Thirteen years ago, times were much more simple. Donald Trump had just landed his first reality tv gig with The Apprentice (his second being his presidential campaign, ’cause did you see the most recent Presidential debate?) America was still united in the aftermath of 9/11. I had just started the eleventh grade. I lived with my parents who paid for my food and the roof over my head. Why didn’t I understand how sweet life was at this age? Meanwhile Danny was just getting settled into his college dorm as a freshmen, the remnants of the blonde tips in his hair and a puka shell necklace tucked safely away in his desk drawer.
Like I said, times were simple. We had no idea where we would be just a quick decade later, happily married, but drowning in nearly $600k in student loan debt. When it comes to student loans, there are many things we wish we understood as we started down our paths that led us not only to each other (we met in college) but to becoming a dentist (Danny) and a lawyer (Amber). As such, it has behooved us to compile a list of things that you should know about student loans, especially before you actually take them out and start accruing interest on them.
Here are some things we just flat out did not understand before our journey commenced.
1) How will I pay for school?
Ideally this is a question that should be answered long before one embarks on the trip that is higher education. But it can be reviewed and you can carefully reconstruct your situation for the better while you are still in school, and even afterwards, if you took out student loans.
- Get lucky and have someone else pay for it.
Obviously, this will be entirely out of your control unless you’ve got the gumption to ask for it and a relationship with someone who has the means. There are a fortunate set of people whose parents or relatives were able to save enough so that their kids could go to college. Danny was one of these lucky ones during his undergraduate years. It really is a huge help if you have someone financing your education. Be grateful and be gracious. If you are a lucky soul who has parents or a person close to you that has offered to pay for school, take them up on it! Do, however, understand that nothing in life is free. What I mean is, they might feel entitled to inquire about your classes, major, grades and anything else tangentially related to school. They are likely right in doing so, after all, you are their investment and they want to make sure they are getting their money’s worth.
- Get a job AND create a plan so that you can pay for it.
Work before you start college, during college, and during summers in between semesters. We both started working in high school, after school and in the summers. While working is good, we both went wrong by not setting a budget or otherwise creating a plan to save for school. I think we both vaguely thought we were working so that we could save for higher education. Neither of us had a real plan about how much money we should be saving per month so that we could actually accomplish that goal. I have always loved saving money, and I did a pretty good job given that I had no plan or budget. But I also exercised almost no restraint in using my hard earned dollars, mostly on entertainment and new clothes. I was proud of myself for being so young (14) and being able to pay for things myself. I should have created a plan to target how I was going to pay for school. I probably could have budgeted enough to use for both entertainment and college savings, because I had time on my side then.
If you have already gone through school, all is not lost. Sit down and set some goals. Do you want to pay your loans off quickly? Do you want to save for retirement? Do you want to invest in real estate? Create a plan so that your money is targeted. Our good ole’ boy Dave Ramsey said it best in The Total Money Makeover, control your money or it will control you!
- Earn a scholarship.
The best thing you can do with your time in school is focus on your academics and/or a sport or talent that will earn you a scholarship. If I had chosen to apply myself harder at school instead of focusing on my job, there is a good chance I could have qualified for a scholarship. I could have worked in the summers for extra money, but while I was in school, I should have focused on school. I wish I’d had someone explain that to me at the time because I flat out just did not think of it that way then.
- Search for grants.
This is another very underutilized mechanism to pay for school. Find out if you qualify for a grant, like a a pell grant. USA Today reported that a whopping $2.9 billion of federal grant money was unclaimed last year. Insane. Grant money is money that you don’t ever have to pay back. It is free money. Free money is good. The U.S. federal government offers:
- Federal Pell Grants
- Federal Supplemental Educational Opportunity Grants (FSEOG)
- Teacher Education Assistance for College and Higher Education (TEACH) Grants
- Iraq and Afghanistan Service Grants
There are also hundreds of other grants you can find online, starting with websites like www.collegescholarships.com which lists more than 100 kinds of grants. Look into it, its well worth your time.
- Take out student loans.
If all else fails, you can always take out student loans. The best way to do it is to take out all the federal loans that you can first, and then if you still need more, take out private loans. Federal loans provide more options and protections than private loans. For example, you may qualify for subsidized federal loans, meaning the federal government will not start charging interest on your loans until six months after you graduate (aka your “grace period”). Private loans generally start charging interest as soon as you receive the loan. You may notice that some private loan companies will actually charge less interest than a federal loan. That is understandably appealing. The best approach would be to take out federal student loans, and then after you have secured a job and understand where your finances are when you are done with school, you can refinance your student loans with a private company (like SoFi or CommonBond— p.s. earn $100-$200 towards your loans using either link).
This begs the next question,
2) There are a million different kinds of student loans. How do I know which ones are best for me?
