January 2007 - Posts
Loan Repayment Options
A humorist once said that there are two things about a bill: always question it and never pay it until you’ve exhausted all the other options.
Funny, yes, but not a strategy that will have fortune smiling upon you when all is said and done.
No, the options I’m talking about here are your repayment options. These are the different ways and methods of repaying your loan, depending on what type of loan your received, what your obligations are for repaying that loan, and the timetable for doing so.
Let’s examine the most common loan repayment options:
Standard Repayment – In a standard loan repayment scenario, you just pay the principal and interest that has accrued on your loan, usually on a monthly basis for the duration of the loan repayment term.
A standard loan repayment option is by far the most common form of paying back student loans. You pay your loan back loan in equal monthly payments over, for example, a 10-year period or 120 equal payments. The minimum monthly payment might be as low as $50, but the actual monthly cost depends on your loan balance and interest rate.
Let’s say, hypothetically, that you borrowed $20,684, including the full amount of the debt, plus interest. With a standard repayment schedule, your monthly obligation to your student loan lender would be $174 per month for 10 years.
The beauty of the standard repayment schedule is that it’s like clockwork. The bill arrives on the same day every month asking for the same amount from you every month. It’s simple, but simple is good when your life grows complicated after college.
Graduated Repayment – With graduated repayments, you start small and work your way up. As I mentioned before, lenders understand that, chances are, you won’t be a lean, mean big paycheck-making machine when you first get out of school. Your big earning years will come later. To accommodate that reality, lenders offer graduated payment plans where your loan can be paid off in smaller, and the increasingly larger regular amounts as you earn more money. Of course, if you get a good job right out school where you earn good money, go ahead and pay as much as you can on your student loan. Remember that the idea is to pay it off as quickly as possible. That’s not necessarily the case with graduated repayment plans.
If, for example, you snagged a student loan directly from the government, your starting payments may be half of what they would be under the standard plan (there is no minimum amount, but your payment can never be less than the monthly interest due). Then they'll increase every two years, for 10 to 30 years. Your monthly payments will never rise to more than 150% of what the monthly payments would be under the standard plan.
With other loans you might pay only the interest on your loans for a few years. After that you'll pay both principal and interest on the loan until it’s retired.
Earnings-Based Payment – Again, lenders often get a bad rap that they have no heart and are after your money and little else. But the earnings-based repayment plan, otherwise referred to as an “income sensitive” plan, like the graduated repayment student loan plan, says different. It says that lenders acknowledge that everyone isn’t paid like a Vanderbilt and that they will work with borrowers to come up with monthly bills that can accommodate the borrower’s budget. As long as the lending institution is getting their money from you on a regular basis - - even in smaller amounts like the earnings-based payment plan – than they’re relatively happy.
That said, there are some caveats involving income sensitive loans. Repayment of your student loans under this option takes into consideration the amount of income you make, or total gross monthly income. Your monthly payment is then based on the amount of your income. Under this option:
You have to come absolutely clean about all of your received.
The income information you give to your lender cannot be more than 90 days old.
You don’t make the call – your lending institution does. They determine whether you qualify for the income-sensitive repayment option.
Your payment plan is liable for review annually by your lender.
Extended Repayment -- Not the ideal repayment option for the student borrower, the extended repayment plan factors in long periods of time where you can’t pay your student loan and gives you more time to do so. About 25 years worth of time. So if you are disabled or lose your job and can’t find another one, the lender will “string out” your loan timetable up to 25 years. Of course, as they do that, your lender will string out and increase the interest payments you’ll be paying as well. Still, it’s nice to have an extended option in your back pocket if things break down, which hopefully won’t happen.
If your loan payments are huge or if you’ve hit tough economic times head on, even the most generous payment plan might not make ends meet. In some instances, you can – for the moment at least -- postpone paying your loans or reduce the amount of your payments. These periods of relief are known as deferments (where Uncle Sam pays your interest) and forbearances (where the money you owe keeps going up because interest payments aren’t being paid). We’ll talk more about deferments and forbearances later on in our discussions of student loans.
Now that you’ve left school and earned your degree, you’ve to pay your loan money back. Hopefully, you want to start the loan repayment process with the blueprint we covered last week in our blog.
That means gathering all your loan documentation that you so carefully stored so you know exactly how much you owe, how much you’re going to have to pay each month, and what your final loan obligation is. You’re also going to have to know where to send your check. Normally, your lender will send you a monthly invoice detailing exactly where the money should go.
