“I understood that it would take 20 years to pay off [my student loans] and that it would take a chunk of my paycheck each month but I didn’t realize it would be forcing me on making decisions of where I can work…” – Joe M.*, $42,000 in debt
“I was never offered information on what my monthly payments would look like. They gave me all sorts of Internet surveys about student loans, but the most they ever really said was I would need to pay them back. They never told me they would completely cripple my ability to make any kind of life for myself.” – Samantha J.*, $150,000 in debt
“What the hell did I do?” –Me, $30,000 in debt
Student Loans: Making All Your College-Going Dreams Come True
As a teenager. I assumed that the insanely expensive cost of college was a necessary and inescapable evil. When I was a senior in high school applying to schools (disgustingly expensive, private colleges, mind you), the price tag didn’t faze me. Forty-thousand dollars a year for four year didn’t seem like real money to me. I wasn’t responsible for thinking about how I was going to pay it back right now. It also felt like I didn’t have a choice. I accepted the fact that college was an unaffordable next step in my life, and the only way to advance my academic career was with tons of debt. But to me, the absurd cost was justified by my guaranteed earning potential after I got a degree.
Coming from a middle-class family, going to college was my chance to escape the “living paycheck-to-paycheck” lifestyle that I had grown up with. Neither of my parents graduated from college, and they knew what a college degree would buy me: the financial security they had never had. It didn’t matter how much I had to pay now to get a diploma, because I knew (and my family knew) that it would pay off when I got a steady, decent-paying job. The problem was that we hadn’t saved up any money for school, and we didn’t know how we were going to pay for it.
It was spring of my senior year of high school, and I’d accepted an offer to attend Boston University. When the bill for my first year at BU came in the mail, my jaw hit the floor. $42,000 for one year. This was a bill, in my name, for tens of thousands of dollars. The financial gravity of my college decision hit me like a punch to the gut. But in the same letter as my lofty tuition bill was my financial aid package. The list included a merit scholarship, a few university grants and a hefty federal loan that would cover all but $2,000 of the bill. Wow, that’s it? That’s all I have to cover?
Sign me up.
The BU financial aid office had, in a single letter, presented me with the biggest financial problem and solution of my teenage life: a $42,000 bill and $40,000 in loans and grants. I’d been offered the chance to attend a prestigious university and I didn’t have to worry about how I was going to afford it.
I did some quick back-of-the-envelope math: I’d be borrowing about $7,000 a year. I didn’t have to worry about paying any of it back until I got a job after graduation. Besides, I was confident that I’d be making enough money to pay back my loans in four or five years, tops.
I didn’t even think of saying no to BU or turning down any of the loans in my financial aid package. It was tough to find $2,000 in cash to cover the balance, but I was relieved that I didn’t have to figure out how to pay for all $42,000. The impossible was possible, and it was like the Student Loan Fairy Godmother had waived her magic wand so I could go get a degree.
I had no idea what I was getting myself into.
Research and Experience Point to One Reason for Student Loan Trouble
The quotes at the beginning of this post came from a survey of student borrowers (and names have been changed to protect the innocent and indebted…except for me). The findings aren’t completely surprising but are nevertheless disheartening: most student loan borrowers misunderstood or were surprised by the terms of their loans.
In other words, the 17- and 18-year-olds that borrow tens of thousands of dollars for college actually don’t know what the hell they’re doing.
(Click here to tweet about borrowing for college).
I was 18-years-old when I took out my first student loan. When I was 18-years-old, I’d never been grocery shopping on my own. I’d never paid my own cell phone bill. And here I was, borrowing $30,000 over four years. At 18, I didn’t know if my high school boyfriend and I were going to last beyond freshman year of college (we didn’t), let alone know what my plan was to pay back thousands of dollars in student loan debt.
There is no way that teenagers have the foresight or experience to borrow thousands of dollars.
So why do we let teens borrow so much money? Who’s to blame?
“Blame the lenders…” “Blame the parents…” “Blame the kids…”
It seems ridiculous that teenagers are allowed to take out a five-figure loan. And yet, the same scenario plays out year after year when high school seniors prepare to go off to college. Every spring, anxious teens receive their university acceptance letters in the mail. Soon after, or even in the same letter, they’ll get their financial aid package. It’s a subtle but effective strategy: you’re already emotionally invested in the college of your dreams, and it’s too late to say no.
