Ch 7 Choosing a Source of Credit: The Cost of Credit Alternatives
3/9/26 10:02 AM
Sources of Consumer Credit
- Credit Costs money, be sure to weigh the pro’s & con’s of a purchase on credit before doing so
○ Avoid sales for impulse purchases
○ Try to see if you can make some purchases in cash before putting it on credit this way your
not paying interest for it later
What kinds of loans should you seek?
- Inexpensive Loans
○ Loans from friends/family
§ Be weary they can complicate relationships, the interest rates varies person to person
○ Can be borrowed on financial assets like a Certificate of Deposit
§ Interest rate can be 5-7%
○ Federal Financial Aid
§ Aka FASFA for educational financing, loans & scholarships
- Medium priced loans
○ Are obtained from either a commercial & federal banks or credit union
§ Borrowing from a credit union has serval advantages
□ Credit free life insurance
□ Tend to be more sympathetic to those with legitimate problems
□ Provide personalized services
○ Credit unions have the same services & loans as any financial institutions
○ Over 124.3 million American belong to credit unions
§ This number is continually growing & about 5,100 credit unions hold $1.84 trillion is
assets
- Expensive Loans
○ Most from either finance companies, retailers and/or banks via credit cards w/ an interest
rate ranging 8-20%
○ Before signing a loan contract be sure to:
§ Explore all your financial options
□ Contact several lenders, compare interest rates, payments, loans etc
§ Know your rights under the law
○ Another way to borrow money is a tax refund loan
§ This type of credit allows an advance on your tax refund, APR can be as high as 774%
○ Some of the best ways to keep track is by comparing online to see multiple lenders at once
to look for the best offer available
The Cost of Credit
- The Truth in Lending Law (1969)
○ Creditors are now required to state the cost of borrowing as a dollar amount so consumers
know exactly what the credit charges are & can now compare & shop for credit
- If you decide to borrow money
1. Find out how much it will cost & if you can afford it
2. Shop for the best option
a. Keep in mind finance charges & annual percentage rates
Finance Charge & Annual Percentage Rates
- Finance Charge
○ The total dollar amount you pay to use credit, this includes:
§ Interest
§ Service Charges
§ Credit related insurance premiums
§ Appraisal fees
- The Annual Percentage Rate (APR)
○ The percentage cost of credit on a yearly basis
§ APR is your key to comparing costs, here’s to calculate your APR
- The Financial Literacy Calculations: The Arithmetic of APR
○ Shows you how to calculate for APR
Tackling the Trade-offs
- Term vs Interest costs
○ Longer term financing for smaller monthly payments but you might have a higher interest
rate
- Lender Risk vs Interest rates
○ Variable Interest Rates
§ Is based on a fluctuating rate in the banking system, you share the interest rate risks
w/ the lender & the lender may offer you a lower initial interest rate instead of a fixed
rate loan
○ A secure loan
§ When you pledge property or other assets as collateral to get a lower rate on your
loan
○ Up front Cash
§ Seen as a higher risk for repaying a loan in high amounts of cash but you might get
better rates, a larger down payment can lead to avoiding interest you could have
earned in a savings account
○ A shorter term
§ Might be able to borrow w/ less risk, a lower interest rate but payments will be higher
Calculating the cost of Credit
- Simple interest
○ Interest computed on principle w/o compounding aka the dollar cost of borrowing money
Simple Interest on the Declining Balance
- When more than one payment is made on simple interest loans, you pay interest on the
amount of the original principal not yet paid
○ The more frequent the payments the lower interest but the 5% doesn’t change
Add-on Interest
- Is calculated on the full amount of the original principle, interest is immediately added to
principal, payments are determined by dividing principle plus interest by the number of
payments made
Cost of Open-End Credit
- Adjusted balance method
○ When finance charges are added after subtracting payments made during billing period
- Previous Balance Method
○ No credit payments made during the billing period
- Average daily balance method
○ When creditors add your balance for each day in the billing period, then divide it by the
number of days in the period
Cost of Credit & Expected Inflation
- Borrowers are more concerned w/ goods & services that money CAN buy, inflation decreases
that power to do so
○ As a result lenders add the expected rate of inflation to the interest rate they can charge
Cost of Credit Tax & Tax Considerations
- Before the Tax Reform Act of 1986, the interest you paid on consumer credit reduced your
taxable income
○ This also affected the deductibility of home mortgage interest, it is no longer permitted to
deduct interest paid on consumer loans
Avoid the Minimum Monthly Payment Trap
- The smallest amount you can pay & still be a card holder in good standing, banks often
encourage only the minimum
When the Repayment is Early: The Rule of 78’s
- AKA the sum of digits
○ Determines how much interest you have paid at any point in a loan
- The law recognizes/authorizes the use of this rule when you pay off a loan early
Credit Insurance
- Ensures the repayment of your loan in the event of death, disability, or loss of property. The
lender is named the beneficiary & directly receives any payment made on submitted claims
