Student Loan Debt and Costs of Education
In This Chapter
- The staggering cost of student loans
- Not all student loans are the same
- Getting a handle on exactly how much you owe
- Paying off your loans without sacrificing your future
- Weighing the costs and benefits of more education
You’ve probably heard the grim statistics regarding student debt: a recent study by NerdWallet found that the average for each household carrying student debt is $47,712, and collectively, Americans owe $1.2 trillion in student loans. The only thing we owe more money on than student debt as a nation are our mortgages. Of all that money, 70 percent of it is owed to the federal government.
Student loan debt has increased tremendously in the past decade as the cost of education has risen 6 percent higher than the rate of inflation.
Having to repay this debt has all kinds of implications for millennials. It can delay when you start saving for retirement and hamper your ability to save money for a down payment on a home. You might not start investing as soon as you would have otherwise because of student loan repayments, or you might not be able to start a college fund for your own children if you have them.
Student debt is a problem, there’s no two ways about it. However, you can maximize your ability to pay it off and take control of your finances. We look at some of those strategies in this chapter and also examine the cost and value of furthering your education.
Types of Student Loans
Generally, there are two types of student loans: federal and nonfederal. Nonfederal loans are often called private loans. Both types are used to pay for educational expenses, but there are differences. Federal loans are issued through the U.S. Department of Education (DOE), while private loans are issued by banks or other lenders. Private loans may or may not be backed by the federal government.
Pocket Change
According to the Institute for College Access and Success, 7 in 10 seniors who graduated from public and nonprofit colleges in 2014 had student loan debt, with an average of $28,950 per borrower.
Lending used to be more evenly split between private and federal sources, but private loans became less accessible during the recession and, therefore, the federal government began to play a bigger role. Federal loans have some protections that private loans probably would not provide, such as subsidized interest payments until the student graduates in some cases. Usually, the private loans require a cosigner or parents must sign directly for the loan.
Other advantages of federal loans, according to the U.S. Consumer Financial Protection Bureau, include the following:
- The interest rate is usually a fixed rate, whereas most private loans come with a variable rate that can rise and increase the amount of money you owe.
- You can limit the amount of money you repay every month based on your income.
- Loan forgiveness after 10 years might be an option for students who pursue a career in public service.
- Options for delaying payments may be available.
- The loan is forgiven if the borrower dies.
- The loan may be forgiven if the borrower becomes permanently disabled.
Private lenders probably will not offer flexible terms for repayment or the borrower protections you can get on federal loans. And private loans may still be harder to get than federal.
If you’re thinking about borrowing money for higher education, shop around carefully and understand all the conditions of your loan—both while you’re in school and after you graduate.
Money Pit
Uncle Sam might be willing to work with you on repayment of student loans, but defaulting is something the government takes seriously. If you don’t repay your loans, your wages can be garnished or the money you owe can be taken from your tax refund.
Determining How Much You Owe
Take some time to calculate exactly how much you owe and what the interest rate is on your debt. Look at all your debt at this point, not just your student loans. If you have credit card debt with 19 percent interest, it doesn’t make sense to double up on your student loan payments that carry 6 or 7 percent interest.
You can check how much you owe on federal loans on the DOE’s National Student Loan Data System (NSLDS). This site can be invaluable for both obtaining student loans and helping you when it comes time to repay them, as it provides information gathered from schools, loan programs, guaranty agencies, and other sources. You’ll need to create a profile and an ID to access the site. Once you’ve done so, you can check the original amount and remaining balance of your loan, your payment status, the business that services your loans, and the interest rate you’ll pay.
If you have privately issued loans, you might have to work a little harder to figure out exactly how much they are. You might discover that the financial institution that originally gave you the loan has sold or “transferred” it to another institution or secondary market, making it challenging for you to access your information.
In 1971–1972, the average cost of tuition and fees at a private, nonprofit, 4-year university was $1,832 in current dollars, according to the College Board. In 2015–2016, the cost was $31,231. At public 4-year schools, tuition and fees cost about $9,139 for the 2015–2016 school year, compared to less than $500 in current dollars in 1971–1972.
If you learn that your loan is being handled by an entity other than your original lender, contact the original lender and ask how you can access information about your loan. You also could check your credit report.
In addition to knowing how much you owe, pay attention to the terms of payment. Know when your grace period ends (if you have one), when you need to start making payments, and how much you’ll need to pay in principle and interest. When you have that information in hand, you can figure out how you’ll work the payments into your budget.
Paying Off Your Student Loans
If you’ve landed a job and are making enough money to easily handle your student loan payments, you’re in good shape. If you are not working or have a low-paying job, things will be a little more difficult.
Let’s say you fall into the former category and are earning enough money to comfortably make loan payments. If you have both federal and private loans, it’s advisable to pay back the private loans first because they’re likely to have variable interest rates, which will increase. Ask your lender if you can get reduced interest rates if you make automatic payments each month. Some lenders will slightly reduce your rate.
If you can, pay more than the minimum due, too. The sooner you pay back your loans, the less interest you’ll pay overall.
If you’re having trouble making your payments, it’s imperative that you talk to your lender and see if any accommodations can be made. Most private lenders won’t let you defer payments, but you might be able to negotiate a lower monthly rate.
