The Do's and Don'ts of Student Debt
By Allie Eklund
Our nation’s youngest and brightest talent is strapped with debt. Today’s average U.S. college loan debt is roughly $33,000 about equal to the price of a new car. That’s just the average for a four year degree. When factoring in a master’s or doctorate degree, that number starts looking more like a home loan.
Debt.org reports a mind boggling statistic… “that every second, $3,000 of student debt is accrued…and when combined all together, our national economy has roughly 1.2 trillion dollars worth of student debt.” The swell of student debt is notedly one of the biggest challenges our fresh faced economy must overcome.
After speaking with three local graduates, consulting with a financial aid director, and calling a few refinancing consulting firms, I learned a lot about the do’s and don’ts of student debt. Whether you’re amidst heavy student loans, or are considering enrolling in higher education, this navigation guide will help you better understand the financial aspect to higher education costs.
So, instead of waiting for Bernie Sanders to get elected with his claims of making public education free, here are some plausible ways to reduce your student debt burden:
DO: Do consider the return on education.
There is good debt and bad debt, and it’s really important to know the difference. What makes good debt? First off, debt isn’t bad by nature, and when used properly and prudently, it can create opportunities. Debt is actually a lot about self control, and, it’s a numbers game if interest rates are low and you are disciplined to pay back your debt, then using credit can be a tool that is worth leveraging.
Taking out student loans to open up career possibilities for yourself and to ultimately live a better life is an example of good debt. Understanding the expected return on education is an important planning consideration. If it’s going to cost $25,000 to receive the education you need to work in a career with a median salary of $50,000 it may be a worthy investment to make. The return on investment or “return on education” should be heavily weighed when examining how many loans you are willing to take out. Mark Krantrowitz talks to Forbes about how students need to “keep college debt in sync with their income.” Bankrate.com offers this easy to use table to help gauge what your return on investment will be on your college degree.
DO: Do look into loan forgiveness and reduction programs.
Free money is awesome. And it’s in places you may not expect. The catch is you have to go sniff it out. Free money exists, and if I have learned one thing, it’s that free money doesn’t have a publicist. One loan forgiveness program I sniffed out while doing my research is the Public Service Loan Forgiveness (PSLF) Federal program. This is a relatively new debt forgiveness program and it’s administered by the federal government. Qualifications of this loan forgiveness program are to work in the public sector or work for a qualified nonprofit organization for a minimum of 10 years and make 120 qualifying payments. These payments are based on your income level during that period of service. After 120 qualifying payments and 10 years of service, whatever is left to pay on student loans may qualify for forgiveness.* (*This program went into effect October 1, 2007, therefore we still have yet to see how and when debt is forgiven and erased for the applicants.)
What’s so great about this Federal program is that it’s applicable to any full-time Government or non-profit 501(c)(3) employee. As Joe Pinkas, Director of Financial Aid at McGeorge School of Law explained, “you could work in Government or 501(c)(3) position” and possibly qualify. This specific program shouldn’t be overlooked in our region, since Sacramento offers a multitude of public service positions and we have many qualified non-profit careers as well.
A loan reduction program is different than loan forgiveness. Loan reduction is a portion of free money, rather than taking an eraser and wiping away all student loans. Bottom line, it’s still free money. For example, in California, some nurses are applicable for a loan reduction program. It requires a nurse to commit to work at certain facilities like an MUA, or “medically underserved area” for two years and in turn, the state of California will provide a loan repayment credit to put towards the applicants bachelors of nursing student debt.
(Check into your industry associations to find out if debt forgiveness or reduction is available to you.)
DON’T: Don’t commit to loan reduction programs with constraints you can’t live with.
There’s an opportunity cost to everything in life. Sure, loan forgiveness and/or reduction is a wonderful thing. However, being in the career you want to be in should be the primary consideration. Picking your profession and selecting a job based on loan forgiveness or reduction programs could mean closing the door on choosing something that you really want to do.
Word of caution: make sure you understand what you may be foregoing if you commit to the constraints that come with a loan reduction or forgiveness program. You don’t want to be five years into a career that is completely unfulfilling, but be stuck since you’d be in over your head with debt if you left. If you’re going to pursue the loan forgiveness or reduction program, you can’t be a commitment-phobe. Evaluate beforehand.
