is extraordinarily lucky to have a job and be able to pay extra on her loans.

Lisa asks her financial advisor, "Should I pay down these loans ASAP or pay the minimum and invest the rest?"

Her financial advisor, Barbara, makes a spreadsheet. Barbara assumes a 7% return on Lisa's balanced investment portfolio. To keep the scenario simple, Barbara doesn't includes taxes or raises in the model, and assumes Lisa will retire in 40 years.

By paying $500/month on her loan, Lisa will get rid of her debt in 5 years, 7 months. At the end of 40 years, if she continues to save $500/month, she'll have a balance of $266,338 (adjusted for 3% inflation).

Say Lisa pays the $300/month minimum on her loan and puts the rest into her portfolio. Now, at the end of 40 years her portfolio is worth $274,385.

Those five lost years of investing cost Lisa a whopping $8000.

The trouble with loans

I'm sharing my spreadsheet with you so you can play with other scenarios: what if Lisa expects to earn more on her portfolio? What if she can save more money per month?

It never makes a huge difference in the end, unless Lisa can somehow keep her loans around for more than ten years and consistently save every month, which is unlikely. But in every scenario, it's true: Lisa ends up with more money in the end by paying off her loan slowly and investing early.

So everyone must be right: hang onto your low-interest debt while you build your nest egg.

Not so fast. There's a huge flaw in this reasoning, and it has to do with risk.

When one investment earns more than another, we can usually conclude that it's riskier. Why do stocks tend to earn more than bonds? Because stocks are riskier than bonds, and investors demand higher returns to compensate for the risk.

"Risk" here means something very specific: it means that we don't know what the final portfolio value will be. If I buy a 5-year bank CD paying 2% interest, I know exactly how much it'll be worth when it matures (except for inflation). If I buy a stock market mutual fund, how much will it be worth in five years? I can make an educated guess, but the actual result will be somewhere within a wide range of outcomes.

In the "invest now, pay off the loans later" scenario, Lisa makes more money because she's taking more risk. She's taking more risk by investing on leverage. "Leverage" is when you borrow money to invest.

I know it doesn't look like Lisa is borrowing money to invest. She has this student loan from her college days, and she's investing. It seems unrelated.

But imagine a world where, to encourage higher education and retirement saving, the government offered a line of credit to college grads. Borrow up to $30,000 at about 4%, and use the money to kickstart your retirement portfolio.

It's not necessarily a bad idea, but it's easy to see that anyone taking advantage of the program would be taking more investment risk: your portfolio might drop to $28,000, but you still owe the full $30,000.

But it's less risky than what Lisa is doing if she chooses to invest instead of paying down her loan, because she already spent the money on college.

Pay it down

Lisa is also taking other kinds of risk by keeping her student loans around. She might lose her job and be unable to pay her loans, which would then go into default, rack up scads of penalties, and demolish her credit score. Some of her loans might have a variable interest rate that could go up.

Yes, there are hardship provisions for student loans, but they're far from perfect—and yes, Lisa should maintain an emergency fund in case she loses her job.

Lisa should also put some value on how good it feels—emotionally and physically—to get out of debt. A growing body of evidence suggests that debt is bad for your health—not just severe debt, but manageable day-to-day debt, too.

Given all this, it makes very little sense for Lisa, or anyone else, to work on saving for retirement before she pays off her student loans. Her financial priorities should look like this:

1. Get the 401(k) match (if available)
2. Save a modest emergency fund
3. Pay off student loans
4. Save for retirement

Finally, while we're inventing hypothetical people, let's recognize that in terms of savings, Lisa is far worse off than a recent grad who minimized their student debt by attending an affordable college.

Matthew Amster-Burton is a personal finance columnist at Mint.com and author, most recently, of Child Octopus: Edible Adventures in Hong Kong. Find him on Twitter @Mint_Mamster.

Intuit

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WeFinance Offers A Crowdfunded Alternative To <b>Student Loans</b> And <b>...</b>

Posted: 07 Apr 2015 09:48 AM PDT

WeFinance, launching today, is the latest startup to use a combination of technology and crowdfunding in order to offer borrowers lower interest rates on loans, while reducing lenders' risk. The new peer-to-peer lending platform operates something like a Kickstarter for personal loans – largely those in the range of $10,000 to $20,000, and many of which are being used to help borrowers fund their educational expenses, including tuitions, bootcamps, financial support during unpaid internships, and more.

Founded in early 2014, the idea for the site comes from co-founder and CEO Eric Mayefsky, who previously spent three-and-a-half years at Facebook as a product manager focused on ads optimization, infrastructure and stability. He explains that, while at the company, he began to loan his friends money directly on good terms, in order to save them from the otherwise "exorbitant rates" they would have to pay on that debt.

The problem, in many cases, was that the things that made them low risk didn't reflect on their credit scores, he explains.

"They had very little credit history," Mayefsky says. "They had good jobs in their past or they had good jobs lined up. In my perspective, they were very low risk."

Those loans turned out to be a win-win for both the borrower and the lender, with access to better terms on the borrowers' side and the loan was a more productive way to put the money into use, rather than having it sit in a savings account.

Screen Shot 2015-04-07 at 12.41.39 PM

Mayefsky's experience eventually prompted the idea to build a site to formalize this process.

On WeFinance, which is also co-founded by Willy Chu, previously of Credit Karma and Kiva.org, borrowers write a brief loan application, and link to their Facebook account to verify their identity. They're also encouraged to link to their LinkedIn too, so lenders can view their educational background and work history. The site then vets their application, offering them feedback on what to change, and if approved, it goes live. Dwolla, meanwhile, is used for the payments and WeFinance covers the fees associated with that.