In summary you should have the following loan documents on hand:
Any loan applications, promissory notes, loan statements, and loan transfer notices.
All correspondence between you and your lender. Keep documents from your school’s financial aid office, too
Exact addresses, phone numbers and e-mail contacts of your lending institution. Again, the same information is helpful for contacting your school’s financial aid office.
Exact names of any contacts you may have already spoken to at your lending institution, or school. Having a good contact is a real boost - -when you have a question or a problem, you can start by contacting that person directly and go from there. A friendly face always helps.
Know Your Promissory Note
In the first bullet point above, I mention the term “promissory note”. I know; it sounds dry and wonkish, but it’s a term you should know.
When you borrow money from a lender, that lender will want you to sign a contract stipulating just who is going to do what, when, and in what amount. In other words, a promissory note.
A promissory note says that you swear on a stack of Bibles to repay the loan under the terms agreed to within the loan. Since a promissory note is a legal document, you need to understand how it can impact you down the road. So read it, maybe have a lawyer read it, or someone knowledgeable about contract law your school’s financial aid department, and understand what it means before you agree to the contract.
What’s a promissory note comprised of? Contract particulars include the amount you are borrowing, the interest rate and fees tied into the loan, the timeframe of the repayment period, and under what circumstances fees and collection costs may be added to your student loan bill.
Not Paying? Sorry, Not Your Best Option
When you signed your promissory note and accepted your student loan, you pledged that you would pay the money back. By meeting that obligation, you gain the type of credit that will enable you to buy homes, lease cars, send your own children to school one day, and all that other good stuff that comes from good financial credit.
But what if you don’t repay your loan? Bad news. If you don’t pay off your loan you get branded with the “D” word - -as in default (or debtor, too, for that matter). The downside of default includes years of bad credit rating, garnishment of wages to pay your student loans (you didn’t think the lender would give up that easily, did you?), seizure of tax refunds, and pile upon pile of added interest rate and administrative (late charge) fees.
Call it spiritual debtor’s prison, where the lender locks your financial life up for years and throws away the key. No warden, either.
So, it’s always best to pay your debt. No matter what.
But . . . if you absolutely can’t pay, take heart. Later on in the book we’ll go into great detail and discuss what to do if you can’t pay your student loan.
Here is a run-down on Need-Based Loans:
Federal Perkins Loans: Formerly known as National Direct Student Loans (NDSL), these loans are made only to the student and carry the very low interest rate of 5%. Payment begins only after the student graduates, leaves school, or drops below half-time status. No interest is charged during the school years, and students have up to ten years to repay. Although the money comes from the government, these loans are administered through the school aid office.
The federal government gives the school a lump sum every year, but the Financial Aid Officer gets to decide which students receive these loans and how much they receive, based on need. Undergraduates can borrow up to $4,000 per year, with a cap of $20,000. Students must show a strong degree of need to be granted these loans.
Federal Stafford Loans: There are two types of Stafford loans. "Subsidized" Stafford Loans are available to students who have shown "need" as determined by their financial aid application. The federal government subsidizes the loan by not charging any interest until six months after the student graduates, leaves school, or falls below half-time attendance status.
The second type of Stafford loan is known as "unsubsidized" and is not based on need. Virtually all students who fill out a FAFSA are eligible for these loans. From the moment a student takes out an unsubsidized Stafford loan, however, he or she will be charged interest. Students are given the option of paying the interest while in school or deferring interest payments (which will continue to accrue) until repayment of principal begins.
In both cases the federal government guarantees the loan, which ensures a very low interest rate. (By and large, the in-school interest rate is 7.00%. The dependent student may be eligible to borrow up to $2,625 for the freshman year, up to $3,500 for the sophomore year, and up to $5,500 per year for the remaining undergraduate years. Graduate students can borrow up to $18,500 per year; however, only a maximum of $8,000 per year will be a subsidized Stafford.
One other wrinkle about Stafford loans: since 1994, some schools have administered their loans directly through the government's Direct Lending program, while others continue to use banks and other lenders. While the banks have lowered the costs of these loans through repayment discounts, the Direct Lending program does not offer these discounts.
There’s really no secret on getting a grip on your student loan debt. It’s really all about getting the right information and acting on it.
