Posted On: 2005-11-17
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Good Morning everyone it is Thursday November 17, 2005 episode 117, this is the Financial Aid Podcast and my name is Chris Penn. I've got a lot to cover today. I've got some news coming out from all over the place, some financial aid news here and there, full tuition scholarship for the Dominican University some more information about that coming up. Podsafe music from Matthew Eble and others and well just lots of good stuff so why don't we started right away with the news.
Topping the news today, from Illinois the Illinois Student Aid Commission. Apparently the Governor of Illinois has been working to try and get the student loan portfolio there sold off. It's state agency ISAC, just like a lot of states have their own student loan agencies that can issue Federal and private loans. What the Governor is trying to do in Illinois is basically get the, at least a chunk of the student loan portfolio sold off to generate between $300 and $500 million dollars for the state budget. We've talked in a few podcasts ago about how state budgets are basically facing structural deficits and will be for some time, and selling off or securitizing student loans is one way of raising money for them. If you're not familiar with securitization, if you're just joining us, we did talk about it a little while ago. Basically what securitization does is it takes bunch of loans and treats them like a marketable commodity that can be placed on the older market and sold. The loans are sold for the net present value plus a fee of some kind to a large financial institution as the means to basically hold onto those loans until they mature. Upon maturing of course the loans then-the money to be made is on the interest. If you're a small bank or you are a small lender, securitization is pretty much one of the best ways to stay in business. Let's give an example. If you had a $100 in your pocket and you wanted to loan it out, you could loan it to someone at a five year repayment term at 6% or whatever interest rate. In order for you to really make the most of that you could hold onto it for the full five year term and reap $106 the first year and whatever 6% compounding on top of that would be year over year. The problem is your $100 that you had to loan out is tied up, you can't loan anymore money because you're basically waiting for this loan to be repaid. What you could do is find someone what has say $1000 or so and sell them the loan. Sell it to them for $105, you would get your money back, your $100 back and a $5 fee of some kind and the person you sold it to, if they have the financial means to do so, they can then hold onto that loan for the full five years and pull in all the interest.
So you're giving up your interest but then get your $100 back that you can then loan to someone else. If you can do this over and over and over again, you can generate a fair bit of money. This is the essence of securitization. This is what companies do on a large scale basis in order to be able to lend to more and more companies. In the past student loan companies have had to sell off and securitize loans pretty much whenever they got really short on cash. Smaller lenders, Credit Unions, small banks, things like that would securitize their loans get that money back and then use that money either to make more loans or use it as operating capitol if things were really tight. So what the state of Illinois is proposing to do basically, what the Governor of the state I should say, because there is opposition in the states legislature, is to securitize those loans and get that money back into state coffers, where they can either use it education or use it for other state priorities. Which of course would be very controversial, because you're basically taking a profit that you're making on student loans and taking that money and essentially not using it for higher education at that point, using it for things like roads, or dinner parties or anything but higher education. That's the controversy brewing in Illinois. Let's see what else is in the news here. The Phoenix, Swarthmore College is online student newspaper has another rehash of the Higher Education Act and Budget Reconciliation Act in it's summary there. There's not too much in the article, the one thing that it does point out, that is worth mentioning; 28.6% of the deficit of reduction will come out of the Higher Education Budget. The federal budget calls for a plan to cut federal spending worth $50 billion over the next five years, out of this $50 billion a net of $14.3 billion is slated to come out of federal student programs; Higher Education being asked to shoulder more of the burden than other programs. One brief little thing, remember when we were talking about that bridge in Alaska, that would go essentially nowhere, cost $432 million, the project its self has been axed as part of the negotiations in Congress. The project its self got killed, however, in a bizarre twist of fate I guess, the $432 million for that bridge has remained in the budget so Alaska will get the money without having to do the project, which is kind of amusing if it weren't for the fact that part of that was my tax money. At least $2 of it, figuring 432 divided by however many people live in America.
