Coming out of the gate swinging, we are starting with student loans. Let me start by saying this, STUDENT LOANS ARE NOT FINANCIAL AID! As far as I’m aware, they are the only form of aid that you are expected to pay back. Here in the USA, it’s a crisis. It’s so bad that presidential candidates are having it included as a major point of their campaign because so many people have loans that it makes up more than 10% of our people in the US could swing the popular vote drastically. 37 million votes in just this demographic.
Student loans like any other loan is composed of two parts, the principle and the interest. Principle is the original balance of the loan. If you were to make a 0% interest loan appear, all payments would go to paying down the principle. Interest is the killer part of student loans as most people are not properly explained how this works.
To put this in a different way of thinking, if a 17/18 year old went into a bank and said, I need $70,000 to start a business and you have no credit history, assets, or anything else, you would almost certainly be turned down. But if you want to do this for school, no worries. Doesn’t that seem odd? Especially when they don’t ask what your major is? They don’t care because they know they will get paid. There is one exception that I will cover later on in this post.
In 2005, an amendment was added to the US bankruptcy code to prevent almost all student loans from being eliminated in bankruptcy. So if you have nothing, you still have your student loans.. how nice. The only real exemption to this is if you can prove that the loans create undue hardship for you and your dependents and even that has proven to be a extremely high bar.
Colleges will tell you about deferment and how it means that you do not have to pay for your loans until you are no longer a full-time student. This sounds great in theory but what they aren’t telling you is that those loans are still growing according to the interest rate and that when you do start to address them, you will often have a much higher number to pay back as a result. This is the power of compound interest and why investing as early as possible can pay off massively, but that is a topic for another post.
So what can you do? Let’s go backwards from least recommended to most.
You hold off on the loans and ignore them.
Don’t do this. If you have issues, call the loan provider up and talk to them. If you can, talk to them and see if you can go into deferment for your loans. If you can, it may prevent your loan from accruing any interest while this is ongoing. This works for a few types of loans but not all so make sure to look at what you have and what that means. There is also forbearance but you accumulate interest during this.
What happens if you don’t pay? If you ignore it, the balance grows higher and higher, your credit score takes a hit which will affect a lot of things, and if a federal loan, the government can take your tax refund or up to 15% of your wages to get their money.
Paying the loans back after you graduate.
Now that you have that piece of paper in your hand, time to pay for it. I personally like the Dave Ramsey way of attacking these, meaning that you make minimum payments on all of them except the smallest one to which you throw as much as you can at it. Rinse repeat with the next smallest until you have used the debt snowball to pay them all off. Just because you pay one loan off, that does not mean that you have that extra cash to spend. It needs to go towards the others.
It seems easier than you may think and if you get in the mindset it can be. I will not tell you to not live your life or not eat out. It is your life and your money, you decide what to do and spend. Plus I would also be a hypocrite if I did. I lived my life and didn’t do instant ramen noodles until it was paid off. You need to live your life, but you also need to pay those loans.
Paying while in school
You can pay the loans. Pay them monthly like any other bill, and if possible more than the minimum so you can actually bring the loan down while you are in school. This may mean working during school in some form or spending money you have saved but puts you ahead of a lot of people quickly. If you are lucky you can not only pay off the interest but even the balance. If you can pay off the balance each year, nice work!
Not having any loans
This may seem like a stretch but you can do this. You could work and go to something like a community college to get the classes that are not for your major out of the way and save yourself a lot of money. If you work during this time, you should be able to avoid at least 2 years of loans which is huge. When you go to apply to your school of choice, look for any and all scholarships. There are thousands and no matter how small they can add up. Find them, do the work and cross your fingers. Think about why you want to go to a specific school as well. If they are known for a given program that will open doors and that is what you are going to go for, I can understand that. If you want to go to a given school to get a degree that you can get elsewhere for a lot cheaper, it might be worth a thought as partying and living that life for 4 years can put a serious damper on the next 30 years.
Other things to consider
So all that said, what other options are there?
If you get loans, you might be able to refinance and get better rates but not always and you lose a lot of the federal protections so make sure to do your research with those and see if the numbers work for you.
There are also parent plus loans. These loans, while for you, are not yours technically. They do not mess up your credit if something happens to them. It allows someone to take out the loan on your behalf. Should you pay these back like any other loan? I think so but you are not obligated to do so. It depends on your family dynamic and lives.
Parents have a powerful tool in their arsenal that if done early enough, can make this whole process a lot easier. This is called a 529 savings account. This is a savings account that you put money into and don’t touch until it is time to use it. I will make a separate post about the 529 as their is a lot to cover.
If you work in a public service field, you may be eligible for Public Student Loan Forgiveness. This requires 10 years of on time payments under one of five plans. Google Public Student Loan Forgiveness and your career to see if you may qualify.
GI bIll. If you are a service member or plan to enlist, take a look at the GI Bill. It can help cover a lot of the costs for school and other education expenses.
I think that about covers things up on a higher level. If you have a topic that you want me to cover more in-depth, let me know and maybe I’ll do a post dedicated to it like the 529 that will be coming next week.
Common Sense Finance 