10 Things I Wish I’d Known About Student Loans

This is a guest post by Kelli Space, a 2009 graduate of Northeastern University and a student loan advocate. She created the site twohundredthou.com to solicit help with her hefty monthly payments. You can follow her on Twitter at @twohundredthou.

Two years ago I was a very recent graduate of Northeastern University, and found myself $200,000 in student loan debt. In retrospect, it seems pretty obvious that I was signing myself up for a bigger disaster each year, but ever the ambitious girl, I only had my eye on the prize: a piece of paper proving that I had graduated from college. Recently I’ve been forced to rethink some of the decisions I’ve made; below are 10 things a 17-year-old heading off to college may not understand about his or her impending student loans.

10. Interest is the enemy
I’ve come to realize that interest is a short and sweet way of saying that you’re spending even more money on money you already owe. For example, if you let a $100 loan sit at 2% interest for 1 year, it will theoretically cost $102 by the end of that year. Loans cost more money just by existing. I’m guessing this was a concept I did not entirely grasp in high school. Worse, student loan interest rates are generally higher than 2%, and student loans tend to be more than $100.

9. Repayment can take… a long time
Barack Obama made his last student loan payment as President of the United States – and only after his two most famous books became best-sellers. He’s also been quoted as saying that his and his wife’s combined monthly payment totaled more than their mortgage payment for several years. What a reality check! Of course, there are few things, if any, as worthy of large debt as education. That being said, long-term repayment plans were on the list of consequences that hadn’t crossed my mind.

8. Cosigners
When I received my acceptance to Northeastern, I was so excited that any thoughts of tuition and fees fell by the wayside. By August, though, it was crunch time and my mom had filled out the FAFSA months earlier; it was time to borrow money for my freshman year. But wait! I needed a cosigner. Mom explained that someone with good credit had to sign onto the loan as insurance to the lender that the loan will get paid no matter what. She wound up filling that role for me initially; my uncle did the same a few semesters down the line. While I must say that having a cosigner is great motivation to make payments on time, as I’d never want to default and make them responsible, it’s still a level of responsibility I never thought I’d assume: one mistake or missed payment and several people’s financial lives could quickly change.

7. Private vs. Federal Loans
Private lenders are notoriously difficult to negotiate with, in terms of repayment, interest rates, and deferment. There is essentially no limit to the amount of money you can borrow in private loans, which makes them all the more dangerous. Federal loans, on the other hand, give you a plethora of options; if you are a public school teacher in a certain field or a certain district, your federal loans can be forgiven in 10 years. This is also true if you join the Peace Corps or volunteer in other ways — learn more here. The majority of my loans are private, making my repayment experience that much more tricky; had I researched the differences between private and federal loans, I’d like to think I would have chosen to borrow more of the latter.

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6. Deferment & forbearance can help and hurt
I flip-flopped between majors for my first couple of years at Northeastern, and eventually settled on Sociology due to my interest in societal issues and politics. I didn’t take into account, though, the low salaries generally earned by those in the social sector. This would not bode well for me being in such debt but, luckily, there are a few measures you can take to avoid default. You can defer your loan in any number of ways to push off payment for a certain period of time or decrease your payments for a time. However, I wish I’d understood that interest not only accrued while I was in school, but also while my loan payments were deferred. Deferment is great in theory, but only if you expect to earn even more money once the specified time period has passed.

5. Sallie Mae is not the only option
Sallie Mae was recommended to my parents and me as a great resource for student loans. The website was always eye-catching and easy to use – plus, guidance counselors, financial aid advisors, and family friends all suggested Sallie Mae; clearly the company had to be reputable… right? It was only after graduating college and finally conducting some research that I learned that Sallie Mae wasn’t exactly easy to deal with, or very flexible. A simple Google search yields thousands of results detailing complaints about Sallie Mae’s customer service, inflexibility, and lack of transparency. Alternately, at alltuition.com, for instance, you can find additional options for private loans; the site gives you a transparent look at fees and interest rates associated with a given loan. Exhausting federal loans first can also help your debt load since, as stated earlier, federal loans are far more flexible and can be consolidated and, potentially, forgiven.