It’s a good time to be looking for information, too. With the advent of the Internet, Google and real-time technology, getting your hands on the information you need is as easy as flipping open your laptop and firing up the World Wide Web.
It wasn’t always so. In 1805, news of the British Fleet’s victory at Trafalgar didn’t reach New York City for six weeks. Nowadays you might see 5,000 accounts of the battle and 50 web blogs dedicated to Admiral Nelson within six weeks.
So, thanks to the Information Age, where information is as much a commodity as vacuum cleaners or Viagra, we now have the most powerful weapon for learning right there at our fingertips, just seconds away from being absorbed by our minds.
Lessons On Loans
There are many different kinds of education loans, but they fall into two main categories: need-based loans, which are designed to help meet part of a family's remaining need (as determined by the federal government or your school); and non-need based loans, which are designed to help pay part of the expected family contribution when the family doesn't have the cash on hand.
The loans that will be offered as part of your aid package in the award letter are primarily need-based loans.
The best need-based loans (the federal Perkins and subsidized Stafford loans) are such good deals that we feel families should always accept them if they are offered. No interest is charged while the student is in school, and repayment does not begin on Perkins or subsidized Stafford loans until the student graduates, leaves school, or drops below half-time status. Even if you have money in the bank, we would still counsel your taking the loans. Let your money earn interest in the bank. When the loans come due, you can pay them off immediately, in full if you like, without penalty. Most loans with the exception of the Perkins loans have some kind of an origination fee (a one-time-only cost that averages about 3% of the value of the loan) and perhaps an insurance fee as well. These fees are deducted from the proceeds of the loan itself; you will never have to pay them out of your pocket.
Online software is obviously a big help in managing your budget as well as your investment portfolio, but there are certain qualities that you should look for. For example, regular viewers of those business and money TV shows on cable hear a lot about budget software packages like Quicken or Microsoft Money. The reason? Both include household accounting functions in addition to their investment portfolio tools.
If you don’t want to spend the $50 -- $100 required to buy such a software package, there’s always the World Wide Web. While the list of personal financial planning Web sites available runs long and deep, a few sites in general offer some stable budgeting and family finance advice.
Some sites I recommend include:
Quicken Financial Network (www.qfn.com) – Easy to learn and easy to use. Does loan payment calculations in addition to budgeting. Plus, it has a good tips and research sections.
FinanCenter (www.financenter.com/budget.htm) – Fairly high brow stuff. That said, the site has some cool calculators for figuring out your financial situation, particularly in the areas of budgeting and spending. The site has some good overall financial tutorials, as well.
MetLife Online (www.metlife.com) – The folks that brought you the Snoopy ads have a great site for everyday financial living. Just made a major purchase? The site has a financial calculator to help evaluate the financial impact on your life. The same story goes for major health expenditures – like surgery for a loved one in your family – or the impact of taking on a new job at a new salary.
Kiplinger.com (www.kiplingers.com) – From the same folks who bring you Kiplinger’s magazine, the company web site has some good overall personal financial information in addition to its impressive roster of financial calculators.
The Dollar Stretcher (www.dollarstretcher.com) – A good site for the whole family. It has a great section on money and budgeting.
Before we get into specific areas of your budget, let’s take a brief look at how a normal household budget works.
Primarily, all budgets are divided into income and expenses, but most good ones now include a third component, savings. Items in the "income" section can include after-tax salary, pensions, investments and tax refunds.
Items in "expenditure" can include rent, mortgage payments, food, gas, utility bills, childcare, entertainment, gifts and holidays. The "savings" section logs how much you put away each month, after satisfying spending requirements. As much as 10 per cent of total expenses should be put into this category to allow for unforeseeable events such as dental emergencies
One way to attack your budget is to use what some debt counselors refer to as “the snowball method”. Using this strategy, simply list your debts in ascending order with the smallest remaining balance first, the largest last. Do this regardless of interest rate or payment. You will pay these off in this new order. This works because you get to see some success quickly and are not trying to pay off the largest balance just because it has a high rate of interest.
Once you pay off the lowest balance, take that payment and combine it with the next payment on the list, so that each month you're making a larger payment on that debt.
Repeat the process, again and again, so that your payments are getting larger, your debts are being paid off faster, and the process starts to snowball until all your debt are paid.
If you’re one of those people who can’t sleep at night worrying about bigger bills, go ahead and address those bills first. Just rank your debts in order of highest interest rate to lowest. Then whittle away at them in that order. Make sure you are not comparing apples and oranges. The effective interest rate is often different from the nominal rate quoted by the lender. For example, mortgage rates are compounded semi-annually, while rates on credit-card debt are usually compounded monthly.
