Life Lesson 13: Student Loans
Why Should I Care?
People with a college degree earn more than those without, but that advantage costs money. "What you want to be when you grow up" matters when deciding which college or university to go to. Don't spend Ivy League money if you want to be an actor or hairdresser where an Ivy League degree doesn't matter. Lawyers and financial professionals, on the other hand, care about those degrees very much. Your job is to decide if the cost of higher education will match up. Below is a career "average salary" estimator that should help you decide which schools and student loans will be worth it in the long run.
Student Loans are great to help you pay for college, BUT in the beginning, very often the Lender's minimum payment required is LESS than the amount of interest accumulating! You might feel like you are paying a lot, but in reality, the amount you owe is going up every year. You should make sure that, regardless of what the lender requires, that you are at least paying the amount of interest every year, otherwise your loans will be negatively amortizing. This means the principal is increasing even though you are making some payments. A simple example:
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$40,000 in student loans at 5% interest would cost $2,000 a year in interest. Starting balance on Jan 1st is $40,000. If your lender says you don't have to make payments for the 1st year out of school while you look for a job, the ending balance of year one is $42,000. If you made a payment of $100 a month, your loan would be $43,275 because the interest is now being charged interest!
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The moral of the story is that even if your lender gives you permission to make smaller payments, TRY to at least pay the interest cost each month so you make at least some progress!
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Whether it's credit cards or student loans, or any other kind of debt, there are repayment strategies that will help you get out of debt years faster. Check out the examples in Life Lesson 12 for examples.
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Take the Quiz!
Student loan repayment from StudentAid.gov for Federal Loans
You need to apply to have your loans paid back using one of these plans:
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Revised Pay As You Earn Repayment Plan (REPAYE Plan)
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Pay As You Earn Repayment Plan (PAYE Plan)
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Income-Based Repayment Plan (IBR Plan)
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Income-Contingent Repayment Plan (ICR Plan)
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REPAYE Plan - Generally 10 percent of your discretionary income. Repayment period 20 years; 25 for loans for graduate or professional study
PAYE Plan - Generally 10 percent of your discretionary income, but never more than the 10-year Standard Repayment Plan amount
IBR Plan - 10 percent of your discretionary income if you're a new borrower on or after July 1, 2014*, but never more than the 10-year Standard Repayment Plan amount. Repayment period 20 years for new borrowers is the lesser of the following: 20 percent of your discretionary income* or what you would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted according to your income
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*Discretionary income is money left over after your basic expenses are covered such as rent, utilities, food, car payements, etc. The government uses a formula to calculate next year's payments based on a form you provide.
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IMPORTANT – There are many criteria for who is eligible for these loans based on income and family size among other factors. Below is a link to the Studentaid.gov website to help you review your options.
Under all 4 plans, your remaining federal loan balance is forgiven after 20 years BUT you must make your income-based repayments. In many cases, if your income is sufficient, you will have paid off these loans before the 20 year period so don’t count on that as a definite strategy.
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Some people may choose to work in the public sector for non-profits which typically pay less, and would then qualify for loan forgiveness in 10 years using the Public Service Loan Forgiveness (PSLF) Program,
Learn the Lingo
Stafford loans Have a limited loan amount each year ranging from $5,500-$12,500 and are given to financially needy students. The government “subsidizes” your education by not charging you interest on these loans while you are enrolled in college at least part-time (taking 6-8 credit hours). Terms can be 10-25 years.
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Direct unsubsidized loans are the same as Subsidized loans, but they start accruing interest as soon as you borrow the funds.
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Income-Based Repayment – There are many variations of this idea. Your minimum monthly payments will be based on a percentage of your income. Generally, 10-20 percent of your discretionary income (your extra income after your basic expenses are covered such as rent, food, phone bill - see Life lesson 8 - Savings Pyramid)
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Public Service Loan Forgiveness (PSLF) – This is a program designed to encourage people to work in areas that have a shortage of qualified applicants – teachers and doctors in low-income areas, non-profit organizations, certain federal, state, and government agencies, as well as Ameri-corp (full time) and the Peace Corp. You must work 10 years in these fields and still make Income-Based repayments. At the end of the 10th year of employment, the balance of your loan is forgiven.
discretionary income, which is the difference between your annual income and 150 percent of the federal poverty guideline for your family size and state.
Deferment – This is the time period during which you do not have to make any payments on the loan
Forbearance is similar to deference in that you don’t have to make payments and it won’t count as missed or late payments (so it won’t hurt your credit score) BUT this is only used in a hardship situation – unemployment, illness, and other difficulties.