DO: Do apply for scholarships and grants.
What a novel idea. Do a little extra work to have someone give you money that doesn’t have to be repaid? Brilliant! Why didn’t I think of that? Debt.org states that “an estimated $46 billion in grants and scholarship money is awarded by the U.S.” If you aren’t going after a piece of this pie, as Julia Roberts once said, “Big mistake. Big. Huge.”
DON’T: Don’t think that everyone else is applying for that scholarship. They aren’t.
One local student explained she has been relentless in her search and application towards grants and scholarships for her Master’s degree. In applying for fifteen scholarships, she’s received six. Quick math, that’s a 40% success rate. A combined total of $28,000 through grants and scholarships has been put towards her Master’s degree. Most students aren’t willing to do the extra work a scholarship application takes. Many attribute this (cough, cough) laziness to the assumption, “why me?” Change your attitude to “why not me?” and you’ll increase your odds.
DO: Do look into consolidating or refinancing loans.
If students aren’t eligible for federal loans, they often turn to the more costly, less flexible private loans. Even in the low interest rate environment we live in currently, private loans carry higher interest rates. One post grad attests to having three outstanding private loans, with the lowest rate being at 7.8%. Ouch. After becoming gainfully employed by a Fortune 500 company and getting a handle on paying his loans down, he decided to work with SoFi, a student loan refinancing and consolidation company. Other tech based student debt refinance and consolidation platforms include Credible, Earnest, and Commonbond to name a few.
Check out SoFi’s student loan calculator to help assess if you can possibly benefit from student loan refinancing. There’s also great free information about the differences between debt consolidation and loan refinancing available. Commonbond provides content that answers some of the most complicated (and boring) questions you may ever need to know regarding financing student loans… like “what is forbearance?”A short blog post answers this question and many more just like it. Or how about “What is one month libor?”I sure hope you have more exciting things to read about than LIBOR, but it’s there if you need it.
DON’T: Don’t refinance or consolidate without doing your due diligence.
Refinancing can be a really great option for the right situation. But don’t commit to anything you don’t understand. When dealing with debt, you must read the fine print. For instance, refinancing and or consolidating loans often means converting loans and rewriting the loan stipulations. Federal loans are known to be much more flexible and less stringent than private loans. Refinancing often means privatizing loans, and losing some of those flexible provisions you originally signed up for. Maybe this isn’t a big deal if you have private loans to begin with, but if you are thinking of privatizing your Federal loans, make sure you know the new rules and how they may impact your life.
DO: Do save while you pay off your loans it’s hard, but not impossible.
“Should I pay off my student loans or save for the future?” Do both. Many think they should aggressively pay down their student debt, and the byproduct is often foregoing stashing away for tomorrow. I won’t say this is a bad idea, but I will affirm it’s not a good idea. Neglecting your savings isn’t fair to you. Think about it this way…you’re effectively draining your liquidity by solely focusing on debt reduction. Balance is key. If it will take you ten years to pay off your student debt and your mindset is save AFTER the loans are gone, you are losing out on time, a resource that slips out of our hands each and every day. Understanding the time value of money is a key financial lesson. Investopedia explains that money presently available “is worth more than the same amount in the future due to its potential earning capacity.” Saving money doesn’t have to be monumental. Find a dollar amount, even if you think it’s insignificant, and put it away.
DO: Do think of future generations.
SavingForCollege.com has a simple college tuition calculator that estimates the future costs of a college education. A two-year old today is estimated to have tuition costs of roughly $198,000. Talk about inflation. Tuition doesn’t usually decrease in price, and it doesn’t move with normal inflation rates thank you budget cuts. There are tax smart ways to save money for your children, or nieces and nephews so that they aren’t riddled with large amounts of debt. Look into 529 savings plans as a way to save money for future college spending needs. These plans allow the grantor to control the gifted money, and the earnings grow tax deferred. Money withdrawn from these savings plans is tax free if used for qualified education expenses. (Here’s a breakdown of what the IRS counts as “qualified education expenses.”)
These recommendations may seem oversimplified, but dealing with student debt isn’t a practice we all have the pleasure (kidding) of dealing with over and over again. It’s important to know the facts and how your life can be positively or negatively affected due to student loans.