Jason is a financial advisor and Dave Ramsey-trained counselor that blogs over at WorkSaveLive. He aims to educate his readers on a variety of financial topics while sharing his family’s journey out of debt.
Having been saddled for the past 6 years with over $80,000 of student loan debt (as a family), I have a soft spot in my heart for those foolish enough to rack up countless amounts of student loans.
With student loan debt mounting at an unprecedented rate (recently surpassing $1 Trillion), it’s simply a matter of time before that bubble bursts and creates another economic disaster our country has to overcome. The current statistics also show that nearly 13% of student loans go into default within the first 3 years, with 850,000 private loans and 2.1 million federal loans being in default.
So, before you joyfully run into debt and fork over those endless payments for the next 20 years, consider a school that offers a tuition-free education. However, if a traditional school is the route you choose to go then here are 4 things you may not know about student loans.
4 Things You Might Not Know About Student Loans
1. There Are No More Grace Periods
If you acquired a loan after June 30th, 2012, then it’s unlikely that it will have that friendly grace period many of us “older” folks were used to. Upon graduation you need to be prepared to start making those wonderful monthly payments immediately; if you have trouble finding a job then you may be able to negotiate something with you lender. However, it’s more likely that you’ll have to ask mom and dad for some more cash to cover the payments.
Even if you are able to defer your payments, it’s best if you work on paying them as soon as possible (especially if you become employed quickly); even while in deferment, your student loans will accrue interest and therefore add MORE to what you already owe.
2. Your (Parent’s) Credit Score Determines Your Interest Rate
When you begin applying for your student loans, the interest rate will be based on your credit score or the person that will be co-signing the loan with you.
If you’re a few years from college and happen to be reading this article, then talk with your parents and ask them to help you take some steps to build your credit (or help them improve theirs).
3. You Borrow It, You Pay It
Even if you face tough financial times, it’s higly unlikely that your student loan debt will ever go away. While it is possible to include private student loans (in specific situations) in a bankruptcy, it’s highly difficult to include federal student loans in your filing. Basically, that means that regardless how bad your financial situation or outlook gets, you still have to pay the money back.
Other than bankruptcy, the only other ways to get rid of student loans (without paying them) are: (1) become totally and permanently disabled, (2) die, (3) get your school to go out of business, (4) become a teacher that works in an underpriviledged area (up to $17,500 reimbursed after 5 years of service), or (5) get a qualified government job in an underserved area and have 100% repaid (after 10 years of service).
…I’m not sure about you, but there aren’t too many of those options that sound like something I’d be willing to pursue in attempt to eliminate my student loan debt.
4. The Modified Repayment Programs Aren’t all that Great.
Once you’re out of school and begin paying on the loans, there are 4 primary re-payment options available: standard, graduated, extended, and income-based.
Regardless of the option you qualify for, or choose, the reality is that you must pay back every dime you borrowed (plus interest). So, even if the income-based option gives you a great low payment that you can afford, all that means is that you’ll probably be paying down the loan for the next 30 years. So, while it may help you today, it may truly hinder you in the long run.
If you’ve gone into student loan debt (or are planning to), do the best you can to get on the most aggressive payment plan after you graduate. Pay down those student loans as quickly as you can and get them out of your life, forever! Trust me…you don’t want to be 45 and still be paying for the mistakes you made when you were 20.
Thanks for allowing me to guest post, Sean! I actually forgot that I had sent this to you! LOL. I hope all went well with the delivery yesterday!
Nice post. It’s crazy the amount of student loans that are floating out there. I was not aware the grace periods are going away, that can definitely be cause for a problematic situation. Correct me if I am wrong, but I was under the understanding that if you die then your loans don’t go away. I always thought that your next of kin would have to pay them off, or come out of your assets.
John, I could be wrong but I’m almost positive the loans are eliminated (especially the federal loans). That may not be the case for private loans in which case the co-signer would have to pay for them or they’d have to come out of your estate.
I agree that if you do have any student loan when you graduate to pay it off aggressively. If that means you have to live a frugal life for a year then so be it. Life after grad isn’t always cruises, fast cars and fancy clothes. Pay the debt and the fun will follow. Great post. Mr.CBB
I had no idea they got rid of the grace period. I found the grace period to be useful even though I did have a job upon graduation. As you said, deferment is possible for people who need it. Sucks that the interest keeps building, but also wouldn’t make sense if the interest didn’t build.
I wouldn’t say regret student loans, because they allow me to make the living I do today, but you really have to look at your loan amount to the salary you expect to make. If you take out 80K in loans and only make 30K per year, that’s maybe not the best decision.