There really aren’t a million different kinds of loans, even though it feels that way. People call the same loans a million different things and that makes it confusing. There are two kinds– federal student loans and private student loans. Federal loans are divided into direct subsidized loans, direct unsubsidized loans, plus loans, and Perkins loans. Private loans are simply private loans.
Direct subsidized loans: are available for undergraduate students who have demonstrated financial need. They usually have a low interest rate (less than 5%) and you are usually not charged interest until the end of your “grace period” (6 months after you end school). The United States Department of Education is your lender, and they usually contract out your loan to a private company, who will service the loan for you (but all of the terms of your loan remain the same, and its still considered a federal loan after this happens).
Direct unsubsidized loans: are available for BOTH undergraduate and graduate students. The two biggest differences between subsidized and unsubsidized loans is that 1) interest begins accruing as soon as the loan is dispersed to you, and 2) graduate students are typically charged a higher interest rate. You do not have to demonstrate a financial need to qualify for this kind of loan. (That makes sense because you are not receiving an interest subsidy– the loans are unsubsidized). The best thing you can do for yourself is try to pay this interest while you are still in school. I did not understand compound interest while we were in school. You can read all about compound interest here. Basically, the idea is that as your interest accrues, and you do not pay it, that sum is added to the principal amount of the loan you took out. Rinse and repeat a million times until all of the sudden your loans have ballooned into a colossal amount that you never thought possible. More on this later.
Direct Plus loans: these can be called “grad plus” or “parent” loans. If you are a graduate student, you do not need a parent, and your loan is considered a grad plus loan. If you are an undergraduate student seeking a parent loan, your parent will have to cosign in order for you to qualify and he or she must not have an adverse credit history. If you are seeking a grad plus loan, you must not have an adverse credit history.
Interest on a plus loan will be the highest you can pay among the federal student loan options, so it is definitely a loan to take out only if you are maxed out and do not have any more direct federal loan options.
Federal Perkins loans: a Perkins loan is a federal loan that has a 5% fixed interest rate. It is offered to students who demonstrate exceptional financial need. The school you attend is the lender of this loan, instead of the U.S. Department of Education. Only about 1800 schools participate in this kind of loan.
Private loan: a private loan will be issued by a private lender, such as Wellsfargo, SoFi, CommonBond, etc etc. Generally, interest on these loans begins accruing as soon as the loan is dispersed. Some companies will allow you a deferment period (though interest is usually still accruing) if you fall on hard times. Obviously, you lose a lot of the protections and options that you have under the federal loans (like income based repayment, for example). Most often, these loans offer competitive interest rates.
But what about…
Sallie Mae: the simple version is this– a Sallie Mae loan is just a kind of private loan. That is really all you need to know, even if you end up taking one out.
Is Sallie Mae different than Fannie Mae? Are they friends? Actually.. they kind of are friends! We won’t get into it. Fannie Mae has to do with mortgages so don’t worry about that for now.
3) But what loans should I take out first?
If you are an undergraduate student, take out everything you can using direct subsidized loans. (P.S. Did you know federal loan interest rates are currently at historic lows? According to time.com anyway. So take advantage of that!)
Then if you still need more money, take out direct unsubsidized loans. If you still need more, take out direct PLUS loans. If you are still in a jam, you can take out private loans in addition to those. Do your best not to take out more than you need, interest is awful (and beautiful. Awful if she is working against you and beautiful if she is working for you.)
4) So…how do student loans work, generally?
First, to apply for federal student loans you must fill out a FAFSA. After you fill out a FAFSA, your school will notify you of the loans you qualify for, and will offer you a breakdown of those loans. You will choose which loans you want to accept. You will also specify how much of each loan you want to accept. You do NOT have to accept the full amounts of the loans offered to you. You should only accept whatever amount you need. (Create and stick to a budget– that is how you will know what you need!) You will be required to participate in entrance and exit interviews when you accept student loans. Overall, its frighteningly easy to get student loans.
5) How does student loan interest work?
Interest is the price you pay in order to borrow money. Interest is a beautiful thing, if you are on the right side of it. Obviously, if you are taking out student loans, you are not on the right side of it. But, aspire to be on the other side of the interest equation some day.
For federal student loans Congress sets an arbitrary (in my opinion) number that becomes your interest rate on student loans each year. (Ok, they look at the financial market and set the interest rate according to that. I am trying to be less snarky, and am withholding a snarky remark here, since our interest rate is 7.9% on some of our loans and I am bitter). This is compound interest, meaning, the interest is compounded onto the principal of your loan. Interest accrues daily.
So, lets break that down for my fellow non-mathematics majors. Say you take out a $30,000 unsubsidized federal loan with an interest rate of 5%. That 5% interest will be divided by the days of the year (365). Then multiplied by the amount of the loan ($30,000) to come up with your daily interest rate.
