For Dr. Charles Phillips, the government’s public service loan forgiveness program meant he could spend his days researching childhood cancer, rather than starting a lucrative pediatrics practice.
Neeraj Kumar plans to take advantage of loan forgiveness to help reintegrate felons into society, instead of pursuing a career at a law firm.
For Rafael Enriquez, who dreams of a life of creativity and comfort at an architecture firm, the program has been a shackle of sorts. Instead of drafting the plans for daring new buildings, he is designing training facilities for the Navy SEALs.
Since 2007, more than 550,000 people have planned their lives around the program, which helps workers who go into government or nonprofit public service — police officers, teachers, nurses, public defenders and others — pay for their educations. Passed by Congress under President George W. Bush and expanded under President Barack Obama, it effectively erases any federal student debt that remains after 10 years of loan payments and public service employment.
The program has not yet cost the government anything; the first class of beneficiaries is on track to have any remaining debt erased beginning in October. But it could become expensive. Government estimates show that a quarter of the nation’s workers, with loans adding up to more than $100 billion, could conceivably be eligible.
And so it became an easy target for President Trump’s cost-cutting budget, which proposes to scrap the initiative after June 2018, and replace it with a less-generous plan available to graduates regardless of their jobs. (The loans of those accepted into the current program before the cutoff date would still be forgiven.)
The program has been praised for enticing college graduates to take on low-paying public service jobs, and criticized as perversely enticing students to take on large amounts of debt.
As Congress debates whether to go along with this and many other proposed cuts, some of the loan program’s beneficiaries spoke about how it shaped their decisions about what to do with their lives.
President Trump’s proposed budget was underwhelming when it came to reforming the federal role in higher education. But in one area it was right on the mark: its proposal to eliminate subsidized student loans. While sold as a progressive policy, subsidized loans are anything but.
The federal government’s Stafford loan program gives undergraduate students access to two types of loans: “subsidized” and “unsubsidized.” Trump’s budget abolishes the former; students would still be eligible for the same dollar amount of loans, but all would be unsubsidized. This change would save taxpayers nearly $40 billion over a decade, per Education Department estimates.
Subsidized loans provide extra benefits to students from low-income families, but make no distinction between students who earn different incomes after college. A team of economists led by Raj Chetty recently published research showing that students from low- and high-income families who attend the same college have similar earnings prospects after graduation. But since eligibility for subsidized loans is based on income before college, two individuals with the same income after college may end up paying different amounts. That’s hardly equitable.
The notion that we should care more about a poor student who becomes rich than a rich student who becomes poor is an odd one , but it’s central to the idea of subsidized loans.
Consider two students, Rosencrantz and Guildenstern, who attend the same college. Each borrows $27,000 from the federal government. However, Rosencrantz comes from a lower-income family and thus uses mostly subsidized loans, while Guildenstern’s loans are all unsubsidized. After graduation, both enter the same field and earn the same income. They both enroll in the standard, 10-year loan repayment plan. Despite enjoying identical education and identical careers, Rosencrantz’s subsidized loans mean he will repay $2,300 less than Guildenstern.
Rosencrantz’s extra benefits are pricey for taxpayers. According to fair-value cost estimates from the Congressional Budget Office, new subsidized loans cost the government 25 cents for every dollar disbursed, compared to 16 cents on the dollar for unsubsidized loans. (Loans to graduate students are cheaper on a per-dollar basis; loans to parents actually turn a profit.)
Parenthetically, these figures show that both types of undergraduate loans are subsidized. If nothing else, perhaps the Trump administration could relabel unsubsidized loans as “somewhat subsidized,” and subsidized loans as “bigly subsidized.”
The main difference between the two programs is that interest accrues on unsubsidized loans while the borrower is still in school. For subsidized loans, interest does not accrue until the borrower leaves school, meaning that taxpayers forgive several years’ worth of interest while borrowers complete their studies. With over six million borrowers using subsidized loans every year, that interest-free benefit adds up.
After all their hard work, the college class of 2017 is finally enjoying the real world and all its “perks,” including having to pay back their student loans.
