There are several things to consider before taking on huge student loans. Unfortunately, financial aid officers don’t always give you all of the information you need to make wise decisions.
You need college to get a decent job and you need money to pay for college. Student loans just seem like they’re part of the deal, but what’s the catch? If you’re not careful, you can get into a heap of trouble before you finish your first semester, much less have a degree in hand.
Student Debt is a Gigantic Problem
In 2014, US student loan debt was more than $1.2 trillion (a new world record) with over 7 million student loans in default, and rising. It can cripple you at a time you’re just trying to spread your financial wings (10% of college graduates start out with loan payments that take up 25% of what they earn). Further, the problem doesn’t end as soon as most students think it will. With average debt loads of around $30,000 (climbing easily to $100,000 or more) these loans can add $16,000 in interest — not counting fees of 1% to 4% — and can take 20 years to pay back at $200 a month. And that’s on average.
The result? Most student loan defaults happen to people from 40 to 49 years old, and according to the New York Federal Reserve, more than 2 million people over 60 still have student debt.
The Financial Aid Collection Companies Aren’t Out to Help You
The Consumer Financial Protection Bureau has found that loan servicers — the companies that collect on student loans — will often try to work the numbers to increase your penalties and fees. They do this by refusing to let you pay off the higher interest rate portions of your debt first. In some cases, if you have more than one loan and make a partial payment, they’ll even split it to stick you with as many late fees as possible.
The Private Student Loan Companies Aren’t Out to Help You
Don’t be fooled by private loans with advertised rates much lower than the Stafford Loan rates. To get those lower rates, they often require a credit score over 770. Only about 20% of applicants qualify.
Further, most private loans have variable rates, and those are only going to rise. And private loans don’t carry the affordable repayment options that come with public loans.
The Financial Aid Departments Aren’t Even Out to Help You
Financial aid award letters are often set up to make their offer seem affordable. They’ll combine aid and scholarships with loans, and mix low interest loans with high interest ones to make it all seem reasonable. Some colleges will even accept you, but with a terrible debt burden. This is called “admit-deny.” The school’s reasoning is, you’re not really an attractive candidate, but they’ll still take you if they can make a lot of money on the deal.
The takeaway here is, examine what they offer carefully. You’re better off going to a 2nd or 3rd choice school than getting held up by your “reach” school. (And studies show it won’t matter in terms of your income potential in a year anyway.)
You also need to be aware of timing. Thanks to a credit check, parents might get rejected for a PLUS loan after they’ve already paid a non-refundable deposit on tuition, then get left holding the bag. And just because you get a nice financial aid offer in year one, don’t expect the same in years 2-4. You’ll need to reapply for aid each year, and colleges hardly ever grant the same attractive packages once you’re already committed.
You are really the only one who’s out to help you. To increase your chances of successfully avoiding all the student loan pitfalls, give serious consideration to hiring a financial planner to guide you through the choices. And at the very least, sit down and figure out how much you’ll really owe, what your payments will be, how long they’ll last, and whether you can afford it. Don’t count on pie-in-the-sky income. Think of all the graduates with degrees in computer programming (and $90K in debt) who stepped out into a failing job market and had to settle for a lot less income than they’d planned on (and a much heavier debt burden than they could bear).
New regulations will erase your loans under certain conditions, such as working for 5 years as a public school teacher in a low-income area, joining the military, or taking a public service, non-profit, or government job. Also, look into the income-based repayment plan. This plan limits your payments to 15% of “discretionary income.” That is, 15% of the amount of what you earn, above the poverty line.
Student Debt is a Real Problem for Millions
Many students and parents are completely unaware of the real implications of student loans. The documentary Scholorship, which you can watch above, gives a good overview of the financial challenges facing students and graduates that have taken on student loans.