Module 2: Budgets, Financial Goals, & Student Loan Debt

What is the difference between net and gross income?

Gross income is your total salary before any taxes, fees, etc. are deducted; net income is the money remaining and you get to keep

Billy Jo works as a veterinary technician at a small animal practice and is paid every two weeks. He is always a bit bummed because when he works 80 hours in a two-week period, he makes $1,280 but he only gets to keep $980 after they take all the "taxes and stuff out." What is Billy Jo's gross income for the two week period? What is Billy Jo's net income for the two week period?

His gross income is $1,280, and his net income is $980.

Net income:

Sometimes referred to as "take-home pay", this is the income that is left after all taxes and other money (e.g., for a retirement plan or health insurance provided through your employer) are taken out

Describe the difference between a subsidized loan and an unsubsidized loan.

Subsidized loans are for undergraduate students, based on financial need, and are determined by the cost of attendance, without expected family contributions or other financial aid. Unsubsidized loans are for undergraduate and graduate students, not based on financial need, and are determined by the cost of attendance, without other financial aid.

What types of income and expenses should be included in a personal budget?

ALL income and expenses

Describe two reasons why it is a good idea to consider obtaining federal student loans before exploring private student loan options.

Federal student loans often have lower and fixed interest rates, and they have generous repayment plans. In contrast, private student loans are often more expensive than federal student loans, and they tend to have higher and variable interest rates.

T or F: your boss has told you that there may be some opportunity for you to several hours of overtime in the next few months so you should include this in your budget when estimating your income.

False

What are some other taxes taken out of your paycheck (other than federal income tax)?

FICA taxes, Social Security tax rate, etc.

What is a budget? What is the significance of a personal budget?

A budget is a itemized summary of likely income and expenses for a given period. It can help you keep better track of where your money goes and can also be helpful when making spending decisions

Forbearance:

A period during which your monthly payments are temporarily suspended or reduced; if you are unable to make payments due to certain types of financial hardships, you may qualify for a forbearance

Default:

Failure to repay a loan according to the terms of the promissory note; there are serious consequences for student-loan defaulters

Describe three benefits of creating a personal budget.

A personal budget can help you figure out how much money you are spending each month, set and reach financial goals, and it can help you build a savings account in case of an emergency situation.

Grace period:

A six-month period that begins on the day after you, the Stafford Loan Program borrower, cease to be enrolled as at least a half-time student at an eligible institution and ends on the day before the repayment period begins

Deferment:

A temporary suspension of the obligation to repay a federal or parent education loan; for an unsubsidized loan, the interest continues to accrue during a period of deferment; for a subsidized loan, interest does not accrue during deferment

Capitalization:

Adding unpaid interest to the loan amount borrowed; this occurs at the end of a deferment, forbearance, or grace period on unsubsidized loans

Loan Servicer:

An organization that administers and collects education loan payments on behalf of the lender

When creating a budget, it can be fairly easy to determine your income. However, expenses are often harder to itemize. Explain why this is?

Expenses are hard to itemize because they are subject to changing. Income can become higher or lower, or there may be added bonuses or "windfalls." In addition, your income is divided into a net and gross income. Gross income is the amount of money you make without factoring in taxes, fees, or any other contributions, and net income is the amount of money you make after considering these contributions. Therefore, your net income is what you will be keeping, but the total amount may change depending on how much money is needed for taxes, etc.

T or F: student loans go into default if you miss two monthly payments in a row.

False

What information do you need to receive from your school or loan servicer when you begin the repayment process?

The amount of your total debt (principal and estimated interest), your current interest rate and the total interest charges on your loan • The date you must start repayment • A complete list of any charges you must pay (loan fees) and information on how those charges are collected • Information about the maximum repayment periods and the minimum repayment amount • A current description of your loans, including average anticipated monthly payments • The name of the loan servicer that holds your loans, where to send your payments and where to write or call if you have questions • An explanation of the fees you might be charged during the repayment period, such as late charges and collection or litigation costs if you're delinquent or in default • An explanation of default and its consequences • A reminder of available options for loan consolidation • A reminder that you can prepay your loan in whole or in part without penalty at any time

What are some possible consequences of defaulting student loans?