The Federal Reserve Bank of New York’s latest report on household debt and credit found that outstanding student loan balances increased in the past year by $83 billion, to $1.34 trillion.
The Student Loan Report, a news site that covers issues related to education debt, conducted an online poll of 400 student loan borrowers from this year’s graduating class. The findings were encouraging and concerning.
Turns out nearly 80 percent of borrowers knew their student loan balance within $500. Most also could state their monthly loan payment within $20.
But the answers to other questions suggest an incomplete understanding both of their borrowing situations and of repayment plans that could give these budding professionals some financial relief.
When federal student loan borrowers were asked when their first payment is due, only a little more than half knew the grace period was six months after graduation.
Why is this important?
Borrowers shouldn’t wait until the first due date to make sure they can handle the monthly payments. A good first step is to contact the company servicing their loan to discuss all their repayment options and to make sure their email and mailing addresses are up to date. More than a third of graduates do not know the name of the company servicing their federal student loans.
Forty-three percent didn’t know that their federal loans had a fixed interest rate.
Sixty-five percent couldn’t say how many years it would take under the standard plan to pay off their loans. It’s 10 years. This is key because the payments under the standard option might be too high for their budget. If this is the case, they should consider an income-based repayment plan.
The poll also found that 40 percent of borrowers did not have a good grasp of income-driven plans offered for federal loans. There are four options:
● Income-based repayment plan (IBR).
● Pay-as-you-earn repayment plan (PAYE).
● Revised pay-as-you-earn repayment plan (REPAYE).
● Income-contingent repayment plan (ICR).
You can learn about the differences in the plans by going to StudentLoans.gov.
A report last month from the Consumer Financial Protection Bureau found that borrowers in income-based plans have much lower default rates than those enrolled in other types of payment arrangements. The CFPB said that 9 in 10 of the highest-risk borrowers were not enrolled in affordable federal repayment plans that allow them to pay based on how much they earn. According to the report, the Education Department estimates that more than 8 million federal student loan borrowers went at least 12 months without making a required monthly payment.
Secretary of Education Betsy DeVos reimposed a 16 percent fee on defaulted loans. Her department then warned that letters to borrowers affirming good standing in the Public Service Loan Forgiveness Program were invalid.
The first four months of the Trump administration have, among other things, seen repeated assaults on the nation’s student loan borrowers. Education Secretary Betsy DeVos came into office and reimposed a 16 percent fee on defaulted loans. Her department then warned that letters to borrowers affirming good standing in the Public Service Loan Forgiveness Program were invalid. The president’s budget, meanwhile, calls for the elimination of the program entirely, as well as the elimination of interest breaks for students while in school and in deferment. All these moves make loans more expensive to the borrowers, and more lucrative for the government and its contractors.
To be clear: The student loan crisis was escalating quickly before Trump took over. Under President Obama, nearly $1 trillion was added to the nation’s student debt tab to a current total of almost $1.5 trillion. Last year, 1.1 million people were added to the default roles, a huge increase from the 400,000 added the year before. At this rate, more than 25 percent of all borrowers will be in default when the mid-term elections happen next year.
A study following 2005 graduates — who borrowed half as much as today’s graduates — found that a whopping 63 percent were either in default, forbearance, or deferment, or were delinquent, by 2010. The Wall Street Journal reported last year that the same percentage of all borrowers are currently not able to pay their loans down. This is 27 million people of the 44 million who carry student debt.
Business owners can enhance the bottom line of their enterprise through boosting profit, cutting costs, or both. An investment in new equipment is one of the ways to accomplish both.
Nearly every business can benefit from equipment upgrades. New machinery builds efficiencies and allows owners to manage growing customer demand. The Equipment Leasing & Finance Foundation predict a robust commitment to upgrades in the months ahead, forecasting that “equipment and software investment should expand by about 3.0%.”
Reasons for companies to invest sooner rather than later include the anticipation of further interest-rate hikes by the Federal Reserve that could drive up the cost of business loans and other credit before the end of 2017.
That said, firms considering new equipment need to strategize their financing. In many cases, a loan is the best option because it allows companies to preserve capital for cash flow needs, and to enjoy the economic benefit of new equipment without the need to amass the necessary funding first. Here are some tips on planning and selecting the right loan.
