New legislation means more "required reading" for creditors Photo by: Piotr Lewandowski (Stock Exchange)

It’s common wisdom – and it even happens to be true – that the longer your credit history, the better. The age of your revolving accounts, both individually and on average, is a major factor in determining your credit score.

Until recently, it was easy to “get in the game” of credit right out of high school, almost as soon as you hit 18. But many credit offers extended to college students have been rife with predatory practices and implicit in long-term debt burdens.

With this in mind, recent legislation aimed at protecting credit consumers has drastically altered the credit landscape for young people.

What’s Changed in Credit Cards for Young People?

In a word: everything. Consumers are now barred from opening a credit card account until age 21, unless they can provide evidence of financial solvency or get a responsible adult to co-sign. This means that the students most likely to start early on their credit history are those with part-time employment; for others, the question of obtaining a co-signer can open up a sticky financial mess for both child and parent.

As with life-changing transactions like mortgages, co-signing on a credit card for a student indelibly links the co-signer and principal of the credit card. In the event the young person cannot pay their credit card for whatever reason, the co-signer is financially and legally responsible for the outstanding balance. This can negatively impact the credit report of the co-signer as seriously as a default on a personal account.

As of now, there is no way to “break the link” between the two parties for a co-signed credit card; both should consider carefully whether applying for a given account is the right move, by reviewing the terms and conditions and coordinating on any major purchases. If an account is diligently maintained until age 21, it might be a good option to apply independently for new credit around that time, and eventually retire the older account – however, this will penalize the young person’s credit rating to some degree.

What Other Credit Options Are There?

Some students who hold a part-time job may remain eligible for credit in their own right even under new regulations. In some cases, this may include students whose income is derived from on-campus employment, including “work-study” financial aid. Likewise, parents can choose to help their kids become more credit savvy by making them authorized users of existing credit accounts. Unlike a joint credit card in the student’s name, this gives the responsible adult full control over the account. In joint accounts, though the co-signer may receive a monthly statement, all decisions are made jointly.

Ultimately, though new regulations make it more difficult to become established, they’ll also help regulators clamp down on unfair practices aimed at victimizing inexperienced consumers. In the long run, the regulatory situation makes credit a decision that requires dependent students to consult their parents, even if they’re away from home – while independent students who are financially sound will still be able to choose on their own. Instead of looking at it as a burden or unfair intrusion, consider it a chance to teach a few more lessons about financial responsibility in the face of real world challenges.

Ready to leave home after graduation? Not so fast!
Photo by: Robert Linder (Stock Exchange)

Inthe last few posts on UWSA, we’ve been talking about student debt. More than any other financial challenge, even high credit card balances, student loans and debt impact the lives of millions of young people on the long term. With tuition rising each year, and the job market unsteady, some experts are recommending systematic change to help students who are dealing with creditors and trying to establish themselves financially. Should college students consider staying at home a year after graduation?

Post-Graduation Options and Your Finances

In the U.S., there’s a long tradition of uprooting and moving far from home at a fairly young age, with college serving as a “practice run.” But many students do not now have the savings or job security it takes to make a down payment on a home and obtain a mortgage at favorable terms. Further, with friends in the same situation, roommates may not necessarily be able to keep up with their part of a rental agreement. What to do? Establishing yourself for about a year in your home community can help contribute to long-term stability, but it’s not the only route. Here are some options considered.

If possible, stay in school. One of the best places to weather a recession is in graduate school, especially if your agreement to attend is made before the economy “bottoms out.” Generally, universities sign contracts with graduate students that are binding and result in a substantial level of financial support, in exchange for academic progress and some teaching responsibility. This amounts to a secure “job” and, often, favorable living conditions in an area that benefits from the university’s presence. On the other hand, pursuing graduate study mid-recession can be more difficult.

