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.
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.
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.
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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.
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!