Develop an expectation of useful life
In other words, consider how long you will be using the equipment. This question is important because it’s wise to choose a loan with a term identical to the life of the equipment. This approach avoids the trap of burdensome payments long after the equipment has served its purpose or high payments before realizing the value of the purchase.
Decide on the type of lender
The next decision will be critical: You can finance with an ordinary bank or an online lender. Cost should be the driver of this choice. A traditional bank, in most cases, will offer more favorable interest rates. Conventional brick-and-mortar banks still have cheaper access to cash despite the recent rise of online lenders. Ordinary banks can borrow from the Federal Reserve at aggressively low rates. Meanwhile, cash from online lenders often comes at a higher cost although the approval process is faster and more accommodating.
Despite a higher cost of capital, an online loan may be necessary for a small business. The reason: There has been a continued downtrend in lending from banks to small businesses. “Together, 10 of the largest banks issuing small loans to business lent $44.7 billion in 2014, down 38% from a peak of $72.5 billion in 2006,” reports The Wall Street Journal. Meanwhile, nonbank lenders have seized the opportunity and captured 26% market share up from 10%.
Banks sometimes downplay small-business loans because they lack a standardized approach that streamlines conventional lending for mortgages and credit cards. Each small business loan request is different, which can make credit decision process less conventional, more time-consuming, and therefore possibly less profitable.
For these reasons, it can make sense to tap loans that are associated with the federal Small Business Loans program. The SBA doesn’t lend directly to the borrower. Rather, they are an intermediary connecting the bank to the business seeking funds. This relationship solves the problem discussed above because the SBA handles the application process and guarantees the loan. This can give both offer the bank an assurance of repayment and are unencumbered with credit evaluations and paperwork.
Know The Market
Interest rates will vary across lenders, with banks typically offering lower interest rates than alternative or online lenders. Loans backed by the Small Business Administration also offer competitive rates, even when compared to bank loans.
Banks spend the same amount of money and time underwriting small and large loans, and since big businesses tend to borrow larger amounts, banks will earn more from them. As a result, banks typically charge small businesses more to make the investment worthwhile for them. As a general rule of thumb, the smaller the loan amount or the shorter the length of the loan term, the higher the interest rate from a bank will be. Another factor that can affect your interest rate is your relationship with the lender. Some lenders will offer lower interest rates or reduced fees for borrowers that have taken out multiple loans and repaid them on-time. This is true for both banks and alternative lenders, so it may be a smart idea to do your borrowing from one place.
Attention “nearly bankable” small businesses: A new loan fund is available through the Montana & Idaho Community Development Corp. and Capital Matrix.
The new funds will increase the Montana & Idaho CDC’s lending to startups and existing businesses that don’t qualify for all or part of needed financing through a bank.
Capital Matrix is a private, nonprofit corporation that is licensed and regulated by the U.S. Small Business Administration to administer the SBA 504 loan program. The Montana & Idaho CDC specializes in lending to businesses that are light on collateral or cash flow.
The loans range from $1,000 to $2 million and can be used for remodeling or purchasing real estate, inventory or equipment, for example. Loan clients also receive one-on-one technical assistance in financial management and other areas of business management.
Applying for credit has gotten easier since the recession. What to know before you borrow.
Need cash? Now might be a good time to apply for a small-business loan.
It’s a notoriously time-consuming and headache-inducing process, but it’s gotten better since the recession: Banks are gradually lending more, a crop of online lenders are offering much more credit–at a price–and regulators have been looking for ways to make it easier for you to get a loan. Which is not to say it’s completely easy or risk-free, especially if you’re applying to one of the newer fintech lenders.
“Right now is actually quite a good time for small businesses to borrow, but getting a loan that works for you and is affordable and has terms you can understand is still a challenge,” says Karen Mills, a former head of the Small Business Administration under President Obama and now a senior fellow at Harvard Business School.
In November, Mills and Brayden McCarthy, vice president of strategy at online lending startup Fundera, published “The State of Small Business Lending: Innovation and Technology and the Implications for Regulation,” a comprehensive look at the current market for small-business credit. What they found can help you figure out where to look for a loan, if and when you’re ready to expand your business.