You also could look into student loan refinancing, which enables you to consolidate your student loans and hopefully reduce your interest rate. To qualify for refinancing, you’ll need to be employed, have a good credit score, and not have excessive debt in addition to your student loans.
Here are some reputable lenders that offer college loan refinancing:
- SoFi (sofi.com)
- Darien Rowayton Bank (DRB; drbank.com)
- LendKey (lendkey.com; uses community lenders to fund its loans)
- Citizens Bank (citizensbank.com)
- Common Bond (commonbond.co)
Be sure to compare the terms carefully before you apply.
If you have federal loans and are having trouble paying, the DOE offers several options to help you. You can change the date your payment is due each month so you get your paycheck before you have to pay your loan. Or you could apply for a Direct Consolidation Loan that lets you combine all your federal student loans into one payment.
If you’re not earning much money, you can request to have an income-driven repayment plan, which determines how much you have to pay based on how much you’re earning. The Revised Pay As You Earn (REPAYE) Plan was launched in December 2015 to make it easier for people to repay their loans. You can link to applications for Direct Consolidation Loans and the REPAY Plan at studentloans.gov/myDirectLoan/whatYouNeed.action?page=ibr.
Money Pit
Having your monthly payment based on your income can lower how much you owe, but be sure the amount you’re paying covers both the principal and interest. If you’re not, the balance of your loan will continue to grow and you’ll end up paying more in the long term.
If it becomes necessary, you may be able to get a deferment or forbearance on your federal student loan payments that would let you temporarily stop making payments or lower the amount you have to pay. Learn more about that at studentaid.ed.gov/sa/repay-loans/deferment-forbearance.
Whatever you do, don’t simply stop paying your loans if money gets tight. That will damage your credit and cause problems that can seriously affect your financial future.
If repaying your college loans is putting too big a dent in your wallet, consider finding additional work to earn extra money. You might be able to get a side job babysitting, tutoring, bartending, waiting tables, cleaning houses, assisting with events, or offering private lessons.
Does a Graduate Degree Makes Sense for You?
Some careers demand that you have more than an undergraduate degree. Many jobs in the medical and business fields require Master’s degrees, with more moving in that direction. Earning a Master’s in addition to a Bachelor’s degree can make the difference between working as an assistant or a director. The problem, of course, is that although valuable, advanced degrees are expensive.
The fastest way to get a degree is to go back to school full-time. However, most people can’t afford to do that. School has to be something that’s done in addition to and around the schedule of your work and other responsibilities.
Colleges and universities eager to fill their graduate schools have gone to great lengths to make their graduate programs appealing to working men and women. Classes are often scheduled online, at night, and on weekends, catering to those with 9-to-5 commitments.
Spend some time comparing graduate programs before committing to one, and don’t assume the school where you did your undergraduate work will have the best program for your postgraduate work. Find out if work-study programs are available to offset costs, and always ask if any scholarship money is available. Higher education is a competitive business, and schools often are willing to help out students to get them enrolled.
Dollars and Sense
Try to tailor your advanced degree to a particular career opportunity, if you can. For example, if you have a psychology degree and you’re interested in working with industry, look for something such as a Master’s program in industrial and organizational psychology.
Enrolling in graduate school and incurring debt, or additional debt, doesn’t always make sense. Some jobs, such as customer service, public relations, communications, sales, and business development don’t require advanced degrees, and you may not realize financial returns that justify the cost of earning a degree. Before enrolling in a graduate program, talk to someone at your work who is in a higher position than you about their education. You might be able to advance in your career without a Master’s degree by obtaining certifications specific to your line of work, such as a Certified Financial Planner (CFP) for financial planners.
If, however, you’re going to need an advanced degree to get ahead in your career, you might as well get it as early as possible to increase your chances of moving up earlier and earning more money before you retire. Overall, people with Master’s degrees can expect to earn $400,000 more than those with Bachelor’s degrees over the course of their careers. Earnings are even more for those who earn doctorates or professional degrees, such as law or medical.
Working in a job you love and find rewarding is priceless, and only you can decide what career is going to make you happy. The simple fact is that even with a Master’s degree, some jobs are more financially rewarding than others.
Before you head back to school for a Master’s degree, consider whether it will pay off for you. Monster.com ranked the five best-paying Master’s degrees and the five worst-paying:
Best-paying Master’s degrees:
- Master’s in electrical engineering
- Master’s in finance
- Master’s in chemical engineering
- Master’s in economics
- Master’s in physics
Worst-paying Master’s degrees:
- Master’s in counseling
- Master’s in social work
- Master’s in music
- Master’s in library and information science
- Master’s in education
Pocket Change
Jobs requiring a Master’s degree will grow the fastest over the next several years, according to the Bureau of Labor Statistics. Jobs requiring only a high school degree will have the slowest growth.
- High amounts of student debt have negative implications for millennials, but you can learn to manage your loans and pay them off.
- Be sure you know whether you have federal or private loans, or both, and take a close look at their terms of repayment.
- It’s essential that you understand exactly how much you owe and the interest rates on your loans. Pay off the loans with higher interest rates first.
- Paying off your student loans enables you to start using your money for retirement savings.
- Earning a graduate degree can increase your lifetime earnings but isn’t necessary for every job.