Student loans are back in the news because interest rates on federal student loans are set to double on July 1, 2013 unless a solution can be reached. A doubling in rate from the current 3.4 percent to 6.8 percent would be a major blow to borrowers who now leave college with an average debt of $24,803. Do you know what you will owe upon completion of your degree? Will you be able to make your monthly loan payment? Check out a student loan calculator to get an idea of what’s in your future.
The thrill of graduation and the agony of repayment
Most student loan repayments begin six months after graduation. That doesn’t give you a lot of time to get your financial act together. Unless your loan was subsidized, interest will be growing on your debt from day one after graduation. Yeah, this is real “Debbie Downer” stuff but it’s better to be informed than to be caught unaware. What strategy should you practice now so that you’re not overwhelmed by debt later on?
Jasmine Barta found helpful advice from a personal finance professor for her June 6, 2013 article for USA Today titled, “Minimizing student loans: Professors, experts offer tips.” Professor Jerry Basford of the University of Utah suggests that the amount of your loans be in line with your future career earnings. Following this logic, a future surgeon will be able to take on more debt than a future elementary school teacher. By working with your financial aid counselors you should be able to predict how much you’ll have to repay and how much you’ll be earning each month.
“Basford suggests using the Department of Education’s website for more information on student loans as well as finding out which fields qualify for loan forgiveness, which he says is most common with teaching or public service jobs,” Barta added.
Tips to keep your overall borrowing low
- Take your first two years of classes at a lower cost college such as a community college
- Limit borrowing to the amount of your expected earnings your first year on the job
- Keep costs low during school by having roommates, preparing your own meals, and using public transportation
- Track your debt by using a student loan calculator
Federal student loans vs. private student loans
Generally speaking, federal loans are a better choice than private loans. Do you know the difference? If not, then check out what Kathy Kristof has to say in her May 20, 2013 article for CBS News.com titled, “Student loans – public or private?” The big takeaway from this article is that private loans will likely end up costing you thousands more over the life of the loan.
One big reason for the difference is the interest rate. Kristof explained how interest applies to private loans. “The interest rate ‘floats’ based on an index rate, plus a ‘margin.’ So, for instance, if the rate was based on prime, plus 9 percentage points, it would currently be 3.25 (prime) plus 9 for a total rate of 12.25 percent,” Kristof said.
Federal loans also allow for a holiday from making payments (deferral or forbearance) if you suffer an economic hardship. Private loans rarely offer the same privilege.
Income based repayment
The down side of getting a deferral or forbearance is that unless your federal loan is subsidized, your interest keeps accruing. You’re not making any payments but your loan balance continues to grow as interest is added to it every month. Are there are things you could do instead?
Mandi Woodruff offered a few suggestions in her June 7, 2013 article for Seattle Pi.com titled, “How to Pay Off Student Loans When You Have No Money, No Job, And Nowhere Else To Turn.” Woodruff suggested that borrowers investigate loan consolidation and income-based repayment.
According to Woodruff, “There are plenty of reasons to take out federal loans in lieu of private student loans, but the Income-Based Repayment plan takes the cake. For most borrowers, IBR payments are capped at 15% of their income. Recently, President Obama signed an order to reduce IBR payments to 10% of income for borrowers who took out loans after October 2011.”
Where to go for help and info with student loans
Need more help? Here are a few useful sites to help you in your quest to manage your college debt.
- Information about the federal direct loan program [direct.ed.gov]
- Office of Education Federal Student Aid [studentaid.ed.gov]
- U.S. Dept. of Education: Student loan forgiveness [ed.gov/fund/grants-college.html]
- Student loan assistance [studentloanhelp.org]
- Federal student aid [myeddebt.com/borrower]
Are you surprised by these escalating numbers? What loan options do you think are best for your education? Let us know in the comments below.