Young people, college bound and otherwise, have a different perspective on the passage of time than their older counterparts. The four or more years young people will spend in pursuit of a college education seems like an eternity to them.
It is perhaps for this reason, coupled with the boundless optimism of youth, that too little caution may be exercised with regard to acquiring student loan debt. The date of repayment appears distant and the prospects of gainful employment to repay the debt are perceived as all but certain.
Collectively, student loan debt has ballooned to $1.2 trillion, which exceeds consumer credit card debt and is now second only to mortgage loan debt in size and scope. As a result, many believe that student loan debt is the next bubble to threaten our economy with recession.
Curb Your Enthusiasm
Time waits for no one—when your four year stint at university has culminated in graduation, the fun (repayment) begins. Most experts agree that curbing one’s appetite for student loans is the preferred course of action. The following facts should be kept firmly in mind as you consider how to fund your college education … assuming you truly want to attend college. Just as I would never discourage anyone from pursuing higher education, I wouldn’t push anyone to attend either. College is not a magic elixir that guarantees future success, financial or otherwise. However, if you have the fire in your belly, go for it—keeping the following admonitions firmly in mind.
- Federal loans offer greater flexibility and a broader range of repayment options than loans from the private sector. Interest rates are generally lower as well. For example, government loans can be retired by performing a stint in public service. The most common being a job in the public sector as a teacher. Joining the Peace Corp or volunteering can also help eliminate or reduce your federal student loan debt. These options do not exist in private sector lending.
- Repayment can take years! The average student loan debt for the class of 2014 stands at $33,000 and that figure does not include the interest expense! Frankly, most graduates will not land a high paying position right out of college and, while it is true that payments are pegged to income, this only serves to prolong the debt. In the interim, you are hard-pressed to find the money in your budget to save for a down-payment on a home, buy a car or put money aside for retirement. In short, many of your dreams are on “hold” while you struggle to retire college debt.
- Don’t forget the fees! Broadly speaking, private lenders charge more fees than government counterparts. However, they all have fees that can add-up to substantial sums over time. These fees are for origination, late payments, disbursements and returned payments, just to name a few. If you borrow, make certain you understand the overall cost of borrowing. These costs go well beyond simple interest expenses. Read the fine print before you sign your life away!
- You will probably need a cosigner. At this point, you need to understand that you are not only making a decision that can impact your financial future, but also the financial well-being of your cosigner. They will be equally responsible for repayment! This should give any responsible person pause.
- Defaulting on your student loan is not without consequences. You cannot file bankruptcy on a student loan. If you have cosigners, you have the added burden of protecting them from the financial consequences of default. Default is a real possibility. There are currently $40 billion in defaulted student loan balances. Eager students often overestimate earning potential and/or over borrow. Jobs are not as plentiful as they once were and the jobs that are available are hotly contested which brings us to this…
Conventional wisdom suggests that you limit your student loan debt to no more than you reasonably anticipate earning in your first year on the job. This may mean taking your first year or two at a less expensive hometown college. This has the potential of saving tuition and housing costs.
You might also consider taking a lighter load that allows you to work a part-time or even a full-time job. Many young people object to this approach because they are in a rush to put college in the rear view mirror. However, you may feel differently when faced with a pile of debt that takes twenty years to pay off. That extra couple of years you will spend getting through college won’t seem like a bad trade-off in comparison.
What about You?
How much thought have you given to college debt? Are you prepared to make personal sacrifices to reduce the amount you need to borrow? Do you feel so strongly about your education that you will enlist a cosigner to help you achieve your goals?