Guide To Student Loans

Don’t Let This Happen to You:

“By all accounts, I should be living well right now. However, due to my personal loans, I pay more to the loan company than I do for rent. I recently had to move back in with my parents in order to cover my loans and attempt to save money.” – Laura, Portland

“I currently owe approximately $25,000 in undergraduate student loans to Sallie Mae. Since graduating in 1994, it is absolutely unbelievable that I could still have outstanding loans after 15 years. I have excellent credit by paying my debt, but this is one monster that no matter how hard I pay, it will not go away due to the high interest rate.” -Janee, Huguenot

“I am a 25-year-old teacher beginning my third year of teaching. To pay for college I took out both private student loans as well as federal student loans. Unfortunately I grossly underestimated the impact these loans would have on my career, my family life and my ability to pay my own way. I currently make $34,000 a year and have a student loan debt of $70,000. My net income after taxes is $1800 and my student loan is $650 a month. HELP!” – Jessica, Phoenix

Stories courtesy of the Institute for College Access and Success.

Student Loans Pitfalls

Understanding the student loan options available to you, and how to avoid the potential debt trap.

An education is an investment in your future.

Salary data from the Department of Labor confirm that education beyond high school will help a person earn, on average, hundreds of thousands of dollars more over the course of a lifetime.

So roughly speaking:

More Education = Higher Salary

But, as we all know, higher education comes with a price tag. There’s the cost of tuition, room and board and books. There can be additional fees, like computer equipment and supplies and travel to and from school. If you rent an apartment, you need to consider other costs like utilities and high speed internet. If you maintain a car while you’re in school, there’s gas and insurance to consider, and car payments, if your vehicle is financed.

The price tag also depends on what type of university you choose. Nearly half (47 percent) of all full-time undergraduate college students attend a four-year college that has published charges of less than $9,000 per year for tuition and fees.

At one end of the spectrum are private four-year colleges that cost $35,000 or more yearly in tuition and fees. While at the other end are two-year colleges, where the average cost for tuition and fees is $2,713.If you are like the majority of college students:

More Expenses = Higher Loans

Many students do not realize that the “sticker price,” the tuition and room and board (if you live on campus), comprises only a part of the total cost of going to school. This is why it is essential to put together a budget and understand the total dollar amount required to finance your education.

Maintain a Budget

Understanding how you spend your money (even loan money) is the first step toward putting together a smart education borrowing strategy. On your right, you’ll find a downloadable budget worksheet. This worksheet will help you organize your expenses and set financial goals. Let’s see how a budget can help with financial decision making.

Meet Angel

I was born and raised in Florida. I always wanted to be a teacher, so I knew I would be going to college after high school. I managed to save up enough money in high school to buy a car in cash. At least I won’t have any car payments while I’m in school!

I decided to go to a state school, located about 45 minutes from my home. One of my best friends from high school was going there too, so we decided to rent an apartment together. I took out loans to cover my tuition and living expenses. I borrowed $7,000 for my first semester, and, I have to say, it wasn’t enough. By the end of the semester, I had to cut back on food and driving to save gas money. I want to borrow more for next semester, but I’m afraid of going too far into debt. How much is too much?

Financial Aid Counselor:

“Angel’s situation is typical. She needs to borrow money for tuition and living expenses, but she doesn’t want to have a big debt to repay after graduation.”

RULE OF THUMB: Don’t borrow MORE than your first year’s salary.

Many student loan borrowers experience “shock and awe” upon receiving their first student loan bill. This usually arrives 6 months after graduation since that is the grace before they need to start repayment.

Imagine buying a car and having no idea what the monthly payment would be after driving it off the lot. This usually doesn’t happen, because when people buy cars, they focus on the affordability of the monthly payment. In fact, many people walk into a dealership with an idea in their minds of a monthly payment that is comfortable for them. This is how you need to approach your student loans.

Your future monthly payment is not hard to predict. You need three pieces of information:

  1. Total amount you need to borrow
  2. Interest rate
  3. Repayment period

Take a moment and use the student loan calculator above to add up the total amount you will need to borrow to complete your education. Is the total more or less than you expect to make in your first year out of school? Take a look at this table from the Department of Labor’s Bureau of Labor Statistics and find out the average salary for your chosen profession.


It is important to understand that everyone has different life circumstances. Some students are able to depend on their parents or a spouse to help them through college and after. Others cannot. You need to assess your monthly payment based on your own situation.

Here are some guidelines to help. These are based on a 10-year repayment plan.

Future STARTING salary:

$20,000-$30,000 – Aim for a monthly payment of $250 or less, don’t borrow more than $30,000

$30,001-$40,000 – Aim for a monthly payment of $330 or less, don’t borrow more than $40,000

$40,001-$50,000 – Aim for a monthly payment of $420 or less, don’t borrow more than $50,000

$50,001-$60,000 – Aim for a monthly payment of $500 or less, don’t borrow more than $60,000

$60,001-$70,000 – Aim for a monthly payment of $580 or less, don’t borrow more than $70,000

$70,001-$80,000 – Aim for a monthly payment of $660 or less, don’t borrow more than $80,000

$80,001-$90,000 – Aim for a monthly payment of $750 or less, don’t borrow more than $90,000


What if my future monthly payment is too high?

