Posted On: 2005-12-06
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Good Tuesday, it is December 6, 2005 episode #131 of the Financial Aid Podcast. My name is Chris Penn. Alright, we got a lot to talk about today and a very late start. I was going into some issues today getting into the office. I apologize for the lateness of the show. Hopefully by the time you pull this you will never know. So, let's get started right away with the news and then we'll go into some News You Can Use, a scholarship update and some Podsafe Music.
Topping the news today the roller coaster resumes it's upward climb as the 91 day T-bill finished off yesterday at 4.025% after a week off of rate hikes the rates for the 91 day T-bill are back on the move upwards. This is bad news for anyone who is tracking the 91-day treasury bill as a means of judging what next year's student loan rates are going to look like. So, if you haven't already consolidated your student loans and you're watching the 91-day T-bill as we do here this would be a good time to do that. There's really no reason not to unless there's some bizarre extenuating financial circumstance. If you want to consolidate your loans I would recommend doing so. Give us a call at 877-328-1565 and ask to speak with anyone of our loan counselors to talk about consolidating.
On capital hill, the Deficit Reduction Act of 2005 is on the move. This is the reconciliation of the bills for the House and the Senate for reducing the deficit. This involves cuts of anywhere from $35-$50 billion over a five year period of time. The deficit, however, if you think about it, last year it was $330 billion so $10 billion decrease each year is not really making a huge difference in what's going on. The partisan politics are going to make it very hard to see exactly what is going on. I definitely recommend checking out the actual bills to see what isn't included. One of the things is the House and the Senate are going to have to reconcile what they are going to do about student loans. For example, the House bill may make the Parent Plus Loan more expensive and removes the rate cap that was supposed to go into effect for Stafford Loans the next year at 6.8%, letting it remain at the current 8.25%. The current bill makes consolidation more expensive, adds in some one-time fees and also makes Plus Loans more expensive but does preserve some additional money for the Pell Grant. So, either way the House and the Senate will have to hash out the differences and see what they can come up with. Hopefully they can be swayed at the last minute by parents, students, colleges, and financial aid professionals to give additional consideration to federal financial aid. If you'd like to contribute and let your voice be heard, let your representatives know in the House and the Senate. You can find your representative's information at www.house.gov and www.senate.gov. You'll just need your zip code for where you're registered to vote.
Finally topping the news today, South Dakota does a great job paying it's loans. According to recent statistics, the South Dakota has the best student loan repayment rate in the country with the default rate only 2.5%. So only 2.5% of all borrowers default on their loans. So congratulations to South Dakota. I hope the rest of the United States can catch up to you.
Ok. Let's move onto some Podsafe Music. I heard this on the Daily Source and liked it so we're going to here it on the Financial Aid Podcast. Hollow Horse with Beggars Town.
Beggars Town by Hollow Horse from the Podsafe Music Network at www.music.podshow.com.
Ok, time for a scholarship update. Today's scholarship update is the Boston College Peter J. Sharp Urban Scholars Award. The Peter J. Sharp foundation has given the Lynch School, the school of education at Boston College a generous endowment to provide financial support to 10 highly talented graduate students per year who are from underrepresented groups committed to teaching in urban schools. One half of the Sharp stipend is an outright grant and the remaining $5,000 is a forgivable loan, so a $10,000 award total. One quarter of the loan amount will be forgiven upon completion of the master's degree, and the remaining 3/4 is forgiven up to the full amount for teaching in an urban school. Tuition scholarship is sometimes paired with the stipend. This award is by nomination by the faculty at the time of admission. So, there's no separate application award. What you do is you apply through the school and based on your background and what you put in on your admission application; the faculty may nominate you to receive the award. So, you need to attend Boston College. You need to find out more information at BC at www.bc.edu and for information about this award and it's specific information page, you can visit our student scholarship search site at www.studentscholarshipsearch.com and of course there will be a link in the show notes today for this award and more information about it. So today's scholarship update is the Boston College Peter J. Sharp Urban Scholars Award.
Let's move onto our next piece of Podsafe Music. Ann Lynn, The Scene.
