ProBudgeting.com

Few people properly budget for their line of credit expenditures.  The constant flow of money though a line of credit that never gets repaid.  Many people have thousands of dollars on HELOC or an unsecured line of credit.

It is possible to get out of the huge pile of debt without paying any extra money.  Just by using the money sitting around in cash in your savings/checking account, it is possible to knock years off your HELOC or other line of credit without paying any extra money.

Both your checking and line of credit accounts are very similar in that they allow you to write checks and pay for products much in the same way.  A line of credit can even be used online in a way similar to a credit card giving the borrower even greater flexibility.  By using the cash in your checking account as a float, it is possible to cut down on your HELOC debts.

The first step is to deposit your checking account into your line of credit.  Instead of cashing your checks into savings, deposit them into your line of credit.  Chances are that the interest you pay for a line of credit is much higher than a savings/checking account pays in interest.

By depositing all of your available cash into your HELOC, you can lower your total debts while still being able to draw on the account much like a checking account.  Lines of credit calculate interest every day rather than at the end of the month, so adding money even if just for a few days can severely cut down on the amount you owe.

Consider that you have a $20,000 debt on a line of credit at 9% interest and $5000 in a bank account.  Instead of keeping your money in a bank account, shift it to the line of credit to lower your overall debt.

By keeping a $20,000 balance, you’re paying about $180 a month for 20 years to pay off the debt.  By transferring your bank account to the line of credit, you drop the balance to $15,000 and only have to make a monthly payment of $135.  But if you make the same payment of $180 each month, you will cut down on the principal payment much faster than if you just make the minimum payment.  The difference of merging your accounts means you make payments for 10 years less than if you keep your accounts separated.

Merging your accounts will have no negative consequences, you can still draw money, still make payments and save 10 years in $180 interest payments.  There is no real reason not to.

Many people have debt problems simply because they don’t have a personal budget. No matter they earn big or small, an accurate budget is very helpful to get them out of debt. If you already have debt problems, debt planning is the right way to go.

Start by calculating what you spend and all of your income. If you have a shortfall, you will have to shrink your spending or cancel some services you can’t afford. Of course, it’s very important to earn as much as you can.

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Variable vs Fixed

Not too many years ago interest rates on Stafford loans and other programs changed from fixed rate to variable rate. Then, as of July 1, 2006 they changed back to fixed again.

But they can change again. What the Government does, it can undo. Also, because lenders have some flexibility, even official rates can be altered in subtle ways. Many lenders, for example, charge the Federally established origination fee of 3% and the default insurance rate of 1%. Others are willing to absorb those costs to get your business. As a rough rule of thumb, every 3% in fees is equivalent to approximately 1% in interest rate.

Rates and Interest Amounts

Though the interest rate changes can be modest, PLUS loans increased from 6.1% to 8.5%, for example. On, say, even as low as $16,000 borrowed, a 2.4% rate difference equals (approximately) a $400 difference in interest charges the first year alone.

For exact amounts, per month, run sample scenarios using a loan calculator, such as that at http://www.bankrate.com/brm/mortgage-calculator.asp

The Future

There are no guarantees. The rates can change, since they’re similar to variable rate home loans, even after the loans are funded. Predicting interest rates, both near term and long term, is a task that challenges even the finest financial experts. If it were otherwise, the bond market would be a pretty dull affair (which it’s not). So, the best the average student or parent can do is to look to what those experts are predicting.

Follow the Leaders

Among the easier ways to follow those predictions is to look at various interest-bearing financial instruments, such as T-Bills or long-term corporate bonds. By examining those numbers, potential borrowers can get the best available guess about where interest rates are headed. That information is easily gained from any finance website, such as Yahoo Finance or some other personal favorite.

Looking at the 30-year Treasury bill, for example, shows two things: what the government is offering to sell debt for projected out over 30 years, and what the buyers of that debt are willing to pay. As that rate varies, most other long-term rates, such as student loan rates, will vary similarly (though not always exactly).