The good news is it is not too late to make changes in your budget and borrowing plan. Let’s see what Angel does to reduce her overall education expense.

If Angel continues to borrow $7000 a semester, she’ll need $56,000 to complete her education. She researches and finds out that a beginning teacher in her area starts at $32,000. According to the rule of thumb, is Angel over-borrowing?

The answer is yes.

If Angel continues to borrow money at the same rate, she will need to dedicate significant percentage of her future monthly income toward repaying the principal and interest on her education debt. Her monthly payments could range between $700-$1000/month for 10 years!

Angel should not increase her borrowing for next year.

Angel’s story continued.

I made a budget and examined all of my expenses to see what money-saving changes I could make. I decided to give up my apartment and move on campus. This meant I no longer needed to keep up a car, gas and insurance. My room and board ended up being slightly cheaper than paying for rent, utilities, cable and internet off-campus. I lost my security deposit, but I was able to make up the difference in a month of living on campus. The other big saving was that I would have had to keep the apartment (and pay the expenses associated with it) over the summer. Now I can go home for the summer and live for free with my parents.

By making these changes, Angel is able to reduce her borrowing to $5000 per semester ($40,000 total). If she adds in money from a part-time job during the school year and a fulltime job over the summer, she will be able to graduate with $30,000 in student loan debt.

By putting together a budget and making strategic decisions about her car and housing, Angle was able to cut hundreds of dollars out of her monthly payment upon graduation. Her new monthly payment will be around $350/month. She will save over $350 in student loan payments, every month, for 10 years. That’s a total savings of $42,000 in payments.

The bottom line is:

Small Sacrifices Now = Big Payoff Later


Scholarships and Grants

Before turning to a student loan as a college funding option, you should exhaust your search for available scholarships and grants that don’t need to be repaid. Check out scholarship providers through this free on-line search provided by the American Education Services. Then check out the Federal Pell Grant program, which unlike a loan, doesn’t need to be repaid. It is needs-based however so income restrictions will factor into your acceptance.

If neither of these “free” funding options are available to you, then it is time to consider student loans.


Types of Student Loans

Have you ever heard someone refer to student loan debt as “good debt”?

The idea of student loan debt being good debt is based on the logic that the loan is a kind of investment that will pay off later with higher income. This is true only if you borrow as little money as possible under the very best terms you can get.

Just like with all loans, you should review the terms of your student loans.

All student loans are not equal.

Let’s compare two main types of student loans: Federal and Private.

FEDERAL STUDENT LOANS

(also known as Stafford Loans)

These are the BEST kind of student loans to have. They come in two kinds:

  1. Subsidized Loans (Stafford & Perkins)

-The Government pays the interest on these loans while you are enrolled as a fulltime student and for several months after graduation.

-The interest rate is 5% for Perkins Loans and 6.8% for Stafford Loans.

  1. Unsubsidized Loans (Stafford & Plus)

-Stafford: Interest is added to the loan while you are in school.

-Stafford: The interest rate is 6.8%.

-Plus Loans are taken out by parents. Repayment starts after 60 days and the interest rate is 7.9%.

Federal student loans, which include Stafford, Perkins and Plus Loans, generally have much better terms than private loans. If you must borrow money to finance your education, apply first for federal student loans.

PRIVATE STUDENT LOANS

Students are finding it increasingly difficult to secure private loans to cover the gap as many financial institutions have discontinued their private loan programs or have

increased their requirements for credit.

Part of the reason for this is because as of July 1, 2010 all federal student loans (Stafford, PLUS and consolidation loans) are now provided only by the US government through what is called the “Direct Loan Program.” This means that Private banks will no longer be able to lend government-backed loans to students.

However if you shop around, you can still find banks offering private loans. As noted earlier, their terms tend to be more expensive than Federal student loans:

  1. Interest rates for private student loans vary significantly based on the lender, your credit score and the prime rate. The 2010 average private student loan interest rate was 12%. This rate is almost double the interest rate for a federal student loan (6.8%).
  2. Set-up fees can range from 0-6% of the loan!

If you borrow $22,000 at 6.8% and pay it off over 10 years, you will pay back the original amount of $22,000 and an additional $8246 in interest.

If you borrow $22,000 at 12% and pay it off over 10 years, you will pay back the original amount of $22,000 and an additional $15875 in interest.


INTEREST RATES MATTER

A lower interest rate means more of your money in your pocket every month for the life of the loan!

FEES

Let’s talk about fees. Many private student loans include high set-up or origination fees. If the $22,000 loan described above was charged a 6% origination fee, that would be an additional $1320 added to the balance. When comparing student loans, use a student loan calculator and consider the fees as well as the interest rate to find the best deal.