The entire unpaid balance of your loan and any interest is immediately due and payable. • You lose eligibility for deferment, forbearance, and repayment plans. • You lose eligibility for additional federal student aid. • Your loan account is assigned to a collection agency. • The loan will be reported as delinquent to credit bureaus, damaging your credit rating. This will affect your ability to buy a car or house or to get a credit card. • Your federal and state taxes may be withheld through a tax offset. This means that the Internal Revenue Service can take your federal and state tax refund to collect any of your defaulted student loan debt. • Your student loan debt will increase because of the late fees, additional interest, court costs, collection fees, attorney's fees, and any other costs associated with the collection process. • Your employer (at the request of the federal government) can withhold money from your pay and send the money to the government. This process is called wage garnishment. • The loan holder can take legal action against you, and you may not be able to purchase or sell assets such as real estate. 8 • Federal employees face the possibility of having 15% of their disposable pay offset by their employer toward repayment of their loan through Federal Salary Offset. • It will take years to reestablish your credit and recover from default.

Consolidate:

The process of combining one or more eligible federal education loans into a single new loan

W-4 form:

The tax form that you will have to complete anytime you start a new job. Part of the information you provide on this form will determine how much federal income tax is withheld from your paycheck

T or F: budgets are meant to be dynamic and should be reviewed and revised on a regular basis.

True

T or F: when you take out a Federal Direct Loan you do not have to start paying back your loan until six months after you graduate.

True

You were injured in a car accident and have not been able to work for several months. Because of this, you are struggling financially and know that next month you will not be able to make your monthly student loan payment. Describe two options that you have that can help you avoid having your loan become delinquent or go into default.

Two ways to help you avoid having a loan become delinquent or go into default is by switching the payment due date or switching repayment plans

Non-recurring expense:

When creating your budget, these are expenses that do not occur on a regular basis; for example, having maintenance performed on your car (e.g., an oil change) is something that is only done several times a year

Recurring expense:

When creating your budget, these are the expense that recur on a regular (usually monthly) basis; an example would be your mortgage or rent and your utilities

Accrue:

When interest on your loan adds to the amount you owe; for example, with an unsubsidized loan, interest continues to accumulate even when a student is enrolled in class and is not paying on the principle amount of the loan

Delinquent:

Your loan payments are not received by the due dates; if you are unable to make payments, consider deferment, forbearance, or switching repayment plans

Gross income:

Your total wages before taxes or other money (e.g., for a retirement plan or health insurance provided through your employer) are taken out

Unsubsidized loan:

a subsidized loan is available to anyone whose other financial aid doesn't meet the cost of attendance; the student takes on the full responsibility of paying the interest regardless of their status in school

Subsidized loan:

a subsidized loan is need-based and awarded only to students who can demonstrate a financial need on the Free Application for Federal Student Aid (FAFSA); the interest is paid by the federal government while the student is enrolled in at least half-time status

What are some advantages and disadvantages of consolidating your student loans?

advantages: it can lower your overall monthly payment and it can simplify your finances so that you are only paying one bill rather than spending off payments each month for multiple loans disadvantages: typically draws out the loan repayment period so you will end up paying more in interest

When should repayment of student loans begin (for various types of student loans available)?

after the given grace period ends

What is the significance of setting a financial goal?

can help you maintain a personal budget and help you make money smart decisions

What are some ways to help someone if they can't make their monthly student loan payments?

contact the servicer immediately to discuss options; consider changing your repayment plan if your current one is not favorable; keep track of all communications

What are the 4 types of Federal Direct Loans?

direct subsidized loans, direct unsubsidized loans, direct PLUS loans, direct consolidation loans

What are the similarities and differences between private and federal student loans?

federal: have lower and fixed rates, generous repayment plans, no prepayment penalties, and no credit checks private: marketed differently through TV ads, mail, etc.; have higher and variable interest rates that may substantially increase the total amount you repay, and the interest rate may depend on your credit score

Which student loans can be consolidated?

income-contingent repayment plan, pay as you earn repayment plan, income-based repayment plan

The more allowances you claim on a W-4 form, the __(more/less)__ tax will be withheld.

less

What types of repayment plans are available for federal student loans?

standard repayment plan, graduated repayment plan, extended repayment plan, income-based repayment plan, pay as you earn repayment plan, income-contingent repayment plan

How does your employer determine how much money to take out of your paycheck to cover federal income taxes?

the number of allowances that you claim on the W-4 form

FICA (Federal Insurance Contributions Act):

this accounts for the Social Security and Medicare taxes taken out of your paycheck

What is a "windfall," and where should it be stored?

unexpected income; it should be put into an emergency fund