Last week, Amanda was faced with a significant financial decision that millions of others have had to face as well without ever having any education or guidance on what they should do: take out student loans for the next year of college or figure out how to pay for it out-of-pocket? From the perspective of a financial planner, this process was completely not transparent. Luckily, Amanda knows a guy.
Whether you’re a current student, a college graduate, a parent, or never even attended college, you probably know someone who has dealt with this decision and you probably know someone who currently has student loans. Most people who are faced with the decision of whether or not they should borrow money to pay for their next year of education have never been educated on the matter.
Even worse, at the point of clicking the button to accept the loans you haven’t even been informed of the terms that you’re about to agree to. At least that was Amanda’s experience.
No interest rate, no loan term, no expected payment. None of the details. Just the amount of the loan.
This is debt that could potentially stay with you for 20 years or more and grow to become unmanageable if you’re not careful. The amount may seem like the most important factor at the time, but those other details could be huge over the long run.
Total Loan Amount
Sure, you get to see the amount of debt that you’re about to incur at the click of a button, and you can even change the number if you want, but what you can’t see is the total amount of debt that you may end up taking out over your entire college career.
A freshman or sophomore who is completing the student loan process by themselves doesn’t get to see the amount of loans they’re about to take out multiplied by four years of school, plus any interest that may be accrued during that time. Likewise, someone entering their senior year doesn’t get to see the amount of student loans that they’ve already accrued and are about to add to.
I think that seeing the total amount of debt that you could end up with over the course of a college career may make some students stop and think before clicking the button to accept so quickly.
Subsidized vs Unsubsidized
There are two funny words next to federal student loans that you may have noticed before and that could play a role in your decision of whether to take on the debt or pay out of pocket – Subsidized and Unsubsidized.
If you take out Federal subsidized loans, then the government covers your student loan interest payments as long as you’re a full-time student under. However, once you drop below full-time, interest on those loans will begin accruing. If you drop below full-time and go back to full-time, then the interest will begin being subsidized again.
Unsubsidized loans begin accruing interest immediately. If you currently have a mixture of subsidized and unsubsidized student loans, then you can login to your student loan servicing website and see that the subsidized loans do not have accrued interest while the unsubsidized loans do.
Fortunately for you, you can find out what the interest rates on these different types of loans are here before committing to them.
Loan Term
Most student loans have a standard repayment period of 10 years. However, there are many different repayment plans and refinancing options that offer periods of up to 20 years. Don’t you think this would be something that you might want to know before committing to taking on the debt or refinancing it? While a longer loan term would make your expected payments lower, it would also lead to more interest being paid over the life of the loan. Would you think twice if you knew the loan you were about to take out was expected to still be with you nearly 20 years down the road?
Expected Payment
Given that the government already knows the amount of your loan, what the interest rate is, and what the loan term is starting out, there’s no reason they shouldn’t be able to at least provide an expected payment. Hell, I wouldn’t care if they put a giant asterisk next to it stating that this payment is contingent on a bunch of stuff. Something is better than nothing. Imagine if you saw all of the expected payments of all of your student loans on one page prior to being able to accept the next one for the upcoming school year.
Paying Off Early
If you’ve already taken out student loans but have decided that you’d like to work on paying them off early, then there are a couple of options. You could make payments equal to the amount of interest being accrued while you’re in school, or slightly more than that, to make sure that the interest doesn’t compound while you’re earning your education. Or, since there’s no prepayment penalty on student loans, you could begin making larger payments to get them paid off quicker.
However, the questions of whether you should pay down the debt more quickly or save your money instead and what debts you should make extra payments towards first are two whole different topics by themselves that deserve thought and consideration if this is something you’ve been thinking about.
A Little Transparency, Please
I’m not saying that there’s anything bad with student loans. After all, according to the Social Security Administration:
“Men with bachelor’s degrees earn approximately $900,000 more in median lifetime earnings than high school graduates. Women with bachelor’s degrees earn $630,000 more. Men with graduate degrees earn $1.5 million more in median lifetime earnings than high school graduates. Women with graduate degrees earn $1.1 million more.”
Source: https://www.ssa.gov/policy/docs/research-summaries/education-earnings.html
There’s obviously a huge value to a college education. However, there can also be a huge disadvantage to the debt that most people accrue along with it. Wouldn’t it be nice if signing up for that debt were a more transparent process?