Consider staying at home. Grace periods for student loans quickly expire, and can raise your monthly cost of living by hundreds of dollars. Seeking employment close to home can eliminate some recurring expenses and allow you to pay down common household bills like high credit card balances that might have built up during college, eliminating recurring payments. Temporarily staying at home may also count favorably in attempts to get consolidation loans, as you’ll have been at the residence for longer, and pay less. You’ll also have the benefit of being able to search for work in an area you’re familiar with; and should the worst happen and you find yourself underemployed, you’re likely to qualify for unemployment deferments for your federal student loans.

Evaluate the job market carefully. If you do plan to move soon after college, don’t rush! Network with former professors, bosses, co-workers, and other students to get leads for work. Narrow down your options by finding out the average rent and cost of living in areas you might want to live or might become employed. Consider seeking professional help from a career consultant to write and develop your resume and your interview skills. And save, save, save! It’s never too early, or too late, to begin building an emergency fund, and there are always unexpected expenses when you move. The best possible situation may be to start with a company “at home” and seek a transfer into your desired area in the future, after you’ve built up some social and professional capital at your workplace. Though this isn’t always possible, try to consider your options on the long term, with your budget in mind.

Is he thinking ahead to years of debt?
Photo by: Harrison Keely (Stock Exchange)

Last time on UWSA we described the basic categories of college financial aid and how each one relates to a student’s financial future.

Now, we’ll zoom ahead a few years to discuss what happens after graduation, when both federal and private student loans fall due.

In today’s job market, a salary that can pay substantial student debts along with living costs within a short time of graduation simply isn’t guaranteed.

Knowing the ins and outs of repayment in advance can make debt management much easier.

Grace Periods, Forbearance, Deferments, and Forgiveness: What to Know

Depending on the type of loans you have, different payment plans will be available, and different criteria will be in place for grace periods, deferments, and loan forgiveness. The grace period is a time following graduation during which no payments are required and no interest accrues. For federal aid, grace periods are quite long, amounting to six months or more. Private loans vary, and may have no grace period at all.

Deferments are periods when no payments must be made, but during which interest continues to accrue. Deferments may be claimed or extended for various reasons, discussed below. Many private loans only permit deferment in cases where the student is continuing his or her studies at the graduate level and is enrolled with a full class load. However, federal loan deferments are much more flexible and there are more options.

Federal loan deferments generally last for 12 months and may be renewed or extended, either on the same basis, or based on new circumstances that also qualify. Loan forbearance is deferment in which the payee is willing, but not able to pay under the loan’s terms due to temporary financial hardship, and has similar implications.

Loan forgiveness is also sometimes possible in the case of government financial aid. Some federal workplaces allow for loan forgiveness after several years of service. There are also employers in the private sphere who may offer programs to help young employees defray the costs of their loans on the long term. In most other cases, loan forgiveness is only possible for students who die or become totally disabled.

Your Loan Deferment Options and What They Mean

Long-term loan deferment is not an answer to the problem of student debt; interest continues to accrue and larger payments will have to be made eventually. However, with an uncertain job market and economy, it’s only reasonable to know which deferments you qualify for. Here are some of the most typical ones. For information on all deferments, including complete eligibility criteria, visit Federal Direct Loan Servicing Online, the centralized resource for federal loans and repayment.

Armed Forces: Personnel who are actively serving in the U.S. military and who have agreed to serve for at least one year may qualify for deferment. National Guard service may also qualify one for deferment during a defined emergency.

Unemployment: Individuals seeking, but unable to find 30+ hours of work per week, and who expect this to go on at least three months, may qualify for a deferment for the duration of their unemployment if they continue to seek work.

Graduate Study: Students who are involved in continuing graduate-level education on at least a half-time basis usually qualify for a deferment for the duration of their program.

Tax Exempt Organization: Individuals working for a charitable nonprofit, directly engaged in service within the community that addresses the problems of poverty, may qualify for a deferment if making less than minimum wage.