- The 3 types of Credit Insurances
○ Credit Life
§ Provides repayment of a loan in the event of the borrowers death if they don’t have
life insurance
○ Credit Accident & Health
§ AKA Disability insurance, repays loans in the event of loss of income as a result of an
accident/injury leading to the inability to work
○ Credit Property
§ Provides coverage for personal property purchased w/ a loan
The Cost of Credit & Credit Card Accountability, Responsibility & Disclosure Act of 2009
- AKA The Credit Card Act
○ Limits the card users ability to increase APR on transferred balance during the first year the
account is opened
○ Restricts card users from applying to higher interest rates to the existing card balances
○ Requires companies to inform consumers of rate increases or other significant changes at
least 45 days in advance
○ States the teaser rates stay in affect for 6mo’s minimum
○ Requires issuers to mail a monthly statement 21 days before payment is due
○ Payments must be made by the due date, potential late fee’s, interest incurred & the state
must warn consumer about the costs of making only minimum payments
○ Required credit card issuers (the bank) to post agreements online
○ States a set due date for the credit card
○ Restricts penalties that issuers can charge for going over the credit limit
○ Prohibits card issuers from giving those under 21 a credit w/o a co-signer or a card to
someone who can demonstrate independent means to repay their debts
Managing Your Debts
- In the event you cant make these payments contact your bank/creditor:
○ Auto loans, paying bills & outstanding debts
Debt Collection Practices
- Fair Debt Collection Practices Act (FDCPA)
○ Prohibits certain practices by agencies that collect debts for creditors
○ The FTC & Consumer Financial Protection Bureau (CFPB) reported that 84,500 debt
collection complaints
- Debt Collectors
○ Are prohibited by federal law from contacting you in any place/time if inconvenience
and/or your place of work
Warning Signs of Debt Problems
1. Emotional Problems
a. AKA Instant gratification
2. The Use of Money as Punishment
a. I.E. A husband buys himself a new car & the wife reacts w/ a diamond watch
3. The Exception of Instant Comfort
a. Young couple’s who believe in using installment plans & that they are entitled to their
parents possessions
4. Keeping up w/ The Joneses
a. Impulse buying to keep appearances of wealth/stability among families who are on limited
income
5. Overindulgence of Children
a. Spoiling kids w/ unnecessary purchases to satisfy parents own emotional needs,
competition between parents and/or inadequate communication skills regarding
purchases
6. Misunderstanding/Lacking of Communication among family members
a. Making purchases w/o consulting other members of the family
7. The Amount of the Finance Charges
a. Can cause conflict if they are able to pay and when they borrow from one company to pay
off another
The Serious Consequences of Debt
- Loss of a job
- Family issues
○ Health may be neglected to pay off debts
○ Children’s educational needs may be delayed/ignored
○ Marital issues
○ Drug abuse
- Paying only the minimum can lead to bankruptcy
Consumer Credit Counseling Services
- The CCCS is a local nonprofit organization affiliated w/ the National Foundation for Consumer
Credit (NFCC) that provide debt services for families w/ serious financial issues, they are not a
charity - they are a lending institution
○ AKA a govt or legal agency
- The CCCS is supported by bank contributions, finance companies, credit unions, merchants &
other community ran organizations
- Every year millions of consumer contact them for assistance, they can be contacted by:
○ Calling (888)860-3004
○ NFCC (800)388-2227
What does the CCCS do?
- Helping families w/ serious debt by managing their money, making realistic budgets & plan for
expenditures
- Help them prevent debt by:
○ Teaching them money management
○ Budgeting
○ Education for all ages to the pitfalls of misused credit
- Their services are free, but an initial fee is required to pay their administration
Alternative Counseling Services
- They’re are several other non profits that provide info & assist w/ debt via phone & online
○ American Consumer Credit Credit Counseling
www.consumercredit.com 1(800)769-3571
○ Financial Counseling Association of America
www.fcaa.org 1(866)797-2891
○ InCharge Institute of America
www.incharge.org 1(800)565-8953
○ Money Management International
www.moneymanagement.org 1(866)889-9347
Declaring Personal Bankruptcy
- A legal process where some or all assets are distributed among creditors because someone
can’t pay their debts, bankruptcy may also include:
○ A plan to repay creditors on in installments
- In 1994 the US senate passed a bill reducing the time & cost of bankruptcy proceedings
○ This bill gave creditors rights
○ Assisted more individuals w/ bankruptcy w/o having to sell assets
- Unfortunately this became used as toll for some leading to other issues:
○ In 2005, the highest rate of U.S. bankruptcy took effect since 1979
○ Court is regularly held on Saturdays regarding bankruptcy hearings
- This all lead to The Bankruptcy Abuse Prevention & Consumer Protection Act of 2005
○ 4/5/05 President George Bush signed this act that is still in place today
§ This act became know & declared as a last resort use only tool
§ This law helps make credit more affordable, w/ less bankruptcy credit can be
extended at better rates
§ The waiting period to apply/reapply for bankruptcy is 8 yrs
§ This law also requires that