But what makes WeFinance different is that borrowers are more in control of the experience. They set the upper and lower limits for their loan requests and the terms they're willing to pay. Four percent is the most common interest rate on WeFinance's loans, which is less than many alternatives, and certainly lower than credit cards.

In addition, the idea with WeFinance is that the borrowers aren't meant to immediately rely on an anonymous crowd of lenders to support them, but rather they first rally support from their own network of family and friends instead.

After those close to them make their initial pledges, their loan then looks more attractive to other potential lenders who can lean on the "social proof" of the earlier commitments to help decide which options to fund.

As noted above, most of the loans to date have been in the $10,000-$20,000 range, though on the low end, they can be $1,000 and up.

The company ran a small test batch this summer, and found that the service was often being used for funding educational expenses among young adults.

"Traditional credit metrics don't work that well for people at that stage in their life," notes Mayefsky. But he adds the site has also helped those who are out of school, too, and undergoing a transition – like switching careers, or taking time off to have a child, for example.

WeFinance is very hands-on with the support it offers borrowers – reading applications, making suggestions on terms, and even organizing groups of similar borrowers (e.g. those looking to fund a code boot camp, those attending the same school, etc.) into "batches." By going live on the site at the same time as others, those borrowers could benefit from network effects, Mayefsky explains.

Currently, WeFinance is not charging fees of any kind while it focuses on growth, but in the future it may either partner with banks or other companies to lend the rest of the amount when a loan is only partially funded, or it may choose to become a source of capital itself.

The San Francisco-based startup is still bootstrapping, but will raise a seed round later this year.

Featured Image: Prasit Rodphan/Shutterstock

The US government holds more than $875 billion in <b>student loan</b> debt

Posted: 08 Apr 2015 03:00 AM PDT

The US government holds more than $875 billion in student loan debt – Quartz

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<b>Student Loan</b> Recipients Start Repayment Strike, Face Default <b>...</b>

Posted: 31 Mar 2015 02:11 AM PDT

Student Loan StrikeManuel Balce Ceneta/APMakenzie Vasquez (from left), Pamala Hunt, Latonya Suggs, Ann Bowers, Nathan Hornes, Ashlee Schmidt, Natasha Hornes, Tasha Courtright, Michael Adorno and Sarah Dieffenbacher say they are on a debt strike and refuse to pay back their student loans. By KIMBERLY HEFLING

WASHINGTON -- Sarah Dieffenbacher is on a debt strike. She's refusing to make payments on the more than $100,000 in federal and private loans she says she owes for studies at a for-profit college that she now considers so worthless she doesn't include it on her resume. The sentiment is catching on.

Calling themselves the "Corinthian 100" -- named for the troubled Corinthian Colleges which operated Everest College, Heald College and WyoTech before agreeing last summer to sell or close its 100-plus campuses -- about 100 current and former students are refusing to pay back their loans, according to the Debt Collective group behind the strike.

They're meeting Tuesday with officials from the Consumer Financial Protection Bureau, an independent government agency that already has asked the courts to grant relief to Corinthian students who collectively have taken out more than $500 million in private student loans. The Education Department is the group's primary target, because they want the department to discharge their loans. A senior department official is scheduled to attend the meeting.

Uncle Sam's Stance

Denise Horn, an Education Department spokeswoman, said the department has taken steps to help Corinthian students, but is urging them to make payments to avoid default. The department has income-based repayment options.

By not paying back their loans, the former Corinthian students potentially face a host of financial problems, such as poor credit ratings and greater debt because of interest accrued. The former students argue that the department should have done a better job regulating the schools and informing students that they were under investigation.

"I would like to see them have to answer for why they allowed these schools to continue to take federal loans out when they were under investigation for the fraudulent activity they were doing," said Dieffenbacher, 37. Dieffenbacher said she received an associate's degree in paralegal studies from Everest College in Ontario, California, and later went back for a bachelor's in criminal justice before later dropping out.

She said she left school with about $80,000 in federal loans and $30,000 in private loans, but when she went to apply for jobs at law firms she was told her studies didn't count for anything. Dieffenbacher, who works in collections for a property management company, said she was allowed at first to defer her loan payments, but now should be paying about $1,500 a month that she can't afford.

In Debt and Nothing to Show for It

Makenzie Vasquez, of Santa Cruz, California, said she left an eight-month program to become a medical assistant at Everest College in San Jose after six months because she couldn't afford the monthly fees. She said she owes about $31,000 and went into default in November because she hasn't started repayment. "I just turned 22 and I have this much debt, and I have nothing to show for it," said Vasquez, a server at an Italian restaurant.

Many of Corinthian's troubles came to light last year after it was placed by the Education Department on heightened cash monitoring with a 21-day waiting period for federal funds. That was after the department said it failed to provide adequate paperwork and comply with requests to address concerns about the company's practices, which included allegations of falsifying job placement data used in marketing claims and of altered grades and attendance records.

The Education Department last week released a list of 560 institutions -- including for-profit, private and public colleges -- that had been placed on heightened cash monitoring, meaning the department's Federal Student Aid Office is providing additional oversight of the schools for financial or compliance issues. The department said the effort was done to "increase transparency and accountability."

The administration has taken other steps to crack down on the for-profit college industry, such as announcing a new rule last year that would require career training programs to show that students can earn enough money after graduation to pay off their loans. The rule has been challenged in court by the for-profit education sector.
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