James and the Giant Pile of Student Loans
I don’t want to sound patronizing but if you’re reading this you probably have a pile of student loans, probably $37,172 pile’s worth.
In fact, Americans owe over $1.4 trillion in student loans, which is $620 billion more than the total US credit card debt.
It won’t do us any good to talk about the fact that the price of higher education has been rising at nearly twice the rate of inflation or to warn you that 7 out of 10 students have student loans averaging $37,172. It won’t do us any good because, well, you can’t really do anything without a college degree so we all have to do it. The purpose of this article is an attempt to help you manage it now that you have it.
Just to make sure everyone is on the same page, I want to go over some things before moving forward.
- Student loans in general have lower rates than regular bank loans. If you borrow from the federal government your loans may be subsidized, which means that the government will pay the interest on the loan while you are still in school. Since students don’t generally have a source of income, federal loans don’t require collateral. Collateral is just a fancy word for an asset guarantee. Think about a mortgage. When you buy a house and borrow money from the bank, you put up your house as collateral, which guarantees the bank in case you default on the loan. The bank also makes sure you have enough income to cover the monthly payments and usually requires two years of employment history. A federal student loan requires no asset guarantee and no employment history.
- Student Loans are not dischargeable in bankruptcy. No asset guarantee makes it easier to get a loan, but will also haunt you forever. If you run into financial trouble and declare bankruptcy, the bankruptcy judge will magically make all of your outstanding debt - like credit card debt -disappear, except for your student debt. To make this disappear, you have to prove that keeping the loan would cause undue hardship. And just a heads up, being unemployed alone does not constitute undue hardship.
The best way to manage your student loans is by keeping an eye on your personal finance. By personal finance, I mean:
- Control your spending: Tracking credit card debt and setting budgets for food, clothing, entertainment, etc. There are a few cool apps to help you with this.
- Mint offers a way to link your bank, credit card, and loan accounts to offer you a snapshot of your financial health and also lets you set budgets per month and keep track and pay your bills.
- Personal Finance is similar to Mint, but focuses more on your investment profile. If you link a retirement account or a stock trading account, it can tell you how you’re doing vs. the major indices like the S&P 500.
- Plan for the future: Recognizing the need to plan for retirement. I know it is a dirty word at our age, but we shouldn’t wait until it’s too late. If you don’t want to think about retirement, substitute that with... Where do you see yourself in 10 years? Are you living with your parents? Are you going out with your friends on the weekend? Do you travel? How do you afford it all? For that you may also need to have a basic understanding of investing and retirement plans such as stocks, bonds, mutual funds, 401K’s, IRA’s.
- Pitly is like the Duolingo for investing. With bite-sized lessons, it guides you through the principles of investing and offers a virtual portfolio where you can practice what you’ve learned.
There is a lot wrong with U.S. higher education to go into here – like how the cost of college grows at nearly twice the rate of inflation each year, or why default rates among borrowers is on the rise or how schools like Yale sue their students for defaulting on their loans – yet people from all over the world still come to the U.S. to get their education. Maybe I’ll write something about what economists and others much smarter than me are thinking on how to fix it, but for now, let’s focus on you. Here are a few Do’s and Don’ts to manage your debt.
- Do Track Your Spending: It can be an eye-opener to see where the money goes. Keep track of your debit/credit card statements and check out some of the apps I mentioned earlier.
- Do Pay off Most Expensive Debt First: keep in mind that Most Expensive Debt is the one with the highest Interest Rate, NOT NECESSARILY the highest monthly payment.
- Do Defer Instant Gratification: Live like a student now so you don’t have to live like a student when you graduate. Save hundreds of dollars each semester by skipping expensive coffee drinks, fast food and the newest tech gadget. The sacrifice only lasts a few years, but the payoff lasts a lifetime.
- Do Borrow Federal First: Federal Loans have low fixed rates that won’t go up when interest rates rise. They also have better repayment plans.
- Learn about investing and plan for retirement. I can’t stress this enough. It is never too early to plan for retirement. Learn about stocks, bonds, retirement accounts like 401k’s and IRA’s and make sure that if you are working, you are taking advantage of all the benefits your company offers.
- Don’t Keep Multiple Credit Cards: One credit card is enough. Pay off the balance every month to avoid high interest rates that can double your balance quickly. Never pay late, and never miss a payment.
- Don’t Borrow More than likely Starting Salary: If you're going to borrow $10,000 a year for four years, you should hope that the field you've chosen has a starting salary of at least $40,000. If you are going to be borrowing more than that, look for a less expensive school.
- Don’t Be Afraid to Ask for Help: Try your financial aid office first. Some colleges even have emergency funds that can be used to help students in need.
- Don’t Drop Out to Save Money: Finishing school is the only way you’ll be able to pay off the debt from even one or two semesters. If you are in school but can’t stay to complete a bachelor’s degree, at least get an associate’s degree. If you drop out, you lose your deferment on your student loans and will have to start paying them back.
In summary, student loans make education affordable in an economy with rising tuition prices. It is important that you take advantage of these opportunities while also securing your financial future. Remember, student loans are not easily dischargeable through bankruptcy. Also, outstanding debt can slow you down in making important decisions like buying your first home and starting a family.