□ The US Trustees develop a financial management training program to educate
better debt management
□ Debtors must complete an approved instructional course on financial
management
□ Clerks of bankruptcy districts must have/attend a list of credit counseling
agencies & instructional courses
○ All of this does however make it more difficult to file for Chapter 7(bankruptcy) and forces
one into chapter 13 (a repayment plan)
Chapter 7 Bankruptcy
- When a debt collector is required to draw a petition listing his/her assets & liabilities
- Debtor
○ The person filing for relief under bankruptcy
- Certain assets of debt are protected
○ Social security payments, unemployment compensation, limited values in equity, a vehicle,
household appliances, tools & books
- If a debtor can’t pay court fee’s they might be waived
- To file a petition the following info must be presented:
○ A list of all the creditors, amount & type of claim
○ Source, amount, frequency of debtors income
○ A list of their property(s)
○ Monthly expenses
- None of the above however doesn’t affect:
○ Alimony, child support, certain taxes, fines, certain debts from educational loans and/or
debts that a debt collector fails to report
○ Debts from fraud, embezzlement, DUI’s, larceny (theft) and/or other malicious acts will be
excluded
Ch 13 Bankruptcy
- AKA wage earners plan
○ When a debtor w/ a regular income proposes bankruptcy to pay their existing debts from
earnings or other properties over a period of time
○ This process can take up to 5yrs which allows the debtor to repay their dues, under certain
circumstances the bankruptcy court must approve a plan allowing the debtor to keep all
property despite not having paid their full property amount
Effect of Bankruptcy on your job & future credit
- Restoring credit after bankruptcy is easier for some compared to others, some may have
already paid their debts off while others couldn’t file, obtaining credit can be easier if you filed
for ch 13 compared to ch 7 w/ no repayments
- The law prohibits employers from firing you due to a bankruptcy case
○ DON’T DO BOTH TYPES OF BANKRUPTCY TOGETHER
Chapter 11 Bankruptcy
- A reorganization of finances requested by a buisness & court ordered until debts are paid
Should a Lawyer represent you in a bankruptcy case?
- You need to complete & file your forms to the court w/ several details concerning your
property debts & financial situation
○ Most people find it easier to do this w/ the help of an experienced counsel/lawyer
- Choosing a bankruptcy lawyer can be difficult
○ It’s best recommended you choose someone who is recommended by others you know &
trust from an employee assistance program
- What are the costs?
○ The momentary costs of Chapter 13 are:
§ Court costs
□ Paying a filing fee for a petition
§ Attorney’s Fee’s
□ Large amounts, are not required in advance, can be paid in installments after a
down payment has been made & can range $2,000-$5,000 depending the state,
attorney & complexity of your case
§ Trustee’s Fees & Costs
□ Are established by the bankruptcy judge & a U.S. trustee in certain district
- Although these costs can be reduced by purchasing the legal forms from an office supply an
attorney is strongly recommended
Education Financing, Loans & Scholarships
- Return of Investments (ROI)
○ A profitable measure for a return of profit, this helps give a general idea about how much
income to expect compared to tuition cost & potential loan amount
Increasing Costs of Education
- What causes it?
○ An increase in student attendance
○ Tuition, books, schools fee’s, living expense’s etc
- Things that can help
○ Loans, scholarships
○ Grants, savings & current earnings
§ Loans have specific repayment terms, scholarship/grants do not
Student Aid - FASFA website
Free Application for Federal Student Aid (FASFA)
1. Complete The FASFA application
a. You will be notified to complete your expected family contribution (EFC)
2. The school will then be notified that a student has completed their FASFA
3. The students situation will be evaluated & provided the best option based on info provided
4. FASFA can be reduced if you are rewarded other types of aid
a. Scholarships, state aid/benefits etc
Scholarships
- Do not have to be repaid
- Can be rewarded from outside sources from school that must be reported to FASFA
- Other places to get scholarships can be
○ Work, clubs, local & regional association, churches and/or businesses
Grants
- Don’t need to be repaid
- Can be used to pay for:
○ Education, trainings, books, tuitions, school related expenses
- The most common is the federal pell grant
○ This grant is only dispersed for a max of 12 semesters
- Other Grants available
○ The Federal Supplemental Educational Opportunity Grant (FSEOG)
§ To qualify to you must also have TEACH (Teacher Education Assistance for College &
Higher Education) which may also be available pending your major & may grant up to
$4,000
○ Iraq & Afghanistan Service Grant
○ FASFA Iraq/Afghanistan Grant
§ Available to students who have lost a parent who served the in armed forces after
9/11
§ This grant is equal to the Pell grant or the cost of your attendance, either one can be
granted IF it is lower than the other
○ Institutional Grants
§ Certain grants that are provided to women, minorities & certain degree programs
Loans
- The total number of loans distributed in recent yrs was $100 billion annually
○ Loan balances are expected to grow over $1.55 trillion
- The four main educational loan categories
○ Stafford
i. Originally called The Federal Guaranteed Student Loan program