Corporate Bonds

The same can be said of certain corporate bonds. Ford Motor Co., for example, has been in financial difficulty for the past few years and that fact is reflected in their bond rates and ratings. Their quality ratings have dipped to near junk bond level, and the rates are significantly higher than average. Many are over 10% coupon rate, a full 5% above money market rates. For most of the large, older, ‘blue chip’ corporations, their bond rates on long bonds (over 10 years) are a good indicator.

Keeping Up

As rates rise, it becomes more difficult for borrowers to pay back the loan. Not only does that cost students and parents more money, but it can make it more difficult to qualify since the higher numbers are factored into lending decisions. Stafford and many others are need-based so it’s not a factor there, but interest rates of one program tend to influence others which may be credit history based.

In a volatile market, the best strategy for many students and parents is to obtain a private loan at a fixed rate. The best loans cost Prime Rate ?1%. That’s a very good deal, but borrowers will need very good credit to qualify.

There’s no ideal solution to financing the high cost of, and the high cost of borrowing for, education today. But, as with any cost, shopping around to find out all the available options is the best bet for the long-term.

The FFELP (Federal Family Education Loan Program) is a Federal Government-private lender partnership and umbrella program that includes Stafford, PLUS and Perkins loans. Established by an Act of Congress in 1965, it began in 1966. Since then, over half a trillion dollars have been disbursed, over $50 billion in 2006 alone.

Funds for Stafford, PLUS and other FFELP loans are provided through a large network of independent banks, credit unions and other financial institutions. Lenders can feel confident loaning money to what otherwise might be high credit risks because the funds are ultimately guaranteed (at least in theory) by the Federal Government.

Private guarantors may get involved, however, in the approximately 5% of cases where the loan goes into default. Guarantors then apply to the Federal Government for (at least partial) reimbursement of any lost funds.

Over 90% of the funds are directed through the two types of Stafford loan, unsubsidized and subsidized. In the latter case, the Federal government pays for interest on the loan accrued while the student is in school and for six months afterward. Unsubsidized loans make the borrower responsible for any interest. If the interest is deferred (as it frequently is) until after the grace period, it’s added to the principal.

The other major program, the PLUS (Parent Loans for Undergraduate Students) loan program, supplies over $8 billion per year in funds to parents. As of July 1, 2006 professional and graduate students are also eligible. Providing money to parents to help cover expenses they would frequently pay for anyway, the PLUS program forms a common part of the total financial aid package today.

In general, all the programs require a FAFSA (Free Application for Student Aid) application to be filled out. The data provided forms the core that allows loan officers to make a funding decision. Typically those decision makers are employed by the individual college at which the student is accepted. Forms are available at: http://www.fafsa.ed.gov/

The financial aid department will make a recommendation for a total package based in part on the EFC (Expected Financial Contribution) of the student and his or her parent(s). Examining income, they aim to supplement any unmet need with a combination of subsidized and unsubsidized Stafford loans and other sources.

Once the student and/or parent accepts the package the funds are disbursed, usually twice per year once each semester, more often in quarter systems. Often the largest share of the money will go directly from the private lender to the school to pay for tuition and more. The remainder is then provided to the student or parent, minus any fees.

Those fees can range up to 4% or more. Many programs will charge a 3% ‘origination fee’ and a 1% insurance fee, which they assign to requirements of the Federal government. Fees as high as 8% are not unknown, though, so shop around.

The costs of education today are ten times what they were less than 40 years ago. But those differences become even more stark when considering undergraduate versus graduate programs. Fortunately, there are resources available to both types of student to help them pay for college.

Undergraduates typically rely on a complex mix of scholarships, grants and loans. Those loans are sometimes taken out by undergraduates alone, others by their parents alone, sometimes a mixture of the two as when the parent becomes a co-borrower or co-signer.

