It’s sad to see that most students don’t know how student loans work. Well, don’t worry, that’s why I’m here! Welcome kids to the wonderful journey we are about to embark on into the beautiful and majestic world of student loans…. SIKE. There is nothing beautiful or majestic about student loans; these loans suck the life of the debtors (you). Your Uncle Sam preaches that education is the key to the future of our union; however, in order to get an education, you need to give up the following items:
- Future Earnings
- Blood of your First Born
Well…maybe not the last one, but it sure seems like it. The United States is one of the most expensive countries to get an education in and also a country that doesn’t teach future students how student loans work. The average cost of a Bachelor’s degree in the United States is about $36,000 give or take, but this depends on your state, city, whether if its public or private, and whether or not you receive any sort of grants (free money). That’s if you go straight to a 4-year university. Some people choose to do their first two years at a community college, which costs about half of that, and students usually receive grants from community colleges as well.
In the picture below, we will see that are the a few ways to fund your education.
As you see in the image above, the first two ways of funding your education is without repayment and, the third is working for the university for some dollar bills. We are going to focus on the last one – the evil one we call student loans.
Hold on kids, it’s going to be a bumpy ride. There are two overall categories of student loans – private and federal student loans.
These are loans that you receive that aren’t backed by the Uncle Sam but rather the lender. These loans can be taken from banks or other intuitions. Some of the requirements for private loans are as follows:
- Be enrolled in an eligible school
- Plan to use the loan for educational expenses
- Meet credit and income criteria
- Some lenders have a citizenship rule
- A cosigner may be required
These are some requirements in order to get a private loan. If you meet all the criteria above, you should make sure to shop around and look at the different repayment requirements. Some lenders want you to pay even if you are in school or others allow you to defer until you graduate; it just depends on the lender. Some people choose this option because they have a good credit score, and they may be able to get a lower interest than if they went the federal route. Just make sure to do research into the lender and the different repayment options. Another thing to note is that you will probably be dealing with a servicer instead of the actual financial institution.
These loans are provided and backed by Uncle Sam. These loans would follow you well beyond the grave. There are four different types of loans that are available.
Direct Subsidized Loans: These loans are for undergraduate students who demonstrate financial need (difference between cost of attendance and expected family contribution). The Department of Education pays the interest on these loans:
- If enrolled at least part time in school
- For the first six months after you leave school (grace period)
- When you defer the payment due to unforeseen circumstances
Direct Unsubsidized Loans: These loans can be for undergraduate or graduate students and there is no requirement for the student to demonstrate financial need. The biggest thing to note on this loan is that the Department of Education will not pay the interest on these loans, which means you are required to pay. If you do not pay the interest during your grace period, the interest will still accrue and be added to the principal of the loan. So, if you receive this type of loan, it may be best to try to pay as much as you can while you are in school so that the interest does not keep compounding as much.
Direct PLUS Loans: These loans are federal loans that graduate or professional students can use to help pay for college or any type of career school. It is also important to note that these loans can be granted to the parent of undergraduate students if needed. The Department of Education is the lender. Additionally, a credit check will be required, so make sure that your credit score is in good order. Furthermore, the amount you receive is the total cost of attendance less any other financial aid received.
Direct Consolidation Loans: This type of loan will combine all the loans that you have received into a single loan with a single servicer. This can be helpful if you have multiple student loans and want to combine them into one fixed interest rate-based loan.
So, Mr. Nahas, will I be dealing directly with the Uncle Sam’s teacher friend? Not really little Carolyn, let me explain this part. After the funds have been dispersed, you will be assigned a loan servicer – this is a company that handles billing and other services on your student loan. If you have any questions or concerns about your loan, you would reach out to the loan servicer for answers.
Now kids, there are a few ways that you can pay off the loan. Attached below are some useful images that outline the most popular repayment plans.
Each person must figure out what the best plan is for themselves and do some math. The goal is to pay the least amount of interest as possible. Something else to remember is that the bulk of the interest will be paid in the first few years of the loan and as you go through the years, you will pay less interest and more principal. Uncle Sam doesn’t want you to know how student loans work because that means you will learn how to cut down your debt and pay less in interest.
The aggregate student loan debt in 2019 was about $1.5 trillion. Yes, you all read that correctly kids, it’s that much, and the reason it’s that much is because most of our youth don’t have an idea on how student loans work. I want to give my opinion on this matter to people who have yet to go to college. If you have a chance, try to do dual enrollment in high school if they offer it. This program allows you to go to community college during your years in high school and the county pays for it. All the tuition, books you need for the course, fees, and any other fee related to the course is paid for. Another thing you can do is go to community college for the first year and a half to two years to save some money. There is nothing wrong with this route as it provides you a cheaper alternative to go to school, which is really cool in my opinion.
A lot of kids are looking for the college experience where they live on campus and party all the time; this route comes with a hefty price, especially if you aren’t receiving grants or scholarships. If possible, you could go to your state school and still live with your parents (if possible) as this will greatly cut down on your expenses. I understand that it might not be possible to go to a school that is close enough to drive or it might not be possible to live with the old folks. To that I say, just be mindful of the money you are spending and try not to spend a lot. The last thing you want is to accrue so much debt that you must work 40 years just to pay it off. I promise you that you will thank yourself in the future if you try to minimize your student loans. The coolest thing in the world is not having student debt, just ask anyone.
To the kids who don’t have the luck of reading this before high school and already have a Mt. Everest size loan, I say pay off the loan as soon as possible. The minute you get your first adult job, try to pay off the debt as soon and as aggressive as possible. If that means living with your parents (if possible) or living with roommates to lower your expenses to do so, then I advise you to do so. A lot of people start spending the money immediately on new cars accessories, and other things that can wait. Those things can wait honestly. When I got my first adult job, I got a BMW. She was the love of my life, and the most beautiful thing I ever laid my eyes on. I like cars, so I wanted to reward myself for working hard in school and getting an adult job. In hindsight, I would not have bought the car. I would have saved the money I spent on the car and invested it in an index fund or saved up to buy real estate. In other words, I would have invested it. You see, the wealthy have nice cars, nice houses, and all the finer things in life. Do you want to know how they are able to get the finer things and still have a lot of money left over? Well, they invest and invest a lot before they think about buying the finer things in life. You must realize something; the rich don’t work for money; they have their money work for them.
I urge you all to try and be mindful of student loans and to try and minimize the expenses where you can. The point of life is to live, not to work the whole time trying to pay off debt. I hope that I gave you all a good understanding on how student loans work. I think that’s enough for one day kids!