Dollars and Sense: Part I
Money Smarts
Posted on February 11, 2008
While in college, students have a lot to worry about. Money should not have to be one of them.
“People are scared by money because they think they need to be an economics or business major to manage it but how you handle your money is eighty percent behavior, twenty percent knowledge,” said Brad Barnett, senior associate director for the Office of Financial Aid and Services.
Loans are a common avenue of financial assistance for students pursuing higher education, but there are differences between federal and private loans.
The most common forms of federal aid are Stafford loans, of which there are two types. Both require that the applicant have a Free Application for Federal Student Aid on file and both have a fixed interest rate of 6.8 percent. The Federal Family Education Loan is funded by a private bank, credit union or other lender, while the Stafford Direct loan is directly funded by the Department of Education.
Both the FFEL and direct loan charge a fee of up to 4 percent on the portion of the loan borrowers receive in a given installment. The government pays the interest on these loans if they are subsidized but that further restricts the amount of aid. The most recent annual limits on federal financial aid are $3,500 for freshmen, $4,500 for sophomores and $5,500 for upper classmen. Loan approval is dependent on enrollment and academic performance.
Private loans are granted and funded by a bank, credit union or other lender. They usually incur much higher interest rates than their federal counterparts and rates fluctuate according to market conditions.
Private loans also involve higher origination fees, incurred when borrowers first take out the loan. After applying online borrowers can expect to see the loan in as little as two to three days, but private loans are an avenue of last resort, according to Barnett.
Rather than take on loans some students turn to credit cards.
“Cigarette companies target youths the way credit card companies target students,” senior Jenny Baker said.
College can be a time to develop credit history, so that when students graduate they will be eligible for the lowest rates on everything from home loans to leases, but bad choices have the potential to haunt them for the rest of their lives.
The most commonly referenced credit scoring system is the FICO score, which breaks down into five components: the amount of debt in ratio to combined credit limits, the length of the credit history, the amount of new credit recently applied for and the types of credit in use. The most important factors are payment history and the amount of debt a user is carrying. The ratio of balances to limits should be around twenty-five to thirty percent. Not paying other bills on time, such as utilities or a cell phone bill, can negatively affect FICO scores.
Loans are a type of credit, so it is possible to develop a credit history without using a credit card. For people who don’t have a loan yet are unsure that they can use credit wisely, secured credit cards are an option. Secured cards require the user to make a deposit, the amount of which becomes the limit they can charge.
Introductory offers eventually expire and paying off one’s balance in full every month is the only way to avoid paying exorbitant interest rates after the grace period ends. As with everything else in life, read the fine print. For more information on using credit wisely, visit myFICO.com and bankrate.com.
This article is the first in a three-part series that will closely examine money management tools for students. Check back in the coming weeks for the next installment of the series.