The Scene by Ann Lynn from the Podsafe Music Network. Alright, let's move onto some News You Can Use. Today I want to talk about the difference between APR and APY. This is based off an article written not an hour ago for our website on credit card debt called www.studentplatinum.com. What is the difference between APR and APY. You see these two terms used a lot both in the investing world and in the debt world. Basically, for loans and investments involving compounding interest these two terms apply and they are not interchangeable. Annual Percentage Rate or APR is a measure of how much interest will be assessed on an annual basis without taking into consideration compound interest. So, it's a flat interest rate. So it basically takes the rate times the number of periods in the year. Annual Percentage Yield or APY is the same measure of interest but accounting for compound interest which is a better measure of how much you'll pay in interest or how much you'll earn in interest depending on whether it's an investment or a debt. Banks and credit card issuers express credit card rates in APR because it kind of hides the amount interest would cost if you used APY rather than APR. Calculating the two is a fairly simple matter. The formula for APR is pretty straight forward, you take the periodic rate so if it's 1% a month times the number of periods in a year. So if you have a 1% a month interest rate and there are 12 months in a year you're APR is 12%. Here's another example, if a credit card company offers a 13% interest rate and they express that rates of APR with a monthly billing cycle. To figure out what your period rate is going to be you divide the 13% by 12 you get 1.083% per month. Then to figure out the Annual Percentage Yield, it's 1 plus the period rate raised to the number of periods per year minus 1. This is by the way, on www.studentplatinum.com so it's much, much easier to follow along. Go through the math, it basically works out to 13.8% as an Annual Percentage Year. So it's actually almost a percentage point higher when you actually take into account compound interest. Compare the payments on a $1000 balance over the span of a year, assuming you make payments or make charges that the balance remains at about $1000 throughout the year. With the APR, if you're paying on the APR you'd pay $130 in interest. If you're paying on the APY which is what is really happening, you're paying $138. So that's $8 the bank manages to sneak in. Now the more you owe the more the difference between APR and APY takes effect. The more the APR looks like an appealing rate to advertise by rather than the APY. Turn it around if you're talking about investments like CDs or savings accounts or things like that, banks publish the APY because the same reason, the rate looks higher. It makes it look like a better investment than it actually is.
I was taking a look out there at one of the many, many websites for 12 month CDs and one of them had a 4.5% APY certificate of deposit. It looks great. Savings compared to T-bills for the same period of time, 4.5% seems like a good investment. If you break that down and do the math, a 4.5% APY breaks down to a 4.4% APR so now you have 1/10 of a percentage point lower. Because investments in these things tend to be very large, $1000, $2,000, $5000, $10,000 whatever, that tenth of a percentage point makes a difference. Let's say you were comparing it to a one year treasure note and that Treasury Note had a 4.45% APR, if you went for the CD thinking it was 4.5% APR instead of an APY you'd actually be making a worse investment. The Treasury Note which has an APR of 4.45% is the better investment so know which term is being used, APR or APY and be able to switch between the two. There's a lot of math involved in this kind of stuff because it's important to know the difference. Know how it's being used in the advertising. The fine print is important, the advertising is important to see what's really being offered. Two things to keep in mind APR is a better measure of interest rate for investments so you want to use the APR to see what the real turn around on an investment is going to be. APY is a better measure of interest rates when it comes to debts and loans. It's going to tell you how much you're going to really owe taking into account that compounding interest rate. So convert between the two depending on what kind of financial interest rate you're talking about to get a better idea of how much things will actually cost you. By the way, as a footnote, when it comes to student loans, student loans do not have compounding interest because they're basically simple amortization loans. You start with a balance xyz dollars and except for when unsubsidized interest capitalizes after a deferment period, essentially the balance does not ever go up because you're not adding compound interest to it. So, APR and APY really don't apply there. They're just amortization formulas that we've talked about in the past. If you want more information definitely check the back episodes of the podcast they're in there. This is also true, by the way, for student loan consolidation as well. Student loan consolidation is simple amortization and is even easier to calculate because it's a fixed rate. So if you're going to be doing a student loan consolidation and you're shopping around for interest rates, APR and APY don't really apply. I supposed you could use those terms but they would be the same because you're not talking about compounding interest.
That is going to do it for with News You Can Use. Let's finished out today's show with another piece of Podsafe Music. You've Changed by Bob Gentry.
You've Changed by Bob Gentry from the Podsafe Music Network. Ok, that is going to do it for today's late show. I apologize for speaking very quickly it was so we could get it out the door as quickly as possible. I wanted to get this up so that people could have something to listen to because I know from experience, having a daily show to listen to, even if it's not a topic that is not the most exciting thing like financial aid is still nice. Heck, I listen to the Catholic Insider and I'm not even Catholic but hey, it's a daily show on a podcast, it's well produced so it is in the line up and Father Roderick does a great job. So, if you want to check out his podcast it's www.catholicinsider.com. Terrific podcast, he's talking about the Chronicles of Narnia so that should be fun. Tomorrow we're going to revisit the whole assets, liabilities, income and expenses. So, if you were looking to teach someone some of the basics of finance, this would be a different spin on how the balance sheets are computed and what it means for your pocketbook and what you can do to, basically be a little bit better off financially. So stay tuned for that. Feedback at email@example.com; written feedback, audio feedback, video feedback, all that is welcome at firstname.lastname@example.org. Links and information are in today's show notes at www.financialaidpodcast.com. You'll also find the link there to our Podcast Alley and Yahoo Podcast Pages. Please do go out and vote for the show on those sites. Let folks know that you like the show. We've got the Frapper Map on the site as well and the Podsafe Music Christmas Album in iTunes is also on the website there. So, definitely check it out as a gift this holiday season for the person who has everything. That's it for today's show and I'm going to get this out the door. So, folks, take care. Thanks for tuning in and stay subscribed. Take care.