Students & Debt

Student loans are a common way to fund education, specifically college and graduate school, and they provide educational opportunities that you otherwise may not be able to afford. But in many cases, college graduates are left with a diploma and an enormous financial burden of credit card and student loan debt – and maybe no job in sight. With Americans owing an estimated $1 trillion in student loans, it’s important that you take control of your college debts today to protect your financial future. We can help.

Student Loans

For you and many students like you across the country, graduation from college does not come with a job. It can come with a pile of student loan debt. The average borrower in the college class of 2014 is expected to carry more than $33,000 in student loan debt, which may be accompanied by growing credit card debt, as well as an auto loan and maybe even a mortgage.

Did You Know?

The costs for a higher education are among the fastest-rising costs in American culture today. Since 1980, tuition costs at U.S. colleges and universities have risen 757 percent. In comparison, food and electricity costs have risen about 150 percent and gasoline prices have risen more than 400 percent over the same period of time. A college education is an important requirement for entry into many of the highest earning professions and jobs. How much you borrow, at what terms, and how you manage your student loan repayment can have a serious impact on your budget, your credit score and your ability to take out a car or mortgage loan in the future. If you or a family member are struggling with student loans, or have questions about your financial situation, speak with one of our skilled student loan specialists.

Student Loan Misconceptions

There are nearly as many misconceptions about student loan debt as there are ways to obtain and pay for it. Too often, college students rely on peers for advice on rules on responsibilities. In the process, a lot of half-truths or just plain misinformation is passed along.

Some of the more popular misconceptions regarding student loans include:

  • It’s good debt. It is, if you get a diploma and job. Generally speaking, the total amount you take as a loan should not exceed your first-year salary.
  • Loans automatically renew until I graduate. Loans typically are for one school year. If you or your family’s financial situation changes, your loan awards could, too.
  • Federal and private loans are the same. There are many differences, some of them enormous. Interest rates, loan modification and forgiveness programs are examples.
  • I can always just declare bankruptcy. Not to solve student loan problems, you can’t. Federal and private loans can’t be forgiven by bankruptcy.

Impact Of Student Loan Debt On Young People

The latest studies say that 70 percent of college graduates leave school with student loan debt that in 2014 averaged $33,000. That much debt at that age does not go away quickly and the impact of this is being felt in several areas, notably purchasing a home, starting a business and delaying marriage.

TransUnion released a study in 2014 that said student loans make up 36.8 percent of the total debt for consumers ages 20-29. A study by Harvard University’s Joint Center For Housing said that the rate of home ownership for people 25-34 has dropped eight percentage points in the last 10 years.

The burden of student debt is the key factor in young graduates not starting a business and the marriage rate for Millennials is down 12 percent from the previous generation.

The good news is that there is a considerable payoff for those who got the diploma. More jobs require a degree so there should be more opportunities; the starting salary is higher for college graduates and they can expect to make about $800,000 more over their lifetime than those who didn’t get a degree.

Trends in Student Loans

The soaring cost of college is slowing and the amount of student loans needed to cover it, is dropping, according to College Board, which conducts annual surveys on the matters.

College Board says the price of tuition at four-year, in-state universities went up 2.9 percent, the smallest gain since 1975.  Per student borrowing is down 9 percent over the last three years. Scholarships and grants (free money!) now make up almost half (49 percent) of the aid students receive.

That is a positive trend. Sadly, it is dwarfed by negative trends over the last 10 years.

Student loan debt has soared from $260 billion in 2004 to $1.2 trillion in 2014; average debt jumped from $18,650 to $33,000; and the number of people over 60 with student loan debt tripled to 2.1 million. That group’s share of the debt has skyrocketed from $8 billion to $43 billion and five percent of them are having loan payments deducted from their Social Security checks.

Down the road, economists predict that student loan debt will affect choice of employment and delay home buying, opening a business, and when to get married and have children.

Thank goodness the news is good now!

What to Do Before Applying for a Student Loan

Every student and family should know what FAFSA stands for before applying for any student loans.

The U.S. Department of Education (DOE) gives you an indication of just how important FAFSA is when it brags on one of its website pages that: “We provide more than $150 billion in grants, loans, and work-study funds each year, but you have to complete the FAFSA to see if you can get any of that money.”

So what is FAFSA? It stands for “Free Application For Student Aid.” The information you provide on a FAFSA form helps the DOE determine your unmet financial needs for college and what they can do to address them with federal money. Many states and colleges also use the information from FAFSA to award the grants or student loans they offer.

There are other situations students and parents can investigate before signing up for a loan – cost of  in-state schools vs. out–of-state; public vs. private; stay-at-home vs. going away; interest rates for various student loans – but nothing is going to happen until you fill out the FAFSA.

If you want a ballpark number, the College Board estimates that a moderate budget for in-state schools will be $22,826 and $44,750 for a private college, depending on the school and its location.

But the big thing is to jump on the FAFSA as early as possible. Most of the information requested should be on your tax filings. Use that as a guide and where necessary, estimate income or costs. Don’t forget: $150 billion in grants, loans and work study funds is at stake.

Student Loan Interest Rates

Interest rates are best defined as the cost of borrowing money and should be regarded as a significant factor in whether someone can afford to take out a student loan to attend college.

Interest rates are calculated as a percentage of the unpaid principal on a loan. The total cost varies, depending on the interest rate charged and type of loan.

All federal loans made after June 30, 2006 carry a fixed interest rate. The rates are set by Congress and during the 2014-2015 academic year, range from 4.66 for undergraduates to 6.21 for graduate students and 7.21 for parents using Direct Plus loans.

It is important to understand when the interest rate is applied to your federal student loan. Students with subsidized loans do not have to pay interest until six months after graduation. They also don’t pay interest during deferment periods. Students with unsubsidized loans start paying interest as soon as the money is dispensed to them.

There are loan fees associated with student loans.  For 2014-2015, the fees are 1.073 percent for undergraduate and graduate loans; and 4.292 percent for Direct Plus loans.

Direct Loans are “simple daily interest” loans. This means that interest accrues daily. The amount of interest that accrues per day is calculated by dividing the interest rate on your loan (as a decimal) by the number of days in a year, and then multiplying that by the outstanding principal balance.

For example, on a $10,000 Direct Unsubsidized Loan with a 6.8% interest rate, the amount of interest that accrues per day is $1.86:

(0.068 / 365) * $10,000 = $1.86

If you are in a deferment or forbearance for 6 months, the loan will accrue interest totaling $340.

If you don’t pay the interest, it is capitalized (added to the outstanding principal balance). You will be charged interest on the increased outstanding principal balance of $10,340. The amount of interest that accrues per day will increase to $1.93:

(0.068 / 365) * $10,340 = $1.93

Under most repayment plans, this capitalized interest will increase your monthly payment and the total amount you pay over the life of the loan.

Alternatives to Student Loans

There is a simple, increasingly popular way to graduate from college without an overwhelming amount of student loan debt – Live at home while earning your four-year degree.

The savings can be staggering. A Bachelor of Arts degree could be had for as little as $25,000!

That would mean two years at a local community college (average tuition and fees are $6,700), two more at a local state university (tuition and fees $18,300) and Mom and Dad supplying room and board (four-year savings of $40,000).

If you don’t live at home, you can still cut costs by finding a roommate to share expenses; reduce personal spending; take extra classes so you graduate in three years; or live away from home for two years and spend two at home.

About 54 percent of college students now live at home and 80 percent of college students go to in-state schools, so college can be done without student loans, but it will take some sacrifice.

Cecillia Barr