Your Budget List
Here are some more tips on building a better budget:
1. Don't make your budget too restrictive. Otherwise, you might lose interest.
2. Use precise figures, not just estimates, so you know at any point exactly how much you need or have.
3. Consider using an Excel spreadsheet with two primary components - income and expenditure.
4. Budget sections should be easily understood. For example, include
contractors and housepainters under Home Expenses. Better yet paint the house yourself.
5. Don’t underestimate what you spend. Figure in lunches that you eat in restaurants, movies (including “Pay-Per-View” at home) and other “extra” expenses .
6. Create and manage your budget on a monthly basis. Or, build a budget that’s based on how often you get paid.
7. Review your budget on a quarterly basis for accuracy – and to see how you’re doing.
8. When the economy enters a low-interest rate period,- take advantage of low interest rates to refinance a home mortgage and make lower monthly payments. Numerous Web sites offer instant calculators that will estimate your new payments, including Error! Hyperlink reference not valid. and www.realtor.com.
9. Add up the fees on your bank statements and shop for a better deal or ask your existing
bank about lower-cost accounts. While you're at it, find out if your employer will automatically deposit your paycheck to your bank account, to minimize the risk of bounced
checks and other mishaps. Consider starting an automatic savings plan that will route some money directly to a separate account before you're tempted to spend.
10. Order a copy of your credit report for $8 from reporting agencies Equifax (800) 685-1111), Trans Union 800 916-8800) or Experian 800 422-4879).
11. Get rid of clutter and raise extra cash by holding a garage sale or get a tax deduction by donating unwanted items to charities. In that case, be sure to keep an itemized receipt of donated goods in case the IRS has questions.
12. Make a detailed household inventory to protect yourself in case of theft or disaster. Engrave your name and an identifying code on high-value items, and record serial numbers. Most insurance companies offer guidelines or even workbooks -- call yours or check out the Nationwide Mutual Insurance Co. Web site.
Above all, keep it fun. Open a bottle of wine, make a date with your loved one, flip a Beyonce CD into your stereo. Saving money will put a smile on your face and make you feel good about yourself. It’s time well spent.
Irish humorist Joseph O’Connor once said that “I feel these days like a very large flamingo. No matter which way I turn, I have this large bill attached to me.”
While O’Connor aptly states the emotional condition of the high-dent sufferer, there’s no need to flap your wings over a big student loan bill. No need, that is, if you know how to control your debt.
The idea here is simple. Control your debt by managing your lifestyle.
Consequently, the key to controlling debt is to first try to live as inexpensively as possible. If that means renting an apartment with a roommate or bringing a bag lunch, then so much the better. Once you pay off your student loans you can ramp up your lifestyle, as you’ll have more cash at your disposal.
Let’s start with a household budget. Without going through the punishing ordeal of ranking your spending priorities, it is difficult to guarantee you will have anything left over at the end of the month to pay your student loan. If this sounds too taxing, then use the paperless budget method. Start by holding back a reasonable portion out of every paycheck to pay down your student loan and other debts and force yourself to live on the balance.
If every now and then you come out ahead, be sure to apply your windfall to eliminate
student loan debts before you start to accumulate savings. This makes sense for a number of reasons. Borrowing rates typically exceed savings rates. Interest expense is usually non-deductible, whereas savings are taxable. Interest charges are a certainty, but investment returns are volatile.
Sure, these terms seems dry and boring. But let’s face facts – it’s not your father’s economy anymore. In an era where consumer spending is high and there’s plenty of new goods and services to buy that weren’t available even 20 years ago, knowing how to budget properly is a big key to your financial success. According to a recent American Express consumer survey on everyday spending, today's list of typical, day-to-day expenses is still dominated by traditional items such as groceries, fast-food lunches, tolls and gasoline. But they've been joined by such 21st century wallet-sappers like cellular phone service, paging fees and Internet service costs.
Consequently, as everyday expenses increase, managing a household budget becomes more complicated. The best solution? Get those costs into your budget as soon as possible. That’s because people tend to spend whatever money is left over after the fixed expenditures and stop only when either the ATM won't give them more cash or the bank calls.