The Slow, If Spotty, Recovery
The number of small-business loans fell dramatically during the recession, as big banks cut off credit to customers they considered risky and many smaller and regional banks that once lent to local business owners shut their doors. It’s better now. In 2016, eight years after the crash, 45 percent of small-business owners reported applying for credit, up from 22 percent in 2014, according to the Federal Reserve. As these two charts show, pessimism about the lending atmosphere is currently low–but getting all the money you need remains a problem.
Is Borrowing Harder or Easier?
Businesses that regularly borrow money report changes in their ability to get credit versus three months prior.
Small business loan approval rates at big banks increased by two-tenths of a percent to a post-recession high of 24.3% in April 2017, according to the latest monthly Biz2Credit Small Business Lending Index™.
While it is encouraging that nearly a quarter of small business loan requests are granted by the big banks, which typically offer the lowest rates, three-quarters are rejected. The approval rates are likely to continue climbing this year, thanks to confidence in the economy and more anticipated interest rate hikes by the Federal Reserve.
The Fed has laid the groundwork to build a strong lending environment, especially for mainstream lending institutions. Since most small business loans are tied to U.S. prime interest rates, there will be more incentives for banks to approve loan requests as lending in this sector is likely be more profitable.
The challenge is that while big banks have the most money to lend, they typically are the most stringent. Small business owners often complain that the banks are willing to lend to people who don’t really need the money. While this is not exactly true, banks can be tougher in their assessments, which is why they can offer the lowest rates in the first place. They are good at minimizing their risk.
Small banks are more likely to provide funding. According to Biz2Credit’s latest survey, small banks approve about half (49%, to be exact) of the financing requests they receive. They are increasingly offering SBA-backed loans, which help reduce lender risk.
While this news is good, the reality is that more than half of the small business owners who apply for loans will find one from a bank.
Is it possible for a loan to improve your credit score?
After all, a loan typically means more debt.
When you use a personal loan to consolidate debt, however, you may be able to boost your credit score.
Here’s what you need to know and how it works.
What Is A Personal Loan?
A personal loan is an unsecured loan typically from $1,000 – $100,000 with fixed or variable interest rates that can be used to consolidate debt or make a large purchase.
The term “unsecured” means that there is no underlying collateral attached to the loan.
For example, if you borrow a mortgage for your house, your mortgage is a “secured” loan in which your home is the collateral. If you default on your mortgage, your lender will then own your home.
The interest rate on an unsecured loan such as a personal loan is higher than the interest rate on a secured loan such as a mortgage because the lender is assuming more risk.
However, interest rates on personal loans are often much lower than the interest rates on credit cards, which typically range from 10-20% (or higher).
Depending on your credit profile, you may be able to qualify for a low-interest rate personal loan and save money compared to a credit card.
The interest rate on your personal loan will depend on several factors, which may include your credit score, credit history and debt-to-income ratio.
The stronger your credit profile and history of financial responsibility, the lower the interest rate you can expect.
When Should You Use A Personal Loan?
Personal loans are best for purchases that you plan to repay in less than five years.
Unlike student loans or mortgages that are spent on specific purchases such as education or a home, respectively, personal loans can be spent at your discretion.
Therefore, you have more flexibility and personal choice when using a personal loan.
1. Debt Consolidation
Debt consolidation is one of the most popular – and smarter – reasons to obtain a personal loan.
You can use a personal loan for debt consolidation in two primary ways:
- Pay off existing high-interest debt with a lower-interest personal loan
- Combine existing, multiple debt obligations into a single personal loan to make debt repayment more organized and manageable
You can use a personal loan to consolidate high-interest credit card debt, and obtain a lower interest rate to help pay off your debt faster.
Of course, that assumes you will take advantage of the lower interest rate and lower monthly payments to accelerate your credit card pay off.
However, if you plan to kick the can down the road and not develop an action plan to repay your debt, then you may want to evaluate other options.
Therefore, use a personal loan to repay credit card debt and become debt-free. Do not use a personal loan as a tool to postpone debt repayment.
