Presented by: Foresight Capital Management Advisors 1‐877‐429‐4690
Laurie Stegenga CPA, PFS, CFP®, AIF®
[email protected]
Copyright 2013. All rights reserved. Reproduction in whole or in part is prohibited.
Go From This…
Or Six‐Figure Debt!!
…To This! Topics
 Workforce Psychology
 Understanding your Student Debt Options
 Budgeting 101 for the Young Professional
 Importance of a Financial Plan
Generational Workforce Differences
Baby Boomers ‐ Hierarchy
 Closed Structure
 Centralized
 Rigid
 Rules and Codes
 Strategic Decision Makers
vs.
Millennials ‐ Network
 Open structure
 Decentralized
 Flexible
 Lack of Organization
 No Hierarchy
Amount of Savings for Retirement
It is estimated that 10%
of all Work Wages should
be saved in order to have
an increased likelihood of successfully saving for retirement.
Investing Requires a Hierarchy!
 Centralized Decision Makers
 Fixed Investing Principles
 High Organization and Planning
 Listening is a Requirement
 Everything cannot Happen
Now Next 10 Years ‐ What is Critical?





Have a Budget
Stick to the Budget
Slowly grow into your new found money and salary
“The BMW might have to wait a few years”
However, the Budget needs to include
 Reasonable young professional’s life style with Fun and Entertainment built into it
 Budget‐wise vacations (backpacking, etc.)
 Dinners out (progressive dinner)
 Long weekends
Repaying Your Loans
1.
2.
3.
4.
5.
TOPICS Interest Rates and Payments
Entering Repayment
Repayment Incentives
Repayment Plans
Making Payments
Getting Started ‐ Types of Loans
1. Direct or Federal Subsidized Loans
2. Direct or Federal Unsubsidized Loans
3. Direct or Federal PLUS Loans
•
Direct Loans are borrowed from and repaid directly to the Federal Government
•
Federal Loans are borrowed from and repaid directly to a bank or other private lender
Source: Exit Consulting Guide www.direct.ed.gov
How Do They Affect Me?
The Major Difference between the types of Loans is how Interest is Calculated.
 Subsidized loans ‐ Federal Government pays interest while you are enrolled in school and during your grace period
 Unsubsidized and PLUS loans ‐ Borrower is responsible for paying the interest starting from the first disbursement date
GOAL: Try to make interest payments during school to avoid “Capitalization”
Source: Exit Consulting Guide www.direct.ed.gov
Interest Rates and Payment of Interest
Subsidized Loans
 Interest paid by Government while
1.
2.
3.
Unsubsidized & PLUS Loans
 Borrower is responsible for paying interest
Enrolled ½ time
Grace period
Certain other periods (i.e. deferment)
All periods (Starting @ time of disbursement)
1.
2 Options:
1. Pay interest as it accrues
(while in school/grace period)
2. Let interest accrue & be added to principal balance (“Capitalization”)
Capitalization
If you let interest accrue on Unsubsidized and PLUS loans it is added to your principal balance!
 Increases Loan Principal Balance
 Pay Interest on Increased Loan Principal Balance
 Total Repayment Amount = GREATER Over the Life of the Loan
Capitalization Example
If you pay the interest as it is charged…
If you let the interest accrue…
Original Loan Amount (37,500 for 4 Years)
$150,000
$150,000
Capitalized Interest for 48 months (at the maximum rate of 7.9%)
Principal to be Repaid
$0
$33,322
$150,000
$183,322
$1,810
$2,214
Number of Payments
120
120
Total Amount Repaid
$217,200
$265,680
Monthly Payment (Standard Repayment Plan)
Source: Exit Consulting Guide www.direct.ed.gov
Repayment Difference $48,480!
Fixed Interest Rates Variable Interest Rates Fixed vs. Variable Interest Rates
 First Loan Disbursement:
1. On or After July 1, 2006 
Fixed interest rates remaining through life of loan
Before July 1, 2006
2.