The most common programs for students remain the unsubsidized and subsidized Stafford Loans. Subsidized loans are the most desirable, since the government pays the interest while the student is in school. But they are need-based. Unsubsidized loans are not need-based, making them available to a much wider group of students.

A detailed breakdown of what can be borrowed by who is available here.

Graduates, on the other hand, often have fewer options for scholarships and grants just at the time when tuition costs jump. But teaching and/or research assistantships usually more than make up the shortfall. They, in effect, have very low-paying (and very long hour) jobs while attending courses and doing research.

Recently a new option has become available to graduate students: PLUS loans. Though the acronym stands for Parent Loans for Undergraduate Students, they are now an option for many grad students. In the undergraduate case, parents are the borrower and are responsible for repayment. In the case of grad students, they become the responsible party.

PLUS loans have several advantages.

First, they’re available. Since they’re based on credit quality, not need-based, most borrowers can qualify. Relatively few grad students have had time to get into the credit binds that working adults often fall into. As a result, though their history may be sparse, they usually have few bad marks on their credit report. That makes the decision easier for college financial aid officials, who determine eligibility.

On the other hand, current interest rates for PLUS loans are not low by historical standards. Rates are either 7.9% or 8.5%, depending on the specific type. Even at the lower rate, on $10,000 borrowed the first year interest amount is over $750 and payments start within 60 days of when the funds are disbursed with no grace period.

Caps on undergraduate and graduate loans, for all non-private loans, differ as well. Even the maximum amount over the lifetime of the program varies between undergraduates and graduates.

Both types of students will need to research all available options. But keep in mind that, though it commonly requires a combination of funds from several sources, money to pay for school is now more available than ever. The total funds borrowed last year by all students was over $50 billion. That money is going to someone. It can easily be you.

Despite high education costs and the cost of borrowing to meet them, students and parents have some advantages today that didn’t exist even ten years ago. The Internet has changed the way financial aid is researched (and granted) in more ways than one.

Today it’s easy to quickly access an enormous amount of information. Interest rates, qualifying criteria, loan limits and much more is readily available. But that also hints at one of the difficulties of easy data - the possibility of too much of it. The old saying in the information technology business sums it up best: it’s like drinking from a fire hose.

Having so much information flood in, especially given the variety and complexity of loan programs today, can make analyzing it all that much more difficult. To overcome that problem, one aspect of the old-fashioned methods is still very helpful: seeking personal advice.

For students still in high school, planning a college education and seeking ways to pay for it, the school counselor is a good first start. These professionals are there to help students sort through the bewildering array of choices, and to point out some of the potential advantages or pitfalls of different ones. But, unfortunately, the quality of that advice can vary quite a lot.

Professional loan counselors are not only up on the latest information, but go through regular courses each year to keep up-to-date and keep their professional standing. But, the downside is that they usually charge for their services. A few minutes of advice on the phone or in person is typically free, but any detailed program is for a fee. That’s understandable, since that’s how they make a living.

The online versions of professional loan counselors also have similar pros and cons. Since there’s so much variety on the web today, finding a trustworthy source can be tough. The advantage of personal contact, which enables judging their reliability by hearing their voice or seeing their face, is missing. But with social networks and blogs growing so much the past few years, that drawback has largely been outweighed.

It’s possible today to get dozens of reliable recommendations from individuals you interact with regularly. When reading comments by new forum members it can be hard to judge the worth of his or her opinion. But over time, you get to know who is providing objective and reliable information. Before long, you can locate one or more professionals to get more in-depth advice.

One place to start is with a site such as http://www.finaid.org/ or http://talk.collegeconfidential.com/forumdisplay.php?f=7

Be sure to allocate at least a year to consider the available options, two years would be better. Saving and planning can and should start much earlier, of course. But getting information that is likely to be useful means not putting too much weight on circumstances that exist several years before beginning college. Interest rates, available programs and qualifying criteria do change over time. And, who knows, the Internet innovators may come up with something even better in the future!