ii. In 1988, they were renamed after US Senator Robert Stafford & his work for higher
education
iii. The Stafford loan is how interest is accrued, in extreme cases the govt will make
interest payments for the student for a certain grace period
iv. This type of loan is referred to as a unsubsidized loan & has two options
Option 1: Pay interest while being enrolled
Options 2: Have interest added to the balance of the loan
v. Negative Amortization
1) The borrower must calculate cost + interest, this happens when your loan
exceeds the original amount borrowed, this can add time to repayment
vi. Maximum amounts borrowed for this loan include:
1) The students current year in school
2) Type of schooling
3) Subsidized v unsubsidized amounts of money
4) Dependency status
○ Perkins
i. Named after Carl D Perkins, a former House of Reps member under Kennedy,
advocated for; higher education & educating the under privileged
ii. The Perkins loan is provided to those who have exceptional financial needs, the
program is run by individual schools who serve as lenders provided by the federal
govt
1) It’s a subsidized loan w/ a low interest rate & repayment plan of 10yrs
iii. Each school determines varying amounts per student within the limits of annual &
cumulative loans
○ Parent Loans (AKA PLUS Loans)
§ Parent Loans for Undergraduate Students
i. When parents of a dependent child assist w/ education needs, when personal income
is not enough parents borrow the remaining amount for costs that the schools/FASFA
will not cover
ii. The parent is responsible for the loan, their creditworthiness is a determining factor if
they receive a loan otherwise the student will need to apply for the unsubsidized
Stanford loan
iii. A variation of this loan is the GRAD PLUS, this allows grad students to borrow money
for educational expenses
iv. PLUS & GRAD PLUS loans have higher interest rates than the Stanford or Perkins &
should be considered very carefully
○ Private student loans (AKA Alternative Student Loans)
§ A private loan should also be looked at closer & carefully, they tend to have higher
interest rates compared to govt programs
□ Interest rates can vary & make payments more difficult to manage
§ There are 3 common reasons people borrow via private loans
1. To fund additional educational expenses that are limited by other programs
2. No FASFA requirements need to be met, its based on credit
3. Loans can be deferred/delayed while the student is in school
○ Social Lending/Peer-to-Peer Lending
§ Comes from the private sector, the origin can post to social media & state the
reasoning for needing the money & viewer can decide if they want to lend the money
or not
§ This can be done short or long term (3 months or 3 yrs)
□ I.E. SoFi, Prosper & The lending Club
□ SoFi SoFi Private Loans
□ Prosper https://www.prosper.com/
□ The Lending Club Lending Club Loans
Repaying your Loans
- There are diff types of loans w/ varying grace periods before 1st payment is due
○ Stafford loans require repayment after 6 months of graduation or dropping to half time
enrollment
○ Perkins loans require repayment after 9 months of graduation or dropping to half time
○ Federal PLUS repayments are 60 days after loan is dispersed, repayment can be deferred if
you are currently in school but interest will still grow similar to a Stafford loan
- When repayment begins federal loan borrowers have other options to consider:
1. Standard repayment
§ Most common option, has the lowest interest, is a fixed monthly amount that doesn’t
exceed 10yrs - 30 for consolidated loans
2. Graduated Repayment
§ Allows new grads to make lower payments as they begin their careers, it increases
over time every 2 yrs, repayment doesn’t exceed 10yrs - 30 for consolidated loans
3. Extended Repayment
• Lowers the monthly amounts, can take up to 25yrs & is considered the substantial
increase in the amount of interest that will be paid
4. Income Contingent Repayment
• Designed to provide leniency, payment is based on income & debts, can last 25yrs
5. Income Sensitive Repayment
• Allows the borrower to set a monthly amount based on % of gross income & is limited
to 15yrs of payments
6. Income Based Repayment (IBR)
• The repayment is based on discretionary income, provides a reduction income
contingent & income sensitive repayment plans for 20-25 yrs IF payments are made
on time
7. Pay as you earn Repayment (PAYE)
• This plan is capped at 10% of discretionary income, provides forgiveness fro 20yrs if
payments are made on time, doesn’t require proof of financial hardship but was
phased out by 2011 & replaced by a revision of its self
8. Revised Pay as you earn Repayment
• The newest option, is open to borrowers regardless of when disbursements are made,
this includes Stafford & PLUS loans, is 20 yrs for undergrads, 25 for grads
Consolidation Loans
- Can lower your monthly payments & increase the time by 30 yrs, not recommended unless you
are struggling to make payments
- There are no benefits to consolidated loans other than making one large payment
- Private loans may allow you to refinance at a lower rate based on credit but this method is not
recommended
Student Loan Default Statistics
3/9/26 10:02 AM
Sources of Consumer Credit
- Credit Costs money, be sure to weigh the pro’s & con’s of a purchase on credit before doing so
○ Avoid sales for impulse purchases
○ Try to see if you can make some purchases in cash before putting it on credit this way your
not paying interest for it later
What kinds of loans should you seek?