One way to keep money from flying out of your pocket is to write down what you're spending, as you spend it. You may not realize it, but that glass of Merlot after work, the dry cleaning you picked up on the way home, and that four-cheese pizza you had delivered to your door for dinner all add up. A record of your daily, weekly or monthly expenditures makes for some interesting reading in most American households, testing the patience of millions of spouses in the process.
As I’ve mentioned, some consumers like to use a credit card to buy everything (the credit card companies LOVE to push that strategy). That way, at the end of the month, they have a ready-made laundry list of expenditures sent to them by their credit card firm. Bad idea. Sure, you get a nice, clean list of what you spent each month. But getting into the habit of using a credit card is never a good ploy. It’s easy to treat that Visa card like cash – but it ain’t. Sooner or later you’ve got to pay for it, with high interest payments to boot if you’re not on time every month. Besides, in the age of the laptop, it’s easy to sit down at the end of the day and compile your own list. You’ll have your record and you won’t get sticker shock opening your credit card bill every month.
Managing your personal finances -- especially your credit card debt – is job one when it comes to squaring your student loan debt.
While credit cards are a necessary evil, when you’re trying to free yourself from student loan debt, they can be more evil than necessary. How so? Well, try paying off your college loans when your monthly VISA statement looks like the annual operating budget for Portugal. In many cases, the interest rate on credit cards is 16 percent or more; the interest you pay is not tax-deductible; and quite often the money you owe is for something you've already gotten the most use out of. Pay it off.
But first, make sure the credit-card bill is accurate. Analyze the bill. Make sure it matches your receipts. Sometimes, when you sign on the dotted line, you don't double-check the amount of the purchase.
For example, amid the rush of holiday shopping, you might not have been charged the sale price for an item; you might have been charged twice for a single item; or you could even have been charged for an item purchased by someone else in line. It happens. If you notice a discrepancy, call your credit card issuer and dispute the charge.
Meanwhile, don't fall for any season's greetings from your credit-card company offering to lower your minimum payment or saying that, because you're such a good customer, you can skip this month's payment. That sounds enticing, but remember, the interest-rate clock is still ticking.
With all your holiday shopping, in addition to your regular expenses, suppose that your
January credit-card bill is $2,500, a typical amount. If the annual interest rate is 18 percent, skipping January's payment could cost you about $38 in finance charges that will show up in next month's bill. No wonder the credit-card company is so nice.
Loan Snapshot: Help Yourself, Help Your Country
As I said, all debts are not bad. In fact, your student loan debt, while tough to pay off, is very good debt. Not only is it good for you, but it’s good for your country.
Here is what I mean.
• The U.S. Department of Education reports that every $1 invested in federal financial aid produces $3 to the U.S. federal treasury in tax revenue.
• The U.S. Department of Labor reports that, according to Bureau of Labor Statistics, 60% of new jobs created through 2010 will require a higher education.
• According to the Institute for Higher Education Policy, your college degree means a lot not just to yourself, but to your country. A college graduate means increased tax revenue, greater productivity, increased consumer consumption, decreased reliance on government financial assistance, and greater workforce flexibility.
• The Advisory Committee on Student Financial Assistance estimates that getting more of America’s youth could add $250 billion in gross domestic product and $80 billion in tax revenues to the U.S. Treasury.
In this blog, I've talked plenty about the perils of credit card debt. But few areas feel more impact from crippling credit card payments than student loans.
Simply stated, credit card debt can kill you from a personal finance point of view. Massive credit card debt can choke your ability to deal with all of your other financial responsibilities, taking over your life and limiting your ability to grow and prosper.
Sure, eating at a five-star restaurant or buying season tickets to watch the Red Sox are worthwhile pursuits – if you can afford them with what you bring home in your wallet every payday. Using a credit card to finance these endeavors is a long-term loser, if only because most of the stuff you buy with credit cards depreciates rather than rises in value. Those high-top Reebok basketball sneakers may look great in the box, but once you slap them on your feet, their value resides only in your mind’s eye, because few others want them anymore. Unlike other depreciable items, like a car that provides vital transportation or a pair of eyeglasses, which allow you to see, most things you buy with a credit card don’t offer much to your personal bottom line.
From your student loan perspective, any money that is earmarked toward your credit card debt is money that you can’t use to free yourself from student loan debt. That’s the primary reason why credit card debt is invariably bad debt.