4. Defaulting has consequences
If you can’t meet your minimal payment obligation, and have exhausted all deferment options, you may default. Default numbers are growing by the year, as it hasn’t been easy for many graduates to pay off their huge loans with no jobs or earning little money. As noted at FinAid.org, “the total defaulted loans outstanding are around $40 billion to $45 billion when accrued but unpaid interest and late fees are included in addition to loan principal.” It is not uncommon these days to default on student loans and some of the consequences can be severe: blemished credit, garnished wages, and legal action — with more fees.

3. Fees can catch you off-guard
When it comes to student loans, not only will you owe the specific amount that you borrowed, along with interest, but there can be various associated fees, as well: origination fees, late fees, returned payment fees, disbursement fees, and more. It’s safe to say that fees are generally associated with private loans, but it’s not uncommon to amass fees with federal loans, either — particularly for late payments. These are costs not many people take into consideration when borrowing, and I wish I’d known a bit more about these additional costs six years ago.

2. Pursuing further education is difficult with debt
Borrowing so much money for my undergraduate degree has left me in a place where I don’t have the option to pursue further degrees which would, theoretically, increase my value and knowledge base. While attending obtain a Bachelor’s degree is notable and almost a necessity nowadays, further degrees signify specialty and (although less so in today’s economy) theoretically higher salaries, as well. As they say, it matters more where you obtain your Master’s, Doctorate, or various other continued education degrees — as there tend to be specialized programs at different schools — than where you spent the most money on your Bachelors.

1. Each situation is unique
I initially believed it was quite common to borrow significant amounts of money to attend college. In my mind, it was just impossible to expect that many families had scraped together $160,000 for their children to go to school, and that most would probably turn to loans to fund the experience. While many students do in fact borrow heaps of money, the most recent average student debt load was $24,000 — a world away from my $200,000. Instead of asking what the normal amount to borrow was, and assuming that Sallie Mae would never lend me more than I could handle, I definitely should have researched all possibilities before choosing my path.

Though the assumptions I made along the way led to mistakes and a whole lot of debt, I’m happy to have learned so much about personal finance. If I hadn’t committed such blunders, perhaps I wouldn’t be so aware of the dangers of debt and the importance of saving now. If nothing else, I hope my story helps students reassess their current situation to be sure they are not inadvertently impacting their future for the worse.

(For more information, visit http://www.FinAid.org and http://www.ed.gov)

This article is part of our Student Loan Debt Resource Center.  If you’re looking for additional information about student loans, be sure to pay a visit!

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  • Guest

    I think there’s some misleading information here.  Deferment for federal loans is often a good choice depending on the loan.  The best thing you can do during deferment is to repay the loan, which will go towards the principal, and not against the interest.  If you repay the loan during deferment, you’ll end up cutting out the interest fees entirely.  

    Going back to school is not necessarily a bad thing, PhD programs are typically free, and pay  a stipend which you can use to repay your principal on your deferred federal loan (because you’re part-time or greater in school).  Other degrees, such as a masters program can qualify you for loan deferment (especially if your employer will pay for a masters).  MDs and JDs will likely incur more debt, but also offer loan repayment programs after graduation (for example: MDs who do research funded by NIH qualify to have the NIH repay the loans, a common scenario if as an MD you wish to work at a teaching hospital).

    Finally, there is nothing that says you only pay the minimum monthly payment on your loan.  Most loans if you overpay the monthly minimum, the overpayment will be applied directly to the principal, meaning that you pay less to repay the loan.  This is by far the worst mistake young people stuck with debt make.  If you overpay by $200 a month you’ll pay off that loan sooner, and on a ten year loan for $100,000, you can save yourself $8000 over the course of the loan.

  • Guest

    Great points!

    You can absolutely pay more than the minimum monthly payment on your loan. However, if you think just paying $200 ‘extra’ each pay period automatically goes toward your loan, that’s actually not true: sometimes they put it toward your next payment, sometimes they apply it toward future interest. I know Citibank lets you choose which you’d like to do, but you have to actually specify where you want extra moneys to go with Sallie Mae.

    You’re also right about going back to school — it’s not necessarily a bad thing at all. But after you obtain your undergrad degree, *generally* speaking the next step would be a Masters. Master’s degrees are not free (again in general) and going to a great school for your Master’s — particularly private? — will still cost an arm and a leg without financial aid/scholarship. Lastly you make a great point about JDs incurring more debt: more law school grads are unemployed now than ever. (http://www.nytimes.com/2011/01/09/business/09law.html?pagewanted=all - one article of many)

    Repaying a loan during deferment is obviously best case scenario but in that case, you wouldn’t necessarily be experiencing a hardship enough to be in deferment in the first place. Saving deferment for those hard times where payments are difficult would probably be best as you don’t want to be in a really tough spot and be told by your lender that you’ve used up all your deferment options, as has happened to friends of mine in the past.

