A Guide to Managing Student Debt
For many students, attaining a college degree is close to impossible without some form of borrowing. Student loans are nothing short of huge business in the United States, as aggregate outstanding student loan debt checks in at $1.41 trillion as of October 2019, with out-of-state tuition and fees averaging $26,290 per year for a four-year public university and $35,830 per year at a private college.
In 2018, the average student loan balance per borrower hit a record high of $35,359, as 54% of all college students borrowed to cover some portion of educational costs. Although the approximate 44 million student loan borrowers working toward degrees are hoping that enhanced marketability upon graduation will lead to improved earnings power, the typical student borrower will begin professional life with approximately $350 in regular, recurring payments due each and every month on student loan debt.
So, how should students prepare for student debt and the challenges associated with paying it back upon graduation? Let’s take a closer look.
It’s really incredible that many people will deliberate over how much money to spend on groceries, clothing, or in which restaurant to have dinner – but when it comes to an incredibly big-ticket item such as higher education, cost may not receive its due consideration.
Fact is, education is an internally driven endeavor – much of the coursework included within an undergraduate (and sometimes graduate) education is actually available for free on the internet – yet a relative very few take advantage.
Instead, the traditional method of spending a small fortune on attaining a formalized higher education remains the common choice, and therefore it is important to weigh all costs associated with it – tuition, books, housing arrangements, meal plans, and all other living expenses. Weigh your options at various schools including large universities within cities and smaller colleges closer to home.
Get granular on the numbers so that you can really get a sense of just how much everything will cost while at school, and then look into whether it can make sense to accumulate any transferable credits at local community colleges that can be applied toward your degree, saving you money in the process.
Types of Student Loans
There are two major types of student loans – Federal and private. Though there is a common mistaken belief that these two categories of student loans are similar in nature, in actuality, they frequently differ widely in interest rates and terms.
Issued by the Federal government, Federal loans are often granted even to borrowers with lower credit scores and usually come with fixed interest rates that are lower than those associated with private loans. Additionally, Federal loans are frequently subsidized – that is, the borrower can defer interest expense – both during school and for a period of time following graduation.
Private loans are usually issued by banks and credit unions and often require higher credit scores and/or a co-signer and frequently carry higher interest rates than those associated with federal loans.
In addition, private student loans are never subsidized – the borrower is always responsible for interest expense, both during school and following graduation.Over 20% of all students engage in some form of private student loan borrowing each year, with the national average checking in at $13,600 per student.
Apply for Financial Aid
Visit the Department of Education website to take the first step toward applying for financial aid and scholarships. Students seeking financial assistance must complete the FAFSA (Free Application for Federal Student Aid) form, which is utilized to apply for most types of federal, state and school funded programs.
The U.S. Department of Education has established guidelines for eligibility including but not limited to an applicant’s income level, family income and expense levels, and the number of siblings attending school concurrently. As would also be expected, a borrower’s credit profile and credit score are factors in determining eligibility, with many students requiring a co-signer to secure funds.
Additionally, it is important to speak with the financial aid office of the school you will be attending (or those you are considering) to gather further information related to the most appropriate student loan resources that are available to you.
Like all loans, student loans must be paid back in a timely manner to ensure the development of a strong credit score and profile. This is particularly important for a young person starting out, but unfortunately, the current student loan delinquency rate (debtors whose payments are at least ninety days late) remains at 11%, where it has stood for the past two years.
This can be attributed in part to the relative young age (and somewhat underdeveloped sense of responsibility) of student loan borrowers in general. Therefore, the first step toward responsible repayment is to develop a full understanding of the exact types of student loan debt that you have by ordering a free credit report to familiarize yourself with the details of each loan and lender before investigating the possibility of income-based repayment plans based upon your current income level.
Federal loans come with a six-month grace period during which you do not have to make payments following leaving school, and this is the ideal time to form your repayment game plan, which can also include making payments during the grace period.
Regardless, investigate your repayment options, and if you are unable to begin making payments on Federal loans, you can apply for temporary deferment (interest expense will not accrue) or forbearance (interest expense does accrue).
You can also investigate student loan consolidation as a means of simplifying the repayment process while possibly altering your required minimum monthly payment amount. These are all important options to consider, and in addition, it is vital to have a clear, written, realistic monthly budget that delineates all cash inflows and individual expenses that illuminates how much you can afford to pay back on your student loans each month.
It very well may prove necessary to prepare yourself for the possibility of continuing to live a frugal “student-like” lifestyle for an extended period of time while you adhere to a realistic budget and cultivate an understanding of the student loan repayment process. The good news, however, is that with improved earnings power and a disciplined approach toward repayment, you can successfully manage your student debt.
About The Author: Steven Brachman
Steven Brachman is the lead content provider for UnitedSettlement.com. A graduate of the University of Michigan with a B.A. in Economics, Steven spent several years as a registered representative in the securities industry before moving on to equity research and trading. He is also an experienced test-prep professional and admissions consultant to aspiring graduate business school students. In his spare time, Steven enjoys writing, reading, travel, music and fantasy sports.
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