Variable interest rates (Adjusted each year on July 1)
Subsidized & Unsubsidized Loans:
• Variable interest rate ≤ 8.25%
PLUS loans:
• Variable interest rate ≤ 9.00%
How is Interest Calculated?
Interest on all loans borrowed under the Department’s federal student loan programs are calculated on a simple daily basis. Source: Direct Loans on the Web: www.direct.ed.gov
Entering Principal
Repayment
1. Graduation
2. Withdrawal from School
3. Drop Below ½ time
Enter “Grace” Period for 6 Months
*Note: PLUS loans do not have a “Grace” Period *Reminder: Unsubsidized Loans are Charged Interest During Grace
• Two Options: 1) Pay Interest or 2) Allow Interest to Capitalize
Repayment Period Begins 1
Day After Grace Period Ends
Source: Exit Consulting Guide www.direct.ed.gov
6 Month Grace Period
Use This Time WISELY! Make a DYNAMITE Résumé! Interview, Interview, Interview! Locate Your First Job!
Use This Time to Get Financially Organized
 Select a Repayment Plan
Make a Budget and Stick to It!
Note: Interest is not charged on Subsidized loans and continues to capitalize on Unsubsidized loans for the 6 month grace period
Repayment Incentives
Direct Loan Program Only
 Automatic Withdrawal Payments
 Have your payment automatically deducted from your bank account and receive a .25% interest rate reduction!
 Be sure to make all of your payments on time!
 The first twelve are critical
 On time payments could result in an interest rebate! You will be contacted by your loan servicer if you qualify
 Contact your FFEL lender to find out if they offer incentives too!
Source: Exit Consulting Guide www.direct.ed.gov
Repayment Options
1. Standard Repayment Plan – 10 Years Fixed Payment Default
2. Graduated Repayment Plan – 10 Years Balloon Payments
1.
Hint: Select Standard but pay back faster on your own
3. Extended Repayment Plan – 25 Years Fixed or Graduated Payments
4. Income Based Repayment Plan – 25 Years Payment Based on Income (IBR). Must apply every year can use alternative W‐2
5. Pay as You Earn – 20 Years Payment Based on Income for borrowers beginning after Oct 1, 2011 (Pay Earn)
6. Loan Consolidation – 30 Year Payments Fixed Rate
10 to 30 Years to Repay Your Loans! Source: Exit Consulting Guide www.direct.ed.gov
Loan Consolidation




Simplify Loan Repayment into one Bill to one Lender
Loan Consolidation Offers Repayment Periods up to 30 Years
Make Lower Monthly Payments by S‐t‐r‐e‐t‐c‐h‐i‐n‐g the Repayment Period
New Fixed Interest Rate is a Weighted Average of the Current Loans (always below 8.25%)
 Income Based Repayments can continue under Consolidation!
 If you already have Direct loans and you consolidate you may lose certain repayment incentives such as automatic withdrawal interest reductions and interest rebates!
 Hint: Convert FFEL private loans into “Direct” loans by consolidating. Also, consolidate your FFEL, Indirect, and PLUS Loans into a “Direct” Consolidation loan it will make you eligible for public service debt forgiveness if you are going to be employed for at least 10 years (120 payments) at a 501( c)(3) organization. Consult a financial advisor before making the decision to consolidate!
Source: Exit Consulting Guide www.direct.ed.gov
Loan Repayment Plan Types
Plan Length
1. Standard Repayment Plan
10 years
•
2. Graduated Repayment Plan
10 years
• Graduated payments increase every 2
years (payments must be greater than interest that accumulates between payments)

3. Extended Repayment Plan
25 years
• Choice of Fixed OR Graduated payments


4. Income‐Based Repayment Plan (IBR)
25 years
• Capped payment amount based upon
income and family size
• Payment = 15% of Discretionary Income
• Possibility of having a portion of the loan cancelled if requirements are met • Eligible if your payments under IBR are less than if Standard Repayment was used
• If you work in public service and have reduced loan payments the remaining balance could be cancelled after 10 years
5. Pay As You Earn Repayment Plan
20 years
• Capped payment amount based upon
income and family size
• Payment = 10% of Discretionary Income
• A Possibility of having a portion of the loan cancelled if requirements are met • Only available to Direct Loans • Must be a new borrower on or after Oct. 1, 2007, and must have received a Direct loan on or after Oct. 1, 2011
Source: Exit Consulting Guide www.direct.ed.gov
www.studentaid.ed.gov
Additional
Information
Payments
Fixed payment amount
•