    • http://www.studentloaninsider.org studentloaninsider

      This is only for government loans (I know nothing about private) but extra payments (as long as interest satisfied on account) will automatically go towards principal as long as loan is more than 120 days from disbursement; but it will also move your payment in the future; Example: Your payment is $50.00 and you pay $75.00. The next bill will only show as $25.00. However just keep making extra payments because it is paying down the principal too and you will save lots!

      • http://www.twitter.com/bwfeldman Benjamin Feldman

        That’s very helpful! Thanks for the insightful comment.

        • http://www.studentloaninsider.org studentloaninsider

          No problem. I’ll try and visit more and see if I can ever help. Any questions just shoot them my way. studentloaninsider@gmail.com

  • Kelly M

    Great post Kelli.  I enjoyed the part about the Obama’s.

    Keep up the good work and positive attitude.

    -Kelly from WA.

    • Kelli

      Thanks, Kelly! I’m trying :)

  • Jaz

    I think Kelli should’ve attended a public university because that was what she could afford. Just because she wanted a private one it doesn’t mean that you can afford it. It’s not your parents’ or family’s responsibility to pay it. As a student you need to understand that you don’t have a full-time job to pay for that and therefore you’re broke. All those spring break trips, studying abroad and getting expensive apparel and such cost money.
    You need the most cost-efficient education i.e: more than a CC less than a private or ivy-league. I’m in my 2nd year of undergrad and have $0 debt so far and plan to stay that way, no loans. All sweat and hard work from working full-time and sometimes overtime during summers, working nights and weekends during the school year and being on a budget.

    This article does not say in what or if she is working right now, what actual steps she is taking for this to go away. It seems like she is not deserving of any money because there’s a lot more students that are in this situation or in a worse one and they aren’t begging for money while they do nothing.

    • Kelli

      Hi Jaz,

      Though I may not have included it in this article, I’ve definitely mentioned it before: I work full-time, and live outside of the city as it is cost effective. I, too, work overtime, as well as blog on the side, and babysit whenever possible. I budget like crazy. I hardly ever spend money. I do all that is necessary to make large payments toward my debt.

      There are a lot of decisions I could have made in hindsight; the fact of the matter is that I made a host of choices that led me to where I am today. Fortunately, I’ve learned a great deal about personal finance and the perils of debt along the way — things I knew nothing about when I was in high school and throughout college. I have a very aggressive goal to be completely out of debt in the next few years and so far I’m on track :)

      Thanks for reading!
      Kelli

  • Kelli

    Hey there,

    It’s unfortunate you don’t think I’ll ever be out of debt — I beg to differ! As I’ve mentioned on twohundredthou.com, I’m actually in a rate reduction program with Sallie Mae for the year, so all money that has been put toward my debt has actually made quite a dent: I’m down to $162K in private loans. I’m being pretty aggressive about it and like to think it’s working out really well! Best of luck to you paying your loans off, as well.

    Thanks for reading,
    Kelli

    • Z1919700

      Even if you lived a spartan life to the tune of 12,000 a year, cutting your expenses back to that amount, interest would eat up so many of your payments that it would take you close to a decade to pay off. Do I think you’re going to live in such a way? No. Considering you chose to live outside your means and study abroad when you couldn’t afford to, you seem the type to have fun first and think later. Sorry, but that’s the impression you’ve given pretty much everyone. And that figure is also assuming you’ll make the maximum possible with your degree–no more than about 40k. So even if you get the best possible salary and live a modest life (which we’ve established isn’t your strong suit) it will take you close to ten years to get rid of your loans. In reality, I think it will take decades for you to be rid of it. Also, weren’t you foolish enough to borrow from Sallie Mae? Those interest rates are extremely volatile. The scenario I painted assumes reasonable and very low interest rates, which I don’t believe you have. So all in all, yes, it’s very possible you will never be out of debt. I still don’t know how someone takes out a mortgage size debt for a sociology degree. I’m just laughing over here, and shaking my head. Nobody should take financial advice from you. It would be like asking a crime lord how to be a law-abiding citizen. And I find it particularly galling how these people keep featuring you on their blogs. Oh yeah, let’s listen to the girl who got herself 200k in debt. She’s a real whiz with money.