It’s bad from a student loan point of view, as well. In fact, student loan debt and credit card debt are joined at the hip. For decades, credit card companies have targeted college students, offering them their first shiny new plastic card while downplaying the dark side of owning a credit card.
Well, that plan worked. Millions of young Americans who received their first credit cards in college (and millions more who didn’t, but got them right after they graduated and earned their first job) have developed the nasty habit of using their credit cards with alarming regularity. In the process, younger Americans have put a real dent in their financial health and made it even harder to address their student loan debt.
According to the college-lending agency Nellie Mae, US college students in 2000 racked up an average credit card balance of $2,748. That’s up from an average $1,879 in 1998, the agency reports. More disturbingly, Nellie Mae also says that a college student who makes the bare minimum credit card monthly payment (with an 18% APR interest rate) would need a whopping 15 years to pay off that entire debt. Worse, the credit card holder would have to pay as much in interest alone as he or she would the original $2,748 debt. And that’s operating the dubious assumption that the cardholder would never use the card again.
As if, right?
Then there’s another study published by New York State’s education agency that reports 78 percent of college students carried at least one credit card while 32 percent carried four cards or more. Furthermore, 10 percent of students shouldered a credit card balance of $7,000. Another 14 percent owed between $3,000 and $7,000.
Remember what I said at the opening of this blog series on student loan debt this week? About how the average student loan debt had reached $15,000?
Now how in the name of Ivana Trump can someone who already owes $15,000 in student loan debt pay that debt off when they have a $7,000 credit card debt?
Answer. In almost all cases, they can’t.
Some people treat student debt like the plague, and make no special effort to pay bills right away or at all. The good news is that the numbers of those who elect to ignore their student loan debts are declining. According to the US Department of Education, student loan default rates have dropped from 22 percent in 1990 to around 5.9 percent in 2004. Educators attribute that decline to an improved US economy in the 1990’s and 2000's and improved awareness on the part of loan recipients of the importance of paying off their student loan debts.
That tells me that student loan borrowers are taking their debt more seriously. It also tells me that people are beginning to understand that knowledge is power and that the fastest way to pay off your student loans is to face them head on and know what they’re up against.
This is a highly significant occurrence. By knowing your debt and understanding how it impacts your financial life, your chances of eliminating that fiscal albatross around your neck increases exponentially.
But what, exactly, does “knowing your debt,” mean?
For starters, it means knowing how much you owe on your loan. If you owe $8,000, then, if nothing else, you know where you stand. It seems like a simple concept but some people can’t be bothered to know their debt amounts. They’re too busy starting their careers or tackling other, more appealing, fiscal responsibilities like a new Jeep or a vacation rental down the beach for the summer. These are the people who are in the highest danger of defaulting on their student loans, simply because, for whatever reason, they stopped paying attention to it.
Don’t be like that. Know your loan. Know its terms, its payment schedules, its repayment options. Know that if you make higher monthly payments you can pay the loan off more quickly. Know who your lender is and where you can reach them. Know that if you move, you need to contact your lender and let them know your new address. Hey, young people move all the time. They get jobs in different cities or decide that they want to live in San Francisco or Boston at least one time in their lives and up and do so.
Knowing your debt also means knowing what to do if you can’t make a monthly payment for some reason. Lenders are usually fairly gracious about this, as long as you let them know you won’t be paying and when they can expect the next payment. Keeping your lender in the loop is a huge part of knowing your debt. Closing them out or ignoring them will only lead to complications and possibly default. And if that happens, good luck landing that new brownstone apartment in Haight-Ashbury or Harvard Square.
Above all, knowing your debt means reading and understanding all of the correspondence you’ll receive from your lending institution. Yes, the language lender use in their statements reads like the Tibetan Book of the Dead. But read it anyway. Remember that it’s all part of knowing your debt.
And knowing your debt could mean the difference between financial freedom down the road or financial fiasco.
Loan Snapshots: If You Got the Money, Honey, I Got the Time
When the cost of attending a good four-year college rivals the cost of a good four-bedroom Colonial in the ‘burbs, you know sticker shock isn’t too far away. According to the College Board in its 2003 report “Trends in College Pricing Survey”, tuition and fees at four-year public colleges rose an average of 14.1 percent from 2003-2003.
For the current academic year, tuition at public colleges averaged $4,694, up almost $600 from the year before.
Woody Allen once said that when it comes to your financial situation, money is better than poverty, if only for financial reasons.