Payment must be at least $50 per month
Tailored to individuals starting out with a relatively low income
You’ll ultimately pay more over the life of the loan than the standard repayment plan
*See qualifications for loan
Monthly payment is less than the Standard Plan, but you’ll pay more over the life of the loan
Studies of Debt to Income for Starting Salaries
Approximate Starting
Salary
Doctors ‐
Approximate
Debt Load
$45,000 $166,750
Sources: hopkinsmedicine.org
studentdoc.com MBA Grads ‐
$90,000 $75,000
Sources: usanews.com
wsj.com
Lawyers ‐
Source: legalnews.com
$55,000 $78,616
How is IBR‐Income Based Repayment Calculated?
 Monthly Payments will be 15% of Discretionary Income.
 Discretionary Income = AGI ‐ 150% of the poverty line ($16,755)
Example:
$45,000 Salary = $3,562 Annual Debt Payment
OR $297 per Month! Income Based Repayment allows for affordable debt payments while you build your career!
Sample Medical Professional First Year Budget
Estimated Student Loan Amortization
IBR results in a 16 year payoff of loans!
Note: Interest continues to build in early years of repayment!
Income Based Repayment allows for efficient payoff of loans and an enjoyable lifestyle for the Young Professional!
Young Professional Budget – 5 Years into Career
Congratulations Discretionary Income Has Arrived!
Special Mortgages for Medical and Dental Professionals
 100% Financing
 No PMI‐Private Mtg Insurance
 No Origination Fee
 Favorable Interest Rates
‐ Doctors of Dental Science (DDS)
‐ Resident Doctors (MD)
‐ Doctors of Dental Medicine (DMD)
‐ Dental surgeons specializing in oral and maxillofacial surgery (MD)
‐ Doctors of Optometry (OD)
‐ Doctors of Ophthalmology (MD)
‐ Doctors of Podiatric Medicine (DPM)
‐ Doctor of Osteopathy (DO)
Hint  For married couples, file separate tax returns
 Otherwise, spouses income is considered for payment amount
Changing Your Repayment Plan
Flexible!
 Contact Loan Holder Servicer
1. Direct Loans


Change repayment plan ANY time
Maximum repayment period under new plan must be longer than the current repayment plan
2. Federal Education Loans

Change repayment plan ONE time PER Year
• Consider Loan Consolidation if Needed!
Source: Exit Consulting Guide www.direct.ed.gov
Important Notes!
 You may prepay all or part of your loan(s) at any time without a penalty.  After you begin repayment, any extra amount paid over your required amount will reduce your outstanding principal balance. (Not suggested for IBR or Pay Earn)
 Your credit history will be affected if you do not repay your loans in accordance with your repayment plan!
 However if you select a 25 yr IBR or 20 yr Pay Earn payback, after the loan time period, the remaining balance is Forgiven in most Direct Federal programs!
Source: Exit Consulting Guide www.direct.ed.gov
What If a Life Event Renders me Unable to Pay my Loans?
Deferment
 A period in which repayment of the principal balance is temporarily postponed if you meet certain requirements
 During deferment, the government pays interest on subsidized loans
 For unsubsidized and PLUS loans, the borrower is responsible for paying interest as it accrues during the deferment period.
Forbearance
 A forbearance allows you to postpone or reduce your monthly payments for reasons such as financial hardship or illness.
 You are responsible for paying the interest that accrues during the forbearance on all loans, including subsidized. Be Proactive! Always communicate with your loan Servicer
Source: Exit Consulting Guide www.direct.ed.gov
Public Service Loan Forgiveness Program (PSLFP)
 Loan forgiveness of remaining loan balance as a public service employee
 Eligibility
 Be a full‐time public service employee @ a qualified public service organization
 Make 120 on time monthly loan payments (10 years) 

