Why are you here today?

Credit and Budgeting for

Graduate Students

Professor Margaret Reed, Ph.D., CPA Lindner College of Business

Why are you here today?

avoiding financial problems in the future You have entered a period of some

financial stress and are looking for some suggestions to help things from getting worse

You know you have major debt and cash flow problems that are looming and are looking for a simple solution

How do people get into

financial difficulties?



By spending more than you have

By signing contracts you don’t

understand



By being overly optimistic



Once you get behind, the system

works against you.

Personal Money Management:

Keys to Success



Know your current financial situation

Think about where you want to end

up



Figure out how to get there



Don’t fall into various financial traps

along the way

Agenda for Graduate Students

Goals and Budgets – Setting goals – Creating a budget – Monitoring your spending

Borrowing – Credit cards

– Student loans and loan consolidation – Credit record and credit score

Setting Financial Goals



Goal setting is an important part of

good money management



Organize goals by short, intermediate

and long-term



Make the goals as specific as

possible



Change the goals whenever

necessary

Creating a budget

Gather your financial records for the past quarter, six months or one year

Accumulate the data so that you know what your income and expenses were

– Use an Excel spreadsheet or start to use Quicken or Microsoft Money

Project your income and expenses for the next period, decide where you can cut back

Ongoing monitoring required

keep track of your spending to see where you were able to stay within budget and where you were not

Your goal is to make a realistic budget, because then you can plan where the money will come from rather than

haphazardly spend using your credit cards Be sure to include some budget slack

Credit Cards

Understanding how credit cards work – Revolving loan, grace period and minimum

payments – Credit Limit

– Annual Percentage Rate – Interest Computation – Cash advances

– Annual fees and other charges – Credit Card Agreements

What is a revolving loan?



A revolving loan is one that does not

have to paid off each month



There is a grace period, usually 14-20

days at then end of the cycle, when no

interest is charged at all if the balance

is paid in full



A minimum payment equal to about

4% of the balance on the card, but not

less than the interest charged, must

be paid each month

Credit Card Limit



This is the maximum amount you can

borrow on the card



The credit limit can be increased

–Once you have a good payment record, the credit card company will offer to increase your limit

–You can request to increase your limit, which is often a better choice than getting additional cards

Annual Percentage Rate (APR)

The APR in the interest rate plus the annual fee (the nominal annual rate does not include the annual fee)

If you won’t carry a balance, choose a card with no annual fee but a higher nominal rate

If you will or might carry a balance, choose a card with an annual fee but a lower APR

The APR can be changed with 15 days written notification from the credit card company

Interest Computation (approx.)

Take the nominal annual rate and divide by 12 to get the monthly interest rate Multiply the monthly interest rate by the

average daily account balance – The average daily account balance is

calculated in one of several possible ways – Average daily balance without a grace period

or the average daily balance with a grace period are two of the most common methods to calculate account balance

Exact Interest Calculation



Assume average unpaid balance of

$350 for the month and an interest

rate of 16%



Approximate calculation would result

in interest of $4.67 for the month

Daily compounding calculation would

result in interest of $4.78 for the

month

Cash Advances



Using your credit card to get cash is

very expensive

–There is no grace period for interest charges on cash advances

–Cash advances can cause your purchase transactions to be subject to finance charges

Annual fees and other charges



Many cards charge an annual fee,

payable up front when you get the

card and due each year after

Late payment charges for making

your minimum payment late



Overlimit charges for going over your

credit limit

Credit card agreements

Difficult to read but important to understand Changes to the interest rate can occur with

15 days written notice

Changes occur after any event that affects your credit record

– You buy a house and take out a mortgage – You are late with a payment on another credit

card or utility bill

What if you get overextended?

Stop using your credit cards and start paying off the credit card with the highest rate first

Consolidate your credit card balances with balance transfers to a zero-rate card, and then pay as much as you can during the zero rate period

Seek lower cost financing to pay off your credit cards, but only if you stop using the cards

How long to pay it off?



Assume you have a $675 balance

outstanding on your credit card

(interest rate of 17%) and you have

$32 per month to pay it off. How

many months will it take you to pay it

off?



Two years and one month

Credit Score Basics



What is a credit score and why is it

important?



FICO score ranges from 330 to 830

–Average score in Ohio was 685 in 2008



What affects your score?

–Amount of debt available and used –Timely payments on debt and other bills –Bounced checks

Credit Score Access



Your credit score must be provided to

you for free once each year, upon

request, by each of the three credit

reporting agencies



Request online or in writing



Checking your score will not affect it

Having creditors check your score

will lower your score

Sources of funds for Education



Scholarships and grants



Parent/guardian or spouse support

Work-study employment



Subsidized student loans

Unsubsidized student loans

General loans or credit cards

Scholarships and grants



Scholarships from a variety of

sources



Federal grants, like Pell Grants,

FSEOGs, Academic Competitiveness

Grants, SMART Grants

–Awarded based on low expected family contribution

Subsidized Student Loans

– Based on financial need, interest currently at 6.0%, repayment begins 6 months after leaving school, no interest accrual during school

Unsubsidized Stafford Loans

– Not based on financial need, interest currently at 6.8%, repayment begins 6 months after leaving school, interest accrued during college is added to the loan principal balance

Lifetime limits



Know the lifetime limits to make sure

you don’t run out of money before

you finish college

– Graduate and professional students $65,000 subsidized, $138,500 total(may be higher for certain health professions)

Repayment of Student Loans

 Keep an inventory of your loans

 Payments on most loans begin six months after you drop below half-time status

 Repayment options: standard (10 years), graduated (rising pymts), income sensitive (fluctuating pymts), extended (over 25 years, if balance greater than $30,000)

 Deferment: up to 3 years max while in grad school or if you can’t find a job

 Forbearance for volunteer work like Americorps (no interest accrual for one year)

Loan Consolidation

Student loan consolidation after you graduate can be a good idea or not, it depends on the interest rates and terms of the loans

– Calculate the payments under each of the loans and add them up, then compare to the payments on the consolidated loan

– Many consolidators extend the term of the loan, decreasing the monthly payment but dramatically increasing the amount of interest you will pay over the repayment period

Minimizing Student Loans

 Estimate how much you will borrow over your college years and calculate the payments that will be due starting 6 months after you graduate (these should not exceed 15% of your projected monthly take-home pay)

 Try to cut expenses to reduce your student loans (live at home, don’t get a car, etc.)

 Try to find scholarship money to reduce your student loans (check with the university, your department, your high school guidance counselor)  Increase your income to reduce your student

loans (find a work-study position, become a tutor, get a part-time job)

Student Loans



They stick with you until you pay

them off

–Student loans cannot be discharged in bankruptcy

–They impact your credit score

–They reduce the amount of credit you can qualify for

–They increase the interest rate you will pay on other debt