You have just graduated from college and the world is waiting for you! You are so excited about your future, and you are ready to put your newly acquired skills to use in the job of your dreams. You are not picky about your upcoming profession, and you don’t mind starting at the bottom. You know you are going to do great things!
However, weeks go by, and you have yet to land an interview in your chosen field. You have already received mail regarding your student loan: now that you have graduated, your loan payments are beginning to be due. Since you don’t have a job and your first payment is due before you will begin receiving a paycheck, you call your loan servicer. The kind person on the other end of the line tells you not to worry – they can put your loan into forbearance until you get a job.
When you graduated, you weren’t thinking about your student loan, since you figured you would easily land a job and be able to start paying. Now your student loan is beginning to be a worry that is always in the back of your mind.
Six months after graduating, you finally accept a part-time minimum wage job, since you can’t find anything in your field. You know you need to start paying on your student loan, so you call your loan servicer, and they suggest and income-based repayment plan. Since accounting and math were not your strong subjects, you accept that the loan servicer is working with your best interest in mind – and they are! They are working to milk the best interest out of you – the most interest they can possibly get out of you. If you had known that you could be paying on your student loan for 25+ years after graduating and end up paying $20,000-$40,000 more than you borrowed in interest, would you have made different choices about college?
Here are some of the most common ways that student loan servicers take advantage of naïve college students:
1. Forbearance. You don’t need to make any payments as long as your loan is in forbearance – but interest still accrues. This means that every month that you do not make a payment, you owe more than you did the month before.
2. Income-based repayment plan. If you have a low-paying job, your payments can be lower than your interest – which means that your total amount owed will continue to grow. Or you might pay only a small amount on your principle, which means your payments will stretch out as long as possible, in order for the loan servicer to receive as much interest as they can from you, for many years to come.
This can also be a problem if you get a raise or higher paying job: you have become comfortable paying a specific amount every month on your student loan, so you don’t want to add your additional income to your payments. Really, what’s the advantage of getting a raise if you just have to put it all on your loan payments?
3. Interest-only payments. Your principle will never go down as long as you pay only the interest. Ten or twenty years after you graduate, you will still owe as much as you owed the day you graduated.
4. Interest on most student loans is compounded daily. What does this mean? It means that every day that you do not make a payment, your interest grows. When you sign up with the loan servicer for them to automatically take out your payment from your bank account, they will wait until the last day in your payment cycle, in order to get the most interest, and they will do it at the end of the day. This way, your payment is received on time, but they process it the next day (accruing another day of interest) and if the payment date falls on a Friday, they service it on Monday, so they get the interest from Saturday and Sunday, too.
If you are stuck with a student loan, make the payment yourself (instead of having them take it out automatically), as early as you can in the month. You will save days of interest every month. Also, pay more than the minimum amount! This is the only way you will be able to pay it off before you are in your mid-40s. Loan servicers are happy to have you make the lowest possible payments because this will give them the most possible interest.
If you are not yet in college, what can you do to avoid the horrors of student loans?
1. Parents, begin a college savings account for your child as soon as possible after birth. Most states have several options for college savings. This can also help you prevent the need to take out a parent loan, which can have many of the same horrible consequences as student loans – and with a higher interest rate to go with it.
2. Students, start saving for college when you are in grade school. Having a college savings account will not affect your eligibility for student financial aid such as grants and scholarships, which do not need to be paid back. Work summers and save your earnings.
3. Educate yourself about financial literacy, especially savings vs. credit and debt. Don’t use the convenient excuse, “I’m not good at math,” because this is not math. It is plain and simple arithmetic. You have a calculator in your phone, and you can easily look up a loan calculator online, but in the numbers, and see how much you will pay for a loan over time, and how long you will be paying. Learn about what this means, and it will save you hours of worry in the future when you make the right decisions about your money.
4. Take AP or other college-credit classes while in high school. This will reduce the number of credits you have to pay for in college, reducing your cost of college.
5. Look at the cost of college. Consider starting your first two years at community college, which is generally much less expensive than universities and state and private colleges.
6. Search for private grants and scholarships through churches, community groups, fraternal organizations, and businesses.
I have heard too many stories of student loan horrors, and I do not want another person to suffer these horrors by getting trapped unknowingly by these tricky methods used by student loan servicers.
Horror stories from several students who got trapped:
“I graduated 12-1/2 years ago, and it took several years for me to get a job where I could afford to make any payments on my student loans. My loans were in forbearance all that time, and I didn’t realize how much interest was being added. When I finally did get a job, they put me on an income-based repayment plan, which, at first, put 90% of the payment on interest and 10% on the principle. I just ran a loan calculator and realized, at this rate, I will finally pay off my loan when I am 47 years old, 25 years after I graduated.” – Student A
“I graduated in 2007 and had a hard time finding a job, but when I did, I was assured that my student loans would be paid off, since it is a public service job. In 2017, I applied for loan forgiveness and discovered two shocking things: One, my student loan balance was the same as it was when I graduated (so I was paying only the interest); and, two, due to a clerical error in 2007, my loan was not eligible for forgiveness. Today I still owe almost as much as I did the day I graduated from college.” – Student B
“After I graduated eleven years ago, I was not able to find a job in my field for five years. In the meantime, I worked in sales, making minimum wage, so my loan was in forbearance all that time. By the time I got a job in my field and was making a decent wage, my student loan balance had nearly doubled. Today I still owe more than I did the day I graduated, even though my payments are $550 per month.” – Student C
Is this the best we can do for our next generation?