      • Guest

        I would just like to respond to Z1919700-it appears that the financial institutions didn’t consider any of your points when they allowed this teenager/young adult to attend this expensive school and fund it exclusively with loans.  We have taught our children to listen to adults and here are “adults” steering our next generation into unimaginable debt.  I have followed this individuals story for quite some time now and hopefully she is educating other teens and young adults NOT to believe that “it will all work out for the best”.  I would rather take financial advise from someone who is working their way out of a bad situation than from someone who has always had money on their side.  Those with money like to brag how they got it but that doesn’t help the rest of us who just eke by. 

      • Kelli

        As I stated, I’m in a rate reduction program with Sallie Mae; so, while their interest rates are definitely volatile (news to me, upon graduation) my interest rates have since been significantly lowered for (fingers crossed) the next 2 years — but at a minimum of 1 year.

        Studying abroad cost the same as a regular semester at Northeastern. You can check that out here –> http://www.northeastern.edu/studyabroad/programs/queens-university-of-belfast/#Cost ($23,170 for the semester, despite 1 semester at Queens costing only approximately $1175. What a bargain). Aside from the assumption that my semester abroad was more expensive than any other of my semesters at Northeastern, there’s really no indication that I’ve had outlandish spending habits since graduating college. In fact that *only* thing I’ve ever “splurged” on has been my education. If that’s the most expensive thing I’ve purchased, I think I’m okay with that!

        Trust me, it’s *not* possible that I will never be out of debt. Again I’m on an aggressive plan and am so far right on track to being out of a great chunk of my debt (currently at $162K) in the next TWO years! I find this extremely exciting as it’s not something I’d ever thought I’d be capable of doing — however, with the help of sites like ReadyForZero, PassivePanda (tips on earning more income), and LearnVest (all-around financial advice), I’ve become a lot more savvy and have enjoyed my transition into adulthood with all the lessons I’ve learned this past year along.

        Thanks again for writing,
        Kelli

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  • http://www.psychologystudent.net/ Michael Hwan

    This goes to show that ALL students should be educated on personal finance before heading off to college! Thanks for sharing your story with everyone Kelli!

  • Jennifer

    I did the exact same thing. I graduated in 2008.I have about $26,000 in federal loans but another $130,000 (I think that’s at what its at now) in private loans. I wish I knew then what I know now. My degree is essentially worthless and I will be unable to achieve the dreams I always wanted for myself. My father cosigned the private loans with me and I haven’t kept up with them. They are now pursuing legal action. I don’t really know what this means. I work as a manager for a fast food company making $11.13 an hour and my father collects VA and Disability. They can garnish my wages but they still are not going to get very much. I feel horrible for dragging them (my parents are still married) into this. I have no idea what to do. I wish I could declare bankruptcy on them or something. I get angry too that I feel as if none of this was discussed 10 or even 5 years ago when I was I school. I wish I knew of a way to help myself. Good luck to you.

    • http://www.twitter.com/bwfeldman Benjamin Feldman

      Hi Jennifer, thanks for your comment. I’m sorry to hear about the difficult situation you find yourself in – that must be really hard and frustrating. One thing I wanted to mention was that the private lender may sell your debt to a collections agency of some kind (or perhaps they already did). This can be bad, but it can also open up the possibility of settling with them for a fraction of your debt. I’m not sure if this would be feasible for you, but it’s worth reading this post for more info: http://www.finaid.org/loans/settlements.phtml.

      If your wages are being garnished, my understanding is they cannot take more than 10% of your disposable income. So be sure to keep tabs on that. This article has more info on these rules: http://www.nolo.com/legal-encyclopedia/if-wages-are-garnished-rights-33050.html.

      Finally, if you are interested in talking with us for a future blog post on our site, please send me an email at Ben (at) readyforzero.com – thanks!

  • Kelli

    Great point, but I think this is a personal choice. Of course there are worthier causes, and people have the option of doing whatever they’d like with money they’ve earned. Asking for help is a bit different than me expecting anyone’s money, or asking for anyone to give me money that they would have given to someone else.