Student loan debt has surpassed total revolving credit card debt, and the momentum is only just beginning. There is now genuine concern about the sustainability of this debt, as 58.8% of students are graduating with loans and other financial obligations. With the right information, conscientious students (and parents) can owe and stress less. Here are a few ideas that will help you better manage and understand your student debt.
1. Understand Your Loans: Federal, Private, or Both?Government or federal student loans are very different from private student loans. Make sure you know what type you have (or will have) after graduating and what the interest rate is. In general, federal loans are less expensive (lower interest rates/fewer fees) and have more flexible payment terms (like deferment options). Federal loans are primarily needs-based, so sometimes you can't rely on them to cover 100% of your costs while you're studying. Some students end up with both types of loans and quickly get confused after graduating because the amounts and options vary so dramatically depending on the type. In short: It's worth the time required to investigate the financial details. At least know what type(s) of loans you will need or have and how much they are costing you in interest. Don't forget to consider tuition inflation in your projections when calculating how much you will need to borrow. The new Consumer Financial Protection Bureau is beginning to provide good online resources for students to compare schools and financial options as well.
2. 100k Salary Doesn't Mean You Can Afford 100k of DebtA few factors go into how much debt you can realistically afford after graduation. Average salaries in your field are not a good indicator because, depending on the economic climate and your experience level, you may get a lot less than what you expected. Also, remember that the highest paying salaries often mean you have to live in an expensive city like San Francisco or New York. This means you will probably spend upwards of a third of your income on your housing alone (sometimes more), another third other living expenses and, after taxes, be left with a lot less than you expected to apply to your debt. You should aim to have no more debt than you can pay off (realistically) in less than 24 months post-graduation. Of course, this may depend on whether or not you are getting an expensive professional graduate degree in law, medicine or other program. Last but not least, give yourself room for changing interest rates or emergencies.
3. Consider a Public vs. Private EducationIf you didn't get into that less expensive, competitive public school or get the academic scholarship to the private school of your dreams, consider spending a few years at community college and re-applying. You will spend less and may even be better prepared once you get to the school of your dreams. If financial success and freedom are what you're after, be sure to consider the longer-term consequence of graduating from a private school with a large amount of debt and a lower than expected salary.
If you are worried that you might not have enough money for college, consider these options:
- If you want to attend a prestigious public or private college, aim for the ones that offer extensive need-based financial aid and work-study programs, then go for it!
- If you're interested in a specific public or private school that doesn't have full need-based aid, research all possible scholarships for that particular school - some scholarships apply only to a particular college, so you might get lucky.
- If you don't get in, or don't get the kind of funding you need to avoid crippling student loan debt (more than you could pay off in a few years), then consider the community college route. Many excellent universities accept community college transfers, and you'd be following in the footsteps of very successful people (e.g. Arnold).
4. Explore ScholarshipsScholarships and monetary fellowships aren't just for valedictorians. Even once you've been accepted, there are lots of organizations willing to part with money to legitimately help students succeed. It may require an essay or interview but it's a lot better than another private loan. This is no joke, there are scholarships for tall people, bowlers, vegetarians, or probably something else you qualify for. Every last bit counts because financial aid arrangements don't last your entire academic tenure. You have to re-apply every year.
5. Start Proactively Monitoring and Paying Down What You OweIf you have no choice but to start tacking on debt, use a spreadsheet or free online software like ReadyForZero to actively track your progress even if it is only passively at first. It will be much more painful to address and reduce later. Every second counts and can help you get out of debt faster. You will be glad you did.
6. Don't Play with Plastic (or Fire)An epic spring break trip on your credit card definitely seems like a good idea after finals, but remember that students pay the highest interest rates. It's easy to charge it but very tough to pay off. One trick is to remember that every $1 you spend on your 15% APR card is actually costing you $1.15. (Depending on when you pay it off, it could be more or less.) It's easy money to spend, but it comes at a cost.
It's unfortunate that today students have to consider these real (and dangerous) financial consequences before knowing what they want to do professionally. I hope these recommendations and ideas will demystify a few of these tough decisions and better prepare you for the future.