Payment plans (IBR or Pay Earn)
Not include payments while loans are “in‐school” status, in grace period, or in a deferment or forbearance program
 Eligible Loans under PSLFP
 Federal Direct Loans

Consolidate FFEL loans, Perkins loans, or any other student loans into Direct Consolidation Loan first!
 After 120 payments at a public service organization
 Submit PSLFP application  Check with your employer before assuming loan foregiveness qualification
What Qualifies as Public Service?
 Any federal, state, or local government agency, entity, or organization or a non‐profit organization that is tax‐
exempt by the Internal Revenue Service (IRS) under section 501(c)(3) of the Internal Revenue Code (IRC).  The type/nature of employment does not matter
 The type of services that are provided by the organization does not matter for PSLFP purposes
 A private non‐profit employer that is not a tax‐exempt organization under Section 501(c)(3) of the IRC can qualify as a public service organization if it provides specified public services Check with your employer before assuming loan forgiveness!
Teacher Loan Forgiveness Programs
 A portion of loan(s), up to $17,500 under Direct Loan Program or FFEL program after Oct 1, 1998, may be forgiven
 Teach full‐time for 5 consecutive years
 Low‐income elementary or secondary school
OR,
 Low‐income educational service agency and meet certain other qualifications
 Seek preapproval from school facilities and loan services to assure you will be forgiven the debts
Tax Benefits for Education
 Tax Credit – Reduces Your Amount on Income Taxes  American Opportunity Credit
 Hope Tax Credit
 Lifetime Learning Tax Credit
 Tax Deduction – Reduces Your Taxable Income
 College Tuition and Fees Deduction
 Student Loan Interest Deduction
How Does Foresight Help You at This Point in Your Career?
Foresight is a Fee‐only Registered Investment Advisor who has a Fiduciary Responsibility to act in their clients best interest. We do not accept any fees or compensation based on product sales
We will complete a Debt Review and Analysis of your Loans Prepare a Debt Repayment Comparison of your situation
and suggest a plan that fits your needs
Complete a Budget that works for your unique inputs
Ultimately guide you to financial independence and investing for your future!
If you are interested in pursuing our assistance please contact us at 1‐877‐429‐4690 or [email protected]
Our Young Professionals Analysis begins at $250
Thank you for Attending!
Special Items to look into



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Emergency management
Military service
Public safety
Law enforcement services
 Public health services
 Public education or public library services
 School library and other school‐based services
 Public interest law 



services
Early childhood education
Public service for individuals with disabilities and the elderly
Red Cross
Charitable Hospitals
Teacher Loan Forgiveness Programs
 A portion of loan(s) under Direct Loan Program or FFEL program after Oct 1, 1998 are forgiven
 Teach full‐time for 5 consecutive years
 Low‐income elementary or secondary school
OR,
 Low‐income educational service agency and meet certain other qualifications
 Must not have any outstanding balance on a Direct Loan or FFEL Program loan Loan Terminology
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


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Deferment
 A period in which repayment of the principal balance is temporarily postponed if you meet certain requirements.
Forbearance
 Allows borrower to postpone or reduce monthly payment amount if temporarily unable to make payments.
Loan
 $ Borrowed from lending institution/Department
Grace Period
~ 6 Month period after