A good line, and one that is completely appropriate for the mindset of the student loan borrower. You know, the one who borrowed all that money to march off to college and study Shakespeare and shoot dice. The one who learned the Pythagorean Theory and how to pour the perfect mug of beer.
In other words, you.
The good news is that you’re not alone.
According to Heather Boshey, an economist at the U.S. Center for Economic and Policy Research, student loan debt is 85 percent higher for students in 2003 than it was for students who borrowed money in 1993. In her paper “The Debt Explosion Among College Graduates” Boshey reports that 1999-2000 college graduates owe more than their predecessors ever did. The numbers tell the story:
• On average, college graduates in 1999-2000 owed $15,000 in student loan debt compared to $8,200 for students who graduated in 1989-2000.
• Those figures rise when private, four-year college graduates are taken into account. Those graduates owed $16,500 on average in 1999-2000 compared to $10,600 in 1989-1990.
• Two-out-of three (67.9 percent) college graduates in 1999-2000 borrowed money for college, up from less than half 46.3 percent) in 1992/93.
Source: The Debt Explosion for College Graduates, Heather Boushey, March 2003
The Cold, Harsh Reality of Student Loan Debt
The ramifications of all that debt are not pretty.
By and large, there’s no getting around the fact that you have to pay off your student loans. Such loans are rarely granted default status and none are ever abolished in bankruptcy situations. Then there is the credit report issue. If you don’t pay off your loan that can haunt you the rest of your life in the form of a bad credit report. And a bad credit report means no new car, no new home, and virtually no hope of ever borrowing money from creditors again. Think Hester Prynne in “The Scarlet Letter” and you get the idea. The only difference is that instead of that scarlet letter “A” for adultery that Prynne bore you’ll be wearing a metaphorical letter “D” for deadbeat until you can pay off your debt.
Besides, ignoring your college debts won’t make them go away. Instead, that will just make things worse. If you take the ostrich route and stick your head in the sand every time a loan statement arrives in the mail, you’re just staving off the inevitable. By not paying delaying, substantial costs – in the form of interest and penalties – could very well be added to your college loan bill.
Translated: Student loans are serious business.
That’s why knowing the particulars of your student loan -- account terms, timetables for payment, penalties, for example – is so crucial. Consequently, facing up to the significant responsibilities stemming from your student loan is the first step in paying them off.
The next step in freeing yourself from student loan debt is to craft a master plan or blueprint to work from as you pay your loan off. After all, you can’t manage your student loan debt unless you can manage your overall personal finances.
But to control your student loan debt, as in most other instances, you have to walk before you can run. That’s why knowing the financial basics – things like knowing the terms of your debt, crafting a household budget, understanding the machinations behind credit and debt, and the importance of eliminating “bad” debt – are so important to your student loan situation.
So, in the spirit of that “walk first, run second” mantra I’ve been prattling away about, it’s imperative that you have your everyday financial life in order. Tomorrow's blog is where to start.
Some debt is good.
Consider the farmer’s attitude toward natural fertilizer. Using it may be an assault on the olfactory senses, but you can’t argue with the results.
The same goes for your college debts. Student loan debt isn’t bad debt, it’s good debt. Think of it as a down payment for your future – that’s the mindset you’re looking for. After all, studies show that in addition to the inherent benefits of a higher education, a college degree is worth 75% more than a high school diploma or more than $1,000,000 over a lifetime in the workforce.
But it’s still debt. And you’ve got to pay it off. And brother, do Americans have a lot of student debt to pay off. In the next few blogs we'll look at great ways to handle and eliminate student loan debt.
Here’s a look at the facts:
The average American college student owes about $15,000 in loans after graduation. Quadruple that amount if you're the average grad school graduate.
According to the Washington, DC-based State’s PIRG Higher Education Project, 39% of student borrowers now graduate with unmanageable levels of debt, meaning that their monthly payments are more than 8% of their monthly incomes.
According to data from the Department of Education's National Postsecondary Student Aid Study (NPSAS), not only are the majority of students turning to loans to finance college, but debt levels are also escalating. In 1999-2000, 64% of students graduated with student loan debt, and the average student loan debt has nearly doubled over the past eight years to $16,928.
In 1999-2000, 71% of students from families with incomes less than $20,000 graduated with debt, compared to 44% of students from families with incomes more than $100,000.
55% of African-American student borrowers and 58% of Hispanic student borrowers
graduated with unmanageable debt burden.