The Student Loans series is going to be split into 3 parts, some sections may not apply to you
Part 1: Student Loans – Accumulation
Part 2: Student Loans – Suffering
Part 3: Student Loans – Strategy and Payoff
Student loan debt is a huge problem for many recent college, depending on the individual, some or all of the below factors might be in play
Some quick facts:
- Current interest rates (per the federal government website) range 4.29 to 6.84%
- The average student loan debt is over $35,000
It is unsettling that we saddle 22 year olds with 35,000 in debt before they even have their first job, or likely their first professional interview. If they pay their loans off over 10 years (which is where the payment plans start at) they would pay an extra $11,000 in interest. One sneaky part, that many people don’t think about, is capitalized interest. If you have an unsubsidized loan, they will capitalize your interest, (add it to the principal balance) at the end of your grace period which then starts accruing additional interest. This can be a significant amount of money! I will lay some examples out below.
#1 – $35,000 with capitalized interest from un-subsidized loans for 4 years, 10 year repayment, 5.5% Interest
The .5 value is the 6 month “Grace Period” that students get after graduating, interest is capitalized after this period ends.
#2 – $35,000 with interest only payments for 4 years, 10 year repayment, 5.5% interest
I did not include the 6 month grace period for example 2, since the interest would be paid off monthly and expect people falling into this category would start making full payments right away.
By paying off your interest each month, you would save $1743.15 in interest during repayment, payments would also be over $60 cheaper each month for 10 years. That is about $750 bucks cheaper a year, and is significant for individuals with entry level jobs out of college.
I will do a full breakdown of my personal situation in the next post
lack of responsible borrowing education
I seriously thought that I would walk out of college, land a well paying job and cruise through my student loans simply because I was a college graduate. This mindset is drilled into young students by their parents, high schools, friends, and even the colleges themselves (I am not saying that it would come easy, just that it is an expectation of many younger students). If I would have had reasonable expectations, and a better understanding of the financial strain my student loans put on me after graduation different decisions would have been made.
Our High Schools need to do a better job of teaching personal finance and showing students the ramifications of their decisions at a young age. This is not specific to student loans, it goes for Credit Cards, vehicles, houses, etc. The one elective class I took focused primarily on balancing a check book (something I have never done).
Since we can not rely on the school system to properly educate students, parents need to take an active role in this education. Money is to much of a taboo, even within the family walls, starting the conversations young can instill good habits for when they are on their own. I am not saying you need to sit down and discuss your salary or how much money the family has in the bank, but showing them the power of interest (both good and bad) is a good first step. Another option is to read and recommend a few personal finance books to discuss. There are great starter books out there that you can get used for under $5.
I believe lenders and colleges should also share this responsibility, instead of simply saying “sign the dotted line” they should show students how much interest will accrue, what their payments will be, how much interest only payments would save them and break down the % of the average starting salary would go to their payments. Not all students would listen, and the blame does not ultimately fall on to the lender/college as these are 18 year old adults, but the whole education system should be built on setting students up for success.
There are other issues at play here that I did not dig into but just want to mention them quick:
- Extra principal payments – I had multiple battles with SallieMae regarding extra principal payments that they held for future payments instead of applying to my balance
- Auto Pay Adjustments – I made a few large payments to my student loan balance, I was rewarded with a lower payment after an “adjustment” so that it would take longer to pay my loan off, essentially destroying my extra payment
- Deferment – Interest still accrues during deferment and can be capitalized when repayment begins, unless you suffered a hardship or are unemployed this needs to be avoided
The ultimate mistake (I made it) is taking out student loans to pay for things other than your education, the government was nice enough to loan me money (6+% interest) to pay rent, bills and even cases of beer (I was drinking Keystone then, curious to see what those “cheap” cases of beer cost me now). I know I was not the only one to do this, disbursement day was like hitting the mini lottery on campus. Don’t make this mistake………..if you already have I will try to help out over the next few posts.
Action Items: How did you handle your college finances? Did you take loans out to live the good life or were you responsible and worked through college while piling up grant money? Are you currently paying off student loans? What is your interest rate/payment plan? Please post your stories/pitfalls and successes below!