Prior to about 6 months ago I was virtually clueless about student loans. My wife and I were fortunate enough to get through college debt free so I had always assumed a loan is a loan. Principle, interest rate and term. What else is there to know? We then helped some friends with their own loans and found out how much we still needed to learn. This article will hopefully get you thinking about student loans a little more carefully. We have used the website https://www.studentloanplanner.com/blog/ for most of our research. There are plenty of good websites out there but this one has a lot of articles that pertain to specific degrees and careers. Believe it or not where you work and in what field can impact your loan repayment options. Here are my thoughts on the very basics.
The numbers can be staggering:
I know of several 20 somethings that have total student loan debt of $100,000 or more. Our first home loan was less than that! At first I was amazed it was even possible to amass such a debt load for a college age kid. After some research I found that depending on the situation a student can borrow anywhere from $5,500 – $12,500 a year for undergraduate studies.* That explains a lot. Essentially the government will not loan that much to a student. For simplicity let’s just say that on average a student might be able to borrow $30,000 for college. I find that number perfectly reasonable. So how do you get to over $100,000.
The Parent Plus trap:
Parents, however, with jobs and credit histories, can get a virtually unlimited amount in student loans for their child. In fact, they can borrow the total cost of tuition at the school minus any financial aid the student qualifies for.** Why do I call this a trap? Because the school plays on guilt and emotion to get you to pay for you child’s dream school. In case you were wondering, this loan is fully in the parent’s name. So if you sign the loan papers I hope you are fully prepared to pay for this loan, regardless of what your child says. Do you really trust your child with tens of thousands of dollars? The government certainly doesn’t. That’s why you, the parent, must sign and obtain the loan. Always remember, just because you qualify for a loan doesn’t mean you should take it.
It is also possible to get private loans for college. This of course allows for even more debt to be taken on. From what I have seen these rates tend to be higher than federal loans. This link explains how the various interest rates work.
Guess who decides all of this:
This is my favorite part. The school is responsible for deciding how much aid (I mean loan) you qualify for. Sounds a lot like writing a blank check to the schools if you ask me. Ever wonder why the cost of higher education is rising so much faster than the rate of inflation? I personally wouldn’t look any further than student loan availability.
Subsidized vs. Unsubsidized
In a subsidized loan no interest accrues until the student has been out of school for 6 months. In an unsubsidized loan it starts accruing immediately (like while you are still in school). Subsidized good (or at least better), unsubsidized bad.
Consolidation vs. Refinancing:
Already have a bunch of loans? Refinancing can save you thousands depending on the rates. Some student loans have good interest rates (4-5% if they were taken in the post recession ultra low interest rate years). However, many have rates over 7% and I have seen private student loans at 12% or more. Warning!!! Be careful when consolidating your loans. Many companies will consolidate your loans to ‘make life easier for you’ but they keep the same interest rates. Thus you pay the same amount over the same time. Instead you want to refinance and consolidate your loans. There are several companies out there doing this. Sofi is one I have recommended. The catch is you need a fairly good credit score to qualify (usually over 650). Yet if you do qualify it is possible to save on your monthly payment and the total loan payback.
Most people know that on average a college degree earns you more money throughout your career. I agree. But remember that averages take into account ultra high earners. The least money you can make is $0 but the high side is unlimited, several million, several billion – you get the point. I would also argue that a kid capable of getting through college and graduating is already a high achiever. Thus college is just one factor in his or her success. Regardless, a high debt level at such a young age can set you back ten years or more financially. Then you are playing catch up with your higher earnings (and fancier lifestyle).
If you are going to college out of desire or career necessity consider carefully the costs involved and your career’s earning potential when you get out of school. I also feel the degree is more important than the school it came from so shop around. Colleges sell you on the lifestyle, campus perks, high academic standards, and job placement. They all say the same thing don’t they? So remember that at the end of the day the school is like a business and you are buying a degree. If you are buying the amenities (fitness rooms, student centers, etc…) you are spending a lot on entertainment. And to you parents out there – Don’t be Stupid! As a parent you should be more financially intelligent than your child. Don’t put them into a financial hole so large they can’t dig themselves out.
Enjoy the ride,
Various Information on Federal Student Loans