Lenders of money are not concerned with the best interests of those to whom they are lending money. This applies to student loans as well as to all other borrowings.
Caveat emptor, aka let the buyer beware, is very much in play when borrowing money, and the decision to borrow tens of thousands of dollars to attend college is a great place to acquire a basic education in personal finance.
Personal financial literacy is critically important, and the time to start helping our youth learn the basic lessons of finance is when they're young --- before entering college. By so doing they can make college a good investment and not a waste of money, much of which is borrowed money at that.
The college decision and how to finance it is also an excellent time to come to realize that in the end we're responsible for the wisdom of our financial decisions, and to understand and internalize that debt is to be avoided if possible, and minimized if needed.
That's simply because what we don't borrow doesn't have to be repaid. Instead that "unborrowed" money can be saved, invested and socked away for our family's future long term benefit. We'll have plenty of uses for it along the way to and during old age. That's for sure.
So here's the plan ---- learn the meaning of the word "value" at an early age and then apply it relentlessly and in a self interested manner throughout life. So know the facts about saving, borrowing and investing, keep the score and then make sense of what you do with money, starting with student loans for college, if not before then.
The 10 most common student loan mistakes has sage advice for those contemplating taking out student loans:
"Student loans are complicated. And, unfortunately, most freshly-minted freshmen sign those promissory notes without having a clue about student loans (let alone know what a promissory note is).
Before you sign on the dotted line, take time to understand your student loan options. And be sure you’re making the best choices.
1. Assuming you need them
Yes, about 60% of students borrow annually to cover their college costs, according to the Chronicle of Higher Education. But that means that 40% don’t.
Contrary to popular belief, you do not have to have student loans to get through college. There are plenty of ways to get around them:
- Choose a cheaper school, and pay in cash
- Opt for a school with a great scholarship for you
- Go to a work-based school for free
- Work while attending school part-time
- Put off school for a year to save up
2. Not exhausting other options first
Before you even apply for student loans, you should be shooting for every single grant or scholarship you can possibly get. . . . Remember, the more free money you get, the less student loan money you’ll need!
And while you’re at it, be sure you understand education-related tax credits , which could put money back in the bank for you (or your parents), making school more affordable.
3. A major new survey by Gallup finds that it isn’t where you go to college that is predictive of whether you are successful at work and happy in life — rather, it matters what you do while you’re in school that counts.
When you get your federal student loan offer . . . you’ll see how much the government is offering you in loans. If you’ve (unwisely) chosen a very expensive school that you really can’t afford, you may actually need the full amount to cover tuition.
But if you’re like most college students — especially those at state schools — you don’t really need that whole amount to cover tuition, or even room and board. Unfortunately, many of these same students take the full student loan amount — either because they want to use loans to fund their frat parties or because they don’t know they can accept less than they’re offered.
Carefully evaluate your actual needs, and only take the amount that you must have to pay tuition for that year. If you need student loan money to cover books, car insurance and other expenses, consider getting a part-time job.
4. Not figuring out monthly payments
One way to keep from taking out more than you need in student loans is to take a few minutes to figure out your monthly payments. Many college graduates are shocked to find out how big a chunk student loan payments will take out of their shiny new post-college paychecks.
5. Not keeping track of your debt
We get it. You’re a student. You deal with a lot of paperwork, and you’re probably not all that organized. This makes keeping track of student loan paperwork difficult. . . .
Also, you need to keep track of the actual amount of your debt. It’s easy to lose tabs on how much you’re borrowing, in total, since you’re just taking out loans once a year for a four-to-six year education track. Make a spreadsheet of how much you borrow each year, and probable monthly payments that you’ll shell out eventually. That, alone, should keep your borrowing in check.
6. Skipping out on interest payments
Unless you qualify for a subsidized student loan (which is based on income), your loans will start accruing interest immediately. The biggest problem here is that your interest will capitalize, which means the outstanding interest is added to the loan’s principal. This means you’re now paying interest on an even bigger principal amount. Let’s let the numbers illustrate:
Let’s say you take out a $5,000 loan for your first of four years of college. The loan is in deferment for 54 months — four years of school plus the standard six-month grace period. On a loan with a 6.8% interest rate that capitalizes annually, your new loan balance when you enter repayment is a whopping $6,722.65!
Because you let that $1,722 in interest capitalize, you’ll now pay around $78 a month on that loan (in a 10-year repayment plan), as opposed to $57 a month otherwise. If you let the loan capitalize and then make minimum payments, you’ll pay a total of $9,283, as opposed to the $6,904 you would have paid otherwise.
What does all this mean? You can — and should — make interest payments while you’re still in school. Even on hefty student loans, monthly interest isn’t too much to tackle. And even if you can only pay part of the interest, you’ll save a fortune in the long run.
7. Turning to private loans
Private student loans have a place for some students, but most shouldn’t turn to them first. Federal student loans typically have lower interest rates and much more flexible payment terms. . . .
8. Asking your parents to co-sign
Some parents automatically assume they need to co-sign on student loans, and this may be the case on private loans. But most students can take out federal loans on their own. And your parents shouldn’t co-sign unless they’re really OK making your student loan payments if you run into financial problems later on....
9. Not updating your information with your loan servicer
Student loan servicers are used to their debtors changing address frequently, and they’re good at tracking people down. But if your student loan servicer doesn’t have your current address, you could miss important information about your loans — like when, who, and how much to pay. . . .
Your student loan servicer will report those late payments to the credit bureaus, which will seriously ding your credit score.
10. Choosing the wrong payment plan
Once you enter repayment on your student loans, you can choose a variety of repayment plans (assuming your loans are backed by the federal government). These plans give you some flexibility in your actual payment, which can be helpful if you can’t find a job or aren’t making much money.
The standard repayment plan has your loans repaid within 10 years, which is good. You want to choose this one if at all possible — even if you have to give up lattes and nights on the town to make your student loan payments. With the standard plan, you’ll pay much less interest over the life of your loan.
Other options — like extended repayment and income-based repayment — are tempting because of their lower monthly payments. But be sure to calculate how long it’ll take to pay off your loan under these plans, and how much interest you’ll pay over time."
Summing Up
Knowledge is power. Information leads to knowledge.
Saving and investing lead to investment gains and personal financial security whereas borrowing, debt and interest expense lead to a lifetime of financial stress
Young people should not begin their adult lives behind the proverbial debt 8-ball. Financially, that means getting a solid education, including an understanding of the widespread benefits of debt avoidance or minimization --- student loans, credit cards, home mortgages and auto loans, one and all.
Debt avoided doesn't have to be repaid, and debt avoided enables the savings and investing benefits to begin.
Be a good buyer in all things, and education is one of the most important things to buy wisely and well.
Tuition is needlessly high at many schools, and the educational benefits often aren't commensurate with the costs. See Elite Colleges Don't Buy Happiness for Graduates.
When selecting and enrolling in college, students and their families should make certain that they make sound decisions and get their money's worth.
That's my take.
Thanks. Bob.
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