Graduation

Leave school

Drop below ½ time
Master Promissory Note (MPN)
 Binding legal document signed saying you will repay the loan(s)
 Contains rights and responsibilities of the borrower
Lender
 Bank, Credit Union, or other lending institution (for FFEL); or the Department (for Direct Loans)
Loan Servicer
 Organization that handles billing and other servicing functions on behalf of lender
National Student Loan Data System (NSLDS)
 Department’s central database for student aid
 Contains all information about all of the student’s loans and other financial aid received
Sources
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Doctor avg debt – http://www.studentdoc.com/medical‐school‐loans.html
Lawyer avg debt – http://www.legalnews.com/jackson/1191253
Lawyer avg salary ‐ http://www.payscale.com/research/US/Job=Attorney_%2F_Lawyer/Salary
MBA avg debt‐ http://management.fortune.cnn.com/2011/08/18/have‐b‐schools‐become‐debtors‐prisons/
MBA starting salary ‐ http://www.mymbacareer.com/mba‐facts/mba‐salary.html
Doctor stating salary ‐ http://www.hopkinsmedicine.org/emergencymedicine/residency/benefits/
Types of Student Loans
Type
Subsidized Loans
Who is Eligible?
1. Undergraduate
2. Graduate
3. Professional
Interest Description
Federal Government Pays interest while:
1. Borrower is enrolled in school at least ½ time
2. In Grace Period
3. In Deferment period *With financial need
Unsubsidized Loans
1. Undergraduate
2. Graduate
3. Professional
Borrower is responsible for paying all interest starting from the date the loan is disbursed
*Not required to have financial need
PLUS Loans
Consolidation Loans
1. Graduate
2. Professional
3. Parent(s) of Dependent Undergraduate
Borrower is responsible for paying all interest starting from the date the loan is disbursed
1. Undergraduate
2. Graduate
3. Professional
4. Parent(s)
Varies
***Contact your specific loan servicer for more detailed information on your loans***
Loan Consolidation
Pros
Cons
 Simplify loan repayment into  Costly  Extend repayment
 Make more payments
 Pay more in interest
 Possible loss of borrower one bill
 Lower monthly payments by having up to 30 years to repay loan
 Switch variable interest rate to fixed interest rate benefits offered with original loan
 Interest rate discount
 Principal rebate
 Some loan cancellation benefits
Before you Consolidate
Review your current federal student loans
1.

Determine your current monthly payment amounts
2.

3.
www.nslds.ed.gov (if unsure about who your lender is)
Contact servicer to receive exact figures
Determine your monthly payment amount if you consolidate


4.
Use direct loan consolidation online calculator
Call Direct Loan Consolidation Center
Decide if you will consolidate


Monthly loan payment difference
Length of repayment

Alternatives:
1.
2.
Re‐evaluate your budget and income situation
Consider deferment or forbearance for short‐term payment relief
What Loans can be Consolidated?

Once Loans are consolidated, they cannot be removed


The consolidated loans are paid off and no longer exist
Most Federal Student Loans











Direct Subsidized
Direct Unsubsidized
Subsidized Federal Stafford Loans
Unsubsidized Federal Stafford Loans
Direct PLUS Loans
PLUS loans from FFEL Program
Supplemental Loans for Students (SLS)
Federal Perkins Loans
Federal Nursing Loans
Health Education Assistance Loans
Some existing consolidation loans

Private education loans are not eligible for consolidation 

If in default at the time, you must meet certain criteria before you can consolidate loans
Consolidate one, several, or all of your student loans.
When Can I Consolidate Loans?
After:
1) Graduation
2) Leave School
3) Drop below ½ time
How to Determine the Weighted Average Interest Rate
Step 1: Multiply each loan by its interest rate to obtain the "per loan weight factor.“
Step 2: Add the per loan weight factors together.
Step 3: Add the loan amounts together.
Step 4: Divide the "total per loan weight factor" by the total loan amount and then multiply by 100. Step 5: *Round the result of Step 4 to the nearest higher one‐eighth of one percent if it is not already on an eighth of a percent.
Step 6: Compare the result of Step 5 with the interest rate cap of 8.25 percent. The fixed interest rate on the Direct Consolidation Loan will be the lower of the two.
What to do about a PLUS Loan?
Repayment period begins day after last disbursement
1.
Disbursed On or After July 1, 2008
Defer repayment 1.
enrolled in school ½ time
2. Defer repayment for 6 months after:
1.
2.
3.
Disbursed Before July 1, 2008
Graduation
Withdrawal
Drop below ½ time
1.
Contact Loan holder or Loan servicer to discuss options for postponing repayment