Taking out a student loan is serious business, but colleges make it easy. When handing out loans, colleges say they are looking out for you. They may say an education is a value that cannot be measured by dollars and cents. But the recent grad looks at the first repayment notice and says, “What have I done?”
What a Student Loan Can Do For You!
Initially the loans look great. You have picked your favorite college, it’s pricey, but the award letter comes in and your out of pocket expenses are zero. With scholarships and loans your education will be cheap.
That is, until four years down the road when you graduate. Suddenly you discover the real meaning of a loan. Upon graduation you make payments on loans that are sometimes equal to a house payment. If you majored in a field with immediate high earning potential, making the payments is no problem. In real life most college grads start in low paying jobs, advance their career over time, and the loan payments are a huge stress. And honestly, there are plenty of college grads who cannot find a job at all.
Student loans are only forgiven upon death. If you declare bankruptcy later in life, other debt may disappear, but your student loans will hang around your neck and stay with you until every last cent is paid.
We often think only about the earning power that a college education can bring and forget to look at the cost.
What a Student Loan Can Do To You!
Financial cost is how much a college education will cost you. The average college graduate is now graduating with $23,000 in student loans. Consider how much money the education costs during the four or five years you are in college either to you, your parents or both. You have probably paid some tuition out of pocket, which is a huge cost, but it is not the only cost. Also add the costs of room and board, books, transportation, entertainment, and so on. Plus the debt you will pay upon graduation. $23,000 is not just $23,000. It is $23,000 plus interest.
Subsidized Stafford Loans
Let’s take a look at the real cost of your loans when you get into the world. What will you have paid for your subsidized Stafford Loan by time it is gone?
Here’s one scenario. In this scenario, you acquire the maximum $19,000 over four years. The Stafford Loan interest rate was 4.66% for the 2014-2015 school year. No interest accrues while you are at least a half time student. Upon graduation the interest and repayment begin. If you make a monthly payment of $198.38 for 10 years, you will pay a whopping $23,805.86 including interest to pay off your $19,000 loan.
Unsubsidized Stafford Loans
How about that unsubsidized Stafford Loan (this is the loan that accrues interest while you are in school)? What is the real cost of it? To cover the remaining balance of $23,000 you need to take out $4,000 in unsubsidized loans over four years. You don’t have to pay these until graduation, but the interest begins immediately. Let’s say that you take out $1,000 each of four years. When you graduate you will not only owe $4,000, but $4,488. After 10 more years, making a payment of $46.86 a month, you will have paid an amazing $5,623.19 for your $4,000 loan.
Subsidized Vs Unsubsidized Loans: What’s the Difference?
To give you an apples to apples comparison of what a subsidized and unsubsidized loan mean to you after graduation we will look at two examples using the same amount. Let’s say you are going to borrow $10,000 over the course of four years of college. Does it make a difference whether it is subsidized or unsubsidized?
First, let’s look at the subsidized loan. Upon graduation you will begin paying on your $10,000. To pay off the loan in 10 years you will make monthly payments of $104.41 and pay a total of $12,529.45 including interest.
Now let’s compare the unsubsidized loan. For this loan I assumed you took out $2,500 per year for four years equaling $10,000. Upon graduation your loan is not $10,000. It has been accruing interest since each of the $2,500 loans were issued to you. Upon graduation you owe $11,220. To pay off the loan in 10 years you will make monthly payments of $117.15 and pay a total of $14,057.92 including interest. The difference between taking out the $10,000 loans is that you will pay $1,528 more for the unsubsidized loan.
If it seems like the money is free, run!
Or at least know why you should consider running. When I was coaching a college women’s soccer team, I often heard players tell me they got money back from the school. This confused me at first, because I knew these particular athletes were taking out loans. Slowly it dawned on me what was going on.
A student would take out the full amount of the Stafford Loan they were eligible for. Many times this amount, when added to all of the other financial aid and money paid out of pocket, came out to be greater than the bill. And so, the student would be cut a check. Most students, and even parents, see this money as a windfall for the student to buy books (best case scenario), use for living expenses (mediocre scenario), or use for entertainment and shopping (worst case scenario, but very popular with students).
I hope you are seeing what is happening. Essentially this money is a loan. It may feel free in the present, but it will not be upon graduation when it is being paid back each month for the next ten to thirty years of the graduate’s life. Ask yourself when this money comes and you think about using it, “Would I take out a loan to… buy books (maybe)…or go out to eat and go shopping (probably not)?”
Slow down. Consider the actual cost, after every penny has been repaid. Ask yourself if it is really worth it.
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