Teacher Shortage Area: Qualified teachers who are working full time in a region, grade, or subject defined by the Department of Education as suffering a workforce shortage may qualify for a deferment.

Working Mother: Mothers of children who have not yet entered the first grade, and who do not earn more than $1 above federal minimum wage (currently set at $7.25 an hour) may qualify for a deferment.

Are you getting “hung out to dry” on student loans?
Photo by: mmagallan (Stock Exchange)

One of the central facts of financial life for millions of young Americans is student debt.

Indebtedness related to tuition at university is one of the major sources of long-term debt burden in the United States, ranking alongside costly medical bills as a potential source of monetary heartache for years to come; even high credit card balances don’t pose the same systemic risk.

For many students whose families lack financial resources to pay full cost of attendance, loans covering some expenses are nearly inevitable. But, with forethought and diligence, long-term debts can be minimized.

This is the beginning of an ongoing series intended to shine a light on college finance. We’ll give you the facts you need to make sure you won’t be dealing with abusive creditors the day after graduation.

Federal Financial Aid Should Always Be Your First Stop

Federal student aid comes in the form of grants and loans. Grants never need to be repaid; they are essentially a “gift” intended to defray some of the costs of education. Loans, on the other hand, must be repaid. To make things more complicated, student loans come in “subsidized” and “unsubsidized” forms. Subsidized loans do not accrue interest while the student is in school, or during deferments or grace periods; unsubsidized loans do.

Subsidized loan eligibility is based on need, according to the income of the student’s parents or guardians. In many cases of high demonstrated need, a large portion of tuition can be paid through subsidized loans. Though federal loans have favorable and flexible repayment schedules, they are obviously not preferable to grants; but federal loans are relatively easy to obtain compared to grants and scholarships, discussed below.

Students who hope to qualify for federal aid must submit a simple Free Application for Federal Student Aid each year, which is used to measure financial need. A student with need is likely to qualify for both subsidized and unsubsidized loans, but can elect not to accept unsubsidized funds, or accept a smaller amount than was offered.

There’s No Such Thing as a Free Lunch – But Grants and Scholarships Come Close

Grant and scholarship are closely related terms. A grant is any money that is provided as a “gift” to help the student pay the costs of college. In effect, all scholarship money comes in the form of a grant: but unlike federal aid, most scholarships are based on direct, academic competition (in other words, “scholarship”) rather than need.

Scholarships in varying amounts are administered by thousands of different private and public agencies, and many require essays or other types of entries to qualify. Scholarships of this kind are called merit-based, and though an individual school may offer several, for the most part it’s up to the student to find, apply, and win them. Though they are the most favorable financially, it’s usually unreasonable to expect them to pay for a very large portion of expenses over several years.

State Colleges are Often More Financially Favorable Than Private Ones

State colleges offer favorable tuition rates to state residents, often a savings of 30% or more compared to rates for out-of-state residents. State colleges may also offer a larger proportion of need-based aid. However, state colleges are subject to budget crunches that many established private institutions can weather more successfully, and this has a direct impact on aid from year to year. In sheer monetary terms, state colleges are usually much less expensive, and transferring from a state college to a more “prestigious” private university usually leads to more financial aid at the private institution.

Private Student Aid is Often a Raw Deal

The final major category of student aid is private funds from for-profit student lenders who work with banks to obtain funds on your behalf. For many, some private loans will be inevitable. However, do everything you can to budget and cut costs before going this route. Repayment terms for private loans vary and are often unfavorable. Interest rates can be exorbitant, leading to long-term debt. Some student lenders have been implicated in abusive and deceptive practices, such as paying university administrators to advocate for their loan products in financial aid offices. If you must use private aid, compare all of your options carefully, and consider getting help from an independent financial adviser.

In our next installment, UWSA will answer questions about student debt repayment. What are your options? What about debt consolidation? Even though aid does not need to be repaid until after graduation, preparing from day one can save thousands of dollars.