The East Carolinian University, the TEC online newspaper points out that debit cards are going to be debuting and ECU at Eastern Carolina University. This is very interesting, the program is going to take your Federal Financial Aid Funds, the left over funds after the student loans have been dispersed along with a checking account and bundle it all together into a checking account called One Account, which is backed by MasterCard. Instead of having to wait in lines at the Financial Aid Office to get a hard copy of a check and then go to a bank, the funds will be immediately available to students for use education expenses. Now there are two things here. Number one, because this is now being done as a debit card, it makes money that more accessible but it also makes it much easier to spend in frivolous ways, I guess you would say, in a sense that debit card you are used to handling plastic for a lot of little of expenses and things like that, so there is that risk. The article points out that this is not a credit card, this is a debit card and it will help students learn financial responsibility, the question that remains unanswered in the article is, is this a debit card with or without overdraft protection? If you have a debit card and it has over draft protection, what's interesting is that over draft protection in some cases has a higher interest rate than most credit cards; outlandishly high rates because it's really not meant to be used as a form of credit. However, students get themselves into pinch, and then they may find themselves accruing a tremendous amount of interest on a relatively small amount of money; worth investing there at ECU.
Finally there's an article by Dick Morris called the "Student Loan Rip-Off," as a test of GOP ridderick talking about more budget reconciliation stuff. I'll put a link in the show notes, because it is kind of an interesting article. Dick Morris of course is strategist for the Republican Party. He does point out that if there was ever a market where de-regulation was needed, and protectionism of established industries, it would be in the student loan market. He points out that the Sallie Mae, who is now called the Student Loan Marketing Association, it's a for profit company, still receives a great amount of protectionism from the government even though it is a fully for profit independent organization, and now is no longer a government sponsored entity. The protectionism being afforded to Sallie Mae is making student loans more strict and less affordable for students. Interesting perspective especially coming from a GOP Strategist who generally goes after-Dick Morris has not necessarily been known for being tactful. Very interesting reading I'll be more than happy to put a link to it in today's show notes. With that, let's get our first piece of Podsafe music and a brief announcement from Matthew Eble.
MATTHEW EBLE: Hey this is Matthew Eble and you're listening to some Podsafe music on the Financial Aid Podcast with Christopher Penn. Oh and don't forget to check out my new album, Beer and Coffee at www.mattheweble.com.
"Wasting my Time," new Podsafe music from Matthew Eble, via the Podsafe Music Network. All right, let's do a scholarship update. Today's scholarship update is full tuition scholarship, well up to a full scholarship from Dominican University Rosary College of Arts and Sciences. Their scholarship is called the Pillar Scholarships. This scholarship is designed for students at Dominican High School who demonstrate leadership in the four pillars of Dominican Life. Study, community, prayer and service, and for who have accumulative grade point average of at least 3.25 on a 4.0 scale. The scholarship will be $10,000 to $17,000 a year depending on the student's academic credentials. To apply send an essay describing your experiences and demonstrating the four pillars of Dominican Life, two letters of recommendation, verifying leadership in the four pillars of Dominican Life. One letter must be from a High School counselor or principal. The deadline is April 1, 2006. Since tuition at Dominican University is about $19,950 a year, the pillar scholarship is fairly close to a full tuition scholarship, not totally there, but very close, making it extremely affordable if you can earn the scholarship. The Dominican University Rosary Arts and Sciences Pillar Scholarships is today scholarship update. You will be able to find a link in our show notes to the scholarship detailed page on our student scholarship search site at www.studentscholarshipsearch.com and you can also find a number of other awards and scholarships. I've been putting in some of the back issues, some of the back scholarships that we've covered in the past like the Baria College full tuition scholarship, The Duct Tape scholarship, and other things. The database is slowly but steadily growing so definitely check it out, www.studentscholarshipsearch.com. All searching, everything on the site is free, no invasion of privacy needed. Let's move on now to another piece of Podsafe music, let's do AudioFarm, "Last Ride."
New Podsafe music from AudioFarm, it's called "Last Ride," via Podsafe Music Network. All right let's do a little News You Can Use, The Secret to Debt Reductions from www.studentplatinum.com one of our many student loan network sites. You probably get the same spam we do everyday, reduce your debt, and get out of debt fast, all this junk mail. There is a secret to debt reduction and its not really all that impressive, certainly not enough to pay a lot of money to these services that are essentially going to do the same thing. The Secret to Debt Reduction is actually not a secret, it's by law the calculations which determine how your interest and payments are computed on a credit card balance can not be a secret. Its not fun math, but by law they have to disclosed. Here is the not so secret formula to reduce your debt faster, this is one time I wish I had a little drum roll sound effect. The secret is pay more often. Probably not the stunning Fort Knox secret formula that you were looking for but it's true. It works on the principal of average daily balance, the billing method that most credit cards use to compute your interest. The faster you reduce your average daily balance the more you'll save in interest. Here's an example. Say you have a starting balance of a $1000 on a credit card with a 15% APR, if you do nothing all month and pay $100 at the end of the month, your finance charge will be computed by a formula, basically it's the APR times the days of the billing cycle times the average daily balance divided by the days in the year equals the interest you pay.
