Student Resources

Spilling the Tea on Student Loans

Did you know that 3 out of 4 students graduate with an average of $30,000 in student debt, which takes an average of 20+ years to repay?

Why is that? And since when does it take 20+ years to pay this off?

Before we answer this, we have to consider a few things, including how we got here.

Why Has the Cost of College Skyrocketed?

As more and more entry-level jobs require college degrees, higher education is no longer a luxury; it is a necessity. And for families in poverty, a college degree is the single most important indicator of future economic mobility.

Because of a huge surge in demand, a need for more faculty members, and a lack of state funding (and state oversight), college tuition has more than doubled since the 1980s. You need a college degree – and colleges know that. And because higher education has become a necessity, colleges and universities can get away with pricing it as a luxury, putting our generation and future generations in debt before we even emerge into adulthood.

On average, tuition tends to increase about 8% per year, which implies that college tuition is going to double every 9 years.

Which means that even though the student debt problem may be dire right now, it’s only going to get exponentially worse.

Federal Student Loans

Thanks to student loans, the Department of Education has become the nation’s largest loan provider. Read that again. The Department of Education supplies 90% of all debt taken on by students, so it’s important to understand how they work.

Because the Department of Education was not built to service loans, they outsource the management of these loans to third-parties. These student loan servicers are financially incentivized to complicate the loan repayment process. If you miss a student loan payment, your interest rate can go up – by a lot. And if you’re thinking, “I’ll just get a great job out of college and pay it off in 5 years,” trust us, we wish it were that simple. Prepayment penalties may have you paying more than if you had just stayed in debt.

That’s why making monthly student loan payments on time have been cited as sources of frustration, anxiety, and even depression among recent grads.

Now, there are some ways to help tackle your student loans, such as debt consolidation or refinancing, but these can be tedious or involve big penalties and fees.

You can also get the debt to be completely waived, known as student loan forgiveness. The government does have a number of federal student loan forgiveness programs you can try, but the problem is that only a few jobs and industries are eligible for such forgiveness. You’ll often need to work for the federal government in a role or location that you may not like for a number of years. While a student loan forgiveness program is an easy way out, it’s simply not for everyone.

There are two types of federal student aid:

  • Subsidized student loans
    • With subsidized student loans, the government pays the interest on your loan for the time you’re still in school, so you don’t have to worry about accumulating interest on your walk to Organic Chemistry
    • How much can I borrow?
      • The amount of subsidized student loans you can take out is dependent on your demonstrated need, determined by your FAFSA (Free Application for Federal Student Aid). However, the need demonstrated on your FAFSA rarely matches up to your need in real life.
  • Unsubsidized student loans
    • With unsubsidized student loans, the borrower (AKA, the student) is responsible for any student loan interest, even interest accrued while in school. There is a grace period, however, so you don’t need to actually make payments until (typically) 6 months after graduation.
    • How much can I borrow?
      • The amount of unsubsidized student loans you can take out is determined by the other loans you have taken and financial aid you’ve been awarded. However, the maximum ranges from $5,500 to $6,500. And when tuition costs are soaring above $50K annually, the federal loan landscape leaves much to be desired.

Private Student Loans

If federal loans and financial aid don’t cover everything, you’ll have to turn to private loans, which are student loans provided by for-profit corporations. The private student loan scholarship is quite murky, and there are many options to choose from. Often, you’ll get better interest rates if you or your cosigner has a fantastic credit history.

In general, be sure to read the fine print before you apply. A typical 18-year-old isn’t going to understand the implications and nuances of taking on debt, and these companies know that. Many private loan providers require you to make payments while still in school, and some have floating interest rates, so you could start off with monthly payments that seem manageable, only for them to increase later on. Before you sign anything, make sure you understand the terms of your loan.

Ask questions, such as:

  • Is there a deferment period? (Do I have to make payments while I’m still a student?)
  • Is my interest tax-deductible? (Can accrued interest be used to reduce your taxable income?)
  • Is there a prepayment penalty fee? (Are you allowed to pay off your principal early without incurring extra costs? And if so, what are they?)

Taking the time to learn about debt and loans now will save you a lot of headaches (and money) later down the line.

What Is the Difference Between Student Loan Deferment and Student Loan Forbearance?

Unlike student loan debt forgiveness, both loan deferment and forbearance only place a pause on monthly payments. The key difference is in the interest. During a period of student loan deferment, no additional interest will be accrued on your account; however, during student loan forbearance, interest will still accrue on the principal and subsequent interest.

How Does COVID Affect Student Loans?

In the short-term, a national student loan deferment has been put in place. The Department of Education has said that monthly student loan payments will not be mandated until 2021, and that the current interest rate on student loans is 0%.

In the long-term, experts say that the COVID-19 pandemic, and its disastrous effects on the economy, will only worsen the already-dire student debt crisis.

The Implications of Student Debt

In recent reports, nearly 38% of student loan borrowers said that because of their debt, they’ve pushed off getting married, buying homes, working their dream job, and having children. When you are financially shackled to making monthly payments, you’re not going to start the company you’ve always dreamed of. You are going to be forced into decisions that prioritize making short-term payments over long-term professional and personal fulfillment.

So What Now?

The key to securing your financial future is to take out as little debt as possible, which means getting the benefits of scholarships will be more important than ever before. By applying to as many scholarships as you can, you are maximizing your potential winnings, and doing what you can to set yourself up for a sustainable financial future.