Here’s what you need to know:

  1. Borrow as little money as you possibly can (remember: small sacrifices now = big payoff later)
  2. Maintain a budget while you are in school

3. Exhaust federal student loans before seeking private student loans

4. When shopping for a private student loan, go for the lowest possible interest rate and low to no set-up fees.

5. Try to keep your total borrowing at or below what you expect to make your first year out of school.


Help. I’m in danger of student loan default. What are my options?

I graduated from college four years ago. I was current on my student loan payments for three years, but last year I lost my job and have been unable to find a new one. I want to pay my student loans, but I don’t have the money. What are the consequences of defaulting, and what are the options for someone in my situation?

If you fail to make your student loan payments for more than 270 days (that’s 9 months), you are in default. Here are some of the consequences of defaulting on your loans:

  • The maturity date of the loan is accelerated so the full amount is due immediately.
  • You will not be eligible for deferment or forbearance (more on this below).
  • You will no longer be eligible for financial aid.
  • Fees, collection costs, and higher interest rates can be added, which will increase the cost of the loan.
  • The default will be reported to credit bureaus, which could hinder credit applications in the future. The loan may be turned over to a collection agency.
  • You could be sued for the entire amount of the loan.
  • Federal and state income tax refunds may be withheld and your future wages could be garnished.
  • You could lose professional licenses (nursing license, law license, etc.).

It is also important to understand that student loans are not bankrupt-able (except under very rare circumstances like permanent disability). If personal financial trouble leads you to declare bankruptcy, you will still owe the full balance of your student loans after bankruptcy.

The good news is, however, that there are many options available to you if you fall into financial hardship. These options include: changing repayment plans, deferment, forbearance, consolidation and cancellation.

If you find yourself in danger of defaulting, you must take action immediately. If you wait until default, you will have fewer options available to you.


Need to Know: TAKE ACTION IMMEDIATELY if you cannot afford your loan payments

Let’s learn more about the options:

REPAYMENT PLANS (only available for the following Federal student loans: Stafford and Perkins):

Extended repayment.

This plan is similar to the standard repayment plan, but it allows a longer term of 12 to 30 years to repay the loan, depending on the amount of the loan. Lengthening the repayment period will lower the monthly payments, but increase the total payment.

Graduated repayment.

The graduated repayment plan starts with lower loan payments and then gradually increases every two years. The reasoning behind this type of repayment plan is that your income will increase with time as you gain work experience. The length of the loan is 12 to 30 years, which normally depends on the total amount of the loan. The payment itself is subject to some guidelines. First, the payment under the graduated repayment plan can be less than 50% and no more than 150% of the monthly payment under the standard repayment plan. The monthly payment must also be at least $25.00.

Income Contingent Repayment.

Under the income contingent replacement plan, payments are based on the borrower’s income and the total amount of debt. The monthly payments are adjusted each year as the student’s income changes. The loan term can be up to 25 years. If there is any remaining balance after 25 years, it will be discharged. The amount of the discharge could be taxable as current income. The minimum monthly payment under the income contingent repayment plan is five dollars. Income contingent repayment plans are only available for student loans, not parent loans.

DEFERMENT

Under deferment, you receive a short term break on payments. However, depending on the type of loan, interest may continue to accrue and add to the balance. Only Federal Perkins Loans and subsidized Stafford Loans freeze interest accumulation during deferment.

Here are some of the common reasons that a deferment may be granted. Check with your lender to find out which reasons apply to your loan:

  • Attending undergraduate school full-time or at least half time
  • Unemployment (deferment can last up to three years)
  • Graduate school
  • Economic hardship (up to three years)
  • Military service
  • Physical disability

FORBEARANCE

Forbearance is similar to deferment, but the interest charges on the loan continue to accrue. You must make payments on the interest charges while your loan is in forbearance. Forbearance is granted in 12-month intervals for up to three years.

CONSOLIDATION

You may benefit from lower monthly payments by consolidating all of your loans into one big loan. If you have trouble keeping track of multiple monthly payments, and the repayment terms are favorable, consolidating your loans may help you manage them better.

LOAN CANCELLATION

(Only Federal Stafford and Perkins loans are eligible)

Your student loan may be cancelled (considered closed and paid) if it meets the following criteria:

  1. You become permanently disabled.
  2. The school that you attended closed while you were attending or within 90 days of your departure from the school.
  3. National Defense Student Loans can be cancelled in return for full-time teaching or military service.
  4. Stafford and Perkins Loans can be cancelled if you teach in a pre-qualified low-income school for a certain period of time.
  5. In some circumstances, the obligation to repay your loan may be cancelled in the event of bankruptcy. However, most student loans continue to be your responsibility even if you declare bankruptcy.

Federal student loans can be forgiven through the Public Service Loan Forgiveness program. Under this program, certain public service employment can qualify you for loan forgiveness after making 120 payments on certain repayment programs.

If you are having problems making your student loan payments or if you want to apply for a change in repayment plan, deferment, forbearance, or student loan consolidation, contact these resources:

www.ed.gov/offices/OSFAP/DirectLoan/

www.finaid.org

http://www.aessuccess.org/