Getting Schooled On Student Loans

A few days before leaving on my trip to Germany, we received a call at the office from a local news station wanting to do an interview regarding student loans. Since Gary was out of town, and I'm a Certified Credit Counselor, I thought it only right to step up to the plate and help out.

Prior to the interview, I asked what the interviewer might want to know in case any specific details would be needed. One of the questions was fairly simple: Why are graduates having to live paycheck to paycheck upon finishing school?

The question sounds simple enough, right? The answer, however, is a bit more complicated. 

How much can you afford

I used the example of purchasing a vehicle. Before shopping around, someone has (or should) a pretty good idea of the monthly payment they can afford. Secondly, there are many financial calculators online that allow you to plug in that monthly payment amount, interest rate, and term to discover what purchase amount will fit into your budget.

So once you have the amount of car you can afford in mind, you can begin the car shopping experience. If your budget is in the $18,000 range, obviously you wouldn't want to begin that journey at the Mercedes dealership, but something a little more conservative. 

After finding the perfect vehicle, you are provided with the exact monthly payment amount, interest rate, length of loan, and total loan repayment (principal plus interest if you pay exactly how the loan is set up) before signing on the dotted line. (Note: this total will vary slightly if the payment is received earlier or later than the date stated on the loan term.)

Know the details of the loan

Student loans work a little differently though. Each semester you'll receive a certain amount of money for a loan (based on your course plan), along with the interest rate on that particular chunk of money. Next semester that rate may be different, and so may the amount you qualify for.

This goes on for as many years until you have completed your studies. That's when the shock sets in... You see, the money you qualified for may have been a little more than your actual tuition was. This is because they allow for things such as books, school supplies, etc. While you were happy to receive the extra cash while you were a poor college student (for food, a new computer, spring break, etc), as a graduate you are responsible for paying it ALL back, plus some. 

Calculations can be difficult

While you may have had a pretty good idea about the total amount of the loan, you may not have realized what that monthly payment would end up being. Why? You wouldn't really know until the repayment period starts. It's difficult to calculate because the interest rates are probably much different on each of the amounts of the loan you received.

What's even more troublesome is the idea that a college graduate thinks they will miraculously be offered some amazing six figure job upon graduating. It's quite a rude awakening for most when they discover they have to start at the bottom and work their way up.

So how can we help students understand the process a little better when it's such a confusing concept for us? Well, we can start by explaining the basics of student loans...

Understanding the basics

Are they applying for a subsidized or unsubsidized loan? Is it a federal loan or private? Have they looked into grants and scholarships? These things all make a huge difference in the amount they may be strapped with at the end of their education.

We can also emphasize the importance of only taking the "needed" amount versus the provided amount. While it's super tempting to "pocket" the extra money for a new computer, or a spring break vacation, that extra amount may cost a lot more in the long run.

Getting help

Still wanting to help out more? There may be some additional light at the end of that dim student loan tunnel. There are student loan relief and forgiveness programs out there for nurses, public servant workers, and teachers. Most have requirements you must meet, but it's definitely worth a look. The Department of Education website has some great resources explaining the various programs and their specific requirements and qualifications. 

So before you, or someone you know, takes out a student loan, make sure the education about one is on the schedule.

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Photo By hywards , published on 13 March 2014 Stock Image - image ID: 100247103