- Inexpensive Loans
○ Loans from friends/family
§ Be weary they can complicate relationships, the interest rates varies person to person
○ Can be borrowed on financial assets like a Certificate of Deposit
§ Interest rate can be 5-7%
○ Federal Financial Aid
§ Aka FASFA for educational financing, loans & scholarships
- Medium priced loans
○ Are obtained from either a commercial & federal banks or credit union
§ Borrowing from a credit union has serval advantages
□ Credit free life insurance
□ Tend to be more sympathetic to those with legitimate problems
□ Provide personalized services
○ Credit unions have the same services & loans as any financial institutions
○ Over 124.3 million American belong to credit unions
§ This number is continually growing & about 5,100 credit unions hold $1.84 trillion is
assets
- Expensive Loans
○ Most from either finance companies, retailers and/or banks via credit cards w/ an interest
rate ranging 8-20%
○ Before signing a loan contract be sure to:
§ Explore all your financial options
□ Contact several lenders, compare interest rates, payments, loans etc
§ Know your rights under the law
○ Another way to borrow money is a tax refund loan
§ This type of credit allows an advance on your tax refund, APR can be as high as 774%
○ Some of the best ways to keep track is by comparing online to see multiple lenders at once
to look for the best offer available
The Cost of Credit
- The Truth in Lending Law (1969)
○ Creditors are now required to state the cost of borrowing as a dollar amount so consumers
know exactly what the credit charges are & can now compare & shop for credit
- If you decide to borrow money
1. Find out how much it will cost & if you can afford it
2. Shop for the best option
a. Keep in mind finance charges & annual percentage rates
Finance Charge & Annual Percentage Rates
- Finance Charge
○ The total dollar amount you pay to use credit, this includes:
§ Interest
§ Service Charges
§ Credit related insurance premiums
§ Appraisal fees
- The Annual Percentage Rate (APR)
○ The percentage cost of credit on a yearly basis
§ APR is your key to comparing costs, here’s to calculate your APR
- The Financial Literacy Calculations: The Arithmetic of APR
○ Shows you how to calculate for APR
Tackling the Trade-offs
- Term vs Interest costs
○ Longer term financing for smaller monthly payments but you might have a higher interest
rate
- Lender Risk vs Interest rates
○ Variable Interest Rates
§ Is based on a fluctuating rate in the banking system, you share the interest rate risks
w/ the lender & the lender may offer you a lower initial interest rate instead of a fixed
rate loan
○ A secure loan
§ When you pledge property or other assets as collateral to get a lower rate on your
loan
○ Up front Cash
§ Seen as a higher risk for repaying a loan in high amounts of cash but you might get
better rates, a larger down payment can lead to avoiding interest you could have
earned in a savings account
○ A shorter term
§ Might be able to borrow w/ less risk, a lower interest rate but payments will be higher
Calculating the cost of Credit
- Simple interest
○ Interest computed on principle w/o compounding aka the dollar cost of borrowing money
Simple Interest on the Declining Balance
- When more than one payment is made on simple interest loans, you pay interest on the
amount of the original principal not yet paid
○ The more frequent the payments the lower interest but the 5% doesn’t change
Add-on Interest
- Is calculated on the full amount of the original principle, interest is immediately added to
principal, payments are determined by dividing principle plus interest by the number of
payments made
Cost of Open-End Credit
- Adjusted balance method
○ When finance charges are added after subtracting payments made during billing period
- Previous Balance Method
○ No credit payments made during the billing period
- Average daily balance method
○ When creditors add your balance for each day in the billing period, then divide it by the
number of days in the period
Cost of Credit & Expected Inflation
- Borrowers are more concerned w/ goods & services that money CAN buy, inflation decreases
that power to do so
○ As a result lenders add the expected rate of inflation to the interest rate they can charge
Cost of Credit Tax & Tax Considerations
- Before the Tax Reform Act of 1986, the interest you paid on consumer credit reduced your
taxable income
○ This also affected the deductibility of home mortgage interest, it is no longer permitted to
deduct interest paid on consumer loans
Avoid the Minimum Monthly Payment Trap
- The smallest amount you can pay & still be a card holder in good standing, banks often
encourage only the minimum
When the Repayment is Early: The Rule of 78’s
- AKA the sum of digits
○ Determines how much interest you have paid at any point in a loan
- The law recognizes/authorizes the use of this rule when you pay off a loan early
Credit Insurance
- Ensures the repayment of your loan in the event of death, disability, or loss of property. The
lender is named the beneficiary & directly receives any payment made on submitted claims
- The 3 types of Credit Insurances
○ Credit Life
§ Provides repayment of a loan in the event of the borrowers death if they don’t have
life insurance
○ Credit Accident & Health
§ AKA Disability insurance, repays loans in the event of loss of income as a result of an