So, 5%/365 = 0.0001369 x $30,000 = $4.10(ish) in interest per day. (and seriously, please, if you are good at math, double check me and make sure I did it right)
Like I said, interest is an awfully beautiful thing, depending on which side of it you are on. Here it is just awful.
Studentloanhero.com also has a pretty good breakdown of this HERE.
6) When does interest begin to accrue?
If you have federal loans that are direct subsidized loans, interest does not begin accruing until six months after you graduate. If you have unsubsidized federal loans, or student loans with a private lender, interest begins accruing as soon as your loan is dispersed.
Be aware of capitalization. Interest accruing now means that in the end you are going to be paying more than what you took out over the life of your loan. This is one reason some people like to pay off their loans as quickly as possible, and also the reason that people often recommend making payments on your loans while you are still in school. It makes the interest gods happy, and your life after graduation happier.
7) What is the best approach to start making payments on my student loans?
There are a million different strategies you could use to manage your student loans. It depends on a lot of factors, such as, how big your loans are (are they 6+ figures?), what your income is, what your projected income is, whether you have a job now, whether you are working in public service, the list goes on. We will dedicate a post of its own to several different strategies you might consider.
They’ll teach you a lot of things in school, but they won’t really teach you about your student loans– that part is up to you! Luckily, you have this free community here at Red Two Green where we can all share the scoop with each other.
What things do you wish you had known about student loans before you started school?
Do you know someone starting college or graduate school? Share deeplyindebt.com with them!
Hi there! I’m Amber! And welcome to the Deeply in Debt blog where we’re offering simple solutions for big debt.
It is a lot better to understand this up front because there are so many more options than later – this is a great overview of all the options.
One thing I would have done differently is not approach the no interest accruing period as a time to not make payments. That is a great time to get ahead.
So true Brian. Its valuable (literally) time that you can never get back.
It’s pretty surprising to me how little people understand interest. And I’m one of those people who is guilty of that!
When I graduated law school, I had a ton of interest that had accrued during those three years, and never even realized it. Then the interest capitalized when it went into repayment (i.e. unpaid interest gets added to the principal balance).
I recently looked at how I paid off my student loans and was surprised to see that I had paid $102k on $87k I had borrowed. Definitely a wise decision to understand how interest works.
Ah yes, I was definitely in a similar boat coming out of law school! I couldn’t believe how much interest had accrued and I definitely understood nothing about capitalization. Why do you think so few people understand interest when it comes to their student loans? Should colleges be better educating borrowers? Should the govt? Or is that a duty that we should just take upon ourselves?
My loans had 10k-15k in interest added during my 4 years of undergrad. Nearly 15% of my total loan balance at graduation was capitalized interest! Freaking crazy.
Also, I looked yesterday we will have paid an additional 70k in interest (not counting what was capitalized at min 20k between us) on our 240k debt by the time we finish paying them. Sickening isn’t it? Truth be told I thought it was higher.
Considering I worked 2-3 jobs every summer and PT during the school year I really wish I had made payments in school. I didn’t realize interest was accumulating. I also didn’t realize how many loans I had. I feel dumb to say I had 10-15k in the bank and bought car in cash while in school meanwhile my loans were going up at 8-9%…
I went into my student loans with my eyes wide open. The financial aid office at the community college I attended made sure to sit down with each new student and explain in great detail how the Financial Aid program, especially student loans worked. What I wished I would have known was the lack of income potential in the field. If I had known that I would have gotten a personal training certificate instead of getting my degrees so I could have started working in my field earlier.
That is a great thing your community college is doing! And I had the same problem– I wish someone had just taken me by the shoulders and said Hey! The only thing you can do with a Sociology degree is go to graduate school! (or do any job that I could have done without a college degree). I just wasn’t thinking that way at the time. I think when I started college most people generally were giving the advice that any degree is better than none, and that is just not true unfortunately.
Student loan debt is pretty scary these days and the way things are headed with higher tuition costs every year it diminishes the value of any degree that’s offered. The stress associated with college debt after graduation is simply not worth it. It’s one reason I did not open a 5229 for my child when he was born. I simply started a dividend growth portfolio in a regular taxable custodial account. This way the investments can grow over two decades and be used any which way without any strings attached like a 529 for college. I just don’t see the value in it anymore.
Student loan debt is crazy scary. I think if you know what you are getting into and if you choose a major that teaches you actual skills and that will actually lead to a job, then its worth the investment. The problem with most of us is that we were kind of taught to just go to school, without giving it real thought of how it would translate in the real world. If your degree is not leading you to a job, then what is the point? Its definitely harder to justify the cost otherwise.