How A Personal Loan Can Cut Your Credit Card Interest By 50%
First, you need to compare the interest rate on your credit card with the interest rate on the personal loan to determine which interest rate is lower.
If you have strong or excellent credit, and existing credit card debt, you should be able to obtain an interest rate lower than your current credit card interest rate.
Second, you need to understand that if you do qualify for a lower interest rate, how many years you will have to repay your personal loan compared with your credit card debt and whether you are comfortable with the repayment period.
Having a shorter-term loan repayment period can not only save you interest costs, but also instill discipline to retire your debt more quickly.
For example, if you have $10,000 of credit card debt at 15% interest and can obtain a personal loan at 7% interest (depending on your credit profile and other factors), you could potentially cut your interest payments by more than 50%.
Self-Reflection: How And Why You Acquired This Debt
When you consolidate your debt, you should reflect on how and why you acquired this debt.
Understanding the how’s and why’s are even more important than lowering the interest rate with a personal loan.
- Are you over-spending?
- Are you making too many impulse purchases?
- Do you need more income to support your spending, or can you just reduce the spending?
Creating a monthly budget to monitor your income and expenses will help you better manage your monthly cash flow.
Are There Alternatives To A Personal Loan?
There are several alternatives. For example, if you have strong or excellent credit and plan to pay-off your existing credit card debt in 12 months, you could use a credit card with 0% interest balance transfer.
If you own your home, a home equity loan is usually a lower cost option. However, unlike a personal loan, a home equity loan is a secured loan so that means your home serves as collateral and can be claimed by the lender if you do not repay the debt.
How A Personal Loan Can Improve Your Credit Score
Lenders evaluate your credit card utilization, or the relationship between your credit limit and spending in a given month.
If your credit utilization is too high, lenders may consider you higher risk.
Credit utilization is reported to the credit bureaus monthly at your closing date. Therefore, anything you can do to reduce your balance during the month before your closing date will help improve your credit score.
Here are some ways to manage your credit card utilization:
- set up automatic balance alerts
- ask your lender to raise your credit limit (this may involve a hard credit pull so check with your lender first)
- rather than pay your balance with a single payment at the end of the month, make multiple payments throughout the month
You can also use a personal loan to help with credit utilization.
For example, you may improve your credit score if you replace credit card debt with a personal loan.
Why? A personal loan is an installment loan, which means a personal loan carries a fixed repayment term. Credit cards, however, are revolving loans and have no fixed repayment term.
Therefore, when you swap credit card debt for a personal loan, you can lower your credit utilization and also diversify your debt types.
When consumers face a personal financial crisis, they tend to prioritize unsecured personal debts ahead of mortgages, credit cards and car loans, a new study has found.
The study was conducted by TransUnion, which has analyzed customers’ payment hierarchy since 2010. This study was the first time the credit reporting agency incorporated unsecured personal loans into its accounting.
“It is quite surprising to us that, for most struggling consumers, unsecured personal loan payments are prioritized over other prominent credit products such as mortgages and auto loans,” said Ezra Becker, senior vice president and head of research for TransUnion’s financial services business unit. “While personal loans have existed for a long time, recent growth in the number of such loans led us to explore this product’s position along the payment spectrum. The prioritization of personal loan payments above all others is counterintuitive, but our study results are clear. We believe the relatively short duration of these loans—usually less than 30 months—is a key factor in the decision process of consumers.”
Personal loans usually had a much shorter term than secured debt like mortgages and auto loans – on average, less than 30 months, compared to 60 months for auto loans and 230 for mortgages.
“We conjecture that personal-loan borrowers may feel they can get a quick win with these loans even when they are struggling, and there is a clear, near-term end to the obligation – a ‘light at the end of the tunnel,’ in a sense,” Becker said. “In contrast, auto loans and mortgages have much longer terms, and credit cards have no set end date. Finding an opportunity to pay a debt in full can be a powerful motivator for a struggling consumer.”
Personal loans have also historically had a much lower delinquency rate than other kinds of debt, TransUnion found. However, personal loan delinquencies have been trending upward over the last few years while delinquencies on mortgages, auto loans and credit cards have generally trended down.