accident/injury leading to the inability to work
○ Credit Property
§ Provides coverage for personal property purchased w/ a loan
The Cost of Credit & Credit Card Accountability, Responsibility & Disclosure Act of 2009
- AKA The Credit Card Act
○ Limits the card users ability to increase APR on transferred balance during the first year the
account is opened
○ Restricts card users from applying to higher interest rates to the existing card balances
○ Requires companies to inform consumers of rate increases or other significant changes at
least 45 days in advance
○ States the teaser rates stay in affect for 6mo’s minimum
○ Requires issuers to mail a monthly statement 21 days before payment is due
○ Payments must be made by the due date, potential late fee’s, interest incurred & the state
must warn consumer about the costs of making only minimum payments
○ Required credit card issuers (the bank) to post agreements online
○ States a set due date for the credit card
○ Restricts penalties that issuers can charge for going over the credit limit
○ Prohibits card issuers from giving those under 21 a credit w/o a co-signer or a card to
someone who can demonstrate independent means to repay their debts
Managing Your Debts
- In the event you cant make these payments contact your bank/creditor:
○ Auto loans, paying bills & outstanding debts
Debt Collection Practices
- Fair Debt Collection Practices Act (FDCPA)
○ Prohibits certain practices by agencies that collect debts for creditors
○ The FTC & Consumer Financial Protection Bureau (CFPB) reported that 84,500 debt
collection complaints
- Debt Collectors
○ Are prohibited by federal law from contacting you in any place/time if inconvenience
and/or your place of work
Warning Signs of Debt Problems
1. Emotional Problems
a. AKA Instant gratification
2. The Use of Money as Punishment
a. I.E. A husband buys himself a new car & the wife reacts w/ a diamond watch
3. The Exception of Instant Comfort
a. Young couple’s who believe in using installment plans & that they are entitled to their
parents possessions
4. Keeping up w/ The Joneses
a. Impulse buying to keep appearances of wealth/stability among families who are on limited
income
5. Overindulgence of Children
a. Spoiling kids w/ unnecessary purchases to satisfy parents own emotional needs,
competition between parents and/or inadequate communication skills regarding
purchases
6. Misunderstanding/Lacking of Communication among family members
a. Making purchases w/o consulting other members of the family
7. The Amount of the Finance Charges
a. Can cause conflict if they are able to pay and when they borrow from one company to pay
off another
The Serious Consequences of Debt
- Loss of a job
- Family issues
○ Health may be neglected to pay off debts
○ Children’s educational needs may be delayed/ignored
○ Marital issues
○ Drug abuse
- Paying only the minimum can lead to bankruptcy
Consumer Credit Counseling Services
- The CCCS is a local nonprofit organization affiliated w/ the National Foundation for Consumer
Credit (NFCC) that provide debt services for families w/ serious financial issues, they are not a
charity - they are a lending institution
○ AKA a govt or legal agency
- The CCCS is supported by bank contributions, finance companies, credit unions, merchants &
other community ran organizations
- Every year millions of consumer contact them for assistance, they can be contacted by:
○ Calling (888)860-3004
○ NFCC (800)388-2227
What does the CCCS do?
- Helping families w/ serious debt by managing their money, making realistic budgets & plan for
expenditures
- Help them prevent debt by:
○ Teaching them money management
○ Budgeting
○ Education for all ages to the pitfalls of misused credit
- Their services are free, but an initial fee is required to pay their administration
Alternative Counseling Services
- They’re are several other non profits that provide info & assist w/ debt via phone & online
○ American Consumer Credit Credit Counseling
www.consumercredit.com 1(800)769-3571
○ Financial Counseling Association of America
www.fcaa.org 1(866)797-2891
○ InCharge Institute of America
www.incharge.org 1(800)565-8953
○ Money Management International
www.moneymanagement.org 1(866)889-9347
Declaring Personal Bankruptcy
- A legal process where some or all assets are distributed among creditors because someone
can’t pay their debts, bankruptcy may also include:
○ A plan to repay creditors on in installments
- In 1994 the US senate passed a bill reducing the time & cost of bankruptcy proceedings
○ This bill gave creditors rights
○ Assisted more individuals w/ bankruptcy w/o having to sell assets
- Unfortunately this became used as toll for some leading to other issues:
○ In 2005, the highest rate of U.S. bankruptcy took effect since 1979
○ Court is regularly held on Saturdays regarding bankruptcy hearings
- This all lead to The Bankruptcy Abuse Prevention & Consumer Protection Act of 2005
○ 4/5/05 President George Bush signed this act that is still in place today
§ This act became know & declared as a last resort use only tool
§ This law helps make credit more affordable, w/ less bankruptcy credit can be
extended at better rates
§ The waiting period to apply/reapply for bankruptcy is 8 yrs
§ This law also requires that
□ The US Trustees develop a financial management training program to educate
