Paying for college: how to make an informed financial decisions about paying for college.

Food for thought:

“For-profit higher education is today a booming industry, feeding on the student loans handed out to the desperate.” -Thomas Frank,an American political analyst, historian, journalist and columnist for Harper’s Magazine. 

I have student loans, you have student loans, the guy sitting next to you has student loans, even your boss is still paying off student loans. It is particularly unheard of in this day and age to meet a student who does not have student loans.Student debt is on the rise in the United States. It should be no surprise that the student lending market has grown to more than $1 trillion in outstanding debt and gives context to consumers considering taking on student loans, according to the Consumer Financial Protection Bureau (CFPB). That’s more than Americans owe on their credit cards or their cars. Education is a major part of the American dream and many students in this country depend on student loans to finance their education.

“In the past twenty years college enrollment has jumped from 13.8 million students to 21 million students. But tough economic times and rising costs have meant that more students than ever before are taking out loans to cover the cost of college.” CFPB.

So let’s take a minute and think about this:

Student debt in the United States is made up mostly of student loans. The balance of federal loan debt is over $850 billion, while private lending makes up around $150 billion. In 2010, the average borrower at a private, non-profit school graduated with $28,100 in debt. Even for those going to public schools, those borrowers graduated with $22,000 in loans.

What does that mean?

It is pretty simple. The cost of college has grown faster than inflation. More people are borrowing, and they are borrowing more. In the past ten years the cost of attendance at public colleges and universities is up 42 percent. For private not-for-profit, it’s up 31 percent, according to the CFPB. What this means is that these costs are trickling down to students, you and I, and many more.

What to do?

I strongly recommend that when pursuing a degree, you need to make informed and realistic decisions so you are not overwhelmed with debt in the end (I do not want to catch you on Anderson Cooper 360 losing your mind).

Choosing a loan that’s right for you:

According to the CFPB, “if you’re considering student loans to help you pay for school, you’re not alone – many students need loans to cover their full cost of attendance. In 2010, 67% of bachelor’s degree recipients used loans to pay for their education. But the more money you borrow now, the higher your monthly loan payments will be after you graduate.”

If you have to take out student loans, you essentially have two choices: federal student loans and private loans.

Federal Student Loans:

For most borrowers, federal student loans are the best option. When you start to pay back your federal loans, the interest rate will be fixed, which will help you predict your payments after graduation. And in some cases, the federal government will pay the interest on your loans while you are in school – these loans are called subsidized loans.

Private Student Loans:

Other student loans are generally private student loans. The most common private student loans are offered by banks. Their interest rates are often variable, which means your interest rates and payments could go up over time. Private loans can also be more expensive – rates have been as high as 16% over the past couple of years. And when it is time to repay, private loans don’t offer as many options to reduce or postpone payments.

For most people, federal student loans are a better deal than private student loans, so you’ll want to take advantage of federal options first.

Take Away: 

Poor understanding and misinformation of student loans and how to use them effectively has landed many new graduates in dire financial situations. Before signing the dotted line for education debt, keep your mind effective, informed, and most of all, realistic.

Join me next week to discuss paying off these loans, of course! 🙂

Happy Lending!

-Misam

 

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