I bet if you’re a parent and your kid just got an acceptance letter from a competitive school, you’re not going to glance at the financial aid letter and say “No, sorry son – that’s too much debt.”
Think about the last time you borrowed $40,000 for anything… it was probably for your home. Would you let your teen take out a mortgage? Probably not. But when it comes to college, teens are allowed to make these kinds of financial decisions.
Who’s to blame here? Unfortunately, you can’t expect the lender or even the college to have your best interests in mind. Realistically, you can’t expect a teenager to make financial decisions of this caliber.
That means it’s up to you, Mom and Dad, to guide your teen through the borrowing process. If your child is applying for student loans, you owe it to your family to be aware of the loan terms and your borrowing options before you sign the dotted line.
3 Steps to Avoiding Thousands in Unnecessary Debt
If you have to borrow money to cover the cost of tuition, make sure you’re comfortable with a few student loan basics:
1. Understand the difference between federal and private loans – and go federal first.
In the same survey, about two-thirds of private loan borrowers, including those who took out both private and federal loans, said that they did not understand the major differences between their private and federal options.
I bet you’ve seen advertisements for private student loans low interest rates. At first glance, paying a 3.9% interest on a private loan might seem like a better deal than a federal loan charging 6.8% interest. But taking out a private loan with a good interest rate could negatively impact your child’s ability to repay her student loans in the future.
Federal loans offer several perks that private loans don’t:
- Fixed interest rates
- Income-based repayment plans (I can’t emphasize how important this is – I’ll talk about this in a later post)
- Loan forgiveness
- Deferment (postponement) options, including deferment of loan payments when a student returns to school
While you may be giving up a preferred interest rate today, you’ll be more protected borrowing from the federal government later. Check out the Federal Aid First website for more information on Federal Student Loans.
2. Take 30 seconds to calculate the expected monthly payment for each loan.
In the student loan borrowers survey, sixty-five percent of borrowers misunderstood or were surprised by aspects of their student loans or the student loan process, specifically:
- Repayment terms
- Monthly payment amount
- Loans’ interest rates
Before you borrow, take a moment to do the math, especially for future monthly payments. Calculating the monthly payments for each loan is a sobering exercise, and it may influence your decision of how much you want (or need) to borrow. Loans in the tens-of-thousands of dollars seem like an abstract number with a far-off repayment period. When you and your teen realize that borrowing $30,000 now will mean monthly payments of $350 after graduation, the dollars seem a lot more real.
FinAid.org has a simple calculator. Just plug in the amount of the loan, your interest rate, and the loan terms. Remember to factor your borrowing across all four years of college. If you’re borrowing $7,000 for freshman year, that probably means you’ll be borrowing at least $28,000 in total (if not more).
In the scenario above, borrowing $25,000 for college means you’ll be paying almost $10K in interest and $300 monthly payments for 10 years. Yikes. I didn’t know that going into college.
3. Talk about the life implications.
I honestly thought that if I landed a $40,000-a-year job after college, I’d be able to pay back all of my student loan debt in 2-3 years. Apparently, I’m terrible at math. When you got your financial aid package in the mail, my parents did not sit down and figure out what kind of income I needed to pay off these loans, or how burdensome the monthly payments would be when I first started my career. We were just happy that I got into school and had loans to help pay for it.
For a teenager, it’s hard to think about “life implications” when you’ve never had more than a few expenses to manage each month. This is probably the first time in their young adult lives that they’ve had to comprehend figures in the tens-of-thousands. If you borrow $25,000, you can expect to pay somewhere around $300 a month after graduation. But what does $300 a month really mean? Effectively, that’s equal to:
- A monthly car payment
- A round trip ticket to Asia and lodging for a month
- Seven iPads in a year
Not to mention the investing and savings opportunities that you would be missing out on. If you’re in the process of deciding between what schools to apply to or where to attend, this one exercise will make any teen think twice.
Know Before You Owe
I’ll end with another sobering quote from a borrower:
“I understood it, but the reality of it never really sunk in. I understood I would have to pay back all that money, but did not realize how hard it would be to find a job that paid well enough to do that in a reasonable amount of time.” – Just another student borrower, $40,000 in debt
The student debt crisis is compounded by the fact that college grads can’t get a job. You can avoid sentencing your kid to the overwhelming anxiety experienced by so many borrowers by researching your options and weighing the pros and cons before borrowing for college. By facing the facts now, you can save yourself thousands of dollars in unnecessary debt and interest in the future.
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