better debt management
□ Debtors must complete an approved instructional course on financial
management
□ Clerks of bankruptcy districts must have/attend a list of credit counseling
agencies & instructional courses
○ All of this does however make it more difficult to file for Chapter 7(bankruptcy) and forces
one into chapter 13 (a repayment plan)
Chapter 7 Bankruptcy
- When a debt collector is required to draw a petition listing his/her assets & liabilities
- Debtor
○ The person filing for relief under bankruptcy
- Certain assets of debt are protected
○ Social security payments, unemployment compensation, limited values in equity, a vehicle,
household appliances, tools & books
- If a debtor can’t pay court fee’s they might be waived
- To file a petition the following info must be presented:
○ A list of all the creditors, amount & type of claim
○ Source, amount, frequency of debtors income
○ A list of their property(s)
○ Monthly expenses
- None of the above however doesn’t affect:
○ Alimony, child support, certain taxes, fines, certain debts from educational loans and/or
debts that a debt collector fails to report
○ Debts from fraud, embezzlement, DUI’s, larceny (theft) and/or other malicious acts will be
excluded
Ch 13 Bankruptcy
- AKA wage earners plan
○ When a debtor w/ a regular income proposes bankruptcy to pay their existing debts from
earnings or other properties over a period of time
○ This process can take up to 5yrs which allows the debtor to repay their dues, under certain
circumstances the bankruptcy court must approve a plan allowing the debtor to keep all
property despite not having paid their full property amount
Effect of Bankruptcy on your job & future credit
- Restoring credit after bankruptcy is easier for some compared to others, some may have
already paid their debts off while others couldn’t file, obtaining credit can be easier if you filed
for ch 13 compared to ch 7 w/ no repayments
- The law prohibits employers from firing you due to a bankruptcy case
○ DON’T DO BOTH TYPES OF BANKRUPTCY TOGETHER
Chapter 11 Bankruptcy
- A reorganization of finances requested by a buisness & court ordered until debts are paid
Should a Lawyer represent you in a bankruptcy case?
- You need to complete & file your forms to the court w/ several details concerning your
property debts & financial situation
○ Most people find it easier to do this w/ the help of an experienced counsel/lawyer
- Choosing a bankruptcy lawyer can be difficult
○ It’s best recommended you choose someone who is recommended by others you know &
trust from an employee assistance program
- What are the costs?
○ The momentary costs of Chapter 13 are:
§ Court costs
□ Paying a filing fee for a petition
§ Attorney’s Fee’s
□ Large amounts, are not required in advance, can be paid in installments after a
down payment has been made & can range $2,000-$5,000 depending the state,
attorney & complexity of your case
§ Trustee’s Fees & Costs
□ Are established by the bankruptcy judge & a U.S. trustee in certain district
- Although these costs can be reduced by purchasing the legal forms from an office supply an
attorney is strongly recommended
Education Financing, Loans & Scholarships
- Return of Investments (ROI)
○ A profitable measure for a return of profit, this helps give a general idea about how much
income to expect compared to tuition cost & potential loan amount
Increasing Costs of Education
- What causes it?
○ An increase in student attendance
○ Tuition, books, schools fee’s, living expense’s etc
- Things that can help
○ Loans, scholarships
○ Grants, savings & current earnings
§ Loans have specific repayment terms, scholarship/grants do not
Student Aid - FASFA website
Free Application for Federal Student Aid (FASFA)
1. Complete The FASFA application
a. You will be notified to complete your expected family contribution (EFC)
2. The school will then be notified that a student has completed their FASFA
3. The students situation will be evaluated & provided the best option based on info provided
4. FASFA can be reduced if you are rewarded other types of aid
a. Scholarships, state aid/benefits etc
Scholarships
- Do not have to be repaid
- Can be rewarded from outside sources from school that must be reported to FASFA
- Other places to get scholarships can be
○ Work, clubs, local & regional association, churches and/or businesses
Grants
- Don’t need to be repaid
- Can be used to pay for:
○ Education, trainings, books, tuitions, school related expenses
- The most common is the federal pell grant
○ This grant is only dispersed for a max of 12 semesters
- Other Grants available
○ The Federal Supplemental Educational Opportunity Grant (FSEOG)
§ To qualify to you must also have TEACH (Teacher Education Assistance for College &
Higher Education) which may also be available pending your major & may grant up to
$4,000
○ Iraq & Afghanistan Service Grant
○ FASFA Iraq/Afghanistan Grant
§ Available to students who have lost a parent who served the in armed forces after
9/11
§ This grant is equal to the Pell grant or the cost of your attendance, either one can be
granted IF it is lower than the other
○ Institutional Grants
§ Certain grants that are provided to women, minorities & certain degree programs
Loans
- The total number of loans distributed in recent yrs was $100 billion annually
○ Loan balances are expected to grow over $1.55 trillion
- The four main educational loan categories
○ Stafford
i. Originally called The Federal Guaranteed Student Loan program
ii. In 1988, they were renamed after US Senator Robert Stafford & his work for higher
education
iii. The Stafford loan is how interest is accrued, in extreme cases the govt will make
interest payments for the student for a certain grace period
iv. This type of loan is referred to as a unsubsidized loan & has two options
Option 1: Pay interest while being enrolled
Options 2: Have interest added to the balance of the loan
v. Negative Amortization
1) The borrower must calculate cost + interest, this happens when your loan
exceeds the original amount borrowed, this can add time to repayment
vi. Maximum amounts borrowed for this loan include:
1) The students current year in school
2) Type of schooling
3) Subsidized v unsubsidized amounts of money
4) Dependency status
○ Perkins
i. Named after Carl D Perkins, a former House of Reps member under Kennedy,
advocated for; higher education & educating the under privileged
ii. The Perkins loan is provided to those who have exceptional financial needs, the
program is run by individual schools who serve as lenders provided by the federal
govt
1) It’s a subsidized loan w/ a low interest rate & repayment plan of 10yrs
iii. Each school determines varying amounts per student within the limits of annual &
cumulative loans
○ Parent Loans (AKA PLUS Loans)
§ Parent Loans for Undergraduate Students
i. When parents of a dependent child assist w/ education needs, when personal income
is not enough parents borrow the remaining amount for costs that the schools/FASFA
will not cover
ii. The parent is responsible for the loan, their creditworthiness is a determining factor if
they receive a loan otherwise the student will need to apply for the unsubsidized
Stanford loan
iii. A variation of this loan is the GRAD PLUS, this allows grad students to borrow money
for educational expenses
iv. PLUS & GRAD PLUS loans have higher interest rates than the Stanford or Perkins &
should be considered very carefully
○ Private student loans (AKA Alternative Student Loans)
§ A private loan should also be looked at closer & carefully, they tend to have higher
interest rates compared to govt programs
□ Interest rates can vary & make payments more difficult to manage
§ There are 3 common reasons people borrow via private loans
1. To fund additional educational expenses that are limited by other programs
2. No FASFA requirements need to be met, its based on credit
3. Loans can be deferred/delayed while the student is in school
○ Social Lending/Peer-to-Peer Lending
§ Comes from the private sector, the origin can post to social media & state the
reasoning for needing the money & viewer can decide if they want to lend the money
or not
§ This can be done short or long term (3 months or 3 yrs)
□ I.E. SoFi, Prosper & The lending Club
□ SoFi SoFi Private Loans
□ Prosper https://www.prosper.com/
□ The Lending Club Lending Club Loans
Repaying your Loans
- There are diff types of loans w/ varying grace periods before 1st payment is due
○ Stafford loans require repayment after 6 months of graduation or dropping to half time
enrollment
○ Perkins loans require repayment after 9 months of graduation or dropping to half time
○ Federal PLUS repayments are 60 days after loan is dispersed, repayment can be deferred if
you are currently in school but interest will still grow similar to a Stafford loan
- When repayment begins federal loan borrowers have other options to consider:
1. Standard repayment
§ Most common option, has the lowest interest, is a fixed monthly amount that doesn’t
exceed 10yrs - 30 for consolidated loans
2. Graduated Repayment
§ Allows new grads to make lower payments as they begin their careers, it increases
over time every 2 yrs, repayment doesn’t exceed 10yrs - 30 for consolidated loans
3. Extended Repayment
• Lowers the monthly amounts, can take up to 25yrs & is considered the substantial
increase in the amount of interest that will be paid
4. Income Contingent Repayment
• Designed to provide leniency, payment is based on income & debts, can last 25yrs
5. Income Sensitive Repayment
• Allows the borrower to set a monthly amount based on % of gross income & is limited
to 15yrs of payments
6. Income Based Repayment (IBR)
• The repayment is based on discretionary income, provides a reduction income
contingent & income sensitive repayment plans for 20-25 yrs IF payments are made
on time
7. Pay as you earn Repayment (PAYE)
• This plan is capped at 10% of discretionary income, provides forgiveness fro 20yrs if
payments are made on time, doesn’t require proof of financial hardship but was
phased out by 2011 & replaced by a revision of its self
8. Revised Pay as you earn Repayment
• The newest option, is open to borrowers regardless of when disbursements are made,
this includes Stafford & PLUS loans, is 20 yrs for undergrads, 25 for grads
Consolidation Loans
- Can lower your monthly payments & increase the time by 30 yrs, not recommended unless you
are struggling to make payments
- There are no benefits to consolidated loans other than making one large payment
- Private loans may allow you to refinance at a lower rate based on credit but this method is not
recommended
Student Loan Default Statistics