In this example 15% is the APR times 31 days in a billing cycle, times the daily balance, the average daily balance which is $1000, because you didn't do anything all month; divided by 365 days. Your interest for that month's credit card bill is going to be $12.74. Granted you know the billing cycles are usually shorter than that, which is why your interest is usually a lot more. Suppose instead of paying $100 at the end of the month, you pay $25 a week on the first day of that week. At the end of the first week, your average daily balance is $975, at the end of the second week, it's down to $950, by week three it's $925 and by week four it's $900. So you've paid the same amount of money, just more frequently but it does effect how your interest is computed. Your average daily balance, instead of $1000 is actually $937.50 if you just do the math and figure it out. Run the calculation, same thing except $1000 is the balance, its $937.50; your interest is going to be $11.94. Granted it's a .80 cents difference, doesn't seem like much but consider what it means. You paid exactly the same amount of money but at the end of the month, you paid 80 cents less interest. You're .80 cents richer; you didn't fling 80 cents down the giant black hole that's interest payments. 80 cents is not going to knock out your debt as fast as you like, it's not a lot of money. Add this into your weekly budget, in addition to paying more frequently if you can pay more. If you can spare $5 a week, which is what, one Starbucks Coffee, two Dunkin Donuts coffees' or something, you can take an even greater advantage of the average daily balance computation.
If we do the math, if we figure out the tables, if you have $1000 at this 15% interest rate, so on and so forth the way we've been computing it, and do nothing except make your monthly payment, your balance at the end of the month is going to be $912.74 because the interest just get added on. If you make $25 payment each week, like we just talked about, your balance at the end of the month is going $911.94, .80 cents cheaper right. Now let's say you make that $30 payment a week instead of $25 payment a week. Your balance at the end of the month is going to $891.78 with that extra $5 a week; you matched and reduced your balance and nearly $1 in interest. $1 you never see again and you wouldn't get anything for it. So basically the secret to debt reduction is pay more, pay more often. Take advantage of this mathematical, it's not a weakness but it's not well known. Take advantage of it in your interest rate. With advent of Internet Home Banking, banking at home and stuff like that, most banks and Credit Unions will automatically schedule payments to set it up. It takes five minutes to figure out your schedule. Set up your weekly payments and start saving more money. The only warning to this is make sure that your credit card actually uses average daily balances as its computation method. You'll find that in the fine prints. That is today's News You Can Use, and with that let's tie things off with one more piece of Podsafe music, one I heard on Podsafe music rewind, Slim, "Quartez and Pizaro," I really like the guitar work on this song. Check it out.
"Quartez and Pizaro" via Podsafe Music Network from an artist called Slim. Like I said, I love the guitar work on the song, it is just terrific, I could listen to that all day. I probably will. So that's going to do it for today's show, hopefully you've got some useful information out of it, you've got a chance to look at it a little bit more in depth about how credit cards stuff work, because really like Brooke was saying in yesterday's presentation, more colleges are losing students to credit card debt than they are to failing people out of school. That is just incredible so, better the handle you can get on things like credit card debt and consumer finance, the better off you'll be not only in college but in the decades after. The way things are moving in the credit industry and stuff, with the way things are going with interest rates, if you don't have a handle on credit cards and the mortgages stuff like this now, you are going to get hosed. There's just no polite way of putting it. You are going to get, hmm,hmm, yes, so get a good understanding of it, do you research, do your homework, there's a lot of really good sites out there. There are some crappy ones too, so buyers beware, but we'll try and bring you the best stuff that we can bring you to help you get more out of every dollar because every dollar is going to account for a lot more in up coming years. At least if the indicators coming out of the financial world are any indication. Show notes will be at www.financialaidpodcast.com you'll also find the IpodNano contest information there. We did the drawings for the iTunes music store gift cards so be sure to check Tuesday's show if you miss that. If you're one of the winners you have until next Tuesday to claim it. After that well, I guess I could just buy some Podsafe music off of iTunes, we'll probably end up doing is taking the un-used giftcards and giving them away as second and third place prizes for the IpodNano contest. Make sure you claim those cards if you haven't Sarah Pernick, your card is on the way. Thanks for e-mailing me. If you like today's show, get a friend subscribed at www.financialaidpodcast.com if you have any comments or questions, feedback of any kind, again www.financialaidpodcast.com so until next time, stay tuned